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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.

New York has recently enacted disclosure laws that could impact clean product manufacturers’ ability to protect their trade secret chemical formulations. While California was the first U.S. state to pass a law requiring disclosure of all substances contained in cleaning products, New York’s Department of Environmental Conservation (“DEC”) Household Cleansing Product Information Disclosure Program imposes stricter requirements than California on what must be disclosed.

Both laws require manufactures of cleaning products to disclose all chemicals used in household cleaning products on their websites, and identify any ingredients that appear on authoritative lists of chemicals of concern. However, the New York law also requires manufactures to identify any ingredient that is a nanoscale material.

While both laws have an exemption allowing trade secrets to not be disclosed there are some key differences:

California’s Cleaning Product Right to Know Act of 2017

New York’s Household Cleansing Product Information Disclosure Program

Disclose all intentionally added ingredients unless it is confidential business information (“CBI”) Disclose all intentionally added ingredients, including those present in trace quantities, PLUS all ingredients present only as an unintentional consequence of manufacturing and present above trace quantities (0.1%) where the manufacturer knows or should reasonably know of such ingredients, impurities, or contaminants, unless they are withheld as CBI
Provide CBI justification only on request for audit by the Attorney General Provide CBI justification only on request of the DEC for evaluation
Penalty: prohibited from selling product Penalty: prohibited from selling product PLUS an initial fine of up to $2500, and $500 for each additional day of violation

 

California’s requirements for manufacturers are a lot clearer than New York’s: the “knew or should have known” standard in New York may make full disclosure more difficult. But in either state, manufacturers are able to protect their trade secret information and withhold it from disclosure. What remains to be seen is how (and if) litigation arises challenging a company’s decision to withhold CBI, what kind of information falls within that scope, and what justification is required to maintain trade secret protection.

In July 2018, U.S. District Judge James Patterson imposed a $59 million penalty against China’s largest wind-turbine firm, Sinovel Wind Group LLC (“Sinovel”), for stealing trade secrets from a Massachusetts-based technology company, American Superconductor Inc. (“AMSC”). This fine was imposed as restitution to the American company, AMSC, after Sinovel was found guilty of stealing trade secrets in federal criminal court in January 2018. At trial, the court found that AMSC’s losses from the theft exceeded $550 million. The ordeal left AMSC in perilous financial shape. The U.S. Department of Justice said that the company lost more than $1 billion in shareholder equity and 700 jobs. Because of the severity behind Sinovel’s theft, the court ordered Sinovel to pay $1.5 million in fines and $57.5 million in restitution, and the company was put on probation for one year. The parties reached a settlement with Sinovel, which it agreed to pay the $57.5 million in restitution.

Acting Assistant Attorney General Cronan stated, “[a]s demonstrated by this prosecution, intellectual property theft poses a serious threat to American companies, and the Department of Justice is committed to aggressively investigating and prosecuting individuals and corporations who undermine American competitiveness by stealing what they did not themselves create.” This case further affirms the United States’ commitment to prosecuting the theft of intellectual property through criminal and civil penalties.

Those who perpetrated the thefts live abroad. One has been successfully prosecuted in Austria. U.S. charges are still pending against him, as well as two others who live in China.

Under the Defend Trade Secrets Acts (DTSA), 18 U.S.C. §1836 et seq., a “trade secret” is any type of “financial, business, scientific, technical, economic, or engineering information” that “derives independent economic value … from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”

The Democratic National Committee (“DNC”) filed a lawsuit against Russia, Wikileaks, the Trump Campaign, and several individuals (including Julian Assange, Jared Kushner, and a hacker named “Guccifer 2.0”) on April 20, 2018 in Federal District Court for the Southern District of New York. The DNC alleges that Russia, Guccifer 2.0, Wikileaks, and Assange violated the DTSA, and that all of the defendants violated the Washington D.C. Uniform Trade Secrets Act, D.C. Code Ann. §§ 36-401-46-410. The complaint defines the stolen secrets as “confidential proprietary documents related to campaigns, fundraising, and campaign strategy.” Specific documents include:  (1) a DNC-authored opposition research report on Donald Trump from December 2015; (2) DNC strategy documents related to the DNC’s “counter-convention” to the RNC convention; (3) personal information-including social security and passport numbers-of individuals who communicated with or donated to the DNC; and (4) Clinton campaign chairman John Podesta’s hacked emails. Continue Reading The DNC Tests the Meaning of Trade Secrets in the Political Arena

PharMerica Corporation (“PharMerica”) is a Delaware corporation headquartered in Louisville, Kentucky that provides institutional and hospital pharmacy services throughout the United States.  The company filed a lawsuit in September 2016 in the Federal District Court of Pennsylvania alleging several employment and tort-related claims, and claims of misappropriation of Trade Secrets under the Pennsylvania Uniform Trade Secrets Act (“PUTSA”) and the Federal Defend Trade Secrets Act (“DTSA”) against former Pharmaceutical executive, Lena Sturgeon (“Sturgeon”) and ContinuaRx.  ContinuaRx is a start-up, long term care pharmacy that serves facilities and institutions with pharmaceutical needs. While the DTSA and the PUTSA use different wording to define a trade secret, they essentially protect the same type of information, and create a private right of action for the misappropriation of trade secrets.

Sturgeon and ContinuaRx filed a Joint Motion for Summary Judgment alleging that PharMerica failed to show it has protectable trade secrets.  At issue is whether PharMerica’s internal information about PharMerica’s service methods, market opportunities, marketing plans, current and prospective customers, and pricing information constitute protected trade secrets. On March 16, 2018, the judge sided with Sturgeon and ContinuaRx stating that while “PharMerica may have certain ‘trade secrets’ that deserve protection … in this instance [the company] failed to identify a single quality, attribute, or feature of any of these alleged trade secrets.”

Furthermore, PharMerica admitted that the majority of underlying materials that create its services, marketing opportunities, and pricing information are publically available, and “largely fixed by Medicare and Medicaid reimbursement rates.” Therefore, the court not only found that PharMerica failed to prove it had a protectable trade secret but also that there was no evidence that Sturgeon and/or ContinuaRx improperly acquired, disclosed, used, or threatened to use any specific trade secret.

Remember: “to warrant legal protection, a trade secret must be, in fact, a secret.”

On January 14, 2018, IBM’s Chief Diversity Officer resigned to go work for Microsoft in the same role. The caveat: she had a twelve month non-compete clause.

On February 12, 2018, IBM filed a lawsuit to enjoin its former diversity officer to honor her non-compete agreement with IBM and to recover damages. The suit, filed in Southern District New York court, alleges that the IBM non-compete agreement that the defendant signed has a New York federal and state choice of forum provision and is, therefore, enforceable. In addition to a breach of the non-compete agreement, IBM asserts a claim for misappropriation of its trade secrets. According to IBM, if its former diversity officer “is permitted to work for Microsoft, [she] will inevitably (if inadvertently) use and/or disclose IBM trade secrets for her own benefit and for the benefit of Microsoft.” In addition to injunctive relief (seeking an order requiring its former employee to honor the non-compete agreement), IBM is also seeking compensatory damages. It has also demanded that its former employee remit to them her equity compensation because of this alleged breach of her employment agreement. As to the demand that the employee return the equity compensation she had earned as an employee, IBM’s theory is that the employee is engaging directly in a business which is competitive with IBM. Furthermore, IBM asserts that this is considered a “detrimental activity” under the Long Term Performance Plan agreement in which the employee’s equity awards are governed by and, subject to cancellation and in certain circumstances like this, are subject to repayment. Continue Reading Diversity is Important – But Is It A Trade Secret?

Sinovel Wind Group Co. Ltd. (“Sinovel”) was convicted on January 24, 2018 for stealing trade secrets from AMSC, a U.S. based company. In March 2011, Sinovel, a manufacturer and exporter of wind turbines based in the People’s Republic of China, contracted with AMSC to sell more than $800 million in products and services for its wind turbines.

On June 27, 2013, Sinovel was charged of conspiracy to commit trade secrets theft, theft of trade secrets, and wire fraud, along with Su Liying, Sinovel’s Deputy Director of Research and Development Department; Zhao Haichun, a technology manager for Sinovel; and Dejan Karabesevic, a former employee of AMSC Windtec Gmbh, a wholly-owned subsidiary of AMSC. The evidence presented at trial showed that Sinovel conspired with the other defendants to obtain AMSC’s copyrighted information and trade secrets in order to produce wind turbines and to retrofit existing wind turbines with AMSC technology without paying AMSC the more than $800 million it was owed under the contract.

Because of the theft of its information and trade secrets, AMSC lost more than $1 billion in shareholder equity and approximately 700 jobs, over half its global workforce. Sentencing is set for June 4, 2018. U.S. Attorney Scott C. Blader stated that the “verdict sends a strong and clear message that the theft of ideas and ingenuity is not a business dispute; it’s a crime and will be prosecuted as such.”

Earlier this month, Sunbelt, a North Carolina Corporation, filed a federal lawsuit against Vortex companies and Vortex Turnkey Solutions (hereinafter named “Vortex”) alleging misappropriation of trade secrets, tortious interference, and unfair trade practices. In a case of follow the “footprints,” Sunbelt alleges that Vortex, through a serious of events, “willingly accepted information from Ghent, a former employee of Sunbelt that they knew or should have known to be Sunbelt’s trade secret and/or confidential information.” Furthermore, the complaint states that Vortex solicited, encouraged, or otherwise incentivized, through salary negotiations, said disclosures and breach of the agreement. Vortex and Sunbelt are direct business competitors in selling and renting industrial and construction equipment and providing services, such as turnkey pumping bypass solutions. There are two key parts to this complaint: 1) Can confidential materials including customer lists and rental histories, and other records and documents pertaining to business transactions be considered a trade secret?; 2) Can Sunbelt successfully prove that Vortex had actual or constructive knowledge of Ghent’s agreements with Sunbelt.