Trade Secrets Trends

Trade Secrets Trends

Analysis and commentary on the latest developments in trade secrets protection, disputes, and enforcement

Chinese Company Challenges ITC’S Authority Over Trade-Secret Theft Occurring Outside the United States

Posted in U.S. Litigation, Uncategorized

About 5 years ago, the Federal Circuit held that the U.S. International Trade Commission (“ITC”) had the power to adjudicate trade-secret theft occurring wholly overseas. The case was TianRui Group Co. Ltd. v. ITC, 661 F.3d 1322 (Fed. Cir. 2011), and we blogged about it here. That decision is now under attack. Last week a Chinese company known as Sino Legend petitioned the U.S. Supreme Court for a writ of certiorari to review TianRui Group’s principle holding—namely, that Section 337 of the Tariff Act gives the ITC jurisdiction over trade-secret misappropriation, even if the predicate acts of misappropriation occur entirely outside the United States.

The background to this significant development sounds similar to many trade-secret stories. A New York company known as SI Group developed a process for producing a type of rubber component, a “tackifier,” commonly used in tires. To serve its overseas customers, the New York company set up a manufacturing operation in China; it created a Chinese subsidiary and hired Chinese nationals to manage the company. Eventually, two of the Chinese nationals left the subsidiary and began working for a competitor in China—Sino Legend. SI Group alleges that the Chinese nationals worked with Sino Legend to misappropriate SI Group’s trade secrets in the tackifier.

In 2008, SI Group began its quest to enforce its purported trade secrets in China. It initiated a series of proceedings before Chinese tribunals, but none were successful. Then, in May 2012, SI Group brought its efforts home to the United States and filed a Section 337 complaint with the ITC. Section 337 of the Tariff Act authorizes the ITC to bar entry into the United States any “articles” that are produced through “[u]nfair method of competition” and which threaten “to destroy or substantially injure an industry in the U.S.” 19 U.S.C. § 1337. The Federal Circuit has previously interpreted the ITC’s power over “unfair methods competition” to include trade-secret theft.

The issue presented by SI Group’s complaint—similar to the issue in TianRui Group—was whether the ITC’s Section 337 authority over trade secrets extends to trade-secret misappropriation that occurs wholly outside the United States and entirely overseas. Relying on TianRui Group, the ITC held that it had authority over Sino Legend’s alleged trade-secret theft and found that Sino Legend had engaged in misappropriation. In accordance with Section 337, it issued a general exclusion order, barring Sino Legend’s importation of infringing products into the United States for a period of ten years. The Federal Circuit, also relying on its TianRui Group decision, affirmed.

Sino Legend now challenges that affirmation by the Federal Circuit and with it the holding of TianRui Group. The question presented in Sino Legend’s certiorari petition says it all: “Whether Section 337(a)(1)(A) permits the ITC to adjudicate claims regarding trade secret misappropriation alleged to have occurred outside the United States.” Sino Legend contends that the ITC lacks this authority. To bolster its argument, the Chinese company references a long-established statutory presumption that federal statutes do not extend extraterritorially unless there is clear congressional intent to the contrary. Sino Legend asserts that nothing in Section 337 clearly indicates that the ITC has jurisdiction over trade-secret theft occurring wholly overseas. Not to mention, it contends that applying Section 337 to trade-secret theft outside the United States, absent clear congressional intent, disrupts international relations by allowing the ITC to supplant the local laws and institutions of foreign governments. In short, Sino Legend argues that TianRui Group is wrong as a matter of statutory interpretation, but it is also bad policy.

We will continue to watch this case closely. As we have blogged before, the aftermath of TianRui Group rendered the ITC an effective forum for U.S. companies litigating international trade-secret theft, particularly when the theft occurs in countries where trade-secret law is more relaxed or less developed. But should the Supreme Court grant certiorari over Sino Legend’s petition, that may all change.

Space Race Starts Anew as Virgin Galactic Files Trade Secrets Claims Against Rival

Posted in U.S. Litigation

Virgin Galactic (“Galactic” or the “Company”), the sub-orbital space flight arm of Richard Branson’s Virgin empire, filed suit last week against competing space flight company Firefly Systems, Inc. (“Firefly”) and two of its officers, alleging that Firefly misappropriated its  trade secrets and confidential information. The lawsuit is the latest salvo in an on-going battle (or as some might call it, a “star war”) between Galactic and the CEO of Firefly, Thomas Markusic, a former employee of Galactic who started the rival company in late 2013. While the Company has pending claims in arbitration against Markusic, this new suit in California Superior Court attacks both Firefly and Markusic’s business partners for knowingly using and benefitting from the alleged misappropriation.

According to the Complaint, Galactic hired Markusic in 2011 as its VP of Propulsion. Markusic’s role gave him intimate knowledge of the Company’s research into liquid rocket propulsion, space vehicle architecture, “aerospike” technology, and other confidential projects. While still employed at Galactic, Markusic allegedly solicited business partners and founded Firefly based on concepts and data he obtained in the course of his work.  Galactic maintains that Markusic and Firefly relied on and continues to use the Company’s technical and marketing information, as well as Markusic’s engineering notes from his tenure at Galactic, to develop products such as a recently announced small launch vehicle.

Galactic’s suit against Firefly and Markusic’s business partners comes after two years of arbitrating trade secrets claims against Markusic himself. That arbitration has been marred by discovery disputes, allegations of spoliation, and a recent attempt (after 2 years of arbitration) by Markusic to challenge the arbitrability of the dispute. Galactic now alleges that Markusic’s business partners knew that Markusic was providing them with Galactic’s protected trade secrets, and nonetheless used and continue to use that information to build and market their products. If proven true, Galactic asserts that Markusic’s business partners may be personally liable for misappropriating trade secrets.  Complaint at 19 (citing PMC, Inc. v. Kadisha, 78 Cal. App. 4th 1368, 1383 (2000), as modified on denial of reh’g (Apr. 7, 2000)).

Interestingly, Virgin Galactic, LLC v. Firefly Systems, Inc., No. BC637340 (Sup. Ct. Cal. Oct. 13, 2016) is not the first space-related trade secrets case Trade Secrets Trends has covered this year (see our post of June 16, 2016). While the outcome of these cases are as yet unresolved, it is safe to say that not many people predicted that the new battle for space primacy would be fought in courtrooms here on earth.

Government Contractor Argues the Insider Threat

Posted in Data Protection, U.S. Litigation

Last week, government contractor Advanced Fluid Systems Inc. wrapped up its summary judgment briefing in a case loaded with trade secrets trends.  In June, Advanced sought summary judgment in the Middle District of Pennsylvania on its claims for misappropriation of trade secrets, and aiding and abetting breach of fiduciary duty.  Advanced had sued a former employee, the company that the employee then founded, and another rival firm – arguing that the defendants had teamed up to steal and exploit Advanced’s proprietary designs for hydraulic systems.  According to Advanced, the result was a $2 million subcontract for work at a NASA launch site, which went to the employee’s new company instead of Advanced.

At the heart of Advanced’s allegations is the charge that, while still working at Advanced, the former employee downloaded “virtually all files” from Advanced’s servers, including sensitive drawings regarding its hydraulic technology.  Advanced argued that, just days later, the employee’s start-up company began attaching its name to some of those drawings and ultimately submitted them as part of their bid on the subcontract.

Whatever the court’s determination on the briefs, the underlying fact pattern is an all too common one.  The case highlights the need to remain ever-vigilant with respect to those employees who have access to a company’s crown jewels, as well as the potential benefits of data loss prevention (or “DLP”) technology.

U.S. Chamber of Commerce Calls for Greater Trade Secrets Protection

Posted in Cyberhacking, Legislation & Policy

On Friday, September 9, the U.S. Chamber of Commerce urged the Obama Administration to take more action against the theft of trade secrets and other intellectual property.  The Chamber did so in response to a Request for Information issued by the National Institute of Standards and Technology (NIST), seeking industry input regarding various cybersecurity issues, including the economic consequences of hacking.

The Chamber explained that “IP-related industries generate 35 percent of America’s economic output and are responsible for two-thirds of all exports and more than 40 million jobs” and that the “threat of trade secrets theft is of increasing concern to U.S. economic well-being and job creation.”  Noting that it had previously called on Congress to pass federal civil legislation, it praised the passage of the Defend Trade Secrets Act as a step in the right direction.

Underlying the Chamber’s emphasis on trade secrets protection was its broader goal of establishing norms and deterrence to “heighten the costs on sophisticated attackers that would willfully hack America’s private sector for illicit purposes.”  This was one of only three “top” cybersecurity issues that the Chamber chose to address, along with standards and information sharing, and that it urged the executive branch to prioritize.

These and other comments submitted will help inform the new Commission on Enhancing National Cybersecurity, which President Obama recently convened.  The Commission will then craft recommendations to the President for improving cybersecurity – and possibly trade secrets protection – across the public and private sectors.

No Soup for You! Panera Sues Papa John’s and Former Exec for Trade Secret Theft

Posted in Non-Competes, U.S. Litigation

Last month, Panera, the sandwich company perhaps best known for its “You-Pick-Two”® soup-salad-sandwich offering, brought suit under the Defend Trade Secrets Act (DTSA) against Michael Nettles, a former Panera executive who left the bread bowl purveyor for employment with Papa Johns. In its suit, Panera alleges that Nettles breached his employment agreement (which specifically identified Papa John’s as a competitor for whom Nettles could not work within one year after leaving Panera) and stole valuable trade secrets when he departed for Papa John’s.

According to the complaint, Panera and Papa Johns “compete with each other as a ‘food alternative’ … [and] fight for customers during the lunch and dinner hours … [by] selling products made from dough.” Nettles – Panera’s former Vice President of Architecture in its Information Technology department – took valuable trade secrets regarding Panera’s “Panera 2.0” initiative, Panera alleges. The initiative consists of “enhanced to-go and eat-in options enabled by a series of integrated technologies” and is designed to “reduce wait times, improve order accuracy, and minimize or eliminate crowding; and create a more personalized experience.” Simply put, Panera is seeking to protect its “strategic technology plan” which Nettles “intimately knows” and consists of “[Panera’s] use of technology to enhance guest experience, its successes in the delivery business, and its use of powerful and integrated systems and processes.”

Earlier this month, Judge John A. Ross of the Eastern District of Missouri granted Panera’s motion for a temporary restraining order. In its opposition to the TRO, Papa John’s had argued that Nettles’s non-compete agreement was unenforceable under Missouri law because Papa John’s and Panera are not actually competitors. Judge Ross was not persuaded – Panera demonstrated (through Papa John’s marketing materials) that both restaurant chains target a so-called “clean ingredient consumer” and that the chains compete in the market for carryout meals among this consumer base.

This case presents an atypical fact pattern: in a case between two restaurants, one might expect that a relevant trade secret would be a recipe or a new way of baking bread faster or more efficiently. This case demonstrates that sometimes the IP used to optimize delivery or consumer experience is just as valuable as the core product itself.

The preliminary injunction hearing is set for November 16, 2016 and the case is titled Panera, LLC v. Nettles and Papa John’s International, Inc., Case No. 4:16-cv-1181-JAR (E.D. Mo.).


United States v. Nosal: Keep Your Friends Close, but Your Passwords Even Closer

Posted in Criminal Prosecution, Data Protection, U.S. Litigation

On July 5, 2016, the Ninth Circuit affirmed the conviction of David Nosal, an ex-employee of Korn/Ferry, an executive search firm, who left to start a competing firm. With Nosal’s knowledge and encouragement, two other former employees of Korn/Ferry used a current employee’s credentials to gain access to the Korn/Ferry database and take confidential information. U.S. v. Nosal, No. 14-10037, 2016 WL 3608752 at 6 (9th Cir. July 5, 2016).

The prosecutors charged Nosal with violating section 1030 (a)(4) of the Computer Fraud and Abuse Act (“CFAA”), which criminalizes “knowingly and with intent to defraud, access[ing] a protected computer without authorization, or exceed[ing]authorized access, and by means of such conduct further[ing] the intended fraud and obtain[ing] anything of value.”1 Having failed to state an offense that Nosal “exceeded authorized access” by violating the company’s internal use restrictions (decided in Nosal I), the government filed a superseding indictment alleging Nosal violated the “without authorization” prong of the CFAA after his login credentials were revoked through his co-conspirators’ use of his former executive assistant’s login information to access Korn/Ferry’s database.

The jury convicted Nosal on all counts. On appeal, the Ninth Circuit analyzed the meaning of the words “without authorization.” The Court held that the phrase was unambiguous and its plain meaning encompassed the situation in this case where the employer rescinded permission to access a computer and the defendant accessed the computer anyway.

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4 Key Takeaways: What the New Federal Trade Secrets Law Means for Your Clients (June 15 Webinar)

Posted in Legislation & Policy, Non-Competes

On June 15, Crowell & Moring hosted a trade secrets webinar, “What the New Federal Trade Secrets Law Means for Your Clients.” The panelists, Mark Klapow, Mark Romeo, Mike Songer, and Vince Galluzzo provided an overview Defend Trade Secrets Act (DTSA), signed by President Obama in May. The panelists also discussed how the courts are likely to interpret certain provisions and provided best practice guidance how to use DTSA to your client’s advantage.

Key Takeaways:

  1. The DTSA creates the first federal civil cause of action for trade secret litigants. Litigants can now freely access federal courts, including technology savvy judges, broad subpoena powers, and straightforward discovery rules and procedures.
  2. There is no preemption, so Uniform Trade Secrets Act (UTSA)-based state law claims remain independently viable. The definition of trade secrets and the test for misappropriation remain largely unchanged from the UTSA.
  3. Ex parte seizures are available on a heightened showing to stop imminent threats and attach assets.
  4. Notice requirements need to be incorporated into new and amended employee agreements to obtain enhanced damages and fees.

Please click on a link below to access webinar materials. (Note: to listen to the full recording you will need to sign-in or register with ON24.)

Presentation Deck [PDF]

Webinar Recording [ON24]

If you have any questions or would like additional information, please contact our team.


DTSA Update: Alphabet and Google Accused of Misappropriation of Trade Secrets Under The DTSA

Posted in U.S. Litigation

In the highest-profile case filed to date under the recently enacted Defend Trade Secrets Act, Space Data has accused Alphabet and Google of misappropriation of trade secrets in the launch of their balloon-based wireless network code named Project Loon, in a complaint filed in the U.S. District Court for the Northern District of California.

Space Data alleges that Google and it engaged in discussions and negotiations concerning Google’s possible acquisition of shares or assets of Space Data in 2007.  Later, in February 2008, Space Data provided Google with access to confidential and trade secret information, including business concepts for the use of balloons to provide wireless service.  According to Space Data, Google then abruptly cut off further discussions later in the month.

A Google subsidiary, now named “X,” first tested Project Loon over New Zealand in 2013.

Space Data’s complaint includes claims for patent infringement and misappropriation of trade secrets under the DTSA and California state law.  It includes allegations that Google’s misappropriations are ongoing.

The DTSA creates a federal cause of action for trade secret misappropriation.  But the law only applies “to any misappropriation of a trade secret . . . for which any act occurs on or after the date of the enactment of this Act,” or May 11, 2016, when President Obama signed the law.  The DTSA is unclear as to what constitutes such an “act” where the alleged misappropriation began before May 11 and purportedly remains ongoing.

The case is Space Data Corp. v. X, No. 16-cv-3260 (N.D. Cal.).

Former Executives Seek Sanctions Against Company And Its Counsel For Alleged Failure To Disclose Insurance In Trade Secrets Dispute

Posted in U.S. Litigation

Former executives, who are accused of theft of confidential information, trade secrets, and other intellectual property, have asked a federal court to impose severe sanctions against their old employer and its counsel, including dismissal of the case, for their alleged failure to disclose the existence of insurance that could have covered the executives’ defense costs.

In May 2015, in Summer Infant, Inc. v. Bramson, No. 15-cv-218 (D.R.I.), Summer Infant, a company that designs and sells baby products, filed suit against its former CEO and five other executives, alleging that they stole company information to launch a competing business.

As part of Summer Infant’s July 2015 initial disclosures, the company stated that “there are no insurance agreements of the nature described in Fed. R. Civ. P. 26(a)(1)(A)(iv).”  Under Rule 26, a party must, without awaiting a discovery request, provide to the other parties “any insurance agreement [that] may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment.”  Fed. R. Civ. P. 26(a)(1)(A)(iv). Continue Reading

When Customer Information Isn’t a Trade Secret – McCormack Auction Company, Inc. v. Hanks

Posted in U.S. Litigation

A California appeals court recently reversed a trial verdict that had found trade secrets in an auction house’s customer information. The case is notable because it demonstrates when customer information falls short of warranting trade-secret protection.


The case McCormack Auction Company, Inc. v. Hanks involved a now-defunct auction house known as the McCormack Auction Company. Operating in southern California, McCormack handled large-scale auctions, both online and in person. It had acquired several repeat customers during its 30-plus years of operation, including bankruptcy trustees, community colleges, and public utilities. McCormack maintained its customer information in electronic databases on its computers. As an advertising tactic, McCormack identified on its website some satisfied customers that it had served in the past, but it did not display the customers’ contact information. Continue Reading