New Defend Trade Secrets Act

By Samantha Leiner

Congress added a new section to the federal criminal trade secret law enacted on May 11, 2016, which allows owners of a trade secret to now file a civil action for misappropriation of that trade secret.  See 18 U.S.C. § 1836(b). The new act is referred to as the Defend Trade Secrets Act of 2016 (DTSA).

 

Before the addition of the DTSA, trade secret misappropriation issues were governed by state laws, in which 47 states have adopted their trade secret laws from by the Uniform Trade Secret Act (UTSA).   The UTSA was published in 1979, and amended in 1985, in an effort to make the ever-growing state common law on trade secrets more uniform throughout the country.  The three states that have not adopted the UTSA are New York, North Carolina, and Massachusetts.

While the DTSA and the UTSA share some common aspects, there are three major differences between them.

Filing an Ex Parte Application for the Seizure of the Misappropriator’s Property

The first major difference between the DTSA and the UTSA/state laws is that the DTSA allows for trade secret owners to file (and the court to order) an ex parte application  for the seizure of the trade secret misappropriator’s “property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action” as a preventative measure and only in extraordinary circumstances.  18 U.S.C. § 1836(b)(2)  The eight requirements for the court to order a civil seizure are: 1) relief under Fed. R. Civ. P. 65 would be inadequate; 2) an immediate and irreparable harm will occur if not ordered; 3) harm to applicant would be greater than the other party’s legitimate interests; 4) the applicant is likely to succeed in showing the information is a trade secret and the opposing parting either misappropriated the trade secret by improper means or conspired to use improper means to misappropriate a trade secret; 5) the other party has possession of the trade secret and any property to be seized; 6) the application is detailed as to what property would be seized; 7) if applicant were to give notice of seizure to the other party, that party would destroy or otherwise make inaccessible the property to be seized; and 8) the requested seizure has not been publicized by the applicant. See 18 U.S.C. § 1836(b)(2); see also Fed. R. Civ. P. 65 (Remedies under Rule 65 includes preliminary injunctions, injunctions, and temporary restraining orders).

Ex parte seizures are not a new concept to intellectual property overall.  In both copyright infringement actions and trademark infringement actiosn the court may issue an ex parte civil erizure order.  See 15 U.S.C. § 1116(d)(1)(A) (trademark ex parte seizures); see also 17 U.S.C. § 503 (copyright ex parte seizures).  The requirements for both trademark ex parte seizures and copyright ex parte seizures are similar to the requirements for ex parte seizures under the DTSA listed above.  However, the DTSA’s civil seizure differs from the trademark and copyright ex parte seizures as far as what may be seized.  Usually, in trademark and copyright ex parte seizures, the seizure is limited to infirnging goods or evidence of infringement.  However, the DTSA states that a court can order seizure of “property necessary to prevent the propagation ro dissemination of the trade secret.” 18 U.S.C. § 1836(b)(2)(A)(i). This language in the DTSA does not specifically state what the ex parte seizure is limited to.  Possibilities of property that may be seized would be devices contaning trade secret information, like cell phones, computers, or tablets; devices in which the trade secret can be potentially transmitted, like email servers; products that were created using the trade secret, which could be reverse engineered by others exposing the trade secret.  While the DTSA is fairly broad in what can be seized, it limits the ex parte seizure to the “narrowest seizure of property necessary,”, and the seizure cannot unnecessarily interupt business operations of the accused persons or companies misappropriating the trade secret.  18 U.S.C. § 1836(b)(2)(B)(ii).

Public Policy Immunity 

The second major difference between the DTSA and the UTSA/state laws is that the DTSA includes a section that creates a public policy immunity to people who disclose a trade secret through confidential disclosure to the government, to report or investigate any violation of law, or is made in a court filing, if under seal.  See 18 U.S.C. § 1833.  This exception offers protection to whistleblowers, in which the government incentivizes citizens to help uphold the law. Before the DTSA was enacted, companies would use the various state trade secret laws against whistleblowers who used trade secret information to reveal to the state or federal government illegal activity their employer was involved in.  This is because state trade secret laws that were adopted from the UTSA do not have protection for whistleblowers.  Additionally, the whistleblower or other individuals may reveal the trade secret during a lawsuit for retaliation when the trade secrets are revealed under seal.

However, the DTSA does not protect a whistleblower from the consequences of violating a confidentiality agreement that the whistleblower signed with the company.  Because violating a confidentiality agreement can bear even harsher consequences than the DTSA, there seems to still be a disincentive for whistleblowers to reveal the secrets to the government or in trial.

Further, the DTSA incentivizes employers to inform their employees of the whistleblower protection in the DTSA by awarding exemplary damages or attorney fees to the employer in an action against an employee to whom notice of the whistleblower protection was provided.

 

Difference Between the Act’s Definition of a Trade Secret and the UTSA’s Definition

 

The third major difference between the UTSA and the DTSA is the definition of what a “trade secret” is.  The DTSA adopts the same definition as the Federal Economic Espionage Act, which is enacted under 18 U.S.C. § 1839.  Applying the same definition from the criminal statutes, such as the Federal Economic Espionage Act, to the civil statute, the DTSA, broadens the reach of the new statute to protect more secrets than the UTSA.  The UTSA’s definition of a trade secret is “‘[t]rade secret’ means information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”  Uniform Trade Secret Act, § 1(4).  While the DTSA’s definition of a trade secret is “‘trade secret’ means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if — (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, 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.”  18 U.S.C. § 1839(3).  The DTSA’s definition clearly broadens the definition from the UTSA to include new forms of trade secrets, such as plans, designs, prototypes, procedures, and codes, whether tangible or intangible.  However, the DTSA’s definition does limit the industries the information is about to financial, business, scientific, technical, economic, or engineering information.

The broadening of the forms the trade secret can take provides an avenue for protection to persons who would not be able to sue under the limited UTSA definition of what a trade secret is.  This means more people will be able to sue for trade secret misappropriation in federal court than were ever able to under the UTSA or state law.

Remedies Available under the DTSA

Another difference between the UTSA and the DTSA is that the remedies differ.  While both the UTSA and the DTSA provide for enjoining against actual or threatened trade secret misappropriation, the DTSA prohibits injunctions in certain cases: (1) an injunction cannot prevent a person from entering into an employment relationship; and (2) an injunction cannot interfere with applicable state law prohibiting restraints on the practice of “lawful profession, trade or business.” § 1836(b)(3)(A)(i)(II).  The first prohibition on injunctions for trade secret misappropriation under the DTSA seems to further and mirror California’s view that there can be no prohibiting former employees to have job mobility in the future.  This view is taken from California’s strict anti-non-competition stance on laws.

Additionally, granting injunctions (a remedy provided in the DTSA) can be seen as limiting a former employee’s movement to a competing company.  The DTSA allows for an injunction to be granted against a former employee if the threat of misappropriation is based on evidence and not speculation or that the former employee merely knows of the information.  However, the DTSA provides that this provision of allowing an injunction against a former employee will not be applicable if the proper “state law prohibit[s] restraints on the practice of lawful profession, trade, or business.” A prime example of this would be the anti-non-competition stance of California, where a law or the effect of a law cannot limit a former employee’s potential future employment relationships.  California is unlike any other state when it comes to non-competition, because in most states “reasonable” non-competition agreements are allowed, while in California all non-competition agreements are void.

Further, attorneys’ fees and punitive damages are available under both the UTSA and DTSA, but the DTSA limits attorneys’ fees and punitive damages to employers who gave notice to the employee/former employee of the whistleblower immunity protection of the DTSA.  In DTSA actions where an employer suse a former employee and the employee’s current employer, the failure to provide the notice will prevent an employer from being awarded attorneys’ fees and punitive damages.  However, a loophole to the employer having to give notice to an employee of the whistleblower immunity, is for the employer to only sue the former employee’s current employer, and not the former employer.

The Non-Preemptive Nature of the DTSA

Under this new statute, Congress made sure it was not disturbing any state laws already in place by not making the  DTSA preemptive of state law.  Congress simply wanted to create another avenue for trade secret owners when their trade secret is misappropriated.

Conclusion

The new statute seems to open up more avenues for trade secret owners to protect their rights, and seems to give the owners more rights than the UTSA or state law.

 

 

Feature Comment: New Laws and Procedures Affecting IP Management Strategies

By James G. McEwen[1]

Legislation Affecting Trade Secret Owners Enacted Federal Legislation Affecting Trade Secret Ownership and Rights

Among other laws affecting trade secret ownership passed in 2007, Congress passed public law 110-175.  Entitled the Openness Promotes Effectiveness in our National Government (OPEN) Act of 2007, the OPEN Act has the potential to cause problems for trade secret owners who rely on the trade secret exemption to the Freedom of Information Act (FOIA), 5 U.S.C. §552(b)(4), to prevent release of trade secrets held by the Government.  By way of background, 5 U.S.C. §552(b)(4) allows the Government to prevent release of trade secret information which would otherwise have to be released under FOIA.  However, in order to prevent release, trade secret owners are generally required, pursuant to Executive Order 12600, to aid the Government to support an assertion that the 5 U.S.C. §552(b)(4) exemption applies to a requested record and in particular to help show that the disclosure would cause competitive harm to the submitter.  This support is crucial since, as noted by the Department of Justice FOIA Guide, “[c]ourts have repeatedly rejected competitive harm claims — and even have ordered disclosure — when those claims were advanced by agencies on their own.”  Freedom of Information Guide, pp. 409-410 (March 2007).

While 5 U.S.C. §552(b)(4) is not directly affected by the OPEN Act, section 6(a) of the OPEN Act requires that the agency respond to a FOIA request within 20 days of the date the request is made.  As such, in order to protect trade secret information in public records to which 5 U.S.C. §552(b)(4) should apply, agencies will be under increased pressure to quickly find the submitter of such information, and if possible, within this 20 day period, require any such support needed to allow the agency to withhold trade secret information under 5 U.S.C. §552(b)(4).  As such, trade secret owners will need to be on the alert for such agency requests and have procedures implemented to respond promptly to such requests from agencies since the failure to timely respond will jeopardize the Government’s ability to protect the trade secret against disclosure under FOIA.

Strategies for Utilizing the Patent Prosecution Highway Program

1.       Background

In order to reduce duplicative efforts where applicants have filed corresponding applications in the United States and in other countries, the United States Patent and Trademark Office has implemented the Patent Prosecution Highway Pilot Program to fast track the examination process where an application in one country has been found allowable, but has not been examined in a second country.  This program is limited to applications pending before the United States Patent and Trademark Office and select foreign patent offices.  Where such applications are copending, the program allows the Examiners in a country of second filing to use the results of an Examiner in a county of first filing, and thus advance the second filed application out of turn.

Currently, the selected foreign patent offices are the Japanese Patent Office, the United Kingdom Intellectual Property Office, the Canadian Intellectual Property Office, and the Korean Intellectual Property Office.  The program is currently slated to end on January 28, 2009 for the Canadian Intellectual Property Office and the Korean Intellectual Property Office programs, September 4, 2008 for the United Kingdom Intellectual Property Office, and has been implemented full time with the Japanese Patent Office.

2.       Process

In order to take advantage of the Patent Prosecution Highway Pilot Program, there must be claims found to be allowable after examination in the first country. After the finding of allowability, the applicant may, in the second country, file a Request for Participation in the Patent Prosecution Highway, which includes a Petition to make the application special.  Where the allowed claims are not the same as the claims pending in the second country, the applicant will need to make any necessary amendments to ensure that the claims in the second country sufficiently correspond to the allowed claims.  By way of explanation, the claims will “sufficiently correspond” where, accounting for differences due to translations and claim format requirements, the claims are of the same or similar scope.

Should the Request be accepted, the second application will be advanced out of turn and examined prior to when the application would otherwise be examined.

By way of example, assume a first application is filed in Korea, and a second application is filed in the United States claiming priority to the first application under 35 U.S.C. §119 or through the Patent Cooperation Treaty (PCT).  If the first application is examined and is found to contain allowable claims, the applicant would be entitled to file a Request for Participation in the United States to ensure that the second application is advanced out of turn and receives early examination.  If the claims in the United States are not substantially the same as those in Korea, the applicant would be entitled to amend the claims to ensure that the claims are substantially those of the allowed claims in Korea.

Suggested Request for Participation forms are found on the United States Patent and Trademark Office website, http://www.uspto.gov/web/forms/index.html.  Included in these forms is generally a requirement to list all office actions issued by the first country’s patent office as well as the allowed claims, or to grant authority to allow the second country to access such actions.  In addition, a translation of the allowed claims may be required where the allowed claims in the first country are not in English.   Also required as a listing of documents reviewed during the examination in the first country and over which the claims were found allowable.  Lastly, the applicant in the second country will need to fill out a claim correspondence table (e.g., claim 1 in first country corresponds to claim 6 in the second country) to allow the Examiner in the second country to process the second application more rapidly.

3.       Strategies to Implement

While the ability to have applications be taken out of turn has obvious benefits, the use of such a Request can be of special interest in those countries or technologies having severe examination backlogs.  For instance, according to the United States Patent and Trademark Office’s Performance and Accountability Report Fiscal Year 2007, the average pendency before a first office action is 25 months, with more severe backlogs in the computer and communications technologies.  In contrast, other countries, such as Korea, have substantially lower pendencies.   Given the mismatch in backlogs, applicants should be alert for such allowances and determine which remaining countries have not received an action.

Indeed, it may be advisable to specifically file in countries with rapid examinations in order to ensure that corresponding applications in remaining countries are advanced more rapidly.  In these situations, applicants should ensure, assuming the allowed claims are acceptable, Requests for Participation are filed in the remaining countries.

Where the claims in the second country do not sufficiently correspond to the allowed claims, applicants should consider amending the existing claims or possibly filing a new divisional or continuation application having the allowed claims.   In this manner, the applicant can maintain the pendency of the parent application in the second country while increasing the chances of an early examination of another claim set which has already been found allowable in another country (thus increasing the chance of allowability for the other claim set).

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[1] Portions of this comment appearing in forthcoming 2007-2008 Final Report, ABA IPL Committee 410 Trade Secrets and Interference with Contracts. The opinions in this article do not represent the official positions of Stein McEwen, LLP.

10th Circuit Finds Trade Secrets Can Be in the Combination of Known Elements

In Hertz v. Luzenac Group, 576 F.3d 1103; 91 USPQ2d 1801 (10th Cir. 2009), Luzenac, a leading seller of talc, has sold various formulations of vinyl silane-treated talc from 1994 to 2002 under the name Mistron 604AV.  From 2002 onwards, Luzenac licensed the production of 604AV to Van Horn, Metz & Co., Inc. (VHM), one of Luzenac’s distributors, wherein Luzenac sold the raw talk used in the 604AV product to VHM.  Luzenac hired Hertz in 1994 to head the technical development and marketing of products that were to become 604AV and hired Lighthart to market and sell the 604 AV product to companies using such coatings.  Luzenac fired Hertz in 1998, however, Hertz won suit against Luzenac under Title VII for firing him in retaliation for his objecting to Luzenac’s religious discrimination.  Lighthart, who left Luzenac in 2001, testified in the case on Hertz’s behalf. 

Several years after Hertz was fired from Luzenac, IMI Fabi contracted Hertz’s consulting company to develop and market a vinyl silane-treated talc to be called “Genera.”  Hertz, in turn, contracted Lighthart to develop a list of prospective customers of Genera and to help market the product.  Luzenac, upon hearing of IMI Fabi’s contracting of Hertz, it sent a cease-and-desist letter to Hertz.  IMI Fabi, upon hearing of Luzenac’s actions, reduced efforts to market Genera.  Soon after, Hertz sought declaratory and injunctive relief against Luzenac, and Luzenac alleged counterclaims including interference with contract and with prospective business advantage, misappropriation of trade secrets, conversion, civil theft and breach of contract.  Hertz amended his complaint to include claims of unlawful retaliation under Title VII, defamation, tortious interference with contract and prospective business advantage.  Subsequently, Luzenac removed the case to federal district court and joined Lighthart in the suit and added claims of unjust enrichment and conspiracy.

In reviewing the District Court’s dismissal of Luzenac’s claims for misappropriation of trade secrets, breach of contract, and conspiracy, the 10^th Circuit reviewed summary judgment decision as per whether there was any issue as to material fact and whether the movant (Hertz) was entitled to judgment as a matter of law. 

First, the 10th Circuit looked to whether the production process of 604AV was a trade secret.  Luzenac alleged that Hertz violated the Colorado Uniform Trade Secrets Act (UTSA) by disclosing Luzenac’s entire formula and process of manufacturing 604AV to IMI Fabi.  The 10^th Circuit and the District Court both focused on whether the production process qualifies as a trade secret.  According to the UTSA, a trade secret is “any scientific or technical information, design, process, procedure, formula, [or] improvement…which is secret and of value.”  Colo. Rev. Stat. Ann. §7-74-103(4).  The 10^th Circuit stated that the test for determining whether something is capable of protection as a trade secret is recited in Colorado Supply Co. v. Stewart, 797 P.2d 1303, 1306 (Colo. Ct. App. 1990), the factors being:

(1) the extent to which the information is known outside the business;

(2) the extent to which it is know to those inside the business, i.e. by the employees;

(3) the precautions taken by the holder of the trade secret to guard the secrecy of the information;

(4) the savings effected and the value to the holder in having the information as against competitors;

(5) the amount of effort or money expended in obtaining and developing the information; and

(6) the amount of time and expense it would take for others to acquire and duplicate the information.

The 10th Circuit noted that the District Court, in applying the above noted test, acknowledged that the last three factors could weigh in favor of Luzenac, and even stated, with respect to the fourth factor, that “a reasonable jury might find that, despite the plurality of comparable products competitive to Mistron 604AV, Luzenac’s position was unique as a result of the information and expertise it developed.”  Aplt. App. Vol. IX, at 3002-03.  Furthermore, the District Court stated that “[a] reasonable jury might determine that Mr. Hertz and IMI Fabi saved time and expense in developing Genera by virtue of the expertise and information Mr. Hertz obtained and discovered during his time at Luzenac.”  Id. at 3002.  However, in granting Hertz summary judgment, the District Court stated that “secrecy is the sine qua non of the claim and there can be no genuine dispute that the process for manufacturing 604AC was not a secret.”  Id. at 3003. 

The 10^th Circuit agreed with the District Court in that the matter being a secret is indispensible to there being a trade secret.  However, the 10^th Circuit stated that the District Court committed three mistakes in evaluating the secrecy of the Luzenac production process:  (1) failing to consider the process in the aggregate; (2) failing to view the evidence in the light most favorable to Luzenac; and (3) focusing on steps Luzenac failed to take to protect the secrecy of 604AV rather than the steps Luzenac did take and whether such steps were reasonable.

In considering the process in the aggregate, the 10^th Circuit noted that Luzenac asserted that the trade secret comprises nine elements and conceded that some of those elements may be in the public domain.  However, Luzenac also asserted that the District Court should have considered the aggregate production process, and not looked at each component of production separately.  The 10th Circuit agreed with Luzenac as per considering the production process in total.  Instead, the District Court reviewed evidence with respect to each one of the nine elements of production, and concluded that “the process as a whole [does not] constitute a trade secret.  Each and all of the elements of the process for manufacturing 604AV are known outside of Luzenac.”  Aplt. App. Vol. IX, at 3003.  Furthermore, in responding to Luzenac’s argument that the aggregate production process cannot be found in a single location, the District Court stated that Luzenac’s assertion was “both true and irrelevant.”  Aplt. App. Vol. X, at 3270.  As per the District Court’s analysis, the 10^th Circuit stated that “the district court did not engage in any substantive analysis of the production process as a whole.”  The 10th Circuit went on to state the District Court applied the incorrect standard and that the holding in Rivendell should have been followed, which states that “a trade secret can include a system where the elements are in the public domain, but there has been accomplished an effective, successful and valuable integration of the public domain elements and the trade secret gave the claimant a competitive advantage which is protected from misappropriation.”  Rivendell Forest Prods., Ltd. V. Ga.-Pac. Corp., 28 F.3d 1042, 1045 (10^th Cir. 1994). 

The 10th Circuit went on to review the District Court’s finding that each of the nine elements of the 604AV aggregate production process was publicly disclosed, and stated that “[w]hile the finder of fact is required to consider the claimed trade secret a whole, it may, in addition, consider whether the individual components are publicly known.”  In reviewing whether the amount of vinyl silane in 604AV was publicly known, the 10th Circuit stated that “[v]iewing all of the evidence as a whole, there is significant support for Luzenac’s position that it has kept the amount of vinyl silane a secret.  The ultimate weighing of that evidence will have to be done by a jury.”  As per the type of vinyl silane, the 10th Circuit stated that there was a genuine question of material fact coming from assessment of relevant documentation and witness testimony.  Additionally, as per a quality control test used in the production process, the 10th Circuit, in finding the two parties’ witnesses’ testimonies incongruent, stated that they can not resolve the conflict without assessing the credibility of the parties’ witnesses.  In summary, the 10th Circuit stated that “the production process of 604AV is not contained as a whole within the four documents to which Mr. Hertz refers; nor can it be indisputably discovered though the consideration of additional documents available to us…Mr. Hertz cannot win on summary judgment simply by saying that a good mechanic could assemble various pieces of public information…” 

Next, the 10^th Circuit went on to review the precautions taken by Luzenac to protect the alleged trade secret.  The 10th Circuit notes that the District Court focused on precautions not taken by Luzenac rather than the focusing on whether the precautions taken by Luzenac were reasonable.  As an owner of a trade secret must take measures to prevent the secret from those not authorized to have access to such, such measures must be “reasonable under the circumstances to maintain its secrecy.”  Colo. Supply, 797 P.2d at 1306.  The 10th Circuit noted that Luzenac took a series of steps to protect the secrecy of the production of 604AV, such as posting signs to maintain confidentiality and having key employees and contractors such as VHM sign confidentiality agreements.  However, the District Court found such measures “ceremonial,” and noted that Luzenac did not have all its customers sign confidentiality agreements and that Luzenac failed to control VHM’s disclosures of the production process of 604AV.  Aplt. App. Vol. X, at 3271.  In response, the 10th Circuit stated that “there are always more security precautions that can be taken.  Just because there is something else that Luzenac could have done does not mean that their efforts were unreasonable under the circumstances,” and as such, whether the precautions were reasonable was a matter for a jury to decide.

After reversing the District Court’s decision regarding summary judgment on the trade secret and remanding the issue of whether the production process in aggregate was a trade secret, the 10th Circuit next looked at whether Luzenac’s customer information was a protectable secret.  The 10th Circuit notes that Hertz conceded that he received a document from Lighthart, who prepared the document while employed with Luzenac.  However, a second document that was prepared by Lighthart, allegedly just for IMI Fabi, contained information on 33 potential Genera customers.  However, the 10th Circuit stated that it was unclear whether the information was misappropriated from Luzenac’s customer information.  In analyzing whether the customer information was a trade secret, the 10th Circuit applied the Colorado Supply factors in conjunction with the Colorado Statutory definition of a trade secret, which includes “listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value.”  Colo. Rev. Stat. Ann. §7-74-102(4).  The District Court, in finding that the customer list was not a trade secret, relied upon the fact that the customer information came from public sources. 

However, the 10th Circuit stated that the District Court did not consider conflicting testimony indicating that the customer information lists were of limited circulation in the company, and that the District Court dismissed Luzenac’s instruction to employees to keep all information confidential as impracticable and because such a blanket prohibition does not qualify as a reasonable attempt to maintain secrecy.  The 10th Circuit believed that the District Court made determinations, like those noted above, that should have been made by a jury and that their review of the record shows that answers to questions at hand are disputed issues of fact that can’t be easily determined from the record at hand.  For example, although the 10th Circuit found that some information on Luzenac’s customer list may not be publicly available, much information on potential customers of vinyl silane-treated talc is available from a variety of sources.  With there being dispute regarding a number of facts concerning the customer lists, such should be resolved by a jury, according to the 10th Circuit. 

On remand, the 10th Circuit instructed the District Court to consider factors enumerated in Colo. Supply, 797 P.2d at 1306-07, which are:  (1) whether proper and reasonable steps were taken by the owner to protect the secrecy of the information; (2) whether access to the information was restricted; (3) whether employees knew customers’ names from general experience; (4) whether customers commonly dealt with more than one supplier; (5) whether customer information could be readily obtained from public directories; (6) whether customer information is readily ascertainable from sources outside the owner’s business; (7) whether the owner of the customer list expended great cost and effort over a considerable period of time to develop the files; and (8) whether it would be difficult for a competitor to duplicate the information.  Additionally, the 10th Circuit cited Sonoco Prods. Co. v. Johnson 23 P.3d 1287, 1290 in noting “there is no requirement in Colorado’s [UTSA] that there be actual use or commercial implementation of the misappropriated trade secret for damages to accrue.  Misappropriation consists only of the improper disclosure or acquisition of the trade secret.”  Thus, the 10th Circuit dismissed Hertz’s argument that that there was no evidence that IMI Fabi benefitted from Luzenac’s customer information as it was irrelevant according to the above.  The only relevant matters presently are whether Hertz misappropriated of Luzenac’s customer list and whether such information is a trade secret, and that such should be decided by a jury.

In addressing whether Hertz committed a breach of contract with respect to a confidentiality agreement he signed, the 10th Circuit noted that even if Luzenac fails as per claims under the UTSA, it may nonetheless succeed in claiming breach of contract.  The 10th Circuit found the confidentiality agreement unspecific as to what information was confidential.  In remanding the claim for further proceedings, the 10th Circuit stated that the relevant factual questions include: “(1) whether Luzenac made it clear that the manufacturing process for 604AV and Luzenac’s customer information were confidential, and (2) whether the information used by Mr. Hertz was exclusively in the public domain or known to him prior to his employment with Luzenac.”  Similarly to the breach of contract claim, the 10th Circuit stated that the conspiracy claim depends on the factual findings of the claim for misappropriation of trade secrets.  As such, if a jury found that the production process for 604AV and Luzenac’s customer list were trade secrets, then Hertz and Lighthart could be charged with conspiracy as well.

The 10th Circuit next addressed Hertz’s attempt to amend his complaint with claim of abuse of process, which the District Court denied because the District Court found that Hertz failed to allege improper use of process by failing to meet the requirements to allege such a claim, and thus Hertz’s attempt to amend his complaint was useless.  The 10th Circuit stated that an abuse of process claim requires a showing of: “(1) an ulterior purpose for the use of a judicial proceeding; (2) willful action in the use of that process which is not proper in the regular course of the proceedings, i.e. use of a legal proceeding in an improper manner; and (3) resulting damage.”  Lauren Corp. v. Century Geophysical Corp., 953 P.2d 200, 202 (Colo. Ct. App. 1998).  With ulterior purposes being a coercive goal or some collateral advantage, whereas the 10th Circuit states that “Mr. Hertz’s claim of abuse stems from Luzenac filing counterclaims against him for misappropriation of trade secrets.  Any ulterior motives Luzenac might have had are insufficient to support an inference of improper use. “  The 10th Circuit went on to state that “Luzenac is entitled to protect its trade secrets.  Its counterclaims are an appropriate means of accomplishing that goal…” and that “Mr. Hertz has not identified any “collateral advantage” to be gained by Luzenac.”  Thus, the 10th Circuit affirmed the District Court’s denial of Hertz’s motion to amend his complaint. 

Lastly, the 10th Circuit addressed Hertz’s tortious interference with contract and with prospective business advantage.  Hertz was contracted with IMI Fabi to receive a percentage of the profits from the sale of Genera.  The 10th Circuit states that for a claim of intentional interference with contract, the plaintiff must show that the defendant “(1) was aware of the existence of the contract; (2) intended that one of the parties breach the contract; (3) induced the party to breach the contract or make it impossible for him or her to perform; and (4) acted “improperly in causing the breach.”  Krystkowiak v. W.O. Brisben Cos.,  90 P.3d 859, 871 (Colo. 2004).  In  Hertz’s claim, he alleges that Luzenac’s claims and litigation caused IMI Fabi to halt sales of Genara, and thus, Hertz’s contract resulted in less performance that it would have had Luzanac not acted.  However, the 10th Circuit noted that “Mr. Hertz concedes that IMI Fabi did not breach its contract,” because IMI Fabi wasn’t required to make any sales of Genera.  Essentially, Hertz argues that IMI Fabi would have more fully performed on it’s contract with Hertz had Luzenac not acted as it did.  In rejecting such a premise for tortious interference, the 10th Circuit notes cites Radiology Prof’l Corp. v. Trinidad Area Health Ass’n, 577, P.2d 748, 749-751, and notes that a contract must be breached, and that realizing less profit is not sufficient grounds for Hertz to support a claims of tortious interference with contract. 

With regards to intentional interference with prospective business relations, the 10th Circuit states that “the plaintiff must show that there is “a reasonable likelihood or probability that a contract would have resulted; there must be something beyond a mere hope.” Klein, 44 F.3d at 1506,” however, “Mr. Hertz cannot prove that he had more than “a mere hope” of entering into any future business deals with IMI Fabi.”  Thus, the 10th Circuit found that no reasonable jury could conclude from Hertz’s evidence that Hertz had a reasonable probability of having a future contract with IMI Fabi.  Thus, the 10th Circuit upheld the District Court’s dismissal of Hertz’s claim of tortious interference with prospective business advantage.

In summary, the 10th Circuit reversed and the District Court’s summary judgment in dismissing Luzenac’s claims for misappropriation of trade secrets because it found that there were issues of material fact to be decided by a jury.  However, the 10th Circuit affirmed both the District Court’s denial of Hertz’s motion to amend his complaint with an abuse of process claim and the District Court’s dismissal of Hertz’s tortious interference claims.

Significance for trade secret owners

Hertz presents a reminder that the bar for what constitutes a trade secret can be very low.  Any collection of information, including a collection of already-known information, is eligible for trade secret protection.  Thus, while trade secret owners must show and plead with particularity in defining their trade secret during litigation, defendants cannot merely point to the well known nature of the elements of the trade secret without accounting for the value of the collection itself.

Fifth Circuit Finds Use of Confidential Information In Filed Patent Applications Potentially Trade Secret Theft

In Triple Tee Golf, Inc. v. Nike, inc., Nos. 05-10934, 05-11442, 2007 U.S. App. LEXIS 8807 (5th Cir. April 17, 2007), Triple Tee Golf, Inc. developed a confidential design for an adjustable golf club.  In order to have a prototype made, Triple Tee contacted Tom Stites, a golf club designer.  Mr. Stites agreed to produce the prototype, and was shown rough prototype drawings and sketches, which Mr. Stites photographed for later reference.  Subsequently, Mr. Stites was hired by Nike as Director of Product Creation, and notified Triple Tee that he could no longer provide the prototype.  Further, while Triple Tee submitted the design idea to Nike for consideration, Nike returned the submission indicating it was not interested in the design.

On a trip to a golf trade show, Mr. Gillig, the owner of Triple Tee, noticed that Nike’s new CPR Woods bore a resemblance to his confidential design which he has submitted to Tom Stites.  Later, Mr. Gillig also found similar uses of his confidential design in Nike’s Slingshot Irons, and OZ T-100 putter. Thus, Triple Tee brought suit against Tom Stites and Nike for misappropriation of trade secrets due to the new clubs.

During trial, Triple Tee requested that Nike provide information about any patent applications which reflect the design, and Nike indicated that no patent applications included the design.  As such, Triple Tee was only able to point to the CPR Woods, Slingshot Irons, and OZ T-100 putter as possibly incorporating confidential aspects of the design shown to Mr. Stites. The District Court determined that Nike’s clubs did not include the confidential aspects of the design actually shown by Triple Tee such that the CPR Woods, Slingshot Irons, and OZ T-100 putter were not the product of a theft of trade secrets since they were not adjustable in the same way that the confidential designs showed adjustable clubs.  Since there remained no other allegation of trade secret theft, the case was dismissed on summary judgment.

Subsequently, Triple Tee discovered that Nike had filed two patent applications, naming Tom Stites as the inventor, which related to adjustable golf clubs and seemed to reflect the design shown to Mr. Stites.  Nike had not produced either patent application during discovery and Triple Tee had not been previously aware of the two patent applications.  As such, Triple Tee filed a Motion for Relief of Summary Judgment in order to proceed to trial due to a theft of trade secrets, which were used in the patent applications and which also showed that Nike was possibly planning to use the confidential design in new clubs.  The district court denied the Motion since, while the patent applications should have been produced in discovery, the patent applications were not included in the specific trade secret theft allegations brought by Triple Tee, which only related to the CPR Woods, Slingshot Irons, and OZ T-100 putter.

On appeal, the Fifth Circuit reversed.  On the issue of the summary judgment, the Fifth Circuit held that Triple Tee had produced enough evidence to sustain a theft of trade secret claim for the CPR Woods, Slingshot Irons, and OZ T-100 putter, but limited the number of clubs to only two.  As such, the Fifth Circuit reversed the grant of summary judgment as there remained material facts in dispute.

On the issue of whether the Motion should have been granted, the Fifth Circuit noted that the district court’s denial of the Motion was based upon the narrowing of the issues to only the known clubs during discovery: CPR Woods, Slingshot Irons, and OZ T-100 putter after the end of discovery.  However, the original complaint related to any theft of trade secrets used by Mr. Stites or Nike, and included the use of the confidential designs in any patent applications or plans for new clubs.  As such, had the patent applications been known during discovery, the scope of the trade secret complaint would not have been narrowed to exclude a trade secret theft occurring through the filing of these patent applications.  As such, the Fifth Circuit allowed Triple Tee to proceed with its allegation of misappropriation of trade secrets through the filing of the patent applications since such filing represented an unauthorized use of the confidential designs.

Potential Impact on Patent Applicants

While the precise fact pattern of Triple Tee Golf is somewhat unique, Triple Tee Golf highlights a dilemma posed to applicants hoping to improve on existing, but non-public, designs or standards.  A similar situation occurred in OddzOn Products Inc. v. Just Toys Inc., 122 F3d 1396; 43 USPQ2d 1641 (Fed. Cir. 1997), where an improvement on a confidential design, which was not disclosed but was prior art under 35 U.S.C. §102(f), was grounds for invalidity under 35 U.S.C. §103.  As such, there is a duty to disclose such confidential prior art being improved upon.  What the combination of Triple Tee Golf and Oddzon teaches is that any confidential design needs to be disclosed, but to prevent charges of trade secret theft as occurred in Triple Tee Golf, the actual confidential portions should not be included in the specification to the extent possible.  Instead, such designs should be submitted for evaluation by the Examiner through the process of submission of trade secret material as outlined at MPEP 724. 

 

Seventh Circuit Holds that, for a Case or Controversy to Exist in Trade Secret Action, There Must Be Evidence of Trade Secret and Value of the Secret

In BondPro Corporation v. Siemens Power Generation, Inc., 2006 U.S. App. LEXIS 23183 (7^th Cir. 2006), the 7^th Circuit affirmed the district court’s judgment for manufacturer Siemens as a matter of law, finding that BondPro’s claimed trade secret had not been revealed in detail sufficient to show that it had commercial value.

BondPro demonstrated to Siemens a particular method of bonding insulation to U-shaped slots that form part of Siemens’ generators, hoping to license the technique.  Siemens, although told by BondPro that this technique was proprietary, later applied for a patent on a similar process.  The Patent Office rejected the application and neither Siemens nor BondPro ever put the method into use.  Yet BondPro sued for theft of a trade secret.  The district court jury found for plaintiff BondPro, but the judge found for the defendant Siemens as a matter of law. BondPro appealed.

After resolving several jurisdictional issues that resulted largely from the sloppiness of the lawyers in this case, the court turned to the issue of if there is a case or controversy.  Here, the court explained that to have a case or controversy, BondPro needs to showing that it has something tangible to gain from reinstating the jury’s verdict. Thus the court examined the claimed trade secret to see if it has value.

The court pointed out that in many cases applying for a patent on what was previously a trade secret will destroy that trade secret by making it public knowledge, even if no patent is granted, since the PTO publishes applications after 18 months.  However, in this case, Siemens allegedly stole the secret method, and in these circumstances would be liable.

Liable for what?  Judge Posner precluded money damages, noting that there was no evidence that the technique had any commercial value whatsoever.  Yet he inquired further into injunctive relief.  BondPro appeared to have taken the proper steps to protect its trade secret, avoiding invalidation by its own inaction.

It all comes down to, in the court’s opinion, what the claimed trade secret is.  The general process as described in the first claim of the Siemens application was arguably something known in the trade already, as it had been demonstrated at a year 2000 trade convention.   But no further details of its secret process were provided by BondPro at trial.  The court noted that usually one expects trade secrets to be highly detailed because general processes will most often be known to experts in the field.  Since BondPro has not provided details that would distinguish its “trade secret” from publicly-known methods, the court concluded that there was no trade secret.  Since there was no trade secret, BondPro has nothing to gain from reinstating the jury verdict; and thus there was no case or controversy as required by the Constitution.  As such, the district court’s JNOV is affirmed.

Significance to Trade Secrets Owners

This case highlights an important rule in trade secrecy protection: the trade secret must be provable as a secret.  One easy mechanism for so doing is to ensure all proprietary materials are specifically identified, such as by a label on a header of each page and/or by including in a license clarifying that trade secrets are being delivered.  However indicated, such evidence is a pre-requisite to successful trade secret enforcement.

Preliminary Injunction

Evidence does not justify trial court’s issuance of preliminary injunction, under California’s Uniform Trade Secrets Act, prohibiting defendant’s publication of digital versatile disc decryption software on the Internet, since record indicates that decryption software had been so widely distributed that encryption technology may have lost its trade secret status by time plaintiff sought preliminary injunction.  The case involved the trial court granting DVD CCA’s request for preliminary injunction and entered an order prohibiting defendants from posting, disclosing, or distributing DeCSS (a computer program allegedly containing DVD CCA’s trade secrets) or related proprietary material.  (DVD Copy Control Association Inc. v. Bunner, 69 USPQ2d 1907, Ca CtApp, 2/27/04).

Discovery

Plaintiffs in action for patent infringement are entitled to discovery of information concerning third party’s polymeric films in connection with issue of patent validity, even if it is assumed that information sought is trade secret, since there is no absolute privilege to protect trade secrets from disclosure during discovery, and plaintiffs have established that information is relevant to subject matter of underlying suit and necessary for them to prepare for trial.  (Ex parte Sealed Air Corp., 70 USPQ2d 1575, DC SC 2/5/04).