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.

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.

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.

In December 2017, Swarmify, Inc. filed a lawsuit against CloudFlare, Inc. in the U.S. District Court for the Northern District of California. The tech companies both have video streaming products. According to the Swarmify complaint, CloudFlare stole Swarmify’s trade secrets revealed during negotiations between the two companies. Specifically, Swarmify alleged that CloudFlare used its trade secrets to create a faster, more efficient video streaming service. After seven months of litigation, on June 21, 2018, and on the eve of the close of discovery in the case, Swarmify filed a motion to dismiss its claims. While Swarmify had initially sought dismissal without prejudice, when the Court informed Swarmify that it would not permit dismissal without prejudice, Swarmify agreed to a dismissal with prejudice. Swarmify’s request that its claims be dismissed was made after the trial court had ruled against it on its request for a preliminary injunction, the decision of which was entered on March 2, 2018.

After the dismissal with prejudice on Swarmify’s complaint was entered, on July 24, 2018, CloudFlare filed a motion for attorneys fees under the California Uniform Trade Secrets Act and Defend Against Trade Secrets Act, arguing that Swarmify had made its trade secret misappropriation claim in bad faith. Specifically, CloudFlare alleged that “Swarmify’s trade-secret claims were objectively specious and pursued in bad faith,” in particular after the Court had denied Swarmify’s motion for preliminary injunction. CloudFlare further alleged that Swarmify was using discovery costs in an improper attempt to obtain leverage for a settlement. CloudFlare asserted that Swarmify “made no realistic attempt to participate discovery or support its own claims” and “ignor[ed] the evidence” presented by CloudFlare, which proved that CloudFlare’s video streaming technology was both independently developed months before any negotiations between the parties had begun, and that the trade secrets at issue were also within the public domain from numerous sources. Further, CloudFlare pointed out that Swarmify’s request for dismissal came only after CloudFlare refused to capitulate to Swarmify’s settlement demands, which, according to CloudFlare, was further indication that Swarmify’s claims were independently baseless. In its motion for fees, CloudFlare claims to have incurred approximately $380,000 in attorney’s fees, but only requested $200,000 (the amount spent after the Court’s ruling on Swarmify’s preliminary injunction).

The federal district court is scheduled to hear CloudFlare’s motion for attorneys’ fees on September 13, 2018. While there is precedent for awarding attorney’s fees for pursuing misappropriation claims in bad faith under CUTSA, if the Court rules in favor of CloudFlare, it could be the first time an award of attorney’s fees is granted under DTSA.

Check back next month to find out how the Court rules.

Following the high-profile trade secrets litigation and settlement between Waymo and Uber in February 2018, covered previously in this blog, a defamation claim was filed by four Uber employees against Uber’s former global intelligence manager, Richard Jacobs. The case alleges that Jacobs defamed the four plaintiffs by accusing them — initially in an intra-office email, which was later broadcast to the world as part of the now-settled Waymo v. Uber case — of wiretapping, trade secret theft, and hacking.

The plaintiffs filed a motion earlier this month asking the federal judge hearing the matter to relate the defamation suit to the initial trade secret case, arguing that Jacobs’ statements received substantial attention in that matter. Jacobs responded by filing an opposition to this motion last week, arguing that there was no reason for the plaintiffs to have waited several months to file the motion, that the cases involve different facts, and that relating the cases would unnecessarily complicate matters. Whether the court agrees remains to be seen.

In June 2018, Tesla brought suit against a disgruntled former employee, Martin Tripp, for trade secret misappropriation. Tesla claims that Mr. Tripp hacked Tesla’s computer system, distributed its proprietary and confidential data to third parties, and distributed photographs and videos of Tesla’s manufacturing facility. In its complaint filed in a U.S. District Court in Nevada, Tesla asserts federal and state trade secret misappropriation, breach of contract, and violations of the Nevada Computer Crimes Law claims against Mr. Tripp. Tesla’s complaint does not identify the specific trade secrets Mr. Tripp is alleged to have disclosed, but alleges that Tesla maintains various methods, systems, and processes as trade secrets and that Mr. Tripp’s conduct revealed unspecified “manufacturing systems.”

Mr. Tripp, on the other hand, tells a different story. Perhaps positioning himself to assert whistleblower immunity under the DTSA, Mr. Tripp claims he shared information with news outlets to expose “some really scary things” going on inside of Tesla after becoming disillusioned with the company’s practices. In particular, Mr. Tripp claims Tesla installed punctured batteries in Model 3 vehicles, improperly disposed of raw-material waste, and inflated sales numbers. Establishing whistleblower immunity under the DTSA, however, may be an uphill battle for Mr. Tripp. The DTSA limits whistleblower immunity to confidential disclosures to the government or attorneys as part of a complaint or other judicial document filed under seal, not leaks to the media. For its part, Tesla has denied Mr. Tripp’s allegations of misconduct.

We will be watching this case to see how it unfolds.