Source: https://www.flatfeeipblog.com/
Timestamp: 2019-04-23 06:29:37+00:00

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In addition to $30 million in compensatory damages, Judge Davila has awarded $30 million in exemplary damages to BladeRoom and against Emerson for willful and malicious misappropriation of BladeRoom trade secrets.
The misconduct that compelled the court to award exemplary damages was that Emerson had undermined the confidence of market participants in being able to safely share trade secrets with potential business partners, thereby stifling competition and innovation to the ultimate detriment of consumers.
Mapping Judge Davila’s thoughtful characterization of trade secret rights to similar features attributed to trade secrets by Professor Lemley suggests the court’s ruling, whether intended or not, is rooted in and supported by the compelling theory that trade secrets are properly understood as an IP right separate and distinct from other legal theories that have been used to justify the protection of trade secrets.
While the trial evidence was extensive, the conduct relevant to exemplary damages can be condensed down to the following statement: after Facebook expressed to Emerson the desire for a data center consistent with BladeRoom’s technology, employees from Emerson (and Facebook) lured BladeRoom into revealing its trade secrets under the guise of a possible data center contract or corporate acquisition, and then used the information it obtained to surreptitiously design and build Facebook’s data center at Lulea 2. . . .
[T]he evidence does not support a series of minor errors in judgment or mistakes which can be remedied with an apology, and Emerson fails to grapple with the broader effects of its misconduct. From a commercial ethics perspective, the misconduct certainly falls within the category of reprehensible; it undermines the confidence market participants can place in confidentiality agreements and causes those who possess trade secrets to seriously question the motivations of those who superficially appear to be interested in legitimate acquisition. The consumer loses as a result, as innovation and competition are stifled while trade secrets are kept buried in the proverbial vault.
Given its effects on the marketplace, society has a genuine interest in deterring similar misconduct.
Judge Davila apparently developed this rationale independent of the parties, whose written briefs on exemplary damages do not discuss the nature of trade secret rights or society’s interest in protecting them. There are no citations in Judge Davila’s findings to the precedent or trade secret theories that he may have been relying upon.
The point in making these observations is not to call out the court for deciding not to reveal the underpinnings of its analysis. To the contrary, the point is that the court’s ruling echoes Prof. Lemley’s IP Rights and therefore is further supported and better understood by tapping into the connections between the two.
What are the trade secret rights that are protected in BladeRoom?
The “property,” then, is not merely a right to exclude others from something in the sole possession of the plaintiff, but a right to restrict the access, use, and disclosure of information that is actually or potentially in the possession of others, often through the action of the secret owner herself.
Why is it important to protect these rights?
Trade secret law confers an exclusive right on the possessor of valuable information not generally known to or readily ascertainable by competitors.
[T]he grant of that legal control encourages the development of new and valuable information by offering the prospect of supracompetitive returns, returns possible only if the developer does not face competition by others who use the same idea.
–Trade secrets promote disclosure of those inventions.
At first blush, trade secret law seems to push in the opposite direction. After all, protection under trade secret laws is conditioned on secrecy, and so it seems to encourage secrecy, or at least the development of inventions that can be kept secret. Paradoxically, however, trade secret law actually encourages broader disclosure and use of information, not secrecy.
First, trade secret protection substitutes for the overinvestment in physical secrecy and other inefficient limits on the disclosure of information that companies might otherwise make.
Trade secret law developed as a substitute for the physical and contractual restrictions those companies would otherwise impose in an effort to prevent a competitor from acquiring their information. In so doing, it encourages disclosure of information that companies might otherwise be reluctant to share for fear of losing the competitive advantage it provides.
The paradox is this: In the absence of any legal protection, the developer of a potentially valuable but secret idea will have a difficult time selling that idea to someone who could make more efficient use of it. In order to sell the idea he will have to disclose it to allow the buyer to evaluate it, but disclosing it destroys the value inherent in its secrecy. To see this, imagine that I tell you I have a great idea, and I’ll share it with you for $ 1 million. Should you take the deal? You can’t know the answer to that question unless I tell you what the idea is. But in the absence of legal protection, if I tell you what my idea is, you no longer need to pay me $ 1 million.
The law, by giving certain rights to the holder of the secret, allows him to disclose information he would otherwise have been unwilling to share, and therefore permits business negotiations that can lead to commercialization of the invention or sale of the idea, serving both the disclosure and incentive functions of IP law.
The BladeRoom trade secrets misappropriated by Emerson are intellectual property rights. The function of intellectual property rights is promoting innovation (which, per Prof. Lemley, includes not just encouraging new invention, but also encouraging dissemination of those new ideas). Emerson’s misconduct prevented BladeRoom’s intellectual property rights from functioning as intended, which harms competition, markets and ultimately consumers. It therefore had to be deterred through the award of exemplary damages to BladeRoom and against Emerson.
While Judge Davila’s ruling relies on the same characterization of trade secret rights and their societal importance as made by Prof. Lemley in IP Rights, it is going too far to say that Judge Davila implicitly adopts Prof. Lemley’s proposal to treat trade secrets as IP rights and not as applications or extensions of existing tort, contract, property or commercial ethics principles. Perhaps Judge Davila would be willing to take this next step given his characterization of trade secrets, but perhaps not. There are references in his ruling to commercial ethics, contract, theft of property and punishing unreasonable behavior which echo traditional trade secret theory. In addition, a key element of Prof. Lemley’s proposal is the primacy of the secrecy requirement in deciding whether to protect trade secrets, which is not part of Judge Davila’s analysis.
All caveats aside, the appeal of BladeRoom judgment and rulings most likely will present issues regarding the interplay of contract and trade secret claims, apportionment between trade secret claims and non-trade secret claims, the interplay between lost profit damages under contract and trade secret claims, the interplay between lost profits and unjust enrichment on trade secret claims, joint and several liability of settling (Facebook) and non-settling (Emerson) parties and related claims for offsets in damages, not to mention awarding exemplary damages based upon the need to deter conduct undermining IP rights. The resolution of these issues on appeal will require the application of trade secret law solidly grounded in legal theory. Understanding trade secrets as “IP rights” residing in “the pantheon of social policy designed to encourage innovation” as espoused by Prof. Lemley would seem to be the right doctrine for the job and it would not be surprising to see it applied in the course of appellate review.
∗ The inspiration for this article came from my colleague Vicki Cundiff, Partner, Paul Hastings, who sent me a note observing that the BladeRoom exemplary damages decision “is interesting from the standpoint of emphasizing that [trade secret] law permits safe sharing of information.” I leave it to others to decide whether this discussion is of the same quality and significance as Vicki’s keen insight.
It is true that under CUTSA, damages claimed for actual loss or unjust enrichment must be caused by the misappropriation alleged. Cal. Civ. Code § 3426.3. This portion of CUTSA does not require, however, that an expert assign damages amongst the trade secrets for his or her opinion to be admissible.
Consistent with this ruling, the court rejected defendant Emerson’s proposed jury instruction that “[d]amages for misappropriation must be tied to each specific trade secret and to each specific combination of trade secrets.” (Dkts. 798 at 162:5-6 and 829 at 8:1-17.) Likewise, the verdict form given to the jury (which they ultimately returned in favor of plaintiff) did not require the jury to apportion damages between trade secrets.
After the jury concluded that [defendant] did not misappropriate all of 02 Micro’s trade secrets, [O2 Micro’s damages] expert testimony regarding damages for misappropriation of all trade secret was useless to the jury.
O2 Micro Int’l Ltd. v. Monolithic Power Sys., Inc., 399 F. Supp. 2d 1064, 1077 (N.D. Cal. 2005) (emphasis added).
O2 Micro’s analysis is consistent with the comments to California’s model jury instructions, which state “[i]n cases involving more than one trade secret, the jury must answer all of the questions in the verdict form separately for each trade secret at issue.” CACI VF-4400 (Verdict Form for Misappropriation of Trade Secrets).
Can these two apparently opposing interpretations of trade secret damages be reconciled?
Yes. A damage expert is not required in every case to determine damages on a trade secret-by-trade secret basis. Whether they should be excused from doing so depends upon whether they are able to assume (i.e. rely on the jury finding) that misappropriation of any one or more of multiple asserted trade secrets could result in the same total amount of damages.
The technical experts have thus opined that each of these individual and combination Trade Secrets was a technical “lock on the door” to Emerson being awarded the Lulea 2 contract. Just as there can be multiple locks on a door, any one of which prevents the door from opening, there are multiple BladeRoom Trade Secrets or Combination Trade Secrets, any one (or more) of which would have prevented Emerson from entering into the Lulea 2 business with Facebook absent misappropriation. . . .
[M]isappropriation of any one or more of these “locks on the door” Trade Secrets by Defendants entitles BladeRoom to the full amount of damages flowing from that award of business to Emerson instead of to BladeRoom.
In comparison, in O2 Micro, the damage expert did not employ a “lock on the door” methodology. He did not assume that misappropriation of any one of the 12 trade secrets asserted in the case was a “lock” that would have prevented the “door” to defendant’s enrichment from “opening” absent misappropriation. He testified to a unitary sum for unjust enrichment damages in reliance on the jury finding misappropriation of all 12 trade secrets. When the jury found only 5 trade secrets to have been misappropriated, there was no evidence upon which the damage award could have been based.
The damage expert’s testimony in O2 Micro was rendered “useless” by his failure to assign damages on a trade secret-by-secret basis. But this does not mean O2 Micro is inconsistent with BladeRoom. Unlike his counterpart in BladeRoom, the damage expert In O2 Micro did not rely on foundational testimony showing that misappropriation of any one or more of multiple asserted trade secrets could result in the same total amount of damages. O2 Micro teaches that absent foundational testimony like that relied upon in BladeRoom, a damage expert will be required to apportion damages amongst trade secrets.
Yesterday evening, the district court in the trade secret litigation Waymo v. Uber et al [3:17-cv-939-WHA] issued revised jury instructions on trade secret misappropriation and proposed special verdict form (Dkt. #2499). The revised instructions retain the requirement in earlier drafts of the instructions that Waymo must show Uber actually used the improperly acquired trade secrets in order to recover unjust enrichment damages.
With due respect to the very hard work of the court and the parties, and recognizing full well that the district court has the final say on such matters, the current draft instructions do not incorporate — perhaps intentionally, perhaps not — the lessons learned by the Western District of Wisconsin in Epic Systems v. Tata Consultancy Services [3:14-cv-748-WMC] in the course of instructing a jury on awarding unjust enrichment damages on an acquisition-based misappropriation theory.
“[T]here is no obligation to demonstrate use or disclosure if trade secrets were acquired using ‘improper means.'” Epic Systems, Order on Post-Trial Motions, at *2.
However, recovery of unjust enrichment damages still requires proof that the trade secrets and confidential information “were in fact actually used” by defendant. Supplemental Damages Instructions (Dkt. #873); see also Closing Instructions (Dkt. #858); Damages Instructions (Dkt. #872); Special Verdict Damages (Dkt. #871).
But proving “use,” while requiring more than knowledge of the trade secret, does not require that the trade secret was used to successfully develop a competing product. Supplemental Damages Instructions (Dkt. #873).
The point is that the law makes clear that you don’t necessarily have to be successful in order to have used and be entitled to — and to be deemed to have been benefited by the development, market or sale of a competitive product. You don’t have to be successful if you’ve used it to develop, market or sell a competitive product. That’s enough. You don’t have to be — you don’t have to prove that it was successfully developed, marketed or sold.
This important clarification is missing from the current Waymo instructions. Without it, a defendant could avoid unjust enrichment damages on the grounds that there is no evidence that it “used” the trade secret to successfully develop, market or sell a competing product.
True enough, the district court in Waymo added new instruction XVI (Dkt. #2449 at 8), which cautions that “use” is not limited to “direct copying but can include studying and consulting” and “studying may constitute use even though the two designs differed.” The underlying intent may have been the same as that which motivated the district court in Epic Systems to issue a supplemental instruction. However motivated, the Waymo instruction falls short of sufficiently warding off argument or evidence designed to narrow “use” to successful competition.
It may help to break down in chronological fashion how the district court in Epic Systems came to believe further explanation was necessary.
In other words, while the court is open to a “use” theory which is broader than specific evidence that Epic’s “confidential and trade secret information was incorporated into TCS’s Med Mantra product” , plaintiff must tie its damages theory to that use. Otherwise, all the jury has is Britven’s assessment of the total value to TCS of Epic’ confidential information without any way to discount that total value to reflect TCS’s actual benefit.
In post-trial motions, defendant challenged the verdict as lacking sufficient evidence, but plaintiff successfully characterized the challenge as erroneously trying read back into “use” the requirement “that Epic had to prove that TCS then ‘used’ the comparative analysis either to improve or market its medical software products. But that is not the standard required under the law, and it is not the standard on which the jury was instructed.” (Pl. Opp. to Post-Trial Mot., Dkt. #926 at 56.) The district court agreed (but did reduce the compensatory award by $100 million on other grounds), see Epic Systems, Order on Post-Trial Motions, at *4-5.
Bringing this back to Waymo litigation, Epic Systems is on point in that it awarded significant unjust enrichment damages on what for all practical purposes was an acquisition-based theory of misappropriation. It rejected the argument by the plaintiff that “use” should not be a required to show unjust enrichment damages — which may be the approach Waymo is taking in its litigation. It also rejects the idea that “use’ requires a showing that the trade secret or confidential information was used by defendant to develop a successful competitive product — which may be the approach Uber is taking in its defense of Waymo’s unjust enrichment claims. It therefore might be worth it for the parties and the court in Waymo to borrow the “use” instructions ultimately issued in Epic Systems.
The Defend Trade Secrets Act (“DTSA”), on its face, creates a private action in district court for misappropriation occurring abroad. Filing a DTSA claim in district court may in certain circumstances provide the best remedy for foreign trade secret theft over other alternatives such as filing a complaint with the International Trade Commission. But over a year-and-a- half after the enactment of the DTSA, are there any decisions applying the DTSA to foreign trade secret theft? Not so much.
(This video was first presented at “Trade Secret Theft Occurring Overseas: The Long(er) Reach of the ITC,” Computer History Museum, Mountain View, CA, Oct. 10, 2017, a joint CLE by Merchant & Gould and Adduci, Mastriani and Schaumberg (hereafter referred to as “Foreign Trade Secret Theft CLE”).
As proposed in the animation, bringing a claim in the International Trade Commission (“ITC”) to block imports that use the trade secrets is a viable and in some instances the best solution. However, there are factors that favor bringing a misappropriation claim in district court.
An ITC remedy may not be available because, notwithstanding a bona fide threat that misappropriation will occur, misappropriation has not yet happened – it is threatened as opposed to actual, or, because the misappropriated trade secret is source code or other intangible digital media that does not qualify as a “good” within the meaning of ITC rules. Even if the ITC remedy is available, it does not allow recovery of money damages, requires intense and expensive factual development prior to filing the complaint, and imposes potentially difficult to prove domestic industry and injury requirements.
Whether a district court action asserting the DTSA is a viable alternative hinges on the whether the DTSA has extraterritorial reach. There is a presumption that U.S. laws do not apply outside the U.S. unless Congress expresses a clear intent otherwise. The language of the DTSA and its related legislative history manifest the requisite Congressional intent and therefore overcome the presumption.
But so far there is little if any evidence in reported decisions of courts extending the DTSA to cover foreign conduct in reliance on the statute’s extraterritoriality provisions.
The DTSA was applied to extraterritorial conduct in T&S Brass and Bronze Works Inc v Slanina (D.S.C. 2017) because the defendants were citizens or permanent resident aliens of the U.S., thus satisfying section 1837 subpart (1). Research has not disclosed any other case applying DTSA extraterritorially based upon the U.S. citizenship of the defendants.
Likewise, research has not disclosed any decision applying DTSA to conduct outside the U.S. because “an act in furtherance of the offense was committed in the United States” within the meaning of section 1837 subpart (2). Nonetheless, there is compelling basis for arguing that where, as in the hypothetical, the misappropriation includes importing, marketing or selling in the U.S. goods made overseas using the stolen trade secrets, there is an “act in furtherance” justifying extension of the DTSA to reach the overseas theft and use of the trade secrets. In VIA Technologies Inc v ASUS Computer International (N.D. Cal. 2015), the district court interpreted California’s version of the Uniform Trade Secret Act (“UTSA”) as allowing a claim for misappropriation based upon marketing in the U.S. goods made overseas that embody the trade secret. Since the DTSA and state court statutes based on the UTSA are deemed coextensive, it is therefore highly likely that a district court would similarly interpret what is meant my misappropriation under the DTSA.
There are instances where the comparative benefits of bringing a DTSA claim to address foreign trade secret theft in a district court as compared to the ITC favor bringing a DTSA claim – assuming a DTSA claim can overcome the presumption against extraterritorial application. The language and legislative history of the DTSA are sufficient to overcome the presumption in certain instances (where the defendant is a U.S. citizen or where an act in furtherance of the offense has been committed in the U.S.). Yet well over a year-and-a-half after enactment of the DTSA, there are few if any reported decisions recognizing the DTSA as a viable theory of recovery for foreign trade secret theft.
Alarms sounded when John Absmeier, technical director of Delphi Automotive’s Silicon Valley autonomous vehicle project, announced he was leaving to join Samsung’s Silicon Valley innovation center where he would lead a self-driving car technology team. They grew louder upon Delphi’s determination that Absmeier downloaded hundreds of thousands of company files and folders onto personal devices prior to giving notice, deleted tens of thousands of files of unknown subject matter on or before giving notice, and retained possession of tens if not hundreds of thousands of company files (contained on personal external hard drives or personal cloud accounts) after having left Delphi.
Delphi has thus far been able to identify some of what Absmeier downloaded—including over 100 gigabytes of data that appears to be the contents of his “My Documents” folder and his Outlook e-mail folder. These documents consist of many, if not all, of the work emails that Absmeier sent and received while a global executive. Those emails include confidential and sensitive information, and confidential and sensitive documents in the form of e-mail attachments. There was no legitimate reason for Absmeier to be downloading work-related documents and emails in the days and weeks before his resignation— and, in fact, there is no evidence that he had ever downloaded documents from his work computer onto external hard drives before October 15, 2015.
This conduct appeared to give Delphi a strong basis for asserting wrongful acquisition of its trade secrets and actionable trade secret misappropriation. Delphi filed a lawsuit and moved for a preliminary injunction in federal court under the court’s diversity jurisdiction, but the court found that Delphi was unlikely to succeed on its trade secret misappropriation claims and denied injunctive relief on these grounds.
Luckily for Delphi, in addition to being able to assert trade secret misappropriation, it also had a signed non-compete agreement. Doubly lucky for Delphi, choice-of-law rules dictated the application of Michigan law, which favored enforcement of the agreement over the competing policy favoring freedom of employees to seek new employment (recognized in other states like California). Delphi was able to obtain an injunction enforcing the non-compete.
The game-changing combination of choice-of-law rules pointing to the law of jurisdictions enforcing non-competes is a subject for another day (and hopefully a separate post!).
#1 Departing employee was forthcoming about taking new job with potential competitor.
#2 Departing employee offered explanation for the challenged pre-departure downloads and deletions, e.g., done as part of routine company file back-up, or to remove personal documents and photos.
#5 Departing employee swore on oath that A) he no longer had any company information in his possession and B) that he had not disclosed or used any Delphi data or documents in course of his employment with Samsung.
#6 Defense counsel made available for inspection the data and devices sequestered with third-party consultant.
The Delphi litigation falls within the category of cases holding that mere possession of company data subsequent to departure (absent additional evidence such as prior bad behavior, that the data was improperly acquired prior to departure, intent to disclose or use the data in the future, or refusal to return the data) will not be sufficient to establish liability for threatened trade secret misappropriation. See, e.g., FLIR Sys., Inc. v. Parrish, 174 Cal. App. 4th 1270, 1279 (2009); Cent. Valley Gen. Hosp. v. Smith, 162 Cal. App. 4th 501, 528 (2008).
In California, it may not be possible to obtain partial judgment on some but not all asserted trade secrets. Lawsuits brought in California court for misappropriation of trade secrets under California law (California Uniform Trade Secrets Act, Civ. Code, § 3426 et seq.) are governed by state procedural rules for summary judgement and summary adjudication. Code Civ. Proc., § 437c subd. (a) (summary judgment) and (f) (summary adjudication). Summary judgement terminates the entire action. Summary adjudication is directed to some but not all “causes of action,” such that following entry of summary adjudication the case proceeds to trial on the remaining causes of action. You therefore can’t get summary judgment on some but not all trade secret claims, but you might get summary adjudication if the challenged trade secret claim is deemed a “cause of action” within the meaning of the rule. Continue Reading Can You Get Partial SJ on Some But Not All Trade Secrets?

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