Making a Federal Case of Trade Secret Misappropriation

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On April 27, 2016, the Defend Trade Secrets Act (DTSA) passed the House of Representatives and went to President Obama’s desk, where it is expected to be signed.  With that, trade secret misappropriation claims will exist under federal law and can be pursued in federal courts.

The DTSA will provide businesses with more effective new tools to protect their sensitive information from misappropriation.  In the context of trade secrets, misappropriation is generally considered the acquisition of hidden information through some improper means .  The broadly structured language of the DTSA extends its protection to “all forms and types of financial, business, scientific, technical, economic, or engineering information” so long as (1) the owner has taken reasonable steps to keep the information secret and (2) the information derives its value from that secrecy.  The DTSA largely tracks the concepts of trade secrets that have long existed in most states.  But under the DTSA, plaintiffs will be able to bring claims for misappropriation of trade secrets in federal court.

Previously, trade secrets have been an outlier in the world of intellectual property.  Unlike copyright, patent and trademark claims, which receive the wider benefit and protection of federal court jurisdiction, trade secret claims have mostly been litigated in state court.  The problem with this has been that, given the diffuse and global nature of business and commerce, state courts are often not the best venue for intellectual property claims.   If a misappropriation occurs across state or national borders, a federal court is better suited to address such jurisdictional conflicts.

To gain access to the DTSA, and federal court jurisdiction, all that is required is that the “trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.”  This is generally a very low threshold, as most products and services these days are used or intended for use in at least interstate commerce – only the most localized of businesses would not be able to meet this minimal requirement.

The DTSA will confer on trade secret holders a greater ability to pursue misappropriation beyond the borders of the United States, and can even pursue remedies before the International Trade Commission.  In addition, a secondary benefit gained from access to the federal court system is a potential for more uniform decisions and precedent than the more disparate and varied state courts decisions.

Another interesting development that the DTSA will usher in relates to injunction and damages.  Injunctions are often sought in trade secret cases to prevent the information at issue from being disclosed.  Previously,  under the Uniform Trade Secrets Act (UTSA), which almost all states have adopted in some form or another, the injunction would end when the trade secret ceased to exist or after an amount of time necessary to stop any potential commercial advantage being gained from a misappropriation.  The DTSA however contains no such limitation, which presumably will give courts more discretion in applying an extended injunction.  Also, where the UTSA allows for double damages in cases of “willful and malicious misappropriation”, the language of the DTSA has upped this to treble damages.

Perhaps the biggest tool in the DTSA tool belt is the ability to seek ex parte civil seizures.  What this means is that a plaintiff can, without giving a defendant notice, seek the seizure of property if the plaintiff can demonstrate that the defendant, or someone working in concert with the defendant, is likely to “destroy, move, hide, or otherwise make such matter inaccessible to the court”.  This type of ex parte seizure is a powerful new tool that will likely allow trade secret holders to better combat harm associated with a misappropriation.  And being a powerful tool, it may be subject to misuse among competitors.

Conkle, Kremer & Engel attorneys stay current on developments that may be important to their clients concerned about commercial and intellectual property issues.  If you have questions about the DTSA or other aspects of trade secret or intellectual property protection, we would be glad to hear from you.

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You Shook Hands – But Do You Have a Deal?

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Courts have held that, in business negotiations, “Handshakes are significant. When people shake hands, it means something.”  Unfortunately, they have also held that when people shake hands, “several meanings are possible.”

In Rennick v. O.P.T.I.O.N. Care, the Ninth Circuit Court of Appeal considered a party’s contention that a deal was struck when, after months of discussion and a 4-hour negotiating session, the parties “got up and circulated around the room and shook hands with each other on having made the deal.”  The Rennick case observed that a jury could reasonably find that “the handshake was confirmation of a contract, or that it was an expression of friendship and the absence of ill will after a day of hard bargaining.”  So, given the uncertainty of its meaning, should we stop shaking hands when discussing business?  Of course not.  Indeed, the Court noted that, “By custom, it is a rude insult to reject an outstretched hand in most circumstances, and to do so at the end of a long business meeting would likely prevent a future deal.”

The issue of the parties’ intent upon shaking hands is not a small one.  In August 2014, Charles Wang, the owner of the New York Islanders was sued by a hedge fund manager who claimed that the parties had shaken hands on a deal to buy the NHA hockey team for $420 million, and that Wang had breached their agreement by demanding more money.  The frustrated purchaser sued to either enforce an apparently unsigned 70-page agreement to conclude the sale of the team, or recover a $10 million break up fee that he claims was among the terms agreed upon with a handshake.

Courts struggle with this kind of issue, with or without handshakes.  In contract disputes, courts try to enforce the parties’ expressed intentions. For example, where the parties clearly express that they do not intend to be bound until they sign a formal written contract, courts will try to honor that intention by finding that no contract exists unless a written agreement was fully signed.  Indeed, negotiating parties usually can express almost any manner of requirement before an agreement becomes enforceable.  Quentin Tarantino’s civil war era film Django Unchained featured a climactic scene in which the odious character Calvin Candie extorted Dr. King Schultz into signing an outrageous contract, and then insisted that the signed contract was meaningless unless Dr. Schultz also shook his hand.  As a general point of law that was a doubtful proposition even in Mississippi in 1858, but if the parties had been careful to express that intention in their written agreement it probably would have been an enforceable prerequisite to the validity of the contract.

In reality, too often there is no such clear delineation.  If the parties do not eliminate such possibilities by an express statement of their intentions, oral expressions or an exchange of emails or text messages might create an enforceable agreement.  That is because, when the parties aren’t careful about expressing their intentions, courts are left to divine whether the parties intended an agreement with or without signatures on paper.  Courts consider testimony about what was said and evidence of what was written and the activities that took place before, during and after the time of the purported agreement to draw conclusions about what the parties’ intentions really were. Often, the parties’ contemporaneous correspondence is the most important evidence of whether the parties intended to have a binding agreement immediately, or whether the parties intended only to express their good will or intention to negotiate further.

To avoid unnecessary disputes, a cautious businessperson should make a point to express clearly his or her intentions.  The best approach is to plan ahead and be as clear as possible in a written expression as to when the deal is considered enforceable.  The Conkle law firm counsels and represents businesses in negotiations to achieve those ends, or in disputes that can arise when the businesses handled negotiations themselves and come to Conkle, Kremer & Engel attorneys only after things did not turn out as intended.

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CK&E’s Judgment of $6.2 million for Unpaid Sales Commissions Upheld on Appeal

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The California Court of Appeal has unanimously upheld the $6.2 million judgment that Conkle, Kremer & Engel won at trial for a sales representative who had been deprived of $2 million in commissions he had earned.

Peter Reilly was a retired electronics industry executive who agreed to use his extensive contacts in the industry to bring new business to a growing manufacturing company, Inquest Technology, Inc.  After Reilly was not paid commissions for the contacts that he brought to Inquest, he asked Conkle, Kremer & Engel for help.

Reilly-Inquest_Team

Reilly v. Inquest – Plaintiff’s Trial and Appeal Team

CK&E’s Eric S. Engel and H. Kim Sim were the trial lawyers who devised the case strategy.  Key to the strategy was establishing by discovery and summary judgment motion the intricate requirements to impose liability against Inquest under a rarely-used law called the Independent Wholesale Sales Representatives Contractual Relations Act of 1990, California Civil Code section 1738.10 (“the Act”).  The main attraction of the Act is that jury awards for willful violations are trebled by the court and attorneys’ fees are awarded to a successful plaintiff.  Few laws in commercial litigation impose a penalty of three-times actual damages – that is a greater multiplier than most permissible punitive damages awards.

CK&E was able to prove that the sales representative relationship that Reilly had with Inquest met the particular requirements of the Act.  At trial, a unanimous jury found that Reilly procured sales for which he should have been paid $2,065,702 in commissions, based on the testimony of Reilly’s damages expert Thomas Neches.  The trial court then applied the Act’s penalty of treble damages to award Reilly a $6.2 million judgment, plus attorneys’ fees and interest, to enter the Judgment for Peter Reilly against Inquest Technology on Jury Verdict.

Of course, the Defendants appealed the judgment.  On July 31, 2013, the Reilly v. Inquest Technology case led to the first published decision of a California Court of Appeal to uphold a judgment trebling damages and awarding attorneys’ fees under the Act.  Anthony Kornarens was the appellate lawyer for Reilly, with assistance by CK&E.  In a unanimous decision, the Court of Appeal determined that Reilly’s judgment of $6.2 million was well supported by the evidence presented at trial, and that Reilly’s claims for unpaid sales commissions were within the special protections of the Act.

Click here for the full copy of the California Court of Appeal decision:  Reilly v Inquest Court of Appeal Decision, Case No. G046291 (July 31, 2013)

Watch for our future posts about the Act, including how CK&E proved that Inquest’s owners were also liable for the full amount of the $6.2 million judgment even though they were not subject to the Act.

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Facebook Status Update: I’ve Been Served

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Social media is entering a new legal realm:  At least one court has recognized that a Facebook message can be used to serve a defendant with documents in litigation.  Historically, service of process has been most often accomplished by serving papers in person, or sometimes by U.S. Mail, to assure the court that a party has received due notice and an opportunity to respond to the legal proceedings.  But service of process is not always accomplished by such old fashioned means.  In a new twist, in Federal Trade Commission v. PCCARE247 Inc., United States District Court, Southern District of New York, Case No. 12 Civ. 7189 (PAE), Judge Paul A. Engelmayer ruled that the FTC could serve legal papers on defendants who were located in India by a combination of email and Facebook messages.  Service by email has been recognized in limited circumstances by other courts, and Judge Engelmayer emphasized that service of process by Facebook message would not be appropriate in every circumstance.  The court noted that the FTC had shown that the particular email and Facebook accounts were actively used by the defendants, and the defendants had already appeared in the litigation through counsel that had since withdrawn from representing them.

The rapidly expanding legal importance of social media is illustrated by the fact that less than a year earlier, in Fortunato v. Chase Bank USA, another USDC case in the Southern District of New York, Case No. 11 Civ. 6608, Judge John F. Keenan refused to accept Facebook as a means of service of process on a party.  Observing that “[s]ervice by Facebook is unorthodox to say the least,” Judge Keenan found that Facebook service would violate constitutional due process requirements, in large part because the court had not been shown to reasonable certainty that the Facebook profile actually belonged to the defendant who was being served.

Legislatures have also noticed the increasing legal importance of social media.  In February 2013, Texas State Representative Jeff Leach introduced a bill that would allow substituted service through social media websites.  If enacted, H.B. No. 1989 would allow Texas courts to prescribe as a method of service an electronic communication sent to the defendant through a social media website if the court finds:  (1) the defendant maintains a social media page on that website; (2) the profile on the social media page is the profile of the defendant; (3) the defendant regularly accesses the social media page account; and (4) the defendant could reasonably be expected to receive actual notice if the electronic communication were sent to the defendant’s account.  The Texas bill is the first of its kind, and it is likely that other states will consider similar legislation.

It seems safe to say that email and Facebook messages will not be the only technological methods by which service of process will be permitted in the future.  As Judge Engelmayer observed, “history teaches that, as technology advances and modes of communication progress, courts must be open to considering requests to authorize service via technological means of then-recent vintage, rather than dismissing them out of hand as novel.”  While people may not feel ready to be informed they are being sued by messages on Facebook, Twitter or LinkedIn, that day may not be far off.  The cautionary lesson is that email and other electronic means of communication need to be monitored for legal demands, notices or court filings, because a prompt legal response may be required.

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CK&E Lawyers CRASH Santa Monica Superior Court

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Conkle, Kremer & Engel lawyers John Conkle and H. Kim Sim recently volunteered their time and expertise to the Santa Monica Superior Court, serving as attorney volunteers in the Court’s Civil Referee Assisted Settlement Hearing (CRASH) mediation program.  Mediation is an alternative dispute resolution (ADR) process in which a neutral person (usually an experienced lawyer or retired judge) meets with the opposing parties to discuss the merits and risks of their claims and defenses, to try to reach a negotiated settlement.

The services of John and Kim were in high demand due to severe budget cuts affecting California courts. In an effort to deal with a significant budget shortfall for the 2013-14 fiscal year, the Los Angeles Superior Court announced in March the implementation of a countywide consolidation plan that will create regional hubs for certain types of cases. Personal injury civil cases filed in local courthouses are slated for transfer to the Stanley Mosk Courthouse in downtown Los Angeles, and when they come up for trial they can be transferred to be tried anywhere in Los Angeles County. The CRASH mediation program took on increased importance as parties in those personal injury cases – in danger of being transferred out of Santa Monica – were sent to participate in mediation conducted by attorney volunteers in a final attempt to settle and avoid a transfer.

CK&E attorneys seldom handle personal injury matters, but they are well practiced in the ways that insurance can be used to help resolve claims.  John and Kim also brought to the table their extensive experience in alternative dispute resolution (ADR) practice, including the mixture of law and psychology that is mediation.  But it was a different experience for them to sit at the center as a neutral, rather than as one of the advocates.  The Court and litigants were not the only beneficiaries of their work.  Volunteering for this program enhanced their insight into the mediation process and will enhance their effectiveness as client advocates.

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