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In an unreported case from the Central District of California, Senior District Judge Ronald S.W. Lew held that plaintiff may not maintain a trade secrets claim for reverse engineering of software code, where plaintiff alleged that a trial version of the software was properly downloaded pursuant to an end user license agreement (“EULA”).  Aqua Connect, Inc. v. Code Rebel, LLC, et al., No. CV 11 5764 RSWL (MANx), 2012 WL 469737 (C.D. Cal.  Feb. 13, 2012).

Background

Plaintiff Aqua Connect, Inc. sued Defendants Code Rebel, LLC and others.  Defendants brought a motion to dismiss plaintiff’s claim for misappropriate of trade secrets.  Id.  Plaintiff alleged that defendants downloaded a trial version of Plaintiff’s Aqua Connect Terminal Server software (“ACTS”) and subsequently reverse engineered ACTS in violation of the End User License Agreement (“EULA”), which defendants had to agree to in order to use the trial version of ACTS.  Id. Plaintiff alleged that defendants misappropriated the trade secrets within ACTS and used that information to create and distribute a competing software product.  Id.

Discussion

The court described the elements of a UTSA claim: “[t]o state a cause of action for misappropriation of a trade secret under California law, a plaintiff must plead that (1) the plaintiff owned a trade secret, (2)  the defendant acquired, disclosed, or used the plaintiff’s trade secret through improper means, and (3) the defendant’s actions damaged the plaintiff.” Id. (citing Cal. Civ. Code § 3426.1; Cytodyn, Inc. v. Amerimmune Pharm., Inc., 160 Cal.App.4th 288, 297, 72 Cal.Rptr.3d 600 (2008)).  The court noted that “improper means” includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means,” but “[r]everse engineering or independent derivation alone shall not be considered improper means.”  Id. (citing Civ. Code. § 3426.1(a); Sargent Fletcher, Inc. v. Able Corp., 110 Cal.App.4th 1658, 1666, 3 Cal.Rptr.3d 279 (2003)).

This Court found that the plaintiff did not allege a legally cognizable trade misappropriation claim because the “only improper means pled in the FAC is reverse engineering, which according to California law, ‘shall not be considered improper means’ by itself.”  Id.

The court rejected plaintiff’s argument that the “EULA form contract and its alleged breach by Movants can legally convert the alleged reverse engineering into an ‘improper means’ of acquiring Plaintiff’s trade secret.” Id.  The Court noted Justice Moreno’s concurrence to the California Supreme Court decision DVD Copy Control Ass’n, Inc. v. Bunner, 31 Cal.4th 864, 901 n.5, 4 Cal.Rptr.3d 69, 75 P.3d 1 (2003) (Moreno, J., concurring), in which Justice Moreno wrote:

[N]owhere has it been recognized that a party wishing to protect proprietary information may employ a consumer form contract to, in effect, change the statutory definition of ‘improper means’ under trade secret law to include reverse engineering, so that an alleged trade secret holder may bring an action.

Id.

The Central District noted the statutory language of the California Uniform Trade Secret Act, Civil Code section 3426.1(a), which states that “[r]everse engineering alone shall not be considered improper means.”  “[F]rom the plain language of the statute, reverse engineering must be combined with some other improper action in order for it to form the basis of a cognizable misappropriation claim.” Id.

“[R]everse engineering is not an improper means of acquiring trade secret information when defendants acquire the item, from which the information is derived, through fair and honest means.”  Id. The Court found that the complaint was insufficiently pled “because it does not allege that the ACTS trial software was obtained through unfair or dishonest means.” Id.

“Though a breach of the EULA may support a cognizable breach of contract claim, the Court finds that the mere presence of the EULA does not convert reverse engineering into an “improper means” within the definition of California trade secret law.”  Id.

Plaintiff also argued an action for misappropriation of a trade secret exists when a person discloses or uses a trade secret acquired (1) under circumstances giving rise to a duty to maintain secrecy or (2) derived from a person who owed a duty to maintain the secrecy of the trade secret. Id. (citing Civ. Code § 3426.1).  Plaintiff argued that the EULA created a “duty to maintain secrecy,” which was allegedly breached when defendants reverse engineered ACTS.  Id.

The court found this argument without merit.  Id.

California Court have found that this “duty to maintain secrecy” generally exists in the context of a fiduciary duty or an employment agreement to maintain the confidentiality of company trade secrets. See Ali v. Fasteners for Retail, Inc., 544 F. Supp. 2d 1064, 1070 (allowing a trade secret claim to proceed in the context of a fiduciary relationship); Ralph Andrews Prod., Inc. v. Paramount, Pictures Corp., 222 Cal.App.3d 676, 682-83, 271 Cal.Rptr. 797 (analyzing liability context of a competitor who hires a former employee of another company who is likely to disclose trade secrets).

Id.

The court found that the “duty to maintain secrecy” does not arise from a form license agreement.  Id.  Since the complaint FAC has only pled that defendants acquired Plaintiff’s trade secret through “reverse engineering.” As such, the Court found that Plaintiff had not pled sufficient facts to support a cognizable trade secret misappropriation claim.

Judge and Attorneys

Senior District Judge Ronald S.W. Lew.

Michael Karl Hagemann, Century City, CA, for Plaintiff.

Andres F. Quintana, John M. Houkom, Quintana Law Group APC, Calabasas, CA, for Defendants.

By CHARLES JUNG

MyFarm (Photo credit: Benjamin Pender)

In a slip opinion, District Judge Yvonne Gonzalez Rogers of the Northern District of California struck portions of trade secret allegations regarding certain gaming applications where those “images” and “features” were visible to the public. SocialApps, LLC v. Zynga, Inc., No. 4:11 CV 04910 YGR, 2012 WL 381216 (N.D. Cal. Feb. 6, 2012) (slip op.).

Background

Plaintiff SocialApps LLC (“SA”) sued Defendant Zynga Inc. (“Zynga”) for violation of the California Uniform Trade Secrets Act (“CUTSA”), copyright, and various other contract-based common law claims.  Id. Zynga moved to dismiss, inter alia, the CUTSA claim.  Id. Plaintiff alleged that it developed the first farming social network game to be accessed through Facebook.  Id.  The game was publicly released on Facebook in November 2008 as “myFarm.”  Id.  In May 2009, Zynga approached SA about acquiring the intellectual property rights and other information about myFarm, and the parties entered into a letter agreement on May 19, 2009.  Id.

Plaintiff alleges that Zynga violated the express terms of the agreement, as well as the implied understandings the parties had reached in connection with the agreement, by making use of the myFarm confidential source code, processes, and other information revealed pursuant to the letter agreement. Id. SA goes on to allege that Zynga thereafter used the confidential source code and other information it acquired from SA to create its own game, “FarmVille,” without SA’s permission and without compensating SA. Id.

Discussion

Zynga argued that SA’s second claim for misappropriation of trade secrets in violation of CUTSA should be dismissed because some of the information allegedly misappropriated was, at the time, publicly available to the world on the Internet. Id. SA alleged that Zynga misappropriated two types of information: (1) proprietary source code and (2) images and features for myFarm. Id. SA defined its trade secrets as including “its proprietary source code, images for myFarm and its various features.” Id.

SA alleged that the myFarm game was publicly released in November 2008.  Id. The court reasoned that “therefore the images and features were visible to the public several months before the May 2009 letter agreement or June 2009 release of FarmVille.”  The court noted that “Publicly available information, by definition, cannot be protected as a trade secret.” Id. (citing Cal. Civ. Code section 3426.1(d); DVD Copy Control Assoc. v. Bunner, 116 Cal.App.4th 241, 251-53, 10 Cal.Rptr.3d 185 (2004)).

Accordingly, the court struck allegations in the trade secrets claim relating to “images for myFarm and its various features.”  Id.

Judge and Attorneys

District Judge Yvonne Gonzalez Rogers.

Graham Bruce Lippsmith, Thomas V. Girardi, Girardi & Keese, Milord A. Keshishian, Milord & Associates PC, Los Angeles, CA, for Plaintiff.

Claude M. Stern, Rachel H. Kassabian, Timothy Allen Butler, Quinn Emanuel Urquhart & Sullivan, Redwood Shores, CA, Larry W. McFarland, Keats McFarland & Wilson, Beverly Hills, CA, for Defendant.

By CHARLES JUNG

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District Judge Jeffrey S. White of the Northern District of California held that the California Uniform Trade Secret Act (“CUTSA”) superseded common law claims for misappropriation, conversion, unjust enrichment, and trespass to chattels.  Heller v. Cepia, L.L.C., No. C1101146JSW, 2012 WL 13572 (N.D. Cal. Jan. 4 2012) (slip op.).  Plaintiff alleged the existence of confidentiality agreements but not that defendants were bound by them.  Id.

Background

Plaintiff Heller was the sole proprietor of Floating Lightbulb Toys. Id. *1. He accused Cepia, A-Tech, The Bean and Ying Leung International Limited (“Ying Leung”) of misappropriating his trade secrets regarding his toy hamster project.  Id.  Cepia moved to dismiss Plaintiff’s claims for failure to state a claim and for sanctions under FRCP 11. Id. Plaintiff filed a counter-motion for sanctions against Cepia. Id. The Bean and A-Tech moved to dismiss based on lack of personal jurisdiction. Id.

Discussion

Cepia argued that Plaintiff’s common law claims were superseded by CUTSA. Id. Citing Silvaco Data Systems v. Intel Corp., 184 Cal.App.4th 210 (April 29, 2010), the court noted that “common law claims premised on the wrongful taking of information that does not qualify as a trade secret are also superseded, unless the plaintiff identifies some law which confers property rights protecting the information.”   Heller, 2012 WL 13572, at *1.

While Plaintiff argued that his confidential information that was not a trade secret is still property because he entered into agreements providing that any non-secret confidential and proprietary business information would remain his property. Id. The court disagreed, dismissing the common law claims:

[W]hile Heller may be able to state a breach of contract claim against the party or parties who signed this agreement, Heller does not allege that Cepia signed this agreement or is otherwise legally bound by such agreement. Moreover, Heller has not identified any law that confers property rights on his non-trade secret confidential information. Therefore, Heller’s common law claims against Cepia premised on the wrongful taking and use of confidential business and proprietary information, regardless of whether such information constitutes trade secrets, are superseded by the CUTSA. Accordingly, the Court grants Cepia’s motion to dimiss Heller’s common law claims against it.

Id.

Judge and Attorneys

District Judge Jeffrey S. White.

Robert Craig Matz, The Law Office of Robert C. Matz LLP, Alameda, CA, for Plaintiff.

Jeffrey R. Chanin, Matthew Mickle Werdegar, Warren Andrew Braunig, Keker & Van Nest LLP, Edwin Ken Prather, Law Offices of Edwin Prather, San Francisco, CA, for Defendants.

By CHARLES JUNG

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In a trade secrets case where the jury awarded plaintiff ClearOne Communications, Inc. damages on lost profits and unjust enrichment, the Tenth Circuit held that prejudgment interest was not appropriate because the damages calculations were based on speculation and assumptions and lacked the mathematical certainty required to justify an award of prejudgment interest.  ClearOne Communications v. Chang, et al., 2011 WL 3468215, No. 09-4128 (10th Cir. Aug. 9, 2011) (slip op.).

Background

ClearOne licensed to Biamp Systems Corporation an acoustic echo cancellation (AEC) algorithm for an average price of $83.49 per channel in 2002. Id. *1. In 2004, WideBand Solutions, Inc. and associated individual defendants agreed to develop AEC software for Biamp and allegedly developed said software based upon ClearOne’s trade secret computer code. Id. Biamp stopped making payments to ClearOne and instead began a licensing agreement with WideBand in 2005. Id. Biamp allegedly used the infringing code to develop its product.  Id. In 2006, Biamp developed its own technology and stopped licensing WideBand’s allegedly illicit code. Id.

Damages Calculations

ClearOne’s damages expert Richard Hoffman calculated lost profits and unjust enrichment. Id. Hoffman calculated lost profits by multiplying the number of channels Biamp licensed from WideBand by $83.49 (the average price per channel from the ClearOne/Biamp contract). Id. The jury found that ClearOne was entitled to $956,000 in lost profits against the WideBand defendants, and $956,000 in lost profits against Biamp. Id.

Hoffman calculated unjust enrichment against Biamp by multiplying the profit that Biamp made on the sale of a particular product by the number of products sold. Id. *2. For WideBand, Hoffman totaled the profits that WideBand made from products that were made using the misappropriated code. Id. The jury agreed with ClearOne and found that the defendants were unjustly enriched in the amounts presented by ClearOne. Id.

ClearOne requested prejudgment interest on the lost profits and unjust enrichment awards in a post-verdict motion. Id. The district court determined that Hoffman’s estimates of these damages lacked the mathematical certainty required for an award of prejudgment interest under Utah law, and denied ClearOne’s request. Id. ClearOne appealed. Id.

Discussion

In Utah, prejudgment interest is only available when damages can be calculated with mathematical accuracy. Id. *2. The court noted that prejudgment interest is most appropriate where defendant owes the plaintiff a liquidated amount because damages are readily ascertainable and quantifiable. Id. *3. The court distinguished these cases from personal injury, wrongful death, or similar cases because in those cases, there is no fixed standard of value so prejudgment interest is not permitted. Id.

Lost Profits

The court remarked on the reluctance of Utah courts to award prejudgment interest on lost profits because the “very nature of lost profits injects an air of uncertainty and speculation into the calculation of damages” regarding what profits would have been made if the defendant had not acted wrongfully. Id. *3. The court wrote that lost profit damages are not an actual, ascertainable loss; they are the factfinder’s best approximation of that loss. Id. The exception the court noted is that prejudgment interest may be appropriate on actual past lost profits, such as the losses incurred before the defendant’s wrongful act. Id.

The Tenth Circuit affirmed the district court’ denial of prejudgment interest on lost profits because it found that lost profits were hypothetical. Id. The court reasoned that even though the expert witness used actual sales numbers from the license between WideBand and Biamp, the actual figures were only an estimate or proxy for the number of sales that ClearOne would have given to Biamp if the misappropriation had not occurred. Id.

Unjust Enrichment

Similarly, the Court of Appeals affirmed the district court’s refusal to award prejudgment interest on unjust enrichment. Id. *4.  The court noted that Utah courts are equally reluctant to add prejudgment interest to unjust enrichment awards unless the actual unjust enrichment is ascertainable. Id.

The court determined that in this case, prejudgment interest was unavailable because there was no definite and ascertainable sum of money to define the unjust enrichment. Id. The court reasoned that the unjust enrichment in the present case only approximated the value of the benefits the defendants gained from misappropriating ClearOne’s trade secret. Id. ClearOne’s expert calculated unjust enrichment by calculating the defendants’ profits, but the court noted that benefits in this case could be determined in numerous ways, and not all of the defendants’ profits may have been attributable to the misappropriation of trade secrets. Id.  The court concluded that prejudgment interest is not appropriate where the expert’s manner of calculating damages was merely one of many ways by which such damages could be determined. Id.

The fact that the jury agreed with Hoffman’s valuation in this case does not mean that the damages were calculable with mathematical accuracy. Damages do not become measurable merely because a factfinder quantifies them.

Judges and Attorneys

Chief Judge Mary Beck Briscoe, wrote the opinion for the court, with Circuit Judges William J. Holloway, Jr. and Jerome A. Holmes concurring.

Richard D. Burbidge, Jefferson Wright Gross, Burbidge Mitchell & Gross, Christine T. Greenwood, James E. Magleby, Jason A. McNeill, Jennifer Fraser Parrish, Christropher M. Von Maack, Magleby & Greenwood, PC, Salt Lake City, UT, for Plaintiff-Appellant.

Randolph Frails, Randolph Frails, PC, Augusta, GA, Peter H. Donaldson, Mark O. Morris, Amy F. Sorenson, Snell & Wilmer, L.L.P., Scott A. Dubois, Christopher Martinez, Karra J. Porter, Christensen & Jensen, P.C., Emily Van Gorder Smith, Ray Quinney & Nebeker P.C., E. Scott Savage, Salt Lake City, UT, Doug Dubitsky, Updike Kelly & Spellacy PC, Harford, CT, Jennifer Lynn Fitzgerald, Leland W. Hutchinson, Jacob Daniel Koering, Matthew J. Kramer, Freeborn & Peters LLP, Chicago, IL, Lamar Fredrick Jost, Christopher P. Montville, Marsha M. Piccone, Wheeler Trigg O’Donnell, LLP, Denver, CO, for Defendants-Appellees.

By CHARLES JUNG

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A 50 state noncompete survey shows that California is in elite company with respect to its general prohibition against noncompete agreements.  North Dakota and Oklahoma are the only other states to disallow noncompetes.

By CHARLES JUNG

The Northern District of California granted partial summary judgment to a defendant in a trade secrets case on the ground that plaintiff disclosed its information to the public in its published patent applications.  Spring Design, Inc. v. Barnesandnoble.com, LLC, No. C 09-05185 JW, 2010 WL 5422556 (N.D. Cal. Dec. 27, 2010) (slip op.).  The court rejected defendant’s argument that plaintiff’s UCL claim was preempted by the UTSA because “if the confidential information is not a trade secret, then preemption would not apply because the claim would seek a civil remedy not based on the  misappropriation of a trade secret.” Id. *10.

Background

In 2006 and 2007, Plaintiff filed several patent applications which claim different variations of an eReader with a dual-display design, consisting of an electronic paper display (“EPD”) and a liquid crystal display (“LCD”).  Id. *1.  In 2009, Plaintiff and Defendant explored possible collaboration on an eReader, and the parties entered into a nondisclosure agreement (“NDA”) in which the parties agreed not to disclose, reproduce, transmit or use the other’s confidential information except to certain employees on a need-to-know basis.  Id. From February to October 2009, Plaintiff and Defendant conducted several meetings and exchanged emails regarding Plaintiff’s eReader technology.  But on October 20, 2009, Defendant announced the release of the NOOK—its Android-based, dual-screen eReader.  Id. *2.  In 2010, Plaintiff launched its competing eReader device, the Alex, which is also a dual-screen eReader. Id.

Plaintiff Spring Design, Inc. brought an action Barnesandnoble.com, LLC alleging, inter alia, misappropriation of trade secrets and violations of California’s Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code section 17200, et. seq. Id. *1.Plaintiff alleged that Barnesandnoble.com used Plaintiff’s confidential information to develop a competing eReader device, the Nook, in violation of the parties’ non-disclosure agreement. Id. The parties brought cross motions for summary judgment.

Discussion

Defendant moved for summary judgment on the UTSA cause of action on the grounds that, inter alia: Plaintiff’s information does not qualify for trade secret protection because Plaintiff disclosed its information to the public in its published patent applications.  Id. **3-4.

The court recited the law as follows:

[I]t is well established that disclosure of a trade secret in a patent places the information comprising the secret into the public domain. Once the information is in the public domain and the element of secrecy is gone, the trade secret is extinguished….” Ultimax Cement Mfg. Corp v. CTS Cement Mfg. Corp., 587 F.3d 1339, 1355 (Fed. Cir. 2009) (citation and quotations omitted); see also Forcier v. Microsoft Corp., 123 F.Supp.2d 520, 528 (N.D.Cal.2000) (alleged trade secrets were not entitled to protection because they had been placed in the public domain either in patents or in patent applications).

Id. *4.

Plaintiff had designed four categories of trade secrets.  Defendant presented the following evidence to support its contention that the trade secrets had been placed in the public domain: (1) an expert declaration opining that Plaintiff’s patent applications disclosed Plaintiff’s trade secrets;  and (2) a claim chart showing how Plaintiff’s published patent applications disclosed each element of Plaintiff’s alleged trade secrets.  Id. In response, Plaintiff offered the following evidence: (1) a competing expert declaration opining that Plaintiff’s patent applications did not disclose certain aspects of Plaintiff’s trade secrets;  (2) deposition testimony from defendant’s expert in which he admitted that Plaintiff’s patent applications do not disclose any of Plaintiff’s trade secrets in their entirety;  and (3) deposition testimony from Plaintiff’s co-founder, that the patent applications do not disclose Plaintiff’s trade secrets because they were drafted and filed before Plaintiff had developed its software and human-computer interaction solutions.  Id.

Upon reviewing the evidence, the court concluded that 1 of the four trade secrets were disclosed in the provisional application:  “the Court finds that Plaintiff’s ’979 provisional application disclosed all of the elements of Trade Secret Number 1 and thus, Defendant is entitled to summary judgment as to this trade secret.”  Id. *5.  The court denied summary judgment with respect to the other challenged trade secrets, and denied defendant’s summary judgment motion as to whether it misappropriated Plaintiff’s trade secrets.

Preemption of the Unfair Competition Law Claim

Defendant also moved for summary judgment on Plaintiff’s claims for violation of California’s UCL.  Id. *8.  Defendant contented that Plaintiff’s UCL claim cannot be based on Defendant’s alleged exploitation of Plaintiff’s confidential information due to preemption of the UCL claim by the UTSA.  Id. *9.  The court reject this view:

[I]f the confidential information allegedly disclosed is proved to be a trade secret, then the UCL claim based on this allegation is preempted…. However, if the confidential information is not a trade secret, then preemption would not apply because the claim would seek a civil remedy not based on the  misappropriation of a trade secret.

Id. *10.

Because the Court has determined that Trade Secret Number 1 is not entitled to protection, Plaintiff’s UCL claim based on improper use of that information would not be preempted. See Cal. Civ.Code s 3426.7(b). With respect to Trade Secret Numbers 2-4, issues of fact preclude summary judgment as to whether these secrets are protectable under the law. Thus, the Court finds that a preemption determination as to Trade Secret Numbers 2-4 is premature.

Id.

Plaintiff’s Motion

Plaintiff moved for summary judgment on the grounds that it was entitled to judgment as a matter of law on its claims for: (1) breach of contract; and (2) violations of the UCL. The Court found significant factual issues and denied denied Plaintiff’s Motion for Summary Judgment.

Judge

District Judge James Ware.

By CHARLES JUNG

I am in trial, so there will be fewer updates until December 11.

Best,

Charles

The Southern District of California denied a motion to dismiss a claim for misappropriation of trade secrets even where counter-claimant does not allege plaintiff’s use of the trade secret to counter-claimant’s detriment.  Young v. Fluorotronics, Inc., No. 10cv976-WQH-BGS, 2010 WL 4569996 (S.D. Cal. Nov. 3, 2010) (slip op.).

Background

Plaintiff John Young, M.D. filed a complaint against Fluorotronics, Inc. and others relating to his investment in Fluoro-Raman technology, which was purported to be a portable, non-destructive and rapid screening device able to detect problems with food and drugs before they are distributed and detect counterfeit drugs.  Id. *1.  Plainitff alleged that the Private Placement Memorandum and Balance Sheet falsely stated that Fluorotronics was the owner of the “iStar ICCD Intensified CCD Detector Head camera” (“Camera”) and “certain Laser Equipment” (“Laser”). Id. Young for himself and others invested in Fluorotronics, but contrary to the representations of defendants, Fluorotronics allegedly did not own the Camera, but borrowed it from Andor Technology.  Id. **1-2.  When Fluorotronics failed to pay Andor for the camera, Young purchased it from Andor. Id. *2.  Plaintiff brought claims for (1) fraud; (2) negligent misrepresentation; (3) intentional misrepresentation; (4) securities fraud in violation of the Securities and Exchange Act of 1934, Section 10(b) and Rule 10b-5; (5) sale of unregistered securities; (6) breach of fiduciary duty; (7) violation of Section 1507(a) of the California General Corporation Law; and (8) violation of Section 2201 of the California General Corporation Law.

Flurotronics brought counterclaims alleging that Fluorotronics was the owner of a patent and system called Pulsed Laser Isochronic & Raman Fluorescense Apparatus, and that one vital part of the System is the ‘Camera’ referred to in the Complaint, and Young knew that without the Camera, the System cannot work.  Id. Fluorotronics alleges that Young “unlawfully [took] possession of the Camera and he keeps it to the present, notwithstanding the objections of [Counterclaimants] and their repeated requests for him to return it to [Fluorotronics].” Id. The counterclaims include a cause of action for misappropriation of trade secrets.

Discussion

Young filed a motion to dismiss the counterclaim, seeking dismissal of inter alia, the cause of action for misappropriation of trade secrets. Id. *8.  Young contended that the Counterclaim “fail[s] to set forth the required elements” and “Counterclaimants have failed to allege . . . that they have any proof that Young used their secret to their detriment.” Id. The court disagreed, and set forth the elements as follows:

To state a cause of action for misappropriation of trade secrets under California law, a plaintiff must plead two primary elements: (1) the existence of a trade secret, and (2) misappropriation of the trade secret. See Cal. Civ.Code s 3426.1, et seq. California law defines “misappropriation” to include “(1) [a]cquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (2)[d]isclosure or use of a trade secret of another without express or implied consent by a person who … [u]sed improper means to acquire knowledge of the trade secret….” Cal. Civ.Code s 3426.1(b).

Id.

The court found that the following allegations were sufficient to state a claim, rejecting the argument that a claimant must allege “use[] of their secret to their detriment.” Id.

The Counterclaim alleges that “the System, including the Camera” were “trade secrets,” and “by unlawfully and/or improperly possessing the Camera and/or using the Camera and/or disclosing to others its inner workings,” Young “misappropriat[ed] said trade secrets, all without the permission of any of the [Counterclaimants].” (ECF No. 5 PP 35, 36). Fluorotronics has adequately alleged a claim for misappropriation of trade secrets.

Id.

Judge

District Judge William Q. Hayes.

By CHARLES JUNG

The U.S. Attorney’s office announced that a defendant entered a guilty plea to a charge of theft of trade secrets from Bristol-Myers Squibb, in violation of Title 18, United States Code 1832.  According the U.S. Attorney, the defendant Shalin Jhaveri holds a Ph.D. from Cornell University and was employed at the time of his arrest in February of 2010 as a Technical Operations Associate in Bristol-Myers’ management training program.  The U.S. accused defendant of stealing trade secrets during his employment with Bristol-Myers and devising a plan to convert them to his own use.  At the time of his arrest, Jhaveri was allegedly meeting in a Syracuse hotel room with an individual he believed was an investor willing to finance a business venture Jhaveri planned to start in his native India.  According to the U.S. Attorney, Jhaveri transferred Bristol-Myers trade secrets to this investor, an individual he knew was not employed by or associated with Bristol-Myers in any capacity.

Jhaveri admitted the following as part of his plea: (1) while employed by Bristol-Myers in its management training program at its Syracuse facility, he devised a plan to steal trade secrets of Bristol-Myers and convert them to his own use; (2) he did steal trade secrets from Bristol-Myers, and in doing so used methods to disguise his actions and evade detection by the Company; (3) he communicated, using a specially created email account and password he set up expressly for that purpose, with an individual he knew was not employed by or affiliated with Bristol-Myers, who he believed to be an investor willing to finance a business venture Jhaveri planned to start in his native India; (4) Jhaveri discussed with and transferred to that individual trade secrets he had stolen from Bristol-Myers; and (5) when asked by this investor whether the information he had taken from Bristol-Myers was everything he needed, responded that it was.

Jhaveri also consented to the entry of an order of removal/deportation from the United States by an Immigration Judge, to take place upon completion of any jail term imposed, and to not seek relief or take an appeal from such order.  Jhaveri faces up to 10 years in prison, a $250,000 fine, up to three years of supervised release, and deportation.

Attorneys

Stephen C. Green was the Assistant United States Attorney prosecuting the case.

The Second District Court of Appeal vacated an arbitration award for failure to resolve defendants’ counter-claim for misappropriation of trade secrets.  Rad v. Keehan, No. B222049, 2010 WL 4487142 (Cal. App. 2d Dist. Nov. 10, 2010).  Defendants Michael Keehan, Lucy Keehan, Lucy’s Silk Store, Inc. and Michael’s Imports, Inc. (collectively defendants) appealed from a judgment entered after the trial court denied their motion to vacate an arbitration award against them and instead confirmed the award.  Id. *1.  Defendants contended that the arbitrator failed to decide their counter-claim for misappropriation of trade secrets, and thus the trial court should have vacated the arbitration award for failure to resolve all issues submitted to arbitration. Id. The Second District Agreed. Id.

Background

Plaintiff Ira Rad, on behalf of his company Bita LLC, executed an agreement (Sales Agreement) with one of defendants’ corporations, Michael Imports, Inc., to sell and distribute silk products from defendants’ “Lucy’s Silk” label. Id. Bita paid defendants $60,000 as partial consideration for the exclusive right to sell the products in the eastern United States, but after execution of the Sales Agreement, defendants continued to sell the products directly to East Coast customers, undercutting Bita’s sales.  Id. Plaintiffs sued defendants, alleging, inter alia, causes of action for breach of contract, fraud, negligent misrepresentation, and rescission with respect to the Sales Agreement. Id. The parties ultimately stipulated to submit their disputes to binding arbitration and a stay of the litigation was entered. Id.

Defendants filed a cross-complaint for damages against plaintiffs alleging three causes of action for breach of contract, misappropriation of trade secrets, and fraud. Id. Their claim for misappropriation of trade secrets alleged that, based on plaintiffs’ assurances that they would make the payments required by a Stock Purchase Agreement, plaintiffs had been given access to defendants’ customer list compiled over ten years and containing detailed and valuable customer preference information. Id. The complaint alleged that defendants had suffered damages by plaintiffs’ use of the proprietary customer list. Id.

After a three-day hearing, the designated arbitrator issued a “Binding Arbitration Award” (Award) that included detailed findings. Id. *2.  Nowhere in the award did the arbitrator mention the second cause of action for misappropriation of trade secrets alleged in defendants’ cross-complaint, despite the fact that defendants’ arbitration brief and post-arbitration brief each referenced this particular cross-claim. Id. Plaintiffs conceded in their brief that defendants presented evidence in support of the misappropriation claim at the arbitration hearing, including testimony from two witnesses. Id.

The trial court granted the petition to confirm the Award and denied defendants’ motion to vacate it. Id. In response to defendants’ argument that the arbitrator had failed to address their cross-claim for misappropriation of trade secrets, the court noted at the hearing that “this arbitrator was empowered to rule [and t]here’s nothing in the record that indicates that he did not rule.” Id.

Ruling

The court noted that The California Arbitration Act “failure to decide an issue submitted to an arbitrator provides a valid ground for vacating the award.” Id. *3 (citing Mossman v. City of Oakdale, 170 Cal. App. 4th 83, 88 (2009)). Where “parties refer all their differences to arbitration, it is the duty of the arbitrators to pass upon the whole subject in controversy, and if it appears upon the face of the award that they have not disposed of the whole matter but have left a part open . . . it is void and will be set aside.” Id. (citing Elliott & Ten Eyck Partnership v. City of Long Beach, 57 Cal. App. 4th 495, 502-503 (1997)).

The court reasoned that while “an arbitrator is not required to make express findings on each issue. . . . the arbitrator’s award must ‘serve[ ] to settle the entire controversy.’” Id. *3 (citing Sapp v. Barenfeld, 34 Cal.2d 515, 523 (1949)).

The court noted that while “courts may generally “presume[ ] that all issues submitted for decision have been passed on and resolved, and the burden of proving otherwise is upon the party challenging the award” (Rodrigues v. Keller (1980) 113 Cal.App.3d 838, 842 (Rodrigues )), the express language of the Award here renders it impossible to presume that the arbitrator impliedly rejected defendants’ counter-claim for misappropriation of trade secrets.” Id. *4.

The Award erroneously stated that defendants asserted only two cross-claims, for breach of contract and fraud, while omitting altogether any reference to defendants’ cross-claim for misappropriation of trade secrets, even though it is undisputed that this claim was submitted to the arbitrator. The Award then concluded only that defendants had “not met their burden of proof to establish their Breach of Contract cause of action,” and issued no further findings with respect to defendants’ cross-claims. The Award’s explicit reference to only two cross-claims suggests that the arbitrator simply overlooked the third claim for misappropriation of trade secrets. . . . Because the Award does not resolve this controversy, it is incomplete.

Judges and Attorneys

Justice Thomas L. Willhite, Jr. wrote the opinion for the Court.  Presiding Justice Norman L. Epstein and Justice Steven C. Suzukawa concurred.

Appeal from a judgment of the Superior Court of Los Angeles County,  Gerald Rosenberg, Judge.

Sun & Kopicka and Josef L. Kopicka for Defendants and Appellants.

Lurie & Park, Barak Lurie and Michele A. Reikes for Plaintiffs and Respondents.

By CHARLES JUNG