Trade Secret / Noncompete : Business, Employment, Intellectual Property, and Litigation Attorneys Focused on Trade Secret/Noncompete Issues

Cases and issues making the headlines*:

Trade Secret Misappropriation Enjoined in California (November 20)
A former high-level engineer at Pacestter in California left to form a rival company, Nervicon, in China, which ordered a 24 MHz surface mount crystal oscillator from one of Pacesetter’s suppliers. The supplier allegedly recognized the order as using Pacesetter’s information and contacted Pacesetter, which sued for, among other things, misappropriation of trade secrets, unfair competition, and breach of fiduciary duty. Pacesetter sought and received a preliminary injunction. The case is Pacesetter Inc. v. Nervicon Co. Ltd., BC424443, California Superior Court, LA County. Story here (paid service).

New Less Onerous Noncompete Valid (November 20)
An Oregon court upheld a noncompete entered, effectively (although not technically), mid-employment. Although such agreements are ordinarily not enforced, the court found that the agreement was less onerous than the pre-existing noncompete, and therefore the protections afforded by Oregon’s noncompete statute were satisfied. The case is Epiq Class Action and Claims Solution Inc. v. James R. Prutsman and Rust Consulting Inc., case number 09-1185, in the U.S. District Court for the District of Oregon.  Story here (paid service).

Idaho Trade Secret/Raiding Case Seeks $10,000,000 (November 19)
Idaho health and home products company Melaleuca Inc. has reportedly sued Utah company, Max International, of corporate raiding, trade secret misappropriation, and unfair competition, seeking not only injunctive relief, but $10,000,000 in damages.  Story here. 

Trade Secret Lawsuit Not An Abuse of Process (November 19)
Restaurant supplier Lasco Foods Inc.’s trade secret action overcame a challenge that it was brought in bad faith (as an abuse of the legal process).  That claim, and the claims under the Computer Fraud and Abuse Act and the Stored Wire and Electronic Communications Act among others, will reportedly proceed against startup,  Hall & Shaw Sales, Marketing & Consulting LLC.  Story here (paid service).

From Patents to Trade Secrets (November 14, 2009)
On November 9, the United States Supreme Court heard arguments in the Bilski case, which concerns the use of “business-methods patents” (i.e., patents to protect methods of performing certain activities).  Story here.  Based on the Court’s reaction, it seems likely that these patents will no longer be generally available, leaving the secret business methods to secure their protection through trade secret laws. 

There’s an App for That? (November 14, 2009)
A computer game developer has been sued for violation of the Computer Fraud and Abuse Act by allegedly collecting personal data through an iPhone app.  Story here and here.

Music to No One’s Ears (November 14, 2009)
Musicians in the Sarasota Orchestra were allegedly prohibited from performing at a concert because of a noncompete clause in a collective bargaining agreement.  Story here and here. 

Recent Articles and News From the Authors (November 14, 2009)
In case you missed them, we will now be linking to recent published articles written by Foley & Lardner’s trade secret / noncompete lawyers and other stories quoting our authors.  Here are the latest:  No-poach agreements: A new generation of restrictions (Computerworld); A practical approach to protecting trade secrets (CIO.com and Macworld); Protecting Your Confidential Business Information While the Noncompete Debate Continues (Foley Newsletter); Mass. non-compete culture to change? (NECN); Marblehead rep co-sponsors overhaul of non-compete agreements (Marblehead Report/Wickedlocal.com); @russellbesq at 22 Tweets (Twitter).

Really? (November 14, 2009)
A recently-filed lawsuit accuses actress Sara Jessica Parker of stealing trade secrets and selling them to Apple’s Steve Jobs, ultimately leading to the development of the iPod.  Story here and here. 

Read On… (November 14, 2009)
Spring Design sued Barnes & Noble, claiming that Barnes & Noble copied its design for a two-screen e-book reader.  Story here. 

Secret Product Placement (November 14, 2009)
Not quite subliminal advertising, but Denizen LLC has reportedly sued MindShare Entertainment for stealing its product placement ideas involving the integration of product placements in television shows.  Story here.

*For earlier stories, go to the In the News (archives) page.

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The Georgia Supreme Court recently narrowed the scope of a noncompete injunction prohibiting a former employee of a retina surgery practice from marketing certain software in competition with his ex-employer.  Coleman et al. v. Retina Consultants PC et al. (GA S. Ct.).

Prior to his employment by The Retina Eye Center ("TREC"), Coleman -- a software engineer -- wrote and marketed a medical billing program called Clinex. While at TREC, he tailored the program to suit that company's business and developed a separate retinal practice application, Clinex-RE.  As the lower court found, it is undisputed that Coleman incorporated TREC's proprietary information and trade secrets in developing Clinex-RE, and that Clinex-RE only operates in conjunction with Clinex. The parties allocated the rights to Clinex and Clinex-RE in a software agreement that also restricted Coleman's ability to distribute the Clinex software or any applications competitive with Clinex-RE to ophthalmologists or optometrists without TREC's consent.

Following his resignation from TREC, Coleman attempted to distribute or license the Clinex and Clinex-RE software to other ophthalmologists; he refused to disclose to TREC necessary passwords to read and revise copies of the software; and  he used or attempted to use TREC's proprietary information and trade secrets to compete with a company owned by Coleman and TREC that was formed to market Clinex and Cline-RE.

TREC brought suit for breach of contract and moved for an injunction to enforce the software agreement's noncompete provision, and to enjoin Coleman from retaining and using access codes, source codes, other information, and passwords required to read and revise copies of Clinex and Clinex-RE.

Finding the lower court improperly enforced the noncompete clause at issue as it is unenforceable as a matter of law because of the failure to specify a time limitation, the Supreme Court nonetheless held that the former employee could be prohibited from marketing Clinex and Clinex-RE together because -- as the trial court determined -- Clinex-RE includes proprietary information and trade secrets.  Coleman would not, however, be restricted from using and marketing his own version of Clinex as that software is his own property.

Further, the Supreme Court ruled that the injunction preventing Coleman from retaining any and all information and documentation related to Clinex was too broad and went beyond the scope required by the software agreement as it would foreclose him from access to information related to his own software to which he is entitled.

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By Russell Beck and Stephen Riden

The Computer Fraud and Abuse Act (the "CFAA"), 18 U.S.C. § 1030, has recently come into vogue as the tool of choice among trade secret (and noncompete) litigators. Why? Because it provides a relatively easy to prove claim. In very (and I do mean very) simplistic terms, the statute (which is, in reality, a criminal statute, although it gives private individuals and companies the right to sue too) requires a showing of only: intentional access to a protected computer without authorization or beyond authorization causing damage. If you can prove those five elements, you have made out your case. The significance? No need to prove that a trade secret was taken.

So, what do those words mean? Well, the statute provides some guidance, but leaves many issues unanswered - and the courts are now starting to fill in the balance, as these cases become more prevalent. Suffice it to say, if you login to a computer, you have probably just satisfied the first two elements (intentional and access). If the computer is used in interstate commerce, you have satisfied the second element (a protected computer). What is interstate commerce? Well, in today's world, it's almost a theoretical question, as any computer connected to the internet will likely qualify.

That leaves two issues (authorization and damages). First the hard one: authorization. The statute applies equally to someone who never had authorization and to someone who had authorization, but exceeded the scope of that authorization. The issue making headlines (well, legal headlines anyway) is whether the following qualifies: an employee who obtains access within the bounds of what he is permitted to do, but accesses the computer for his own gain - not for the benefit of the employer. In some federal circuits (think states), the answer is that it does qualify. In others, it does not.

So, all of that must cause damage, right? Seems easy enough. Well, the question is what qualifies under the CFAA? The value of any misappropriated property - perhaps surprisingly - does not qualify. But, the cost of the forensic investigation to assess the harm, probably does. Go figure.

That's it, in a nutshell. Like everything else, however, a little knowledge can be dangerous - so, be careful. The CFAA is far more complicated than this post makes it seem - and it should be carefully evaluated before its power is indiscriminately wielded, lest, for example, you find yourself in federal court, when you wanted to remain in state court.

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The stakes in trade secrets litigation are frequently very high.  The dispute between Semiconductor Manufacturing International ("SMIC") and rival Taiwan Semiconductor Manufacturing ("TSMC") is but one very recent example.  In a that case, brought in the Superior Court of Alameda County, California, TSMC claimed more than $1 billion in damages based on allegations that SMIC stole its trade secrets.  The parties settled the case, with SMIC paying TSMC a reported $200-plus million, including $40 million that SMIC owed TSMC from a previous trade secret and patent infringement case.  SMIC is also giving up a nearly 7.5% in SMIC over to TSMC.  Additionally, the litigation brought about the abrupt resignation of SMIC's chief executive, which analysts speculate was forced and related to the dispute.  Read more about that here.

The risks arising from allegations of trade secrets theft can involve more than simple claims of money damages.  In Spring Design, Inc. v. Barnesandnoble.com LLC, pending in the United States District Court for the Northern District of California, Plaintiff Spring Design is seeking an injunction prohibiting Barnes & Noble from, among other things, the sale of its Nook electronic book reader.  If Spring Design succeeds, Barnes & Noble may be forced to delay the release of the Nook until sometime after the typically lucrative holiday season.  Click here to read more about this case and to review a copy of the complaint.

The threats in trade secret cases run the gamut from sublime to the bizarre.  A case in point is the recent decision by a Wisconsin judge to award two individual plaintiffs $1.26 billion dollars against PepsiCo and two of its Wisconsin distributors.  The plaintiffs allege that PepsiCo - which sells the ubiquitous Aquafina brand bottled water - stole their trade secrets and idea to sell bottled water.  When PepsiCo did not respond to the suit and failed to appear in court, the Jefferson County, Wisconsin Circuit Court sided with the plaintiffs and entered a default judgment.  That order was overturned a month later when PepsiCo appeared and argued that it had not responded to suit because of a "human error" caused by one of its secretaries.  PepsiCo also cited the fact that it had been served in its incorporation state of North Carolina instead of its headquarters in New York.  

Finally, last week, Plaintiff Franz Wakefield sued Apple Inc., Steve Jobs, and Sarah Jessica Parker (yes, THAT Sarah Jessica Parker of Square Pegs and Sex and the City fame) in the United States District Court for the Central District of California for, among other things, misappropriation of trade secrets.  Wakefield alleges that, in 1983, he and Parker had a friendship which resulted in Wakefield and Parker agreeing to a trade secret deal where Parker would commercialize various iterations of the iPod and the iPhone, and Wakefield would receive 2% of gross revenues of any license of the technology to an appropriate technology company.  The then 18-year-old Parker allegedly betrayed Wakefield by going to Steve Jobs, who sat on the technology for two decades.  Similar to Spring Design, Wakefield seeks to halt the sale of iPods and iPhones.  Wakefield also seeks to enforce his agreement for 2% of gross revenues on sales of the devices.

Read more from Marty Bishop at www.cfslitigation.com.

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Hot off the presses. Spring Design, Inc. has filed an action against Barnesandnoble.com LLC, in the Northern District of California, alleging that Barnes and Noble breached a non-disclosure Agreement with Spring Design and misappropriated trade secrets related to Barnes & Noble's development of an electronic book reader device.

Click here for a copy of the Complaint that was filed on Nov. 2, 2009: Spring Design, Inc. v. Barnesandnoble.com LLC Complaint.

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