Trade Secrets

Jury Rules for Defendant in $80 Million Perfume Trade Secret Case

After a five week trial, a federal jury in New Jersey found that the fragrance company Mane USA Inc. had not conspired with a former Givaudan Fragrances Corp. perfumer to misappropriate over 600 trade secret Givaudan formulas.

James Krivda was a perfumer with Givaudan who created fragrances such as Celine Dion Enchanting and Britney Spears Fantasy.  He was the vice president of the company’s perfumery division.

Givaudan is the world’s largest fragrance company, with annual revenues over $4 billion.

Krivda left the company in 2008 and joined Mane USA.  Mane’s parent company is Mane SA, which employs 35 people in 30 countries and had sales of $841 million in 2012.

Givaudan claimed that as Krivda was leaving the company he printed out and took with him hundreds of trade secret formulas with the intent to use them at Mane.  Krivda said that he shredded the documents.

Krivda was also accused of taking trade secrets such as “head space” analyses prepared by a Gevaudan perfumer, and gas chromotographies used to analyze products.

Givaudan sued Krivda months after he left, saying that 38 of the stolen formulas appeared as similarly or identically named Mane fragrances.

Givaudan contended that its formulas were worth $80 million and threatened to bring criminal trade theft charges against Krivda.

Krivda and Mane denied the trade secret theft allegations and the ensuing litigation lasted five years.

In October of 2013, Mane obtained a partial summary judgment on Givaudan’s cause of action for computer fraud, since Krivda was authorized to access Givaudan’s proprietary database even though he was not allowed to print documents.

The remaining cases of action were addressed at the jury trial.

According to Krivda’s lawyer, his legal team was able to prove that the formulas Krivda created for Mane were independently developed and not stolen from Givaudan.

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Judge Rejects Most Trade Secret Theft Charges against Raytheon

A federal district court judge in Arizona has ruled that most of the trade secret theft claims made by Ordnance Technologies Inc. against Raytheon Co. are time-barred because Ordnance failed to sue within three years after first notifying Raytheon of the alleged theft.

Ordnance and Raytheon had entered into a technical assistance agreement in 2002, under which Raytheon was to provide services relating to integrating Ordnance’s Lancer Multiple Warhead System into Tomahawk cruise missiles.

This agreement included a provision under which Raytheon agreed not to disclose or use Ordnance’s proprietary information.  An amendment to the agreement gave Ordnance full rights to use and manufacture the warhead designs.

In January of 2009, Ordnance learned that Raytheon had made an agreement with the US government for a “Joint Multi-Effects Warhead System” to modify the Tomahawk.  Soon after, Ordnance accused Raytheon of infringing its intellectual property rights in the warhead designs.

In July of 2009, the US Navy awarded Raytheon a $12.8 million contract to develop the warhead.

After correspondence and meetings between the parties, Ordnance finally sued Raytheon in May of 2012.  Raytheon filed a motion for summary judgment on nine out of ten of Ordnance’s claims, including its claim for trade secret misappropriation, saying that they were barred by the three-year statute of limitation.

Raytheon also denied any theft of trade secrets, saying that no proprietary Ordnance information was used in its designs.

The court granted Raytheon’s motion, saying that Ordnance knew of the alleged trade secret misappropriation in January of 2009 and that the fact that Ordnance was not aware of the extent of the misappropriation until later was not relevant.

The judge also said that there was no evidence Raytheon caused Ordnance to delay taking action by failing to deliver documents showing that it had not misappropriated Ordnance’s trade secrets.

Only a single breach of contract claim now remains to be litigated in the case.

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Judge Allows Headhunter to Delay Jail Time for Trade Secret Theft Charges

A federal judge in California has allowed a former executive headhunter to delay serving a prison sentence while appealing his conviction for theft of trade secrets, hacking, and conspiring to use proprietary information.  However, the judge also ordered the headhunter to pay a $60,000 fine immediately.

David Nosal, a former recruiter for Korn/Ferry, was sentenced to a year and a day in prison for violating the federal Computer Fraud and Abuse Act and the Economic Espionage Act.

Nosal was convicted by a federal jury of conspiring to gain unauthorized access to Korn/Ferry’s computer system to obtain the firm’s trade secrets.  Prosecutors said that he intended to use these materials to set up a new business.

According to the Assistant US Attorney, “At the end of the day, stealing is stealing, whether you use a crowbar or a computer.”

Nosal pleaded for probation, claiming that he had come from humble roots and worked three jobs to put himself through college.

The judge sentenced Nosal to less than the maximum prison term, but said sending him to prison would send a message to others and deter trade secret theft.

At his sentencing, Nosal said that he intended to appeal to the Ninth Circuit and that the sentence would not deter him from competing with Korn/Ferry.

Nosal was served with a federal 20-count indictment in 2008 after he convinced three of his former staff members to access Korn/Ferry’s database to obtain lists of executive candidates he wanted for his new company.   He was eventually found guilty of six of the charges.

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Expert Says DuPont Titanium Process Was Trade Secret

In a criminal case involving the alleged theft of trade secrets by individuals linked to companies funded by the Chinese government, an expert witness has testified that DuPont’s process for making titanium dioxide by chlorination was a closely guarded trade secret.

Two men are on trial in federal court in California for trade secret theft.  Robert Maegerle is a former DuPont engineer, and Walter Liew is the founder of a company called USA Performance Technology Inc.

Prosecutors claim that Maegerle shared DuPont’s trade secrets with Liew, and that Liew then used that information to help companies funded by the Chinese government open new titanium dioxide plants.

According to the government, Liew and Magerle earned $28 million from the trade secret theft.

In a pending civil action that is related to the criminal matter, DuPont is suing Liew for theft of trade secrets, but this lawsuit is on hold pending a ruling in the criminal trial.

The defendants claim that the DuPont process has been public knowledge for decades, and that they designed the Chinese plants using information from textbooks and other legal sources.

But expert witness Robert Gibney denied that was possible.  Gibney is a former senior vice president for Tronox Ltd., which is also in the titanium business.

Gibney testified that DuPont was able to command premium prices for its titanium dioxide pigment, and that competitors knew that the DuPont process was more efficient than the alternatives — but not how it worked.

Gibney said that DuPont made special efforts to protect its process, requiring employees to sign codes of conduct and swearing them to secrecy each year.  It also prohibited cellphones and cameras in its plants, and used on-site guards in its titanium dioxide factories.

The Uniform Trade Secrets Act (“UTSA”) defines a trade secret as:

  • information, including a formula, pattern, compilation, program, device, method, technique, or process,
  • that derives independent economic value, actual or potential, from not being generally known to or readily ascertainable through appropriate means by other persons who might obtain economic value from its disclosure or use; and
  • is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

UPDATE in DuPont Trade Secret case: Ex-DuPont Engineer Convicted Of Trade Secret Conspiracy.

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California “Green Chemistry” Law May Force Companies to Re-Think Trade Secret Strategy

Under California’s “Green Chemistry Initiative” (GCI) the state has listed 1,200 chemicals as “chemicals of concern.”  Makers of consumer products that contain these chemicals will have to disclose these components if the products are made or sold in California.

Companies that use the chemicals are required to submit detailed regulatory filings, which will be posted online for public review and comment.  The information would also be available to a company’s competitors.

The state may eventually limit or ban the listed chemicals.

The California Department of Toxic Substances Control (DTSC) approved the GCI’s regulations in July of 2013 and the regulations took effect in October.

However, one important aspect of the final regulations has not yet been resolved.  In August, the California Office of Administrative Law disapproved two provisions of the regulations that were intended to protect trade secrets.

The Office disapproved Section 69509.1(c) due to impermissible vagueness in the “substantive criteria” that the DTSC would apply to determine whether submitted materials should be designated as trade secrets.

The Office also disapproved Section 69509.1(a) due to uncertainty over when the trade secret designation would be made, and whether DTSC could decline to designate something a trade secret.

With trade secret protection for chemical formulas regulated by the GCI thus in limbo, the time is ripe for companies to re-evaluate their strategies for protecting proprietary information.

The two primary ways for a company to protect proprietary information (such as a chemical formula) are via patent law and trade secret law.

For patent applications filed on or after June 8, 1995, US patent law protects an invention for 20 years from the filing date of the earliest US patent application.

Information can theoretically be protected as a trade secret “forever” as long as it is not disclosed.  For example, the formula for Coca Cola has been a trade secret since the drink was invented in 1886.  (“The Vault of the Secret Formula” is an exhibit at the World of Coca-Cola museum in Atlanta.)

If disclosure is mandated under the GCI, and adequate trade secret protections do not apply, companies may wish to seek patent protection for their chemical formulas.

However, under the “on-sale bar” doctrine, an inventor may not acquire a patent if

the invention was patented or described in a printed publication in this or a foreign country or in public use or on sale in this country, more than one year prior to the date of application for patent in the United States.

Under a recent decision by the Federal Circuit, this “offer to sale” includes an offer by an authorized supplier to make the product at issue and sell it to the inventor – even if the product is not yet offered for sale to the general public.

Thus, patent protection won’t be a viable option to protect trade secrets associated with products that have been for sale for years.

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Mattel and MGA Fight over “Bratz” Dolls

A federal judge in California has ruled that Mattel Inc. may no longer delay paying MGA Entertainment Inc. $137 million for attorneys’ fees and costs incurred in a dispute between the companies over “Bratz” dolls.

Mattel had sought an injunction to stop the payment, expressing concern that the money was subject to competing claims from others, including MGA’s former attorneys.

MGA recently settled a fee dispute with its former lawyers and also reached an agreement with its insurance carrier over coverage for its legal fees.

The lawsuit arose from a dispute between Carter Bryant, a toy designer, and Mattel over whether Byrant invented Bratz dolls while working at Mattel, or whether he came up with the idea before he signed a contract with Mattel.
Bryant later brought the idea to MGA, which has sold Bratz dolls since 2001.  A decrease in sales of Mattel’s Barbie dolls has been attributed to the increasing popularity of the Bratz brand.

Mattel claimed that Bryant stole its copyrights and trade secrets when he brought Bratz to MGA.  Mattel alleged that it lost $300 million in profits as a result.

Mattel sued MGA and in 2008 and was awarded $100 million in damages by a California federal court jury.  However, major parts of the decision were struck down by the Ninth Circuit Court of Appeals in 2010.

In 2011, another jury found that MGA had not stolen Mattel’s trade secrets but that, to the contrary, Mattel had misappropriated MGA’s Bratz-related trade secrets.  MGA was awarded $108 million in attorneys’ fees and $202 million for damages and other costs.

But in January of 2013, the Ninth Circuit threw out this second jury award, holding that MGA’s counterclaim of trade secret theft should not have reached the jury.  The Ninth Circuit let stand the jury’s award of $137 million for attorneys’ fees and costs incurred by MGA in successfully defending itself against Mattel’s copyright claims.

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Company Must Pay Legal Fees for Ex-Employee Charged with Stealing Trade Secrets

A federal judge has ruled that Goldman Sachs must pay the legal costs of a former employee accused of theft of Goldman’s proprietary source code.

Sergei Aleynikov is a programmer who worked on Goldman’s high-frequency trading software.  In 2009, just before he went to work for a Chicago start-up, Aleynikov downloaded the Goldman source code in order to use it at his new company.

Aleynikov was charged with theft of trade secrets, in violation of the federal Electronic Espionage Act, and also with transportation of stolen property.  He was sentenced to 97 months in prison but his conviction was overturned in February of 2012 and he was released – only to be arrested again by New York authorities for state-law trade secret offenses.

The Second Circuit’s reversal of his conviction led to the passage of the Theft of Trade Secrets Clarification Act of 2012.

Aleynikov sued Goldman in New Jersey federal court in September 2012, seeking indemnification for his legal fees.

In October of 2013, the district court ordered Goldman to advance Aleynikov’s legal fees (about $700,000 so far) for defending himself in the state law case.  Goldman was also required to pay Aleynikov’s legal fees (over $1 million) in the indemnification suit.

Among other things, the district court judge noted that Aleynikov (along with 12,000 other Goldman employees) had the title of “Vice President,” and Goldman’s bylaws on indemnification of officers defined “officer” broadly.  Goldman had previously paid legal fees for 51 out of 53 employees who had incurred them – including 15 with the title of “Vice President.”

Aleynikov will be “required” to pay back the legal fees if he loses in state court.  However, since he has no job and no money, it is unlikely that Goldman would be able to collect.

Goldman has appealed the district court’s order.

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Trade Secrets Gain Protection Worldwide

The European Commission has introduced proposals that would make it easier for trade secret owners to sue when their proprietary information, including algorithms, recipes, manufacturing processes, and client lists, is misappropriated by competitors.

According to the Commission, 20% of European companies have been victimized by trade secret theft or attempted theft during the past 10 years.  Half of the businesses surveyed reported that the risk of trade secret theft has increased.

Trade secrets are not now expressly protected by EU-wide intellectual property laws.  This makes it harder for European companies to sue when their secrets are stolen.  Trade secret disputes are primarily governed by the divergent laws of EU member states.

The proposed EU directive would harmonize trade secret laws and enforcement throughout the EU and create a shared definition of protected know-how.

China, which recently beefed up its trademark law, amended its Civil Procedure Law in 2012 to make it easier for parties to seek preliminary injunctions.  A recent ruling by a Shanghai court established that the new law also applies to cases involving the theft of trade secrets, enjoining the defendant from distributing alleged trade secrets downloaded from the plaintiff’s website.

In the US, trade secret law was for many years left up to the states.  The 1996 Economic Espionage Act (“EEA”) made theft of trade secrets a federal offense and imposed criminal penalties (including imprisonment) for trade secret theft.

In 2012, Congress passed the Theft of Trade Secrets Clarification Act to clarify the scope of the EEA, amending it to include things like software used within a company as well as products “produced for or placed in interstate or foreign commerce.”

Even more recently, the Economic Espionage Penalty Enhancement Act of 2012 increased the maximum federal criminal penalties for foreign economic espionage and theft of trade secrets.

Proposed US legislation would further strengthen the EEA by, among other things, covering foreign-government-sponsored hacking and the theft of negotiating positions or strategies.

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Chinese Firm Accused of Using Stolen IMAX Technology

 

IMAX Corporation claims that one of its former software engineers stole the company’s technology and has used it to help a lower-cost Chinese giant-screen rival.

According to IMAX’s court filings, Gary Tsui worked for IMAX in Mississauga, Ontario from 1999 to 2009.  When he told his employer that he intended to quit, he was fired first when IMAX discovered that he had started a company that was bidding for giant screen business in China.

IMAX searched Tsui’s computer and allegedly found “rampant use” of the company’s trade secrets in starting his company.

Tsui is now the chief engineer for China Film Giant Screen (CFGS).  IMAX says CFGS misappropriated IMAX’s technology for converting 2-D movies into 3-D.

CFGS was co-developed by the China Film Group, which determines which foreign movies may be shown in China.

The CFGS system is used in 50 movie theaters in China, compared to 20 using IMAX.  The CFGS system is cheaper than IMAX, and ticket prices for CFGS theaters are lower.

In Ontario, IMAX obtained an injunction against Tsui which ordered him to stop competing with IMAX pending trial.  The court also ordered Tsui detained for failing to comply with its orders, but he has apparently remained outside Canada.

IMAX also filed suit in Los Angeles against a Burbank company associated with a Hong Kong-based parent company.  IMAX accuses the Burbank company of selling a CFGS system based on the IMAX technology allegedly stolen by Tsui.

The CFGS system is being used by Sony and MGM to exhibit the movie RoboCop in China.  Large-format movies are especially popular in China, and the number of IMAX theaters there grew 37% in one year.

The Chinese film market is now second only to the US market, and growing rapidly, with about $3.6 billion in ticket sales annually, compared to about $10.8 billion for the US and Canada combined.

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Congress Considers New Trade Secret Bills

The US Congress has recently passed two bills to protect trade secrets and is working on more.

The Theft of Trade Secrets Clarification Act was passed in 2012 in response to a court decision overturning the trade theft conviction of former Goldman Sachs programmer Sergey  Aleynikov.

As previously reported, Goldman has been ordered to pay about $1.7 million (so far) for Aleynikov’s legal fees.

Another act passed in 2012, the Foreign and Economic Espionage Penalty Enhancement Act of 2012, increased penalties for trade secret theft.

Reports that the Chinese military had hacked into the computers of US businesses to steal trade secrets have led to even more trade secret protection bills.

Representative Zoe Lofgren (D-CA) has introduced the Private Right of Action Against Theft of Trade Secrets Act of 2013 (H.R. 2466).  This act would give individuals and companies a right of action under the federal Economic Espionage Act of 1996 (EEA) to sue those who misappropriate trade secrets.  The EEA now only allows federal prosecutors to file criminal trade secret cases.

 

Senator Jeff Flake (R-AZ) introduced the Future of American Innovation and Research Act (S. 1770), which would create a private right of action for trade secret theft by foreign entities.  The act would give US federal courts jurisdiction over thefts by foreign entities that injure a US citizen or cause an injury within the United States.

Representative Mike Rogers (R-MI) introduced the Cyber Economic Espionage Accountability Act (H.R. 2281) and Senator Carol Levin (D-MI) introduced the Deter Cyber Theft Act (S. 884).

The Cyber Economic Espionage Accountability Act would allow federal agencies to penalize foreign officials that committed or aided cyber-espionage and trade secret theft.  Penalties would include freezing assets, banning travel to the US, and other measures.

The Deter Cyber Theft Act would create a “watch list” of counties that engage in “economic or industrial espionage in cyberspace with respect to United States trade secrets or proprietary information.”

In order for information to be protected as a trade secret under either state or federal law, a company that owns the so-called secrets must take adequate steps to maintain the confidentiality of the information.

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