MVS Filewrapper® Blog: Should Trade Secret Misappropriation be Federalized?

The legal community (along with bipartisan legislation) has been discussing the creation of a private cause of action under federal laws for trade secret misappropriation – or trade secret theft. In light increased cyber-espionage and the apparent ease in which trade secrets can be misappropriated in the marketplace, Congress has taken an apparent interest in "strengthening" trade secret protections.

 

Currently, trade secrets are a matter of state law. This means that each state has established requirements for trade secret misappropriation. In sum, these require a finding that a trade secret holder has a "secret" with value as a result of it not being generally known by others (i.e. competitors), that the trade secret holder has taken efforts to maintain secrecy, and that the party alleged to have access or appropriated the secret used some sort of improper means. Although the precise definitions for these standards may vary among the states, there are relatively small distinctions among the states.

 

Both the House and the Senate may consider bills introduced as early as this fall to consider federalizing this cause of action. The "Defend Trade Secrets Act of 2014" ("DTSA") (S. 2267) and the "Trade Secret Protection Act of 2014" (H.R. 5233) have been introduced to create a private cause of action under the existing Economic Espionage Act of 1996.  The DTSA as drafted would authorize a trade secret owner to bring a civil cause of action in federal court for either (1) a violation of the Economic Espionage Act (which criminalized types of trade secret theft), or (2) a “misappropriation of a trade secret that is related to a product or service used in, or intended for use in, interstate or foreign commerce.” The Judiciary Committee has held a hearing to discuss the benefits of the federal cause of action. A few of the purported benefits of establishing federal legislation would be to grant access to federal forums (based on the subject matter instead of matters of diversity and/or supplemental jurisdiction), along with granting access to federal remedies for seizures to prevent irreparable harm caused by trade secret misappropriation.

 

As expected, there are vocal critics of such federalization, including a group of legal scholars and professors (see opposition letter at http://cyberlaw.stanford.edu/files/blogs/FINAL%20Professors%27%20Letter%20Opposing%20Trade%20Secret%20Legislation.pdf). As stakeholders continue to voice opinions (and concerns) over pending legislation, more information will be provided through Filewrapper.com.

MVS Filewrapper® Blog: Federal Trade Secret Protection Proposed in the Senate

Defend Trade Secrets Act of 2014

 

Senators Chris Coon (D-DE) and Orrin Hatch (R-UT) proposed a bill on April 29, 2014 that would provide federal protection for trade secrets. Under the current state of the law, trade secrets are protected by a combination of various state statutes, state common law, and aspects of contract law.  There is no private federal cause of action for appropriation of trade secrets, although 18 U.S.C. 1832 is a criminal statute prohibiting theft of trade secrets.

The Defend Trade Secrets Act would allow an owner of a trade secret to pursue civil action in federal court for misappropriation of a trade secret used in interstate or foreign commerce.  The proposed bill would also authorize the court to issue orders for the preservation of evidence in a civil action, including making a copy of electronic storage where the trade secret is located or allowing seizure of any property used to facilitate the theft of the trade secret. However, this seizure is limited to that which is not merely incidental and so long as the seizure does not interrupt the normal and legitimate business operations unrelated to the trade secret. This seizure will essentially be enforced through the requirements in paragraphs (2)-(11) of the Trademark Act of 1946.

The bill also provides for remedies including the granting of injunction against any actual or threatened violation of the Act and if appropriate, affirmative actions to protect the trade secret. Additionally, if injunction is inequitable, the court may condition the future use of the trade secret on the payment of a reasonable royalty for the time for which use could have been prohibited. The court may also award damages for actual loss and for any unjust enrichment caused by the misappropriation. Finally, if the trade secret is wilfully or maliciously misappropriated, the court may also award exemplary damages not to exceed three times the amount of actual damages. The Act would also allow for the granting of attorney's fees in this instance and in the situation where the claim of misappropriation was made in bad faith.

It is important to note that misappropriation is defined within the statute as using improper means to acquire the trade secret including: theft bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means. However, improper means does not include reverse engineering or independent derivation.

The text of this Act reads very similar to the Uniform Trade Secrets Act (USTA) which has been enacted by 48 states (New York and Massachusetts have not adopted this legislation). However, each state often modifies the UTSA allowing for different interpretations.  Notably, the Defend Trade Secrets Act states that nothing in the Act would "preempt any other provision of law" and does not contain the language of the USTA which states that it "displaces tort, restitutionary, and other laws." Ultimately, this means that the Defend Trade Secrets Act still leaves the possibility for state law variations and allows plaintiffs to choose federal or state court for their action.

The Senate Judiciary Committee, Subcommittee on Crime and Terrorism held a hearing on May 13, 2014 concerning economic espionage and theft of trade secrets, including the proposed bill, and heard testimony from two panels of witnesses. No action has been documented since that date.

 

 

MVS Filewrapper® Blog: New and Useful - July 10, 2013

·         In Convolve v. Compaq Computer the Federal Circuit affirmed in part the United States District Court for the Southern District of New York ruling that Compaq Computer Corp., Seagate Technology, LLC., and Seagate Technology, Inc. did not misappropriate 11 of 15 alleged trade secrets from Convolve, Inc.  In addition, the Federal Circuit affirmed the district court’s judgment that 8 claims of U.S. Patent No. 4,916,635 (“the ’635 patent”) are invalid.  However, the Federal Circuit vacated the district court’s ruling that Compaq did not infringe several claims of U.S. Patent No. 6,314,473 (“the ’473 patent”), and remanded the case for further proceedings relating to that patent. 

Convolve and Massachusetts Institute of Technology (“MIT”) sued Compaq and Seagate for both trade secret misappropriation and patent infringement, all related to technology developed by Dr. Neil Singer while a graduate student at MIT.  The technology involves seeks in computer hard drives, and minimizing the vibrations created by those seeks—the ’635 patent discloses a method “for generating an input to a system to minimize unwanted dynamics in the system response and to reduce energy consumed by the system during moves,” and an apparatus for shaping commands to a system “to reduce endpoint vibration.” The ’473 patent covers the same type of technology, but relating specifically to data storage devices such as computer disk drives.  The ’473 patent is owned by Convolve, a company owned by Dr. Singer, and the ’635 patent is owned by MIT.  Convolve is the exclusive licensee of MIT software motion control technology called Input Shaping, which Convolve alleges is covered by the trade secrets and patents involved in the case. 

Convolve entered into licensing discussions with Compaq, which included a non-disclosure agreement (NDA) signed by both parties and covering confidential information disclosed between August 13, 1998 and October 15, 2000, but explicitly excluding any information that: (1) the recipient possessed prior to disclosure; (2) was a matter of public knowledge; (3) was received from a third party without a duty of confidentiality attached; (4) was independently developed by the recipient; (5) was disclosed under operation of law; or (6) was disclosed by the recipient with the discloser’s prior written approval.  The NDA further stated that any confidential material or presentations must be particularly identified as confidential.  Compaq sought to include Seagate as the potential designer and manufacturer of hard disk drives incorporating Convolve’s technology to include in Compaq’s computers.  Convolve then disclosed its technology to Compaq and Seagate, but Convolve and Compaq/Seagate never entered into a licensing agreement.

Convolve filed suit alleging breach of contract, misappropriation of trade secrets, patent infringement of the ’473 patent, ’635 patent and breach of good faith and fair dealing.  The district court granted Compaq and Seagate’s motions for summary judgment, dismissing Convolve’s claims of breach of contract, infringement of the asserted claims of the ’473 and ’635 patents, and misappropriation of a subset of the trade secrets asserted against Compaq and Seagate; and granting Seagate’s motion for summary judgment for invalidity of the ’635 patent.  

Regarding the alleged trade secrets, the Federal Circuit upheld the district courts findings and judgment that Compaq and Seagate had not misappropriated 7 of the asserted trade secrets because Convolve disclosed the information in the absence of a written confidentiality follow-up memorandum mandated by the NDA.  The Federal Circuit also affirmed the district court’s ruling that 6 of the asserted trade secrets were either generally known before any disclosure by Convolve or were not used by Seagate following any disclosure by Convolve.  Further, the court rejected Convolves argument that Seagate’s actions constituted trade secret misappropriation under the California Uniform Trade Secret Act notwithstanding the NDA, concluding that where the parties have contracted the limits of their confidential relationship regarding a particular subject matter, one party should not be able to circumvent its contractual obligations or impose new ones over the other via some implied duty of confidentiality.

The Federal Circuit vacated the district court’s grant of summary judgment to Seagate and Compaq for non-infringement of the asserted claims of the ’473 patent, concluding that there were material issues of fact that precluded a grant of summary judgment  as to direct or indirect infringement.  The court also concluded that there was sufficient evidence to preclude summary judgment for induced infringement on the basis of the court’s recent holding in Toshiba Corp. v. Imation Corp. that when an alleged infringer instructs users to use a product in an infringing way, there is sufficient evidence for a jury to find direct infringement.

·         The Federal Circuit in Wyeth v. Abbott Laboratories upheld the U.S. District Court for the District of New Jersey's grant of summary judgment that claims 1 and 2 of U.S. Patent No. 5,516,781 and claim 1 of U.S. Patent No. 5,563,146 are invalid for nonenablement.  The patents relate to the use of rapamycin for the treatment of restenosis.  The patents disclosed use of the rapamycin species sirolimus to reduce thickening of arterial walls.  Wyeth sued the defendants for patent infringement for their products that elute everolimus and zotarolimus.  These compounds fall under the umbrella of rapamycin, but are not mentioned in the specification of the Wyeth patents.

The main issue on appeal was whether practicing the full scope of the claims requires excessive experimentation.  The specification describes assays used to determine whether a potential rapamycin compound exhibits the desired characteristics of immunosuppressive and antirestenotic effects.  Wyeth argued that even though millions of compounds would meet these criteria, one of skill in the art would know that an effective compound had to be small enough to permeate cell membranes.  However, that still leaves tens of thousands of compounds to test and the specification gave no indication of which types of rapamycin compounds would be preferable over others, leaving scientists to synthesize and screen each and every compound. 

While synthesizing and screening compounds is considered routine experimentation, the Court noted in Cephalon, Inc. v. Watson Pharm., Inc. that routine experimentation is "not without bounds."  One indication of excessive experimentation is length of time that would be spent to do the experiments.  Wyeth's expert admitted that it would take technicians weeks to complete each of the assays. 

A final indicator that the invention is not enabled is the unpredictability of the field.  Simply offering a starting point for further research in field like organic chemistry does not properly enable an invention.  Due to the uncertainty, there needs to be more concrete guidance given in the specification in order to avoid undue experimentation.

Ultimately, the Federal Circuit determined that synthesizing and screening tens of thousands of candidate compounds constituted undue experimentation.  While they did not draw a definitive line between routine experimentation and undue experimentation, the Court did provide some guidance on what could be considered excessive experimentation in organic chemistry.

·         In Commil USA v. Cisco Systems, Cisco Systems appealed a district court final judgment in favor of Commil, asserting that the district court gave erroneous jury instructions, improperly precluded Cisco from presenting evidence of good-faith belief of invalidity, and abused its discretion by granting a new partial trial.  On appeal, the Federal Circuit found that the district court gave erroneous instructions to the jury with respect to indirect infringement and that evidence of a good-faith belief of invalidity may negate the intent required to show induced infringement.  The Court determined that the district court did not err in granting the partial new trial.

In regard to the issue of indirect or induced infringement, the jury had been instructed in part that to show induced infringement, "Cisco knew or should have known that its actions would induce actual infringement."  In light of the Supreme Court's decision in Global-Tech Applicances, Inc. v. SEB S.A., which held that induced infringement "requires knowledge that the induced acts constitute patent infringement," a finding of induced infringement may no longer be based on recklessness or negligence.  As such, the Federal Circuit concluded that the jury instructions were erroneous as a matter of law.  The Court found that this erroneous instruction could have changed the result of the trial.  Due to the prejudicial effect of the jury instruction, the Court vacated the verdict of induced infringement and remanded for a new trial. 

With respect to invalidity, Cisco had provided evidence to support its good-faith belief that the patent at issue was invalid.  However, the district court granted Commil's motion in limine to exclude that evidence.  Federal Circuit case law has shown that evidence of a good-faith belief of non-infringement tends to show that an accused inducer of infringement lacked the requisite intent.  Similarly, the Court in this case found that a good-faith belief of invalidity serves the same purpose as a good-faith belief of non-infringement as far as specific intent is concerned.  The Court noted that "one could be aware of a patent and induce another to perform the steps of the patent claim, but have a good-faith belief that the patent is not valid.  Under those circumstances, it can hardly be said that the alleged inducer intended to induce infringement."  The Federal Circuit ultimately held that a good-faith belief of invalidity can negate the specific intent required for induced infringement.

Judge Newman dissented with regard to this portion of the ruling, finding that the Court had changed the law of induced infringement.  She stated that a good-faith belief in invalidity does not avoid liability for infringement because infringement in fact does not depend on the belief of the accused infringer.  Judge Newman relied on tort theory to support her position that "A mistake of law, even if made in good faith, does not absolve a tortfeasor."

With respect to the decision to grant a partial new trial on the issues of indirect infringement and damages, the Federal Circuit determined that it did not violate the Seventh Amendment because the issues were distinct and separable.  The jury in the partial trial was asked to determine whether Cisco possessed a good-faith belief of invalidity, but not whether the patent was in fact invalid.  Cisco argued that these issues are intertwined, but the Court determined that they could be separate issues. 

Judge O'Malley disagreed with this part of the decision, believing that Cisco was deprived of its right to a jury trial under the Seventh Amendment.  She noted that because statements by Cisco's counsel were prejudicial towards the Jewish inventors of Commil, the entire trial was affected.  As a result, Commil was entitled to an entire retrial of all of the issues instead of a partial new trial.

Accent Packaging, Inc. v. Leggett & Platt, Inc.: Reminders on Claim Construction, Discovery Matters

In Accent Packaging, Inc. v. Leggett & Platt, Inc., the Federal Circuit affirmed in part and reversed in part the district court’s grant of summary judgment of non-infringement.  Accent is the assignee of U.S. Patents 7,373,877 (the '877 patent) and 7,412,992 (the '992 patent).  The patents are drawn to a wire tier device useful for baling and handling recyclables and solid waste to facilitate better handling.  Accent sued Leggett for patent infringement and violation of the Missouri Trade Secret Act.  Leggett filed a motion to dismiss the trade secret claim for failure to state a claim and the claim was dismissed.  During discovery, Accent’s expert inspected Leggett’s allegedly infringing device.  Leggett produced a redacted copy of its own patent application that Leggett argued covered its device, engineering drawings, marketing and promotional materials related to the device, and an operating manual for the device.  Accent filed a motion seeking additional discovery, including:  (1) information related to an alleged sale of Leggett’s device.; (2) a deposition pursuant to FRCP 30(b)(6) to address infringement and claim construction; and (3) production of the redacted parts of the previously produced patent application.  The district court denied the motion for additional discovery and both parties filed motions for summary judgment.  The district court denied Accent’s motion for summary judgment of infringement and granted Leggett’s motion for summary judgment of non-infringement.  Subsequently, Accent appealed to the Federal Circuit.  The Federal Circuit opinion provides three reminders:

Reminder #1:  Claim construction should allow the claim to cover the preferred embodiments

The '877 Patent

The district court granted summary judgment of non-infringement of the '877 patent largely based on its claim construction of the terms “each” and “a respective one.”  The court construed the terms to require four elongated operator bodies, with every operator body coupled only to one gripper, knotter, cutting element or cover.  On appeal, Accent argued that the pertinent claim language did not require that each elongated operator body be coupled to one and only one of those articulated elements.  The Federal Circuit overruled the district court’s claim construction of the terms “each” and “a respective one” stating the construction essentially excluded a preferred embodiment from the scope of the claims, as a preferred embodiment showed “two elongated operator bodies . . . operably coupled to both the knotter and the cover.”  In supporting this holding, the Federal Circuit quoted its previous holding in the 2004 case, On-Line Technologies, Inc. v. Bodenseewerk Perkin-Elmer GmbH stating, “We have held that ‘a claim interpretation that excludes a preferred embodiment from the scope of the claim is rarely, if ever, correct.’”  386 F.3d 1133, 1138 (Fed. Cir. 2004). 

The '992 Patent

Accent appealed the district court’s claim construction of the term “of at least about ninety degrees.”  The asserted claims of the '992 patent require, “a mount for [the] cover permitting the cover to be pivoted away from said knotter to a knotter access position remote from said wire-maintaining position and through a pivot arc of at least about 90?.”  Accent argued that Leggett’s device would pivot through the required ninety degrees if it weren’t for its SafeLatchTM stop.  The district court held that this was “a distinction without a difference, noting “[t]he SafeLatchTM stop is in fact part of the . . . device.”  Accent also argued that the device infringed the '992 patent because the SafeLatchTM stop can be easily removed, which permits the cover to pivot at least ninety degrees.  The Federal Circuit found this argument unpersuasive, again citing its own precedent:  “[A] device does not infringe simply because it is possible to alter it in a way that would satisfy all the limitations of a patent claim.” High Tech Med. Instrumentation v. New Image Indus., Inc., 49 F.3d 1551, 1555 (Fed. Cir. 1995).  In light of this reasoning, the Federal Circuit affirmed the district court’s summary judgment of non-infringement of the '992 patent.

Reminder #2:  Plausibility in pleading also applies to discovery motions

As noted above, Accent’s motion for additional discovery was denied by the district court.  Accent appealed this ruling and the Federal Circuit affirmed the district court’s ruling.  The Federal Circuit stated that Accent’s problem was “that it never ‘set forth a plausible basis for believing that specified facts . . . probably exist.’”  Slip op. at 10 (quoting Raby v. Livingston, 600 F.3d 552, 561 (5th Cir. 2010).  The Federal Circuit found it important that Accent had received “extensive information” regarding Leggett’s allegedly infringing device through production, and Accent’s counsel and expert had thoroughly inspected the device.  Despite all this evidence, “Accent failed to set forth a plausible basis for believing that additional discovery” was necessary.  Moreover, the evidence already present suggested the facts were opposite Accent’s argument.  Thus, the Federal Circuit affirmed the district court’s denial of Accent’s motion for additional discovery.

Reminder #3:  Sufficient factual material to render plausibility is required for all claims

Accent appealed the district court’s dismissal of the trade secret claim arguing that the court ruled on the motion before Accent even had a chance to respond in writing to the motion to dismiss.  Accent’s trade secret misappropriation claim was based on the argument that the specifications and tolerances of its commercial device constituted trade secrets.  Accent argued that Leggett misappropriated those secrets by copying Accent’s commercial device delivered to one of Accent’s customers.  However, the Federal Circuit found it important that Accent’s own complaint acknowledged that its commercial device was sold in the regular stream of commerce.  Thus, the device was not subject to reasonable efforts to maintain its secrecy.  In affirming the district court’s grant of summary judgment for Leggett, the Federal Circuit relied on Twombly and Iqbal, holding that the “complaint fails to state a claim to relief that is plausible on its face.”

Today's lesson for litigators: make sure you present all your arguments to the district court

In a decision Tuesday, the Federal Circuit affirmed a district court's holding that two patents were invalid under the on-sale bar of 35 U.S.C. § 102(b).  The inventor filed a declaration during prosecution that the invention was reduced to practice before the critical date of the patents, and thereafter sold the claimed method, also before the critical date.  The post-reduction to practice sales could not be considered experimental use, as once an invention is reduced to practice, experimental use is no longer possible.  Further, there was insuffucient evidence to call the inventor's declaration into question.  On this point, the plaintiff attempted to rely upon additional evidence not presented to the district court in opposition to the defendants' summary judgment motion.  The Federal Circuit rebuffed this attempt, limiting the plaintiff on appeal to the evidence presented to the district court in opposition to the summary judgment motion.  As a result, the court affirmed the finding of invalidity.

The Federal Circuit further affirmed the district court's dismissal of the plaintiff's trade secret claims as barred under the statute of limitations.  The court held the plaintiff had sufficient information to allege trade secret misappropriation at least as early as 1996, but did not file suit until 2005, well outside the applicable 3-year limitations period.  Accordingly, dismissal of the trade secret claims was proper.

More concerning In re Cygnus Telecomms. Tech., LLC, Patent Litig. after the jump. 

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Seventh Circuit: Injunction against use of plaintiff's copyrights and trade secrets too vague

In a decision last week, the Seventh Circuit vacated and remanded a district court's preliminary injunction in a copyright and trade secret case.  The court addressed the degree of specificity necessary for an injunction against misappropriating trade secrets and infringing copyrights, and vacated the injunction because it failed to detail the substance of the trade secret or confidential information the defendant was enjoined from using.

Interestingly, the court called attention to the fact that most of the information claimed as trade secret could actually be obtained by FOIA requests sent to state authorities.  The parties are modular home manufacturers, and are required to submit specific details of the homes they plan to sell in order to obtain state approval; those details were among the purported trade secrets.  The court said the injunction did not specify whether information obtained through the FOIA requests would violate the injunction.

More detail of Patriot Homes, Inc. v. Forest River Housing, Inc. after the jump.

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The problem of marketing an idea: how much do you tell a prospective licensee?

Forbes has an interesting piece regarding marketing ideas, specifically way to protect an idea when pitching it to companies or ways to avoid "giving something away" in the process.  It's written to be easily understood by non-lawyers, and has some good general suggestions.  Notably absent from the list:  using the line "I'd tell you, but then I'd have to kill you."

Mattel sues makers of Bratz dolls for trade secret misappropriation

Mattel, the manufacturer of Barbie dolls, sued a former employee, Carter Bryant, for trade secret misappropriation in 2004.  Now, Mattel is attempting to add MGA Entertainment, makers of the relatively new Bratz dolls, to the case.  Mattel alleges that Mr. Bryant conceived of the Bratz doll design while working for Mattel, and therefore Mattel owns the rights to Bratz dolls.

Mattel is also attempting to register several of Mr. Bryant's drawings prepared during his Mattel employment with the copyright office that allegedly show dolls very similar to Bratz.  This could potentially give Mattel a copyright infringement case against MGA once they are registered.

While it is unclear how this case will be resolved, this lawsuit illustrates the types of issues that can arise when employees leave a company to work for a competitor.  However, in most cases, the intellectual property allegedly taken by the employee doesn't reach $2 billion in sales annually.

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