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Southern District Holds That Misappropriation of Trade Secrets Claim Properly Pled Even Where Complaint Lacks Allegation of Use to Plaintiff’s Detriment

In Motion to Dismiss on November 17, 2010 at 7:47 am
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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. Read the rest of this entry »

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Second District Vacates Arbitration Award for Failure to Resolve Misappropriation of Trade Secrets Counterclaim

In Arbitration on November 15, 2010 at 11:08 am
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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. Read the rest of this entry »

Plaintiffs Awarded Over $1 Million After Bench Trial in a Trade Secrets Case

In Judgments, Verdicts on November 2, 2010 at 11:41 am
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After a bench trial in San Francisco Superior Court, plaintiffs in a trade secrets case recovered judgment on the merits against certain defendants in the amount of $921,469, plus pre-judgment interest in the amount of $301,664, and punitive damages of $275,000.  UltraEx Inc. vs. Express It Delivery Services Inc., Case No., CGC-05-447942, 2010 WL 4260535, 44 Trials Digest 13th 5 (Cal. Sup. Ct. Verdict Date: April 1, 2010).

According to court records, on April 29, 1998, plaintiff UltraEx Inc. merged with two other corporations, Express It Courier Services Inc. (“Old Express It”) and 800 Courier Inc.  Id. *1. Plaintiff was the surviving corporation in this merger, but prior to the merger, Old Express It and 800 Courier had each been actively conducting a package delivery business in California.  Id. Defendant Express It Delivery Services Inc. (“New Express It”) was a California corporation formed in November 2004. Id. Read the rest of this entry »

Approaches to Damages in Trade Secret Cases

In Damages, Practice articles, Reasonable Royalty, Unjust enrichment on October 20, 2010 at 7:59 pm
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Once a trade secret lawsuit progress beyond the preliminary injunction stage, the key battleground usually shifts to damages.  Assessing damages can be particularly difficult in a trade secret case because of the problematic uncertainty in measuring the value of trade secrets.  Marc Pensabene and Christopher Loh summarized some of the flexible approaches that plaintiffs and defendants might pursue in arguing for and against trade secrets damages calculations.

From the plaintiff’s perspective, the authors offer the following aggressive approaches (not all of which have been accepted by California courts):

  • In calculating lost profits, argue that the amounts should include not only lost sales that were diverted from the plaintiff to the defendant, but also losses attributable to price erosion or to increased costs cause by the misappropriation, such as the costs of an advertising campaign to recoup market share stolen by defendant
  • Argue for provable future profits, overhead costs, general and administrative expenses, lost profits on reorder or spare parts or other natural follow-on items
  • Ask the court to calculate plaintiff’s lost profits by applying the defendant’s profit margins to the plaintiff’s lost sales
  • In seeking unjust enrichment, if the defendant does not incorporate the trade secret into a product but rather uses it to promote its existing products or to develop new and different products, ask for a portion from those products
  • If plaintiff is unable to prove lost profits or unjust enrichment, seek development costs (so-called “head-start” damages), the diminution of the value of the plaintiff’s business or stock, or a reasonable royalty based either on the actual royalties that have been paid to the plaintiff, or a hypothetical royalty that the litigants would have negotiated at the time of the misappropriation Read the rest of this entry »

California Trade Secrets on Holiday This Week

In Blog Status on October 18, 2010 at 4:54 pm

[Interior of Coliseum, Rome, Italy] (LOC)

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I am traveling this week, so California Trade Secrets will be updated less frequently.  I’ll resume daily updates next week, October 26, 2010.
Cheers!
Charles Jung

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Trade Secrets Issues in Cloud Computing

In Uncategorized on October 14, 2010 at 5:05 pm
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Roy E. Hadley, Jr. and John L. Watkins have written a useful article on the legal issues relating to cloud computing.  As they state in the article, cloud computing refers to the practice of providing access to computer software through an Internet browser, with the software and data stored at a remote location at a “data center” or “server farm,” instead of on the computer’s hard drive or on a server located on the user’s premises.

The same protective measures that businesses apply to protecting trade secrets on local area networks (“LANs”) are likely to be useful in showing “reasonable” measures to a court.

Although it is difficult to predict how courts will react to trade secret claims based on information stored in cloud-based systems, a key factor will likely be the steps taken to maintain the secrecy of the information. Courts will likely inquire into whether the cloud provider has access to the data and whether it is bound to maintain the secrecy of such data. Other inquiries will focus on who from the client is permitted to have access to the information, password protection, and other security measures, much as in cases involving information stored on local networks. Read the rest of this entry »

Proactive Steps to Take to Strengthen Litigation Position in Advance of Trade Secret Misappropriation Suit

In Implementation of Security Program on September 28, 2010 at 11:47 pm
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Stephen Hall has written a helpful article reminding businesses of proactive steps they can take to strengthen a client’s litigation position in trade secrets, patents and copyright infringement.  With respect to possible claims for trade secret misappropriation, Hall recommends the following:

  1. Implement a written trade secret policy and include the policy in its employee handbook. “New employees should read and sign the trade secret policy when hired, and preferably acknowledge the policy in any exit interview.”
  2. Maintain the confidentiality of your secret sauce: “As a good rule of thumb, companies should at least (a) limit disclosure of its trade secrets to those employees with a “need to know,” (b) mark trade secret documentation accordingly, i.e. designated as “confidential” or “proprietary”, and (c) require employees to sign confidentiality agreements acknowledging the confidential nature of inventions, customer lists, pricing, manufacturing apparatus, procedures, etc.”
  3. Review and evaluate any “standard” or boilerplate non-disclosure agreements that are presented by third parties. “However, many of these ‘standard’ non-disclosure agreements have a short time limit on the non-disclosure obligations” and “carefully consider what protection is offered for trade secrets before blindly entering into a non-disclosure agreement.” Read the rest of this entry »

Northern District Denies Preliminary Injunction Where Plaintiff’s Declaration Failed to Show Customer List Was the Result of Substantial Time, Expense and Effort on Part of Plaintiff

In Customer lists, Motion to Dismiss, Preemption, Preliminary Injunction on September 24, 2010 at 11:02 am
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The Northern District of California denied defendants’ motion to dismiss based on UTSA preemption and denied plaintiff’s motion for preliminary injunction.  Kovesdy v. Kovesdy, C 10-02012 SBA, 2010 WL 3619826 (N.D. Cal. Sept. 13, 2010) (slip op.). Plaintiff Eric Kovesdy (“Eric” or “Plaintiff”) sued his stepmother, Defendant Hedy Kovesdy (“Hedy”) for, inter alia, for misappropriation of trade secrets under California’s Uniform Trade Secrets Act (“UTSA”), Cal. Civ. Code §§ 3426-3426.11, and trademark infringement under the Lanham Act, 15 U.S.C. § 1125(a). Id. (1) Defendants moved to dismiss; and (2) Plaintiff moved for preliminary injunction.

Background

Peter Kovesdy (“Peter”) opened a professional tax practice known as Humex Income Tax (“Humex”).   Read the rest of this entry »

Immediate Steps to Take Upon an Employee’s Departure for a Competitor

In Employee Mobility, Investigations on September 17, 2010 at 2:57 pm
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Richard C. Darwin posted a useful summary and reminder of the steps an employer should take once an employee has decided to pursue an opportunity with a direct competitor.  Darwin recommends the following nine common-sense precautionary measures to be taken right away to reduce the risk of lost or deleted evidence:

  1. Secure the defecting employee’s computer and make sure no one uses it.
  2. If the IT department recycles backup tapes, immediately suspend that practice.
  3. Check the former employee’s office or workspace for missing documents and files.
  4. Get copies of the tapes or electronic files if the building has security cameras. Read the rest of this entry »

Split in Authority re Interpretation of “Without Authorization” in Computer Fraud and Abuse Act (“CFAA”)

In CFAA on September 4, 2010 at 9:08 am
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Law360 has published a useful discussion by Eric Welsh and Sarah Fulton of a split in authority in the interpretation of the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030.  The CFAA is a statute that provides for both criminal and civil claims for persons who have “knowingly accessed a computer without authorization or exceeding authorized access, . . .”  Id. § 1030(a)(1).  “In the context of an employee that steals data from a computer, the question under this statute is whether that person’s access to the computer was ‘without authorization’ . . . .[but] in the absence of a clear definition, courts in the United States have struggled to define the circumstance where a person acts ‘without authorization.’”  In the context of employee misappropriation, courts have approached the interpretation of “without authorization” in two ways: Read the rest of this entry »