Back to the Future: Contracts 101 and Mission Product Holdings v. Tempnology

May 24, 2019

In Mission Product Holding, Inc. v.  Tempnology, LLC, 587 US. ­­­___ (2019) [hereinafter ‘Mission Product’ and ‘Tempnology’] the U.S. Supreme Court held that trademark licenses are governed by the same contract principles within a bankruptcy estate as outside the estate. Bankruptcy debtor Tempnology had earlier asserted that an executory contract,[1]  such as a license, may be rejected by the bankruptcy debtor, and therefore the licensee exclusively possesses a damages remedy. Tempnology conceded that there is a statutory exemption for intellectual property licenses by which the licensee also retains its license rights. 11 U.S.C. 365(n). However, 11 U.S.C. 101(35A) of the Bankruptcy Code designates subject matter which qualifies as intellectual property, but this provision does not include trademarks or a residual clause. According to Tempnology, a licensee of intellectual property exclusively within this designation retains its rights if the debtor rejects the executory license. However, because this list does not include trademarks, a trademark licensee may not continue using a debtor’s trademark under a rejected executory license. Consequently, the question before the Court was whether a debtor/licensor’s rejection of an executory trademark license terminates the licensee’s rights.

The license between the two companies provided that Mission Products use Tempnology’s trademark upon its apparel products. The bankruptcy court selected Tempnology’s analysis and held that Mission products could not use the trademark. The Bankruptcy Appellate Panel reversed and held that Tempnology could use the trademark, because (i) rejection of an executory contract under section 365(g) comprises a breach, and (ii) under basic contract law the non-breaching party retains its contract rights. However, the United States Court of Appeals for the First Circuit (‘First Circuit’] reversed this decision, because (i) 11 U.S.C. 101(35A) exclusively defines intellectual property in bankruptcy proceedings, but (ii) this provision does not designate trademarks. Consequently, Mission Products as a trademark licensee exclusively possessed a breach of contract remedy for damages, but without the right to use Tempnology’s trademark.

The Supreme Court reversed and remanded the First Circuit’s decision. In most relevant part, the Court stated that (i) section 365(g) specifically defines rejection of any executory contract in bankruptcy as a breach, and (ii) breach is defined under the law of contracts because there is no definition for breach which is specific to the Bankruptcy Code. As a result, and absent any state law or contract term to the contrary, a non-breaching possesses both (i) a remedy of damages as well as (ii) retention of its rights under the breached contract. Moreover, according to the Court this is the correct result because the bankruptcy estate cannot possess more property rights than it would possess outside bankruptcy. Furthermore, if Mission Products did not retain its contractual rights upon rejection, then the result under basic contract law would be rescission and not a breach. However, since section 365(g) explicitly states that a rejection comprises a breach, and not a rescission, then retention of the rights to use the mark is the only correct result. The Court concluded by stating that (i) the intellectual property designation of section 101(35A), (ii) the specific performance exceptions for intellectual property contracts under 365(n), and (iii) potential burdens of the debtor for supervising the licensee’s trademark use do not supersede or modify the result under sections 365(a) and 365(g).

©2019 Adrienne B. Naumann, Esq.  Ms. Naumann does not endorse or sponsor the advertisements at adriennebnaumann.wordpress.com.

[1] That is, a contract that neither party has finished performing. See 11 U.S.C. 365(a).

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Defend Trade Secrets Act: As time goes by, Part 1

May 8, 2019

As the time interval from the effective date of the federal Defend Trade Secrets Act [hereinafter the Act] increases, more issues inevitably arise, and so we address some of them here. In Next Payment Solutions Inc. v. CLEAResult Consulting, Inc., 2019 WL 3637356 (N. D. Ill. July 31, 2018) the court denied the defendant’s motion to dismiss, and where the motion was based in part upon the defendant’s reliance upon the Act’s reverse engineering provision. Although reverse engineering is lawful under the Act, the plaintiff alleged that the defendants unlawfully distributed its trade secrets outside the scope of a confidentiality agreement between the parties. As a result, there could have been distribution of the plaintiff’s trade secrets to unauthorized persons, and reverse engineering could have occurred in this unlawful manner.

There is at least one sovereign immunity decision under the Act.  In Fast Enterprises LLC v. Pollack, 2018 WL 4539685 (D. Mass. Sept. 2, 2018) the court granted the motion to dismiss where Ms. Pollack, as the Director of the Massachusetts Department of Transportation, authorized distribution of bid information of private entities to the public.  According to the court, the Act does not include otherwise lawful acts of government agencies within its scope, and so there is no liability as a matter of law.

For the Act to apply, there must be subject matter jurisdiction based upon alleged trade secrets being directly related to or part of interstate or international activities of a plaintiff. To date, several decisions have addressed whether this subject matter jurisdiction requirement was sufficiently alleged in a  complaint. For example, in Sun Distribution Company v. Corbet et al., 2018 WL 4951966 (S.D. Calif. Oct. 12, 2018) the court granted a temporary restraining order where the plaintiff alleged distribution of trade secret related publications outside its principle state of business.  In Revolution FMO LLC v. Mitchell, 2018 WL 2163651 (E. D. Missouri May 10, 2018), the court denied the motion to dismiss based upon subject matter jurisdiction because the plaintiff sufficiently alleged that it (i) reviewed its trade secrets for compliance with numerous states’ regulations and (ii) licensed trade secrets outside its state of incorporation.

Similarly, in Video Gaming Technologies Inc. v. Castle Hill Studios LLC et al., 2018 WL 3437083 (N. D. Okla. July 17, 2018) the court granted a motion to amend a complaint where the amended complaint would allege that (i) the plaintiff’s games were used across multiple states and (ii) its proprietary game algorithms were submitted for potential use outside the state of the plaintiff’s principle business. In all of these cases the courts found that the Act’s subject matter jurisdiction was based upon interstate activities which were sufficiently related to alleged trade secrets. However, a different result was reached in DLMC, Inc. v. Flores et al., CV No. 18-00352 DKW-R (D. Hawaii January 23, 2019). In this litigation the elder care company plaintiff alleged that the defendant former employees unlawfully transferred confidential client lists to a business competitor. The plaintiff alleged subject matter jurisdiction based upon (i) federal funding and (ii) federal patient identification numbers. Nevertheless, the court granted a motion to dismiss without prejudice, because these allegations bore no relationship to the client lists and there were no allegations of how either company provided interstate services.

© 2019 Adrienne B. Naumann, Esq., all rights reserved. Ms. Naumann does not sponsor or endorse the advertisements at adriennebnaumann.wordpress.com


DEFEND TRADE SECRETS ACT, Part 4: OK, now you’ve crossed the line

May 3, 2019

Currently there are few decisions for the ‘whistleblower provision’ of the federal Defend Trade Secrets Act ([hereinafter the ‘Act’]. Under this provision an employee is immune from civil and criminal trade secret misappropriation liability under both the Act and state law if

  • an employer’s trade secrets are conveyed to an employee’s attorney or the government;
  • in a lawsuit document or other proceeding under seal, and
  • solely to report or investigate a possible violation of law.

However, the employee must be ‘squeaky clean’ and strictly comply with the conditions of the Act’s whistleblower provision to benefit from the immunity.

In an early decision, the court denied whistleblower immunity because an employee’s reliance upon this immunity was premature. Unum Group v. Loftus, 220 F. Supp3d 143 (D. Mass. 2016). In this case Unum Group requested a preliminary injunction against former employee Loftus to prevent disclosure of  confidential health care information.  Loftus then moved to dismiss the employer’s lawsuit based upon whistleblower immunity. The court concluded that

  • it was not known which documents containing confidential health care information the employee provided to his attorney; or
  • whether the employee planned to use, disclose or transfer the trade secrets for purposes other than investigating an employment related grievance; and
  • the employee had not yet filed a lawsuit that required trade secret disclosure.

Consequently, the court took the employer’s allegations as true, denied the motion to dismiss and granted the preliminary injunction.

Another court granted an employee’s motion to dismiss the employer’s counterclaim for trade secret misappropriation based upon this immunity. Christian v. Lannett Company, Inc., 2018 WL 1532849 (E. D. Pa. March 29, 2018). In this case the disputed information was disclosed under a court order related to the employer’s alleged civil rights violations against the employee. The court also observed that the employer never alleged that

(i)the plaintiffs’ attorney intended to use or disclose the purported trade secrets to other persons, or

(ii) the plaintiff intentionally or accidentally disclosed or intended to disclose these same disputed trade secrets to third persons.

However, in the pending litigation of Spano v. Ohio Hospice & Palliative Care, 2018 U.S. Dist. LEXIS 15516 (W. D.  Pennsylvania, filed January 31, 2018), according to an employer’s counterclaim the former employee had misappropriated and then transferred several hundred pages of confidential records to her attorney purportedly for an age discrimination and wage dispute.  Thereafter, the state government filed a criminal complaint against the employee for affirmatively misappropriating this information.  Although the counterclaim was not originally brought under the Act, the Act provides immunity for state law misappropriation claims. For this reason, employees should understand the scope of the Act’s immunity provision, as well as potential consequences if their actions lie outside this scope. Let’s be careful out there!

©2019 Adrienne B. Naumann, all rights reserved. Ms. Naumann does not sponsor or endorse the advertisements at adriennebnaumann.wordpress.com.


Defend Trade Secrets Act Part 3: Who picks up the check?

May 2, 2019

The Defend Trade Secrets Act [hereinafter ‘the Act’] explicitly allows attorney fee awards to a prevailing party where misappropriation claims were made in bad faith.  However, although the Act is a federal statute numerous federal district courts have relied upon state law when resolving whether to award attorney fees. For example, in Xoran Holdings LLC v. Luick et al., 2017 U.S.  Dist. Lexis 147868 (E. D. Michigan September 13, 2017) the court denied the defendant’s motion to dismiss his former employer’s trade secret misappropriation claim, but it also denied the employer’s request for attorney fees for two reasons. First, the employer had never provided the Act’s notice of whistleblower immunity in the defendant ‘s employment agreement or another appropriate  document. Because the Act explicitly requires this notice before an employer may recover attorney fees, then Xoran could not recover these fees. Secondly, the court observed that both Act and state trade secret law require allegations of willful misappropriation with malice for an award of attorney fees.

In Farmer’s Edge, Inc. et al. v. Farmobile LLC et al., 2019 WL 3747833 (D. Neb. August 7, 2018) hereinafter ‘Farmer’s Edge’ and ‘Farmobile’], Farmer’s Edge alleged that its former employee and a competing business misappropriated its confidential source code, but the defendants prevailed on the merits of the case.  The court denied the defendant’s request for attorney fees, because under both state and federal law the lawsuit was not brought in subjective bad faith and had not been objectively baseless. An appeal of this decision is currently pending in the U. S. Court of Appeals for the Eighth Circuit.

Farmer’s Edge and Xoran are not isolated decisions in which a federal court relied at least in part on state law when awarding attorney fees under the Act. For example, in Swarmify, Inc. v. Cloudflare, Inc., 2018 WL 4680177(N.D. Calif. September 28, 2018) the court awarded attorney fees to a defendant for proceedings occurring when the plaintiff improperly continued the litigation after unequivocal evidence exonerated the defendant. Relying in part on state law, the court held that maintaining the lawsuit after disclosure of this evidence was objectively baseless and for an improper purpose.

For an award of attorney fees under the Act there must also be a prevailing party, and whether a prevailing party exists is an issue raised in other Act decisions. The United State Court of Appeals for the Fifth Circuit has interpreted the Act’s term ‘prevailing party’ exclusively under federal case law. Dunster Live, LLC v.  Lonestar Logos Management Corp. et al., 908 F.3d 948 (5th Cir. 2018). In Dunster, the appellate court affirmed the denial of attorney fees to the defendant for the claim under the Act. In so holding the court explicitly stated that prevailing party status under the Act is exclusively determined by federal law.  More particularly, under federal law a dismissal without prejudice does not result in prevailing part status, and an earlier denial of the plaintiff’s request for an injunction also did not result in this status.

In Southern HVAC Corp. v. Konforte et al., 2019 WL 918072 (M. D. Fla. February 8, 2019), although not bound by Fifth Circuit precedent the magistrate relied upon Dunster to recommend that attorney fees be denied to the defendant.  In this instance the magistrate had originally recommended that the complaint be dismissed without prejudice, and under federal law dismissal without prejudice does not result in a prevailing party. Unfortunately, we do not yet know whether the remaining federal circuits will rely exclusively upon federal law to interpret ‘prevailing party’ as well as other terms of the Act.

© 2019 Adrienne B. Naumann, all rights reserved. Ms. Naumann does not endorse or sponsor the advertisements at adriennebnaumann.wordpress.com.


Keep Your Enemies Closer: Part 2

April 24, 2019

In my last article I addressed representative Defend Trade Secrets Act [hereinafter ‘the Act’] decisions in which the courts evaluated threatened or inevitable misappropriation. In this article we look at the judicial conclusions that justify an ex parte seizure of privately-owned property upon premises outside the courtroom. This seizure is possible because the Act authorizes law enforcement officials to enter a physical premise without notice and seize property which may contain trade secrets. However extraordinary circumstances must exist for which a Federal Rule of Civil Procedure 65 order would be inadequate [hereinafter Rule 65].

According to the case law to date, such a seizure is justified whenever a person or entity has previously destroyed evidence, failed to comply with court orders, or repeatedly shown dishonesty towards the courts or the plaintiff(s). Whether force may be used to access areas of a premise is within the discretion of the court. In an early decision under the Act a court ordered seizure of the defendant’s computer at the defendant’s residence. Mission Capital Advisors LLC v. Romaka, Case No. 16 CIV. 5878 (S.D.N.Y. July 29, 2016). In this instance the court found that the defendant had disregard its initial temporary restraining order. However, this court did not authorize force to access areas within the premises on which property containing trade secrets would be located.

In contrast, the court in AVX Corporation v. Kim, Civil Action No. 6:17-CV – 624-MGL (D.S.C. March 8, 2017), did authorize law enforcement officials to use force to access locked areas if necessary. The court granted the seizure under the Act, in part because the defendant/employee had previously signed a nondisclosure agreement as a condition of employment with the plaintiff. In addition, the defendant had also repeatedly been dishonest, attempted to conceal the misappropriated computer files, and retained physical possession of the confidential files.   The court also granted an ex parte temporary restraining order to prevent actual or threatened misappropriation in the event the defendant intended to transfer the trade secrets to the plaintiff’s business competitor(s). Another court granted a seizure order in Blue Star Land Services, LLC v. Coleman, 2017 WL 621090(W. D. Oklahoma December 8, 2017) based upon the alleged duplicity towards the plaintiff and the significant value of the trade secrets. The court concluded that a Rule 65 order would be ineffective, because

  1. the defendants could easily copy the trade secrets onto other storage media,
  2. their prior behavior demonstrated a pattern of evasion and disregard of law; and
  3. harm to the plaintiff could not be remedied in a less intrusive manner.

Although most courts have relied upon Rule 65 and not an ex parte seizure under the Act, the above decisions provide exceptions of which practitioners should be aware. For this reason, a defendant’s attorney should urge prompt compliance with a Rule 65 order, so a defendant personally delivers property to the court without physical intervention by law enforcement officials. The alternative to this initial compliance could become an unexpected disruption of a home or business, as well as destruction of third persons’ property if they innocently share a targeted premise.

©2019 Adrienne B. Naumann, all rights reserved. Ms. Naumann does not sponsor or endorse the advertisements at adriennebnaumannword.press.com.


Keep Your Enemies Closer Part 1

April 18, 2019

The popular press has successfully raised the profile of trade secret misappropriation during the past several years. However, this high profile was primarily directed to: (i) criminal international espionage and the Waymo v. Uber litigation. The prosecution of international theft is ongoing while the Waymo litigation terminated in a 2018 confidential settlement. Beginning in 2016 the federal Defendant Trade Secrets Act [hereinafter “the Act”] provides original subject matter jurisdiction for civil trade secret misappropriation lawsuits between private parties.  Original subject matter exists if a plaintiff’s products and services in interstate or international commerce are related to the disputed trade secrets. Several hundred such lawsuits have already been filed nationally.

The vast majority of lawsuits under the Act arise when former employees wrongfully take their former employer’s trade secrets to (i) their next employer, or (ii) begin a competing business.  The Act explicitly states that threatened misappropriation is actionable although it does not explicitly address inevitable disclosure. Unfortunately, decisions under the Act to date show inconsistency for evidence or allegations necessary to prevent threatened disclosure or inevitable disclosure.  For example, In Primesource Building Products, Inc. v. Huttig Building Products et al., No. 16CV 11468 (N. D. Ill. December 9, 2017) the magistrate judge denied a preliminary injunction to prevent use and disclosure of business information because (i) there was no evidence of wrongful taking, (ii) the defendant employees could perform in new positions without accessing their former employer’s trade secrets and (iii) alleged trade secrets were already stale in a rapidly changing industry.

In Executive Consulting Group LLC v. Baggot, 2018 WL 1942762(D. Colorado April 25, 2018) the court granted a preliminary injunction for actual and threatened misappropriation, because the defendant forwarded confidential information to her personal e-mail account in violation of her employment agreement. In Industrial Packing Supplies, Inc. v. Channell et al., 2018 WL  2560993 (N.D. Ill. June 4, 2018) the court squarely held that an employee would not inevitably misappropriate trade secrets merely because he or she merely moved to a business competitor for similar employment. Instead this court held that there should be evidence to support the former employer’s suspicions.  Recently a Minnesota district court provided criteria for inevitable disclosure, and based in part upon state law these criteria include a subsequent employer’s failure to prevent improper disclosure and use. PrimeTherapeutics LLC v. Beatty et al., 2018 WL 5669270(D. Minn. November 1, 2018).

However, other courts hold that the mere act of accepting employment with an employer’s business competitor is sufficient to trigger liability under the Act. For example, in TFC Partners, Inc. Stratton Amenities, LLC et al., 2019 WL. 369152 (W.D. Texas January 30, 2019), the court granted a temporary restraining order against several defendants, because under Texas state law an employee’s move to a competitor for similar employment establishes a presumption of threatened misappropriation. Similarly,  in Fres-Co Systems USA, Inc. Hawkins et al., 690 Fed. Appx. 72 (3rd Cir. 2017) the court stated that allegations of threatened misappropriation may justify a preliminary injunction if an employee’s previous employment and subsequent employment substantially overlap (i) geographically and (ii) in job description.  The takeaway for practitioners is to review state law for threatened or inevitable misappropriation outcomes, because federal courts often rely at least in part upon state law to interpret the federal Act.

©2019 Adrienne B. Naumann, Esq., all rights reserved. Ms. Naumann does not sponsor or endorse the advertisements and announcements at adriennebnaumann.wordpress.com.


Push Back the Scrimmage Line: Fourth Estate Public Benefit v. Wall Street.com

March 25, 2019

In Fourth Estate Public Benefit Corporation v. Wall-Street.com, LLC, 586 U.S. __ (2019) [hereinafter ‘Fourth Estate’ and ‘Wall-Street’] the United States Supreme Court [hereinafter ‘the Court’] held that the United States copyright office [hereinafter ‘copyright office’] must affirmatively grant or deny registration to a work prior to a copyright infringement lawsuit by a claimant.  In so holding the Court resolved a split in the appellate circuits over whether the copyright office’s registration decision was a pre-requisite to commencing a lawsuit. The relevant statutory provision reads in part that a civil suit may commence “after registration has been made” and interpretation of this language was the focus of the litigation. See 1 7 U.S.C. 411(a).

In this case, the district court dismissed Fourth Estate’s copyright infringement lawsuit, because the copyright office had not yet acted upon its registration application for the disputed work. The United States Court of Appeals for the Eleventh Circuit affirmed for the same reasons. Before the Court, Fourth Estate contended that the passive voice of the disputed statutory language evidenced that no action by the copyright office was necessary. Fourth Estate further contended that other provisions of the Copyright Act supported its interpretation because some works do not require registration prior to a lawsuit.  Fourth Estate also asserted that section 411(a) explicitly allows a claimant to commence litigation even if the copyright office refuses registration, and therefore a copyright office decision is unnecessary. In response Wall-Street contended that a copyright office decision granting registration is not the condition precedent; rather the issue is whether the copyright office must either affirmatively either allow or deny registration prior to a lawsuit.  Wall-Street also distinguished Fourth Estates’ examples where registration was not necessary prior to commencing a lawsuit (movies and musical works), by characterizing them as statutory exceptions to section 411(a).

The Court agreed with Wall-Street and affirmed the Eleventh Circuit decision. In particular, the Court stated that the first two sentences of section 411(a) focused upon action by the copyright office.  It also concluded that the last sentence of section 411(a), and by which the copyright office may become a party to the lawsuit, would be unnecessary if a copyright office decision was not required. On this point the Court noted that Congress modified section 411(a) to address instances in which the copyright office refuses registration.  The modification provides notice of the lawsuit to the copyright office and allows a claimant to proceed with a lawsuit after this copyright office refusal.

The court further noted that other provisions of the copyright supported its interpretation of section 411(a). For example, the statutory pre-registration option would be unnecessary if a completed application without more comprised registration. 17 U.S.C. section 408(f).  Finally, the Court dismissed Fourth Estate’s contention that because rights automatically vest in copyrightable works, then these works should be protected in court without copyright office participation.  However, the Court concluded that although by statute ownership may spontaneously arise without the copyright office, protection of these rights requires a registration decision of the copyright office.

©2019 Adrienne B.  Naumann, Esq. Ms. Naumann does not sponsor or endorse the advertisements at adriennebnaumann.wordpress.com