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Orrick Wins 6-Year Long Misappropriation of Trade Secrets Battle for Intel

In California Appellate Opinions on August 20, 2010 at 1:13 pm
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On Wednesday, the California Supreme Court denied review of Sivaco Data Systems v. Intel Corp., 184 Cal. App. 4th 210, 109 Cal. Rptr.3d 27 (Cal. Ct. App. 6th Dist. Apr. 29, 2010), ending a six-year long trade secret misappropriation battle.

Plaintiff Silvaco Data Systems (Silvaco) sued defendant Intel Corporation (Intel) alleging that Intel had misappropriated certain trade secrets used by Silvaco in its software products. Id. *215.  The gravamen of the dispute was that Intel had used software acquired from another software concern with knowledge that Silvaco had accused that concern of incorporating source code, stolen from Silvaco, in its products. Id. **215-16. Read the rest of this entry »

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Eighth Circuit Upholds 2-Year Restrictive Covenant

In Eighth Circuit, Restrictive Covenants on August 16, 2010 at 10:18 am

The U.S. Court of Appeals for the Eighth Circuit considered an appeal from a judgment following a bench trial, in Mayer Hoffman McCann, P.C. v. Barton, et al., No. 09-2061,  — F.3d —-, 2010 WL 3155177 (8th Cir. Aug. 11, 2010).  The district court granted judgment to Plaintiff Mayer Hoffman McCann, P.C. (“MHM”) , awarding MHM permanent injunctive relief and $1,369,921 in liquidated damages.  Defendant appellant appealed, contending, among other things, that enforcement of the restrictive covenants is contrary to Missouri law.  The Eighth Circuit rejected these contentions and affirmed the judgment of the district court.

Mayer Hoffman McCann, P.C. is national certified public accounting (CPA) firm. MHM sued its former employees and shareholders-Thomas L. Barton, Anthony W. Krier, James N. Stelzer, and John C. Walter (collectively, “appellants”), all CPAs licensed by the State of Minnesota-to enforce restrictive covenants contained in contractual agreements between the appellants and MHM.  Following a bench trial, the district court granted judgment to MHM, awarding MHM, inter alia, permanent injunctive relief.

As part of a stock repurchase agreement, Appellants agreed that for the “Post-Employment Restrictive Period,” a period of two years following the termination of their employment, they would not: (1) solicit, directly or indirectly, or attempt to solicit MHM’s clients or otherwise interfere with MHM’s relationship with its clients, or (2) solicit MHM’s employees. Appellants further agreed not to copy, disseminate, or use MHM’s confidential information at any time.

Appellants asserted that the restrictive covenants are unreasonable in scope and, therefore, unenforceable.  The court rejected this argument, holding that the two year restrictive covenant “has been found reasonable under the “overwhelming weight of case authority” and was “reasonable under Missouri law”.  Id. *10 (citing Missouri Alltype Fire Prot. Co. v. Mayfield, 88 S.W.3d 120, 123 (Mo. Ct. App. 2002)).

Although the restrictive covenants in this case are not restricted geographically, Missouri law recognizes that a customer restriction may substitute for an explicit geographical restriction. See Schott, 950 S.W.2d at 623-24, 627 (concluding that a two-year restriction on CPAs soliciting their former employer’s customers, or doing any accounting work for them, was enforceable, without a geographical restriction, because “the covenant does not prevent employees from practicing in any particular geographical area, it merely prohibits them from soliciting employer’s clients”); Mills v. Murray, 472 S.W.2d 6, 11-12 (Mo. Ct. App. 1971) (determining that a three-year restrictive covenant was reasonable, even absent a geographical restriction, because the former employee was only restricted from soliciting his former employer’s clients such that he could even “conduct a competing business at [his former employer’s] doorstep as soon as [he] left [his former employer’s] service”). As the Schott Court observed, where “the specificity of limitation regarding the class of person with whom contact is prohibited increases, the need for limitation expressed in territorial terms decreases.” 950 S.W.2d at 627 (quoting Seach v. Richards, Dieterle & Co., 439 N.E.2d 208, 213 (Ind. Ct. App. 1982)). Under Schott and Mills, the restrictive covenant at issue here is not unenforceable, even though it lacks a geographical restriction, because it only prohibits appellants from soliciting MHM clients-not from performing services for MHM’s clients whom the appellants did not solicit. Furthermore, even if the restrictive covenant completely barred the appellants from doing any accounting work for MHM clients, the appellants would still be free to provide accounting services to all non-MHM clients anywhere. Therefore, the scope of the restrictive covenants at issue here is reasonable under Missouri law.

Judges and Attorneys

Before Judge Raymond Gruender, Judge Bobby E. Shepherd of the Eighth Circuit Court of Appeals and Hon. John A. Jarvey, United States District Judge for the Southern District of Iowa, sitting by designation.

The trial court judge was Hon. Gary A. Fenner, United States District Judge for the Western District of Missouri.

Kay Nord Hunt, argued, Minneapolis, MN (Phillip A. Cole, Robert Kent Sellers, Michael Jat Abrams, Diane M. Odeen, Hudson, WI, on the brief), for Appellant.

John C. Aisenbrey, argued, Kansas City, MO (Patricia Konopka, Robin K. Carlson, on the brief), for Appellee.

By CHARLES H. JUNG

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Eastern District of California Rejects UTSA Preemption of Contractual Nondisclosure Claim

In Preemption on August 6, 2010 at 5:35 pm
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Since the opinion in  Court of Appeal decision in K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., 171 Cal. App. 4th 939, 954 (2009), defendants have successfully demurred to common law-based causes of action, arguing that the UTSA preempts them.  In this next case, Removable Media Solutions v. AAR Mobility Systems, 2010 WL 3034219 (E.D. Cal. July 28, 2010) (slip op.), defense counsel takes it one step further, arguing that the statute preempts a contract claim.  This is despite the language of the statute that expressly excludes preemption of “contractual remedies, whether or not based upon misappropriation of a trade secret“.

Plaintiff Removable Media Solutions, Inc. (“RMSI”) previously sought to sell a telecommunications device to the California National Guard. RMSI sought the assistance of defendant AAR Manufacturing, Inc., (“AAR”) in this endeavor. The California National Guard eventually elected to retain the services of AAR but not RMSI in producing the device, and AAR subsequently sold similar devices to other states.

RMSI’s claims alleged that AAR breached a non-disclosure agreement. AAR sought summary judgment on both.  The court denied the motion as to the non-disclosure agreement.

AAR’s sole argument for summary judgment on this claim was that it was preempted by the Uniform Trade Secrets Act, as by California, and in particular by Cal. Civ. Code § 3426.7. In pertinent part, this statute provides that:

(a) Except as otherwise expressly provided, this title does not supersede any statute relating to misappropriation of a trade secret, or any statute otherwise regulating trade secrets.

(b) This title does not affect

(1) contractual remedies, whether or not based upon misappropriation of a trade secret,

(2) other civil remedies that are not based upon misappropriation of a trade secret, or

(3) criminal remedies, whether or not based upon misappropriation of a trade secret.

“Undaunted by the statute’s explicit statement that it does not affect contractual remedies, AAR argues that the statute preempts for breach of the non-disclosure agreement. This assault on the plain language of the statute fails.”

The Court wrote:

Courts have held that except for the three exemptions noted in subsection (b), the statute implicitly “preempts common law claims that are based on misappropriation of a trade secret.” Ali v. Fasteners for Retail, Inc., 544 F.Supp.2d 1064, 1070 (E.D.Cal.2008) (internal quotation marks omitted); see also K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., 171 Cal.App. 4th 939, 954 (2009), Accuimage Diagnostics Corp. v. Terarecon, Inc., 260 F.Supp.2d 941, 954 (N.D.Cal.2003) (holding that this interpretation was implied by Cadence Design Systems, Inc. v. Avant! Corp., 29 Cal.4th 215, 224 (2002)).

AAR’s argument that this implicit preemption extends to contract claims invokes a gross misreading of the caselaw. AAR quotes the statement from Digital Envoy, Inc. v. Google, Inc., 370 F.Supp.2d 1025 (N.D.Cal.2005) that “all state law claims based on the same nucleus of facts as the trade secrets claim are preempted under California’s UTSA.” Id. at 1034.FN4 AAR argues that notwithstanding the statute’s explicit saving of contract claims, courts have stated that “common law claims” arising out of the same operative facts as a trade secret claims are preempted, and that contract claims are common law claims, so contract claims must be preempted.

To the extent that Digital Envoy held that “all claims” are preempted, it plainly referred to “all claims” argued to be preempted in that case, i.e., claims for unfair competition and unjust enrichment. Id. at 1035 (“California’s statute. preempts Digital’s claims for unfair competition and unjust enrichment.”). Digital Envoy and other cases have explicitly recognized that § 3426.7 does not preempt contract claims. Id. (§ 3426.7 “explicitly states that claims based upon breach of contract … are not preempted by the statute.”); see also First Advantage Background Servs. Corp. v. Private Eyes, Inc., 569 F.Supp.2d 929, 936 (N.D.Cal.2008), HiRel Connectors, Inc. v. United States, No. CV 01-11069, 2006 U.S. Dist. LEXIS 93332 (C.D.Cal. July 18, 2006) (“Plaintiff’s claim for breach of contract is not preempted by California’s Uniform Trade Secrets Act.”). While few California courts have spoken to the scope of this statute, at least one state court has allowed a claim for breach of a non-disclosure agreement to proceed in parallel with a claim for misappropriation of trade secrets. Glue-Fold, Inc. v. Slautterback Corp., 82 Cal.App. 4th 1018, 1021 (2000). Although Glue-Fold did not discuss possible preemption of the contract claim, this may well be because the issue was so clear as to require no discussion.

Although this conclusion should be obvious, the court has exhaustively searched cases citing § 3426.7, finding no cases providing even implicit support for AAR’s theory. AAR’s motion is therefore denied as to this claim.

Id. **4-5.

Senior District Judge Lawrence K. Karlton wrote the opinion.

By CHARLES H. JUNG

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Sixth District Reverses Grant of Summary Adjudication of UTSA Claim on Equitable Estoppel Grounds

In California Appellate Opinions, Statute of Limitations on July 29, 2010 at 5:47 pm
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In Insyst Ltd. v. Applied Materials, Inc., 2010 WL 2892712 (Cal. Ct. App. Jul. 22, 2010) (unpublished), the California Sixth District Court of Appeal reversed the trial court’s grant of summary adjudication of plaintiff’s misappropriation of trade secrets cause of action.  The trial court granted summary adjudication based on the lapse of the statute of limitations.  The Court of Appeal reversed on equitable estoppel grounds.  Defendant “effectively concedes that in its motion it presented no evidence of plaintiff’s conduct after December 2002 apart from the filing of the complaint on July 30, 2004. Instead, in its reply defendant simply challenged plaintiff to present evidence of its diligence, arguing that plaintiff made no showing of diligence. This is not how a party should be able to obtain a summary adjudication.”

By CHARLES H. JUNG

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