Feds in Utah Charge Scientist at Frontier Scientific of Stealing Secrets and Sending Them to Brother-in-Law in India

Sometimes it's a particularly bad idea to go into business with family. Well - Prabhu Mohapatra is learning that lesson as he's been charged with violations of the federal Economic Espionage Act for allegedly stealing chemical-based secrets of his employer, Frontier Scientific, and then sending them to a brother-in-law in India for use there.

The Washington Post is reporting that Mohapatra apparently used a company computer to communicate with his brother-in-law, who was in the process of setting up a company called Medchemblox in India to compete against Frontier Scientific in producing the specific chemicals that Frontier Scientific has a niche place in producing. The government quotes Mohapatra in an apparent attempt to stop the brother-in-law from going too fast: “Please do not make any product currently present in Frontier Scientific’s catalogue. I will lose my job and even could face jail time.”

We'll keep an eye on developments in this matter for you.

DoubleLine's and Gundlach's Expert: TCW's Expert is Way Off on "Reasonable Royalty"

So you'll recall that TCW and its former bond king, Jeffrey Gundlach, had a whopper trial out in California and the jury found that Gundlach and his friends had stolen some trade secrets of TCW but the issue of damages was left to the judge. You'll also recall that the same jury found that TCW had stiffed Gundlach and three of his compadres for some money owed and that they owed the group $67 million.

TCW and the court are now moving forward with the hearing on TCW's trade secrets damage. The facts seem clear that Gundlach and the team that left with him now control about $48 billion in assets under management and a good deal of those assets were from former clients they serviced at TCW. TCW's expert has looked at the departed customer files and the information the jury was convinced that Gundlach and his friends misappropriated. He opined that Gundlach and his friends would've had to have paid a royalty of $81.7 million if an arms-length negotiated transaction took place. That's TCW's argument.

Not so fast, says DoubleLine's expert. He says TCW wouldn't have negotiated a royalty for those $48 billion in royalties to leave with Gundlach. BusinessWeek quotes DoubleLine's expert saying: "TCW would not have allowed the transfer of the $48 billion in assets under management. It’s not a proper assumption for a hypothetical negotiation.” So now it is apparently up to the judge. What will he decide?

Stay tuned . . . .

Arbitration of Trade Secret Theft Claim Leads to $525 Million Award Against Western Digital

Reuters is reporting that Seagate Technology LLC has been awarded $525 million in an arbitration that it brought against Western Digital and a former Seagate employee who joined Western Digital. The claims involved misappropriation of trade secrets. We have not seen the arbitration award but presume it is as nondescript as most arbitration awards prove to be - one usually has to guess which evidence they found persuasive or compelling.

"We do not believe there is any basis in law or fact for the damage award of the arbitrator," said Western Digital Chief Executive Officer John Coyne. The company said it will "vigorously" challenge the verdict that was awarded in an arbitration action in Minnesota.

Appeals of arbitration awards are particularly difficulty to win but we'll keep an eye on this one for you. This is a big one and we would imagine Western Digital is second-guessing its agreement to arbitrate this dispute.

Who Owns the Information Related to the Twitter Account - Employer or Employee or Neither?

We're linking you to a great piece in Ars Technica by Venkat Balasubramani - an attorney who specializes in media, technology and internet issues. The piece examines a recent case in which the former employer, PhoneDog, sued a former employee, Noah Kravitz, for misappropriation of trade secrets, interference with economic advantage, and conversion of information related to a Twitter account Kravitz operated for the company Kravitz decided, alas, to change the password on is way out the door and PhoneDog was effectively shut out of the account. They, of course, sued.

We're interested in the trade secret claim, and Mr. Balasubramani is too. He notes that the court refused to dismiss the trade secret claim, stating "PhoneDog has sufficiently described the subject matter of the trade secret with sufficient particularity and has alleged that, despite its demand that Mr. Kravitz relinquish use of the password and Account, he has refused to do so. At this stage, these allegations are sufficient to state a claim. Further, to the extent that Mr. Kravitz has challenged whether the password and Account followers are trade secrets and whether Mr. Kravitz's conduct constitutes misappropriation requires consideration of evidence beyond the scope of the pleading."

Makes sense, right? The court is forestalling the question of whether the Twitter data and information is a trade secret or not - they want to hear more about that claim and the information will come from documents and testimony OUTSIDE of the complaint or answer. The piece goes on to examine the jurisdictional "amount in controversy" issue and we found that issue interesting, too. On the issue of whether the password for the Twitter account is a trade secret, that seems to us to be beside the point. The password is just the key to entry to the real trade secrets, if there even are any there. The independent commercial value is in the operation and cultivation of the followers - and this will be an interesting issue to watch as the court attempts to peel this onion.

More on the SEC and Trade Secrets

Back in 2006 and 2007 we ran a series of posts (the first one here) concerning hedge fund manager Phillip Goldstein whose firm, Bulldog Investors, was challenging the SEC’s Rule 13f which required him to publicly disclose the fund’s holdings when they crossed a certain threshold.

Mr. Goldstein was of the view that the constitution and/or trade secrets law ought to protect him from such disclosures.

Now the issue has come up again, albeit in a slightly different context of SEC waivers granted to certain investors, like Warren Buffet, while they amass positions in particular stocks. The New York Times has a column on the practice today.

The obvious questions are: first, do some investors get special treatment when it comes to non-disclosure waivers, and, second, can the exceptions effectively swallow the rule?

Trade Secrets of the “Better Beers”

From Huffington Post, an interesting story about a battle of the breweries in which Boston Beer Company (maker of Sam Adams beer) is suing Anchor Brewing (maker of Anchor Steam beer) over allegations of employee poaching and misappropriation of trade secrets.

Boston Beer executive Judd Hausner left Boston Beer earlier this year for Anchor. Boston Beer claims that just before leaving its employ, Hausner attended high-level meetings about Boston Beer's internal strategies.

According to Huffington Post, there’s also a market definition issue in the case:

Boston Beer defines their particular market at the "better beer" category that makes up 20 percent of total domestic beer consumption, as opposed to the "mainstream domestic beers" which comprise the other 80 percent. Anchor claims its products are instead in the "craft beer" category, which only makes up five percent of the total domestic market, and therefore isn't a direct competitor with Sam Adams.

The case is proceeding in Massachusetts, not in California where Hausner worked managing distribution in Marin, Napa and Sonoma counties. (Do they drink anything other than wine there?) Massachusetts is a lot more friendly to non-compete cases than California.

Choice of law issues are likely to be paramount and we'll try to keep you in the loop on this one.

U.S. Government: Chinese and Russian Spies are Infiltrating American Databases to Steal Trade Secrets

The U.S. Office of National Counterintelligence Executive has issued a report (linked above - please click on title to this post) suggesting that foreign spies, including from key U.S. allies, are increasingly using cyber-theft to access and appropriate secrets of the U.S. and economically important companies here. China and Russia were singled out as the most pervasive threats to economically sensitive secrets.

“The nations of China and Russia, through their intelligence services and through their corporations, are attacking our research and development,” Robert “Bear” Bryant, the national counterintelligence executive , said during a news conference discussing the report. He added that foreign industrial espionage is a “very serious problem facing the economic viability of the United States." Cyberespionage will continue to represent a major challenge to U.S. economic security, the report concluded. The proliferation of portable devices that connect to the internet and the trend of pooling information processing and storage will further enable such activities.

It is refreshing to read that the government, and cooperating and coordinating agencies in the federal government, is aware of risks and threats that we've been detailing in this blog for years. What is even more important, however, will be the government's counter-measures to fend off these cyber-threats and its role in working with private industry to accomplish joint prerogatives. This report makes a fascinating read.

Trade Secrets of Major League Baseball Management?

Boston attorney Debra Squires-Lee authored an interesting piece in last week's online magazine CFO.

Ms. Squires-Lee notes that the departure of Boston Red Sox General Manager Theo Epstein, a young wunderkind who helped lead the Red Sox to great success during his tenure, to the Chicago Cubs suggests that perhaps the Red Sox could've done something contractually to limit what Mr. Epstein could and could not share with the Cubs in terms of knowledge generated while with the BoSox.

She writes: " If they did their job right, the senior executives in the Boston club curbed Epstein’s ability to tap into its secrets to create a successful 2012 team in the Windy City. If Epstein was privy to any proprietary, secret, statistical method for analyzing baseball talent, that method could be considered a trade secret. If he uses that method to benefit the Cubbies, the Sox could try to fight its wrongful use, but that would be costly. The expense of litigating a trade-secret case can be game changing. The cost of the lost business advantage if the Cubs start using the Sox’s secrets may be season ending."

What Ms. Squires-Lee does not mention in her piece is the possible use of a noncompetition agreement. These agreements, which limit for some period of time the departing employee's ability to compete in a certain territory, are ubiquitous in many industries and are commonly enforced by courts across the country (with some limitations - California, for example) when they are well drafted and protect a legitimate business interest of the former employer. But this leaves us wondering - does Major League Baseball have a per se rule regarding any club's use of noncompete agreements for important non-performing employees, such as coaches, managers or general managers? We don't know.