Trade Secrets: Remedies & Criminal Liability

Intro to IP – Prof Merges

4.10.2012

Agenda

• TS remedies

• Criminal enforcement

UTSA § 2(a) Actual or threatened misappropriation

may be enjoined. Upon application to the court, an injunction shall be terminated when the trade secret has ceased to exist, but the injunction may be continued for an additional reasonable period of time in order to eliminate commercial advantage that otherwise would be derived from the misappropriation.

UTSA § 3

(a) In addition to or in lieu of injunctive relief, a complainant may recover damages for the actual loss caused by misappropriation. A complainant also may recover for the unjust enrichment caused by misappropriation that is not taken into account in computing damages for actual loss.

Headstart notion

• “At the very least plaintiff's predecessors, through the acquisition of the Lawrence formula under this contract, obtained a head start in the field of liquid antiseptics which as proved of incalculable value through the years.” -- 178 F.Supp. 655, 666 (S.D.N.Y. 1959).

Remedies

• Disgorgement (defendant's actual profits): defined by sales derived from the use of the trade secrets, such as a customer list.

• Or, actual damages suffered by virtue of profits on the sales actually diverted from the plaintiff's business by the defendant. In the trial before a jury, the defendant's net profits are considered to be a convenient measure of plaintiff's potential loss.

Analogy to patent damages

The cost to the defendant of using the trade secret is compared to the cost of "accomplishing the same result" by other means open to the defendant at the time of the misappropriation.

-- International Industries, Inc. v. Warren Petroleum Corp., 248 F.2d 696, 699 (3d Cir. 1957)

Notable TS damages awards• $46,700,000 was affirmed by the Eighth Circuit

in Pioneer Hi-Bred International, Inc. v. Holden Foundation Seeds, Inc., 35 F.3d 1226 (8th Cir. 1994)

• $25,000,000 reward for compensatory damages, plus $2,400,000 for unjust enrichment, was affirmed by a Florida Appeals court in Purdue Farms, Inc. v. Hook, 777 So.2d 1047 (Fla. Dist. Ct. App. 2d Dist., 2001).

Winston Research v. 3M

• Good review case– Existence of TS: combination of elements in

public domain

– Reasonable precautions, apparently

• Injunction issue specifically

Old tech: flywheel

New tech: servo motor

Best technology

Facts

• After four years of research and development based upon this approach, Mincom [3M] produced a successful machine with an unusually low time-displacement error.

Definition of TS in this case

• Mincom (3M): Broad definition – the entire approach of replacing flywheel with servo and smaller parts

• Court: No – this much was “generally known to the public.”

What was 3M’s TS?

• The specific arrangement and interactions in the 3M design

• Fact that they were developed by employees themselves does not make them non-TS subject matter

Negative know-how

• What NOT to do

• Protectable as TS

• IPNTA 5th at 116

TS definition tied to proper remedy

• Length of injunction

• Damages if any

Why an injunction at all?

• Property rule vs liability rule

– Who sets the “price” of an infringement?

• Discourage “take now, pay later” approach

Why not a permanent injunction?

• In effect, would impose a Warner-Lambert agreement on the parties

– Would that be fair? What they intended?

• Note: may not be many people skilled enough to compete with Winston in tape recorder business . . .

TS Contracts

• Common provisions in nondisclosure agreements

Very common clause

2. Exclusions from Confidential Information. Receiving Party’s obligations under this Agreement do not extend to information that is: (a) publicly known at the time of disclosure or subsequently becomes publicly known through no fault of the Receiving Party; (b) discovered or created by the Receiving Party before disclosure by Disclosing Party; (c) learned by the Receiving Party through legitimate means other than from the Disclosing Party or Disclosing Party’s representatives; or (d) is disclosed by Receiving Party with Disclosing Party’s prior written approval.

Headstart period here

• Two year period found by trial court

• Upheld by the 9th Circuit here

Invention assignment

• Pending patent applications transferred from 3M to Winston

• Under “trailer clauses” in employee agreements

Assignment of future inventions

• Littlefield v. Perry, 88 U.S. 205, 226 (1874). However, if the invention does not exist, the employee can only assign equitable title to the employer. This equitable title will become a valid legal title to the invention once the invention exists.

– Need to have employee assign after invention is made also

• “New Jersey courts previously have not specifically addressed the enforceability of a ‘holdover’ clause. We have, however, addressed the enforceability of analogous employee noncompetition contracts. We find that our determination on the enforceability of those post-contracts is applicable to our determination in this case of the enforceability of ‘holdover’ clauses.”

-- Ingersoll-Rand Co. v. Ciavatta, 542 A.2d 879, 888 (N.J. 1988).

“The agreements in question are for an indefinite period of time. … It is now ten years later and Interface seeks to enforce termination agreements against these former employees which would require them to turn over all inventions for an indefinite period of time covering subjects both within the Company's field of activity or “contemplated field of activity.” It is hard to imagine a more restrictive or overbroad agreement. It would be reasonable to restrict these ex-employees from using information gathered at Interface. It is not reasonable to confiscate all new inventions made by the employees for which Interface might have an interest. … It is well settled that invalid agreements are unenforceable.”

• Fed. Screw Works v. Interface Sys., Inc., 569 F. Supp. 1562, 1564 (E.D. Mich. 1983).

Cal. Penal Code § 499c

(c) Every person who promises, offers or gives, or conspires to promise or offer to give, to any present or former agent, employee or servant of another, a benefit as an inducement, bribe or reward for conveying, delivering or otherwise making available an article representing a trade secret owned by his or her present or former principal, employer or master,

[T]o any person not authorized by the owner to receive or acquire the trade secret and every present or former agent, employee, or servant, who solicits, accepts, receives or takes a benefit as an inducement, bribe or reward for conveying, delivering or otherwise making available an article representing a trade secret owned by his or her present or former principal, employer or master, to any person not authorized by the owner to receive or acquire the trade secret,

Punishment

shall be punished by imprisonment in a county jail not exceeding one year, or by imprisonment pursuant to subdivision (h) of Section 1170, or by a fine not exceeding five thousand dollars ($5,000), or by both that fine and imprisonment.

(9) “Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

(A) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and

(B) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Application

• People v. Laiwala, 143 Cal.App.4th 1065, 49 Cal.Rptr.3d 639 (Cal. Ct. App. 2006).

• Held: evidence did not establish that ex-employee took any trade secrets; DVD decryption “master key” was widely disseminated inside former employer’s company

Federal Crim Statute

Economic Espionage Act of 1996: 18 USC § 1831 criminalizes trade secret

theft intending to benefit “any foreign government, foreign instrumentality, or foreign agent,” while § 1832 criminalizes trade secret theft intending to benefit “anyone other than the owner”

Elements of an EEA Offense

(1) Defendant stole, or without owner authorization, obtained, destroyed or conveyed proprietary information; (2) knew the information was proprietary; (3) information was a “trade secret” as defined under the EEA; (4) defendant intended to economically benefit someone other than the owner of the trade secret; (5) intended to injure the owner of the trade secret; and (6) trade secret is related to or included in a product that is produced for or placed in interstate or foreign commerce.

Penalties

• The penalties for violating § 1832 include, for individuals, up to 10 years in prison and/or fines not to exceed $250,000, and, for organizations, fines of up to $ 5 million.

• See, e.g., United States v. Williams, 526 F.3d 1312, 1316, 1323 (11th Cir. 2008) (10 year prison term for theft of PepsiCo marketing information)

Kolon Industries: Case Study

In 2007, DuPont officials suspected former employee Michael Mitchell of providing sensitive trade secret information related to one of DuPont's synthetic fibers to his new employer, Kolon. FBI and Commerce Dept. in turn executed search warrants on Mitchell's home as part of their joint investigation. The agencies recovered hundreds of pages of DuPont proprietary information from Mitchell and were able to convince Mitchell to cooperate in the government's investigation into the trade secret theft.

E.I. DuPont de Nemours & Co. v. Kolon Indus., 688 F. Supp. 2d 443

(ED Va. 2009)

• For over ten years, Kolon Industries, Inc. (“Kolon”) has attempted to produce a market-acceptable aramid fiber, but has met with little commercial success. Within the past three years, however, Kolon's product offering has dramatically improved.

Eureka!

Department of JusticeFebruary 12, 2010Justice Department Announces New Intellectual

Property Task Force as Part of Broad IP Enforcement Initiative

Attorney General Eric Holder today announced the formation of a new Department of Justice Task Force on Intellectual Property as part of a Department-wide initiative to confront the growing number of domestic and international intellectual property (IP) crimes.

Problem areas

• Reverse engineering

• Attempt to commit economic espionage

• IPNTA 5th at 122