The Reversal of a Massive Verdict on the Basis of Disclosure in Prior Litigation
When discussing reasonable efforts to protect trade secrets, the discussion typically focuses on the efforts taken by the company during its normal course of business. Equally important, however, are the reasonable efforts taken to protect trade secrets during litigation. Unsealed filings and public presentations in the course of past litigation can lead to a finding that the “trade secret” in question is no longer secret in future litigation, costing clients massive judgments. Such was the case in E.I. DuPont De Nemours & Co. v. Kolon Industries, Inc., 564 F. App’x 710, 714 (4th Cir. 2014).
In DuPont, the Fourth Circuit reversed a nearly $1 billion jury verdict on the basis of the lower court’s evidentiary ruling. DuPont sued Kolon under the Virginia Uniform Trade Secrets Act, alleging that Kolon hired former DuPont employees in an effort to acquire its trade secrets related to the production of Kevlar, a proprietary DuPont product. At trial, Kolon intended to introduce evidence showing that a number of the alleged trade secrets at issue in the case involved publicly available information. Specifically, Kolon sought to demonstrate that DuPont had disclosed the trade secrets in the course of a 1980s intellectual property litigation between DuPont and a competitor called AkzoNobel.
According to Kolon, the Akzo litigation was a “widely publicized patent dispute” in which DuPont “disclosed vast amounts of technical information about the Kevlar manufacturing process—beyond its patent disclosures—in open court and public filings.” Kolon contended that 42 of the 149 trade secrets at issue in the present case were wholly or partially disclosed during the Akzo litigation. Although Kolon could not locate the actual trial exhibits due to the passage of time, it relied in part on the trial exhibit list, which suggested that DuPont introduced some trade secret information at the public trial. In addition, Kolon pointed to two documents in the publicly available Joint Appendix from the appeal of the Akzo litigation, further showing that supposed trade secret information was disclosed to the public. DuPont moved in limine to preclude Kolon from presenting this evidence, and the district court granted the motion, holding that “Kolon has produced no evidence that any particular trade secret, much less a trade secret that is at issue in this litigation, was disclosed in the litigation between the plaintiff and Akzo.”
The Fourth Circuit reversed, finding that “information disclosed in the Akzo litigation contained details of the Kevlar production process that were strikingly similar to aspects of several of the alleged trade secrets in this case.” Id. Finding that the district court’s standard—that the disclosed information must be the same as the trade secrets at issue—was too stringent, the appellate court explained that “we think a ‘strikingly similar’ standard of relevance is enough.” That is, “to show the relevance of the evidence, Kolon simply needed to make a plausible showing that, either directly or circumstantially, one or more elements of DuPont’s misappropriation claims, e.g., the reasonableness of its efforts to maintain confidentiality was less likely true.” Id. Accordingly, the Fourth Circuit found an abuse of discretion and remanded (to another judge) for further proceedings. The Fourth Circuit was careful to note, however, that it was not holding that all information from the Akzo litigation must be admitted at trial—only that the district court’s “blanket exclusion” was inappropriate and reversible error.
The Importance of Identifying Trade Secrets with Particularity
Courts continued their trend toward requiring early and specific identification of the trade secrets underlying a plaintiff’s claims, and penalizing plaintiffs for failing to do so. In Purchasing Power LLC v. Bluestem Brands, Inc., 22 F. Supp. 3d 1305 (N.D. Ga. 2014), the District Court for the Northern District of Georgia granted summary judgment in favor of the defendant because, among other things, it found that the plaintiff failed to adequately identify the trade secrets underlying its claims.
The case arose following discussions between the two companies regarding a potential merger or acquisition. At the time, Bluestem was a national retailer focused on selling consumer products to low-income and credit-constrained customers by allowing them to make a series of payments over time. Purchasing Power was also a retailer but focused on selling “big ticket” consumer products through voluntary payroll deduction. Shortly before signing a nondisclosure agreement as part of the merger discussions, Bluestem undertook an internal effort to develop its own payroll deduction sales model. In doing so, it took steps to segregate that development team from the team that was managing due diligence for a potential transaction with Purchasing Power. After the negotiations fell through and Bluestem launched its Paycheck Direct program, Purchasing Power filed suit alleging trade secret misappropriation, breach of contract, fraud, and negligent misrepresentation.
On summary judgment, the court explained that “Plaintiff has identified, only vaguely at best, its alleged trade secrets” and that “Plaintiff did not identify any specific information it claims is a trade secret.” Noting that Purchasing Power identified 12 general categories of information, the court reasoned that “[t]hese broad information categories are not sufficient to meet Plaintiff’s legal obligation to allege and prove it has a trade secret.” Finally, the court concluded that Purchasing Power’s failure to specifically identify the trade secrets “precludes Defendant and the Court from evaluating whether a ‘trade secret’ exists and, if so, whether it was misappropriated.” Id. at *17–19. Finding no genuine issue of fact as to any of Purchasing Power’s other claims, the court granted complete summary judgment in favor of Bluestem.
Software Patentability after Alice and the Trade Secret Alternative
The narrowing of patentable subject matter has changed the landscape for intellectual property protection in the software world. The Supreme Court’s decision in Alice Corp. v. CLS Bank International, 134 S. Ct. 2347 (2014), has made it substantially more difficult to obtain a software patent. The Alice Court held that software patent applications must set forth “an inventive concept” beyond computer implementation of an abstract idea.
In the wake of Alice, the Federal Circuit and district courts around the country have invalidated numerous software patents because they lacked “an inventive concept.” See, e.g., Buysafe, Inc. v. Google, No. 2012-1575 (Fed. Cir. Sept. 3, 2014); Loyalty Conversion Sys. v. Am. Airlines, Inc., No. 13-CV-655 (E.D. Tex. Sept. 2, 2014). This trend has understandably caused software innovators to reevaluate their approach to protecting intellectual property and to revisit the benefits of trade secrecy.
While the world of patentable subject matter shrinks, the world of trade secret protection may be expanding. In May of 2014, the California Court of Appeal held in Altavion, Inc. v. Konica Minolta Systems Laboratory, Inc., 226 Cal. App. 4th 26 (Cal. Ct. App. May 8, 2014), that general ideas, including combinations of ideas, are protectable as trade secrets. The case involved Altavion’s digital stamping technology (DST), which enables digital and paper documents to be self-authenticated using bar codes that are encoded with the content of an original document. Konica Minolta Systems Laboratory was interested in incorporating DST technology into its line of multifunction printers, and the parties signed a nondisclosure agreement during negotiations over a possible licensing agreement. After those negotiations broke down, Altavion discovered that Konica had applied for patents that included multiple aspects of DST. Altavion sued Konica in November 2007 for, among other things, trade secret misappropriation.
On appeal, the principal question was whether general ideas and concepts are protectable trade secrets, and Konica argued that “generalized ideas and inventions are protectable by patents and thus cannot be trade secrets.” The California Court of Appeal disagreed. It explained that an overlap exists between trade secret and patent law, and ultimately held that “it is clear that if a patentable idea is kept secret, the idea itself can constitute information protectable by trade secret law.” Id. at 55–56. The court also reiterated the protected status of “compilation” trade secrets, holding that even though certain elements of Altavion’s software design concepts were in the public domain, the particular combination of those elements was not public and was a protectable trade secret.
As a result of these cases, software innovators may find that maintaining their intellectual property as trade secrets is preferable to seeking a patent in a post-Alice world.
The Defend Trade Secrets Act and the Trade Secrets Protection Act
A pair of bills were introduced in the Senate and House in 2014 that would create a federal cause of action—and assured jurisdiction in federal court—for trade secret misappropriation. In April, the Defend Trade Secrets Act was introduced by Senators Christopher Coons (D-DE) and Orrin Hatch (R-UT)—both members of the Senate Judiciary Committee—and would substantially enhance trade secret protection in the following ways.
Creating a uniform federal standard. Trade secret litigation is currently governed by state law, which creates inconsistencies in how trade secrets are defined and protected around the country. This bill would create a uniform definition of trade secrets and provide for consistent forms of relief. This uniformity would provide companies with more predictable and cost-efficient methods for protecting trade secrets and enforcing their rights.
Strengthening remedies for trade secret theft. The bill contains several tools for protecting trade secrets in federal court:
• Ex parte orders to preserve electronic evidence of misappropriation and to seize computers and other property used in misappropriation.
• Injunctions to protect trade secrets.
• Money damages for misappropriation, including treble damages if the misappropriation is willful or malicious.
• A longer (five-year) period to seek relief.
Providing trade secret owners the advantages of federal court. Federal court can give trade secret owners advantages, such as ease in serving discovery on nonparty witnesses and swift nationwide service of process. This bill would give trade secret holders access to the same forum as holders of other federally protected intellectual property, such as patents, trademarks, and copyrights.
In July, a companion bill was introduced in the House. The Trade Secrets Protection Act of 2014 (H.R. 5233) had 18 cosponsors (11 Republicans, 7 Democrats) and was similar to the Senate bill with two principal exceptions: The House bill permits only a civil claim for trade secret theft related to interstate or foreign commerce and provides greater limitations on the ex parte provision than the Senate version. On September 17, the House Judiciary Committee approved the bill with a single amendment.
With the swearing in of a new Congress in January 2015, both bills will need to be reintroduced in order to advance, but that will likely happen given the historic bipartisan support for the proposed legislation. Companies and their counsel should stay tuned.
The Continuing Trend Toward Large Damages Awards and Settlements
Although the DuPont verdict was overturned, 2014 showed no signs of reversing course on the trend toward large damages verdicts and settlements in trade secrets cases. In April of 2013, a software manufacturer, MSC Software Corp., obtained a sizable award for misappropriation of its trade secrets by a competing company and another six-figure award against its former employees for breaching both confidentiality and non-solicitation agreements with MSC.
MSC is a global provider of software that enables engineers to validate and optimize their designs using virtual prototypes. In 2007, MSC filed a complaint in the district court in Michigan, alleging that its competitor, Altair Engineering, improperly recruited MSC’s developers and misappropriated its trade secrets and confidential information to develop a directly competing product. The jury agreed. Following nearly seven years of litigation and a six-week trial, the jury returned a verdict in favor of MSC, finding that Altair willfully and maliciously misappropriated MSC’s trade secrets and that the former employees breached their agreements with MSC. MSC was awarded $26.1 million in damages for the misappropriation and an additional $425,000 in damages for the employees’ contractual breaches.
Larger still is the $630 million trade secrets arbitration award upheld by the Minnesota Supreme Court in October of this year. The dispute arose when Sining Mao left hard-drive manufacturer Seagate to accept a position with a competitor, Western Digital, in 2006. Seagate sued Western Digital and Mao in district court seeking injunctive relief to prevent Mao’s disclosure of trade secrets. The district court granted the defendants’ motion to compel arbitration pursuant to Mao’s employment agreement with Western Digital. In 2011, the arbitrator found that Mao had fabricated documents intended to prove that three of the trade secrets had been publicly disclosed and that there was “no question that Western Digital had to know of the fabrications.”
As a sanction for the defendants’ misconduct, the arbitrator precluded “any evidence by Western Digital and Dr. Mao disputing the validity” or use of certain trade secrets in question and entered a judgment against the defendants for misappropriation. The arbitration award was initially reversed by the Minnesota district court, which found that the arbitrator failed to consider all of Western Digital’s defenses, but that decision was later reversed by the Minnesota Court of Appeals in July 2013. The Minnesota Supreme Court had the final word, confirming the award and noting that Western Digital demanded the arbitration process and, having done so, must live with the consequences. Seagate Tech., LLC v. W. Digital Corp., 854 N.W.2d 750, 765 (Minn. 2014).
In short, the days of focusing only on immediate relief are over. Companies and counsel need to consider the monetary value of their claims from the beginning and shape litigation strategy accordingly.
Keywords: litigation, business torts, trade secrets, damages, patents, Defend Trade Secrets Act, Trade Secrets Protection Act