In Dunster Live, LLC v. LoneStar Logos Mgmt. Co., LLC, 17-50873, 2018 WL 5916486 (5th Cir. Nov. 13, 2018), the United States Court of Appeals for the Fifth Circuit recently dealt a blow to parties seeking to recover attorneys’ fees under the fee shifting provision of the Defend Trade Secrets Act (“DTSA”). In the underlying case, plaintiff sued defendants, a competitor company and its owner who was formerly a member of the same LLC, for winning state contracts to construct and install road signs formerly held by the LLC after purportedly stealing proprietary software in violation of the DTSA. Defendant spent over $600,000 in out-of-pocket litigation costs defending against this “baseless” lawsuit and ultimately plaintiff agreed to voluntarily dismiss the case without prejudice. Defendant moved for attorneys’ fees under § 1836(b)(3)(D) of the DTSA which states “[a court may] award reasonable attorney’s fees to the prevailing party” where “a claim of… misappropriation is made in bad faith.” The District Court refused to award fees, and the Fifth Circuit agreed, finding where a party is free to refile a case, there is no material change in the “legal relationship of the parties,” and therefore no prevailing party. Id. at *1 (citing Buchananon Bd. and Care Home, Inc. v. W.V. Dept.of Health and Human Res. 532 U.S. 598, 604 (2001)). The Fifth Circuit reasoned “[any] dismissal without prejudice thus does not make any party a prevailing one.” Id.

LoneStar provides a few lessons for other DTSA defendants, namely that securing a voluntary dismissal without prejudice may not be enough to warrant fee shifting and encouraging them to pursue other independent bases for protection beyond the DTSA including Fed. R. Civ. P. 41 which permits a court to refuse to grant a motion to dismiss that was made in bad faith and Fed. R. Civ. P. 11 which permits sanctions for violations of pleading standards which would apply regardless of whether the defendant “prevail[ed].” Id.

It remains to be seen how other circuits will interpret this DTSA provision.

Two New England craft beer companies are dealing with a hangover from a contentious trade secret dispute. Massachusetts-based franchisor Craft Beer Stellar, LLC recently filed a complaint in Massachusetts federal court against Maine-based franchisee Hoppy Days, LLC. Plaintiff brought breach of contract claims in addition to alleging violations of the Defend Trade Secrets Act, the Computer Fraud and Abuse Act, Massachusetts trade secret law under M.G.L. C. 93, §§ 42 & 42A, and the Massachusetts Consumer Protection Act under M.G.L. c. 93A §§ 2 and 11. The parties executed a franchise agreement in 2015 and defendant’s franchisee store opened its doors in early 2016. Plaintiff sent a notice of default for failure to comply with the franchise agreement to Defendants in October 2017. However, after sending the notice of default, according to Plaintiff, Defendants started posting Plaintiff’s trade secrets and confidential and proprietary information including secret formulas, patterns, and compilations of information used to operate its franchise on Glassdoor.com – a public job recruitment forum. Plaintiff seeks monetary and punitive damages as well as injunctive relief.

However, this is not the only trade secret litigation spawned by this franchisor-franchisee relationship. Plaintiff also brought suit – unsuccessfully – against Glassdoor for Defend Trade Secrets Act violations. The U.S. District Court for the District of Massachusetts dismissed Plaintiff’s Defend Trade Secrets Act claims after finding that Section 230 of the Communications Decency Act (“CDA”) protects website operators from lawsuits relating to a third party’s publication of defamatory content. See Craft Beer Stellar, LLC v. Glassdoor, Inc., 2018 WL 5505247 (D. Mass. Oct. 17, 2018) (finding “[a]lthough § 230(e)(2) of the CDA provides an exclusion for “intellectual property” laws, the Defend Trade Secrets Act expressly provides that it “shall not be construed to be a law pertaining to intellectual property for purposes of any other Act of Congress”) (citing Defend Trade Secrets Act, §2(g)).

One can only hope that hoppier days are ahead for future franchisors and franchisees facing trade secret disputes.

It is a long standing principle in trade secret law that “[a] trade secret can exist in a combination of characteristics and components, each of which, by itself, is in the public domain, but the unified process, design and operation … [makes it] a protectable secret.” Imperial Chem. Indus. v. Nat’l Distillers & Chem. Corp., 342 F.2d 737, 742 (2d Cir. 1965).

In a recent decision, the United States Court of Appeals for the Fourth Circuit reaffirmed protection of combination trade secrets in a case brought by software company AirFacts Inc., a developer and licensor of software around ticket price algorithms and audits, against a former employee for breach of contract and trade secret misappropriation. The trade secrets at issue involved two flowcharts displaying ticket prices rules derived from information in the public domain. In a bench trial, the Maryland district court ruled that the flowcharts contained public information and were widely available to AirFacts’ employees, and thus, these documents were not trade secrets under the Maryland Uniform Trade Secret Act (“MUTSA”).  The Fourth Circuit disagreed, ruling that the flowcharts were protectable trade secrets and remanded the case back to the lower court to determine if the defendant misappropriated those documents. AirFacts Inc. v. Amezaga, No. 17-2092 (4th Cir. 2018).

The Fourth Circuit’s decision rested on three key points:

 

  • The evidence at trial demonstrated that the information was not readily ascertainable to outsiders because defendant compiled the information in particular groupings and applied his expertise to create the flowcharts.
  • The defendant’s painstaking, expert arrangement of the data made the flowcharts inherently valuable separate and apart from the publicly available contents.
  • Plaintiff took reasonable steps to protect the flowcharts’ “confidential status outside of the normal scope of their restricted use within AirFacts’ business” and granted only “a few” employees access to the flowcharts. This case is a valuable reminder that trade secret protections can extend to a combination of information that is itself in the public domain.

In an indictment unsealed last week, the U.S. Department of Justice charged two companies – one based in China and the other in Taiwan – as well as three individuals, with trade secret theft, conspiracy to commit trade secret theft, economic espionage, and other related crimes. These charges are the latest in a recent string of similar prosecutions, as U.S. officials have sought to combat the threat of Chinese economic espionage against American technology companies, defense contractors, and other entities.

The indictment claims that defendants stole trade secrets from U.S.-based Micron Technologies, Inc., relating to the research and development of dynamic random-access memory (DRAM), a technology used to store data in electronic devices. DRAM had been identified by the Department of Commerce as an “essential component of U.S. military systems.” According to the indictment, the People’s Republic of China (PRC) has “publicly identified the development of DRAM technology as a national economic priority because PRC companies had not been able to develop technologically advanced DRAM production capabilities, and PRC electronics manufacturers relied on producers outside the PRC to supply DRAM.”

The indictment claims that United Microelectronics Corporation (UMC) (a semiconductor company headquartered in Taiwan) and Fujian Jinhua Integrated Circuit, Co., Ltd. (a PRC-funded company dedicated to the development and manufacture of DRAM) entered into a technology cooperation agreement to develop DRAM for a product described as “32nm and 32Snm DRAM.” The companies subsequently recruited three former Micron employees, including the former head and two former employees of Micron’s Taiwan subsidiary responsible for making DRAM, all of whom left Micron to work for UMC in 2015 and/or 2016. The indictment further claims that prior to leaving Micron, the former employees downloaded and took Micron information pertaining to at least eight different trade secrets, totaling nearly 1,000 files.

According to the indictment, the defendants used the numerous Micron trade secrets to “advance the development of UMC’s F32 DRAM technology,” including filing five patents and a patent application concerning DRAM technology that “contained information that was the same or very similar to technology described in Micron’s trade secrets.”

The indictment follows the recent addition of Jinhua to the Department of Commerce’s “Entity List,” which the Secretary of Commerce stated will limit Jinhua’s “ability to threaten the supply chain for essential components in our military systems.” Notably, the DOJ also filed a civil action seeking an injunction preventing UMC and Jinhua from exporting, selling, or importing to the U.S. any product containing DRAM manufactured by either Jinhua or UMC.

The indictment is the fourth case brought by the DOJ relating to Chinese economic espionage in the last three months. The three other cases are the following:

  • Charges against ten defendants working for the Jiangsu Ministry of State Security (JSSD), alleging conspiracy to steal information from U.S. and European defense contractors relating to aerospace technology (Oct. 30, 2018);
  • Charges against Ji Chaoqun, a Chicago resident, for allegedly assisting JSSD to recruit U.S. engineers and scientists, including U.S. defense contractors (Sept. 25, 2018); and
  • Charges against Xiaoqing Zheng, a GE engineer residing in New York, alleging theft of GE trade secrets relating to turbine technology (Aug. 1, 2018).

In noting that Chinese economic espionage against the U.S. is “increasing rapidly,” Attorney General Sessions has announced a new initiative dedicated to curtailing Chinese theft of U.S. trade secrets. A video of the DOJ’s announcement of the indictment is available here. The flurry of recent activity clearly demonstrates that the DOJ is continuing to increase its policing efforts.

Last week, airplane manufacturer Bombardier filed a complaint against Mitsubishi Aircraft Corporation and former Bombardier employees in the Western District of Washington alleging violations of the federal Defend Trade Secrets Act and the Washington Uniform Trade Secrets Act, tortious interference, and breach of contract. Bombardier claims as trade secrets its designs, testing, and regulatory “certification approach” for obtaining approval from aviation safety agencies, as well as the underlying regulations themselves, which it claims are identified “only after an aircraft manufacturer meets in confidence with certifying authority representatives… to reach agreement on which specific subset of regulations must be satisfied.”

Bombardier alleges its employees were actively recruited to help the defendants obtain regulatory approval for a new line of regional jets, and that several engineers sent confidential Bombardier documents and regulatory certification reports to their personal email accounts in the weeks preceding their departure. Bombardier claims that this information provides invaluable guidance in meeting “innumerable exacting” regulatory standards.

The complaint seeks monetary and punitive damages, as well as injunctions preventing the defendants from using proprietary Bombardier information or recruiting Bombardier personnel.

Noncompete agreements are nothing new, in fact, 18% of all U.S. workers are subject to noncompetes while an estimated 70% of senior executives and 43% of engineers are bound by noncompetes. Employers frequently use noncompetes—which may restrict former employees from working for or starting competing businesses for a set period of time—to protect a company’s goodwill and trade secret information and as an effective tool for retaining talented employees from making a move to a competitor. Employees subject to these agreements may also be subject to a provision that provides for “garden leave,” which requires that an employee who is in the process of terminating their employment stay away from the workplace or work from home or another location during their notice period. In some cases, such “garden time” may not be paid. Recently, Massachusetts weighed in on the issue of “garden leave.” In first-of-its-kind legislation, Massachusetts signed into law House Bill No. 4714 stating that former employees in Massachusetts serving required “garden time” under noncompete agreements may be entitled to pay. Under this legislation, employers are required to pay former workers serving out their “garden leave” at least 50% of the workers’ base salary or, alternatively, provide “mutually-agreed upon consideration.” This reflects a compromise between opponents of noncompete agreements, who argue that they restrict economic growth, and the business community, which views noncompete agreements as necessary to protect legitimate business interests. In addition, this new legislation places Massachusetts squarely in the middle of a divide between states like California, which prohibits noncompete agreements except in certain limited contexts, and the many states that allow for their enforcement. However, as a practical matter, it remains to be seen how frequently former employees on “garden leave” will actually receive compensation since the bill does not define or restrict adequate consideration. Stay tuned…

On September 14, 2018, a former scientist at GlaxoSmithKline (“GSK”) pled guilty to conspiring to steal trade secrets from his former employer. Dr. Tao Li was accused of stealing confidential information about anti-cancer drugs from a GSK facility in Upper Merion, Pennsylvania after conspiring with other GSK employees who provided information to him via email, in person, and on a thumb drive. Dr. Li had established a rival company in Nanjing, China with financial backing from the Chinese government. The trade secrets allegedly stolen from GSK included detailed information about multiple products under development and information about manufacturing these products. This case is part of a larger trend, as federal authorities seek to crack down on the theft of trade secrets used to establish competitor companies in China. The United States Attorney for the Eastern District of Pennsylvania, William McSwain, commented “[n]ot only is this a serious crime, but it is literally a form of economic warfare against American interests. Such criminal behavior must be prosecuted to the fullest extent of the law.” Dr. Li will be sentenced on January 4, 2019 and faces up to 10 years in federal prison.

StubHub, an online ticket exchange company, successfully defeated a suit brought by start-up company Calendar Research LLC. Calendar had alleged that three of its former employees used proprietary data in developing applications for StubHub. In its suit, Calendar Research alleged that the former employees downloaded proprietary information that belonged to the startup that they didn’t return and maintained access to Calendar Research’s source code.

A California federal judge found that Calendar Research failed to show that the application created by StubHub used proprietary information. The applications did not use the same source code or have any other similarities. Furthermore, Calendar failed to meet an element of a claim for misappropriation under the Defense Against Trade Secrets Act (DTSA) that requires plaintiffs to show that a defendant had knowledge that the trade secret was improperly acquired. The court held that it “lacks any evidence to make a finding that StubHub acquired, disclosed, or used plaintiff’s trade secrets with knowledge. And the court lacks any evidence with which to impute that knowledge, considering that the code does not show any similarities and plaintiff’s alleged compilations do not have novelty.” In reaching this decision, a thorough review of the source code for both applications revealed that proprietary information was not misappropriated. For seven of eight StubHub apps for which the ticket company submitted source code, the judge said that neither of the experts who analyzed the code from those apps found that it was “similar, let alone identical, to the Calendar Research code.”

Although he dismissed the DTSA claims, the judge lifted the stay on several other claims, including allegations brought under the Computer Fraud and Abuse Act. The attorneys for Calendar Research stated that they are considering appealing the order because “Through this lawsuit, we are sending a message on behalf of tech startups everywhere that StubHub and other large companies have to pay a fair price for technology they want, they cannot just take it.”

In May 2018, U.S. District Judge Katherine B. Forrest of the Southern District of New York granted PepsiCo, Inc.’s (“Pepsi”) summary judgment motion against ScentSational Technologies, LLC (“ScentSational”).

ScentSational, a company that develops methods of delivering scents in food and beverage packaging to alter a consumer’s taste perception, alleged that Pepsi learned its trade secrets in the course of their business relationship that it included in a patent application that caused Coca-Cola (“Coke”) to terminate a $70 million dollar project with ScentSational. Pepsi argued it was actively pursuing parallel in-house development at the same time it was in discussions to use ScentSational’s aroma release technology.

The court granted Pepsi’s summary judgment motion on trade secret misappropriation and breach of contract claims because there was no causation where ScentSational and Coke’s lone statement of work had already expired and chances of commercializing the project were “well below 50%” such that no reasonable juror could conclude that Pepsi’s patent application caused Coke to terminate its project with ScentSational, and no damages where ScentSational failed to put forward sufficient record evidence to support its $70 million dollars in alleged lost profit damages.

As we previously posted, in June 2018 Tesla filed suit against a former employee, Martin Tripp, alleging trade secret misappropriation. Mr. Tripp has now filed an answer to Tesla’s accusations expanding on his whistleblower defense and bringing three intentional tort counterclaims against Tesla. According to his answer, Mr. Tripp was driven to act as whistleblower in response to numerous manufacturing practices at Tesla’s Nevada facility that allegedly posed a risk to both employees and customers. For example, Mr. Tripp alleges that Tesla used a non-validated manufacturing line to produce automotive parts and that his supervisors allowed workers to leave hazardous amounts of scrap metal throughout the manufacturing area. Mr. Tripp alleges that when his supervisors failed to address these concerns, he brought them to Tesla’s CEO Elon Musk directly. But rather than take corrective action, Tesla reassigned Mr. Tripp to Tesla’s battery assembly line. That’s where Mr. Tripp alleges to have learned that a defective manufacturing robot punctured over a thousand batteries and that Tesla knowingly installed hundreds of these defective batteries in Model S vehicles. Mr. Tripp also denies accessing Tesla’s operating system to steal trade secrets—although he admits to using Tesla’s manufacturing software to track which parts were installed in automobiles.

Additionally, Mr. Tripp brings three counterclaims based, in part, on Tesla’s allegations of trade secret misappropriation. For instance, Mr. Tripp claims Elon Musk defamed him in an email to Tesla employees that accused him of “extensive and damaging sabotage” and of “exporting large amounts of highly sensitive Tesla data to unknown third parties.” In addition to defamation, Mr. Tripp asserts invasion of privacy and intentional infliction of emotional distress claims based on statements made by Elon Musk and a spokesperson for Tesla about his actions as well as a accusations that Mr. Tripp threatened to “shoot . . .up” the Tesla facility.

We’ll keep watching and report how Tesla responds to Mr. Tripp’s counterclaims.