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


Mind The Gap: Helsinn Healthcare v. Teva Pharmaceuticals

March 14, 2019

In Helsinn Healthcare S.A.  v. Teva Pharmaceuticals USA, Inc. et al., 586 U.S. ____ (2019) [hereinafter ‘Helsinn’ and ‘Teva’], the United States Supreme Court [hereinafter ‘the Court’] held that the term “on sale” in 35 U.S.C. 102(a)of the American Invents Act [hereinafter ‘the AIA’] includes both confidential and public commercial sales of an invention. Under this section, together with section 102(b), a sale or offer for sale of an invention triggers a maximum one-year period for submission of a patent application to the United States patent office. After this one year elapses an applicant may no longer submit an application for that particular invention. The pre-AIA statute expressly provided that on sale activities and public use trigger this one-year period.  AIA section 102(a) now expressly reads “public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention [Emphasis added].”  The issue in Helsinn became whether the ‘on sale’ term of the AIA excludes confidential sales because of this additional “or otherwise available to the public” category of activities.

Helsinn originally owned patents for a pharmaceutical that decreases adverse side effects from chemotherapy. Helsinn entered into an agreement with another company to (i) distribute this pharmaceutical at specific doses and (ii) preserve Helsinn’s confidential information received under the agreement. The agreement’s existence was announced in a joint press release, and the actual  agreement was submitted to Securities & Exchange Commission [hereinafter SEC] with the dosages redacted. Nearly two years later Helsinn submitted its first patent application for this pharmaceutical to the U. S. patent office. Thereafter, Helsinn sued Teva for patent infringement when Teva requested government permission to market the pharmaceutical at a dose disclosed in Helsinn’s patents. However, Teva contended that in addition to its three earlier patents, Helsinn’s U.S. Patent No.  8, 598,219 [hereinafter ‘Pat. No. ‘219’] was invalid, because it was submitted after a gap of more than one year after the distribution agreement’s effective date.

Pat. No. ‘219 was the only patent in the litigation governed by AIA 35 U.S.C. 102(a). The district court held that the AIA ‘on sale’ deadline did not apply, because the SEC filing and joint press release did not disclose the claimed dosages. The Court of Appeals for the Federal Circuit reversed, because (i) the existence of the ‘on sale’ event (i.e., the distribution agreement) was publicly disclosed, and (ii) this ‘on sale event’ triggered a one-year application submission deadline even if invention details remained confidential. Because the Federal Circuit held that the sale was public, it did not address whether confidential sales trigger application submission deadlines under section 102(a) of the AIA.

Before the Court, Helsinn contended that under the AIA confidential sales do not trigger a one-year filing deadline, because “or otherwise available to the public” means that only public sales now trigger this deadline.  Nevertheless, the Court held that a commercial sale to a third party who is required to preserve the invention as confidential is also within the scope of the “on sale” AIA deadline.  The Court observed that under pre-AIA precedent a sale or offer of sale does not require that invention details be publicly available to trigger this deadline.   Congress also re-enacted the same ‘on-sale’ language into the AIA, and which is consistent with earlier judicial construction of that phrase.  In sum, the addition of “or otherwise available to the public” is not a sufficient change to conclude that Congress intended to alter the original scope of the term “on sale.”

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


Tale of Two Universities

November 25, 2018

In Broad Institute, Inc. et al. v. Regents for the University of California et al., ____ F.3d ___ (Fed. Cir. September 10, 2018) [hereinafter ‘Broad’ and ‘UC’] the United States Court of Appeals for the Federal Circuit [hereinafter ‘the Federal Circuit’] held that Broad’s bioengineered molecule differed sufficiently from UC’s bioengineered molecule [hereinafter CRISPR-Cas9] to qualify as a separate invention. If this CRISPR-Cas9 could successfully function within animal cells, then the first and sole invention owner would possess enormous commercial potential for medical applications.

UC originally requested the Patent Trial and Appeal Board [hereinafter ‘the Board’] to resolve which entity was first to invent CRISPR-Cas9 that functions within animal cells.   Broad owns patents and patent applications for a method in which CRISPR-Cas9 successfully severs genetic molecules in animal cells. UC also requested patent protection for CRISPR-Cas9 that functions within animal cells. However, UC’s patent application and earlier research publication exclusively disclosed operable isolated CRISPR-Cas9 in environments without any kind of cells.

Before the Board UC maintained that Broad’s animal cell CRISPR-Cas9 was too similar to UC’s CRISPR-Cas9 to qualify as a different invention.  However, Broad observed that soon after publication of UC’s first research paper about CRISPR-Cas9, UC’s own scientists stated that achievement of functional CRISPR-Cas9 in animal cells was uncertain for several technical reasons. Based in large part upon these statements, the Board concluded that UC’s and Broad’s CRISPR-Cas9 sufficiently differed from each other to each be eligible for patents to separate inventions. The Board also relied upon evidence that additional research was required to achieve success in animal cells, and that Broad’s CRISPR-Cas9 implemented this innovation.

Before the Federal Circuit, UC contended in relevant part that the Board had improperly relied upon statements of UC’s inventors and professional witness which were made shortly after its original research publication. However, the Federal Circuit affirmed the Board’s decision because it was supported by credible, reliable and relevant substantial evidence.   In reaching its conclusion the court stated that the Board properly relied upon statements by UC’s inventors and expert which were not prepared for litigation.  The court also looked at UC’s and Broad’s evidence regarding predictable development of other gene editing systems.   On this basis, the court concluded that successful transfer of isolated gene editing systems, such CRISPR-Cas9, to animal cells from other environments remained extremely limited. The court also concluded that such transfers invariably require nonroutine and non-predictable research and development.

After addressing UC’s remaining contentions, the court agreed that there were two distinct inventions, and that there was no reasonable expectation of success for predictably developing Broad’s operable CRISPR-Cas9 in animal cells.  The court further observed that the degree of predictability, and therefore a reasonable expectation of success, is determined on a technology by technology basis.  In this instance, the prior technology offered as evidence by both UC and Broad established that gene editing results, of which CRISPR-Cas9 is one example, were highly unpredictable.

In sum, the judicial result is that UC’s application does not describe the same invention (CRISPR-Cas9) as Broad, there is no sole initial inventor, and so each entity may continue patent prosecution. Whether UC’s application will withstand challenges to patentability during prosecution remains to be seen.

©2018 Adrienne B. Naumann, Esq. Ms. Naumann does not endorse or sponsor the advertisements at adriennebnaumann.wordpress.com.


If you can’t change your fate change your (IPR) attitude

August 5, 2018

In Oil States Energy Services LLC v. Green’s Energy Group LLC, 584 U.S. ___ (2018) [hereinafter ‘Oil States’ and ‘Green’s Energy’], the United States Supreme Court [hereinafter ‘the Court’] upheld the inter partes review provisions of the America Invents Act [hereinafter IPR] after a challenge based upon the United States Constitution. Briefly stated, to commence an IPR any person may petition the Patent Board of Trials & Appeals [hereinafter ‘the Board’]to review an issued patent for invalidity. The Board may then commence the IPR, but its decision to either do so or to decline the petition is not appealable. However, a party to an IPR which does proceed, and who is dissatisfied with the outcome, may appeal the Board’s decision to the United States Court of Appeals for the Federal Circuit [hereinafter ‘the Federal Circuit’].

In this case Oil States challenged the constitutionality of IPR based upon Article III (independent judiciary) and the Seventh Amendment (right to a jury trial). Green’s Energy originally attacked Oil State’s Energy patent in federal district court, and it also petitioned the Board to commence IPR to cancel this same patent. The Board concluded that Oil States’ claims were unpatentable and the Federal Circuit affirmed the Board’s decision. Furthermore, because that Federal Circuit held in a previous decision that IPR did not offend Article III or the Seventh Amendment, it summarily affirmed on that basis as well.

Before the Court, Oil States contended in relevant part that patents are private property to be litigated at common law, but that IPR improperly adjudicates private rights without an Article III judge. Oil States also contended that IPR impermissibly expands the public rights doctrine, because this doctrine requires that the government to enforce agency rules, but IPR resolves disputes between private parties.   Oil States further contended the IPR violates the Seventh Amendment which requires juries for common law disputes. Green’s Energy position was that patents are public rights, because they exclusively originate from a federal statute and regulatory scheme. Green’s Energy also contended that IPR differs from litigation because there is no resolution of ownership, damages or liability.  Therefore, IPR does not offend the Seventh Amendment, because there is no right to a jury in cases involving pubic rights or administrative proceedings.

The Court held that IPR was not unconstitutional, because Congress may properly delegate adjudication of public rights to non-Article III entities. According to the Court, patents clearly qualify as public rights because they remain subject to patent office authority for cancellation through agency procedures such as IPR.  There is also no violation of the Seventh Amendment where Congress properly assigns adjudication to a non-article III agency such as the patent office. However, the Court also stated that its decision was based exclusively upon challenges under Article III and the Seventh Amendment. As a result, this decision did not address or resolve whether patents are personal property for proceedings under the Due Process Clause or Takings Clause of the Constitution.

©2018 Adrienne B. Naumann, Esq. all rights reserved. Ms. Naumann dos not sponsor or endorse the advertisements posted at adriennebnaumann.wordpress.com