Business Method Patents Live! – Federal Circuit Finds First Patent That Survives Post-Alice Analysis

DDR Holdings, LLC. v. Hotels.com, L.P., et al.,

No. 2013-1505 (December 5, 2014) (Wallach, Mayer, and Chen)

Since the Supreme Court issued its June 2014 decision in Alice Corp. v. CLS Bank International,[1] federal district courts, the Court of Appeals for the Federal Circuit, and the United States Patent & Trademark Office have been invalidating patent claims under 35 U.S.C. § 101 at an unprecedented rate. But on December 5, 2014, the Federal Circuit bucked the recent trend, ruling for the first time that a challenged claim is patent-eligible under the analysis set forth in Alice.

The patentee, DDR Holdings, LLC (“DDR”), is the assignee of U.S. Patent Nos. 6,993,572 (“the ‘572 patent”) and 7,818,399 (“the ‘399 patent”), which relate to generating a composite web page that combines a host website with content of a third-party merchant. Many web pages include advertisements from third-party merchants that, when clicked on by a customer, re-direct the customer to the merchant’s website, and away from the host website. In order to eliminate the host website’s lost web traffic, DDR’s patents disclose a system that generates a composite webpage that displays product information from the third-party merchant but retains the host website’s “look and feel.” Slip Op. at 3-4. At the trial court, the defendants argued that DDR’s patents are invalid for, among other reasons, claiming patent-ineligible subject matter under 35 U.S.C. § 101. The lower court denied the motion, and a split panel of the Federal Circuit affirmed.

Writing for the majority, Judge Chen applied the two-step analysis set forth in Alice to determine that DDR’s claims are patent-eligible. Under the first step–whether the claims are directed to a patent-ineligible abstract idea–the majority did not explicitly answer the question, but instead noted that under any of the alleged underlying abstract ideas proposed by the defendants and the dissent, the claims are patent-eligible because they satisfy the second step of the test. In particular, the defendants argued that the claims were directed to the abstract ideas of “making two web pages look the same,” “syndicated commerce on the computer using the Internet,” and “making two e-commerce web pages look alike by using licensed trademarks, logos, color schemes, and layouts.” Slip Op. at 19. Dissenting Judge Mayer described the claims as directed to the business goal “that an online merchant’s sales can be increased if two web pages have the same ‘look and feel.’” Dissenting Op. at 2. The majority found that regardless of which definition of the abstract idea is adopted, the claims are patent-eligible under the second step of the analysis.

Applying the second step of the analysis–whether the claim includes elements that transform the nature of the claim into a patent-eligible application of the abstract idea–the majority first noted that the claims at issue are “necessarily rooted in computer technology in order to overcome a problem specifically arising in the realm of computer networks,” and do not “merely recite the performance of some business practice known from the pre-Internet world along with the requirement to perform it on the Internet,” like the claims in Alice. Slip Op. at 20. The majority also disagreed with the dissent’s position that the claims were merely an Internet implementation of the well-known “store within a store” abstract concept. Id. at 21. In the well-known “brick and mortar” context, a physical warehouse store may include a kiosk selling third-party products. However, unlike what happens when an online customer clicks on a third-party advertisement, a customer in the physical warehouse store is not transported out of the store to a separate physical location associated with the third-party simply by walking up to the third-party kiosk. Id. at 22. According to the majority, the distinction is that in the cyberspace context, the customer is able to purchase the third-party product without any indication that they were previously at the host website, and is not required to return to the host website. The majority therefore concluded that the claims are not merely directed to a computer implementation of a well-known abstract concept, but address a problem specific to the Internet.

The majority was however careful to note that “not all claims purporting to address Internet-centric challenges are eligible for patent.” Id. Unlike the patent-ineligible claims in Ultramercial, Inc. v. Hulu, LLC,[2] which used the Internet in its conventional fashion to implement a method of offering media content in exchange for viewing an advertisement, DDR’s claims change the normal operation of the Internet that occurs when a user clicks on a third-party advertisement. Id. at 22-23. The majority further noted that the claims also do not attempt to preempt every application of the idea of increasing sales by making two web pages look the same, instead reciting a specific way to automate the generation of a composite website by an outsource provider. Id. at 23.

While this case hardly re-opens the flood gates for business method and software-related patents, it should at least provide some hope to patent owners and applicants that Alice has not killed off this entire segment of patents. As articulated in Alice, this case confirms that patents related to improving the functionality of a computer or the Internet–as opposed to improving a preexisting concept by implementing the concept using computers or the Internet–may have a chance at surviving a § 101 challenge. However, given the split panel decision, this case may be headed for en banc review by the full Federal Circuit, so the glimmer of hope may be short-lived.

 

[1] 134 S. Ct. 2347 (2014).

[2] __ F.3d __, 2014 WL 5904902 (Fed. Cir. Nov. 14, 2014).

Federal Circuit Reverses Course, Affirms Patent Ineligibility Ruling in View of Surpreme Court Alice Decision

Ultramercial, Inc. et al. v. Hulu, LLC, et al.,

No. 2010-1544 (November 14, 2014) (Lourie, Mayer, and O’Malley)

On November 14, 2014, after twice before reversing the lower court’s dismissal of Ultramercial’s complaint for failing to claim statutory subject matter, the Federal Circuit agreed with the lower court that Ultramercial’s patent claims are ineligible under 35 U.S.C. § 101. Applying the new test set forth in the Supreme Court’s recent decision in Alice Corp. v. CLS Bank International, 134 S. Ct. 2347 (2014). the Federal Circuit found that Ultramercial’s claims directed to distributing copyrighted media over the Internet at no charge in exchange for viewing an advertisement, claimed nothing more than an ineligible abstract idea.

According to the two-step test, the court first determines whether the claims are directed to one of the three exceptions to patent-eligible subject matter: laws of nature, natural phenomena, and abstract ideas. If so, it is then determined whether the claim contains “an element or combination of elements that is sufficient to ensure that the patent practice amounts to significantly more than a patent upon the [ineligible concept] itself.” Alice, 134 S. Ct. at 2355. The additional elements must be more than “well-understood, routine, conventional activity” in order to transform the abstract idea into patent-eligible subject matter. Slip. Op. at 10 (quoting Mayo Collaborative Services. v. Prometheus Laboratories, Inc., 132 S. Ct. 1289, 1298 (2012)). The Federal Circuit found that Ultramercial’s claims are directed to the abstract idea of “showing an advertisement before delivering free content.” Slip. Op. at 10. Although the claims included limitations such as the user selecting the advertisement to view, and recording the transaction in an activity log, the Court found that these limitations merely add a degree of particularity but the claim as a whole is still devoid of a concrete or tangible application. The Court was careful to note that not all software-based patent claims are directed to abstract ideas, but agreed with the lower court in this case that the claims are directed to the abstract idea of “using advertising as an exchange or currency.” Id.

Moving to the second step of the analysis, the Federal Circuit examined the remaining claim limitations to determine whether they constitute an “inventive concept” that renders the claim patent-eligible. The Court found that the majority of the eleven claimed steps are merely incidental to the abstract concept of offering media content in exchange for viewing an advertisement (e.g., receiving the media content, selecting the advertisement, making the content available subject to the condition that the consumer views the advertisement, displaying the advertisement, allowing access to the content, and receiving payment from the advertiser). The additional steps of updating an activity log, requiring a request from the user to view the advertisement, restricting public access, and using the Internet, are merely conventional steps that are “insufficient to supply an inventive concept.” Slip. Op. at 11. Although not necessary to finding the claims patent-ineligible, the Court also noted that the claims fail the machine-or-transformation test because the claims are not tied to particular machine or apparatus and do not transform a particular article into a different state or thing.

Writing in concurrence, Judge Mayer made several interesting points with respect to patent eligibility. First, Judge Mayer encouraged lower courts to address patent eligibility at the outset of litigation–like the trial court in this case did–to conserve judicial resources, reduce vexatious litigation by resolving disputes before engaging in expensive discovery, and to free the public from innovation-stifling patents. Second, Judge Mayer argues that no presumption of validity should attach when conducting a section 101 analysis, unlike the presumption of validity for prior art challenges. Third, Judge Mayer interprets Alice as essentially implementing a “technological arts” test. Judge Mayer’s interpretation relies on the Supreme Court’s finding claims ineligible where they did not “improve the functioning of the computer itself” or “effect an improvement in any other technology or technical field.” Alice, 134 S. Ct. at 2359. Under this interpretation advances in non-technical disciplines such as business, law, or the social sciences––seemingly, any business method patent–– would be patent-ineligible.

The Ultramercial decision is not surprising given the Supreme Court’s decision in Alice, and the recent flood of decisions invalidating patent claims on patent-eligibility grounds. The most interesting aspects of the case come from Judge Mayer’s concurrence arguing that there is no presumption of patent-eligibility and that the issue of patent-eligibility should be determined at the outset of litigation. Over the last several months, district courts have decided the patent-eligibility issue at the pleadings stage with increased frequency, as opposed to on summary judgment. Judge Mayer’s concurrence further encouraging this practice should result in even more trial courts addressing the issue earlier in litigation.

Federal Trade Secrets Protection — Finally Something Both Parties Can Agree On

In recent months, two bipartisan bills have been introduced in Congress providing for a Federal civil remedy for trade secret misappropriation — the Defend Trade Secrets Act , introduced in the Senate in April, and the Trade Secrets Protection Act, introduced in the House in July.   These companion bills are substantively similar in that they both amend the Economic Espionage Act of 1996 to establish a private right of action for a trade secret violation.  So far, the House bill is moving faster, having been approved on September 17, 2014, by the House Judiciary Committee and presumably moving toward a full House vote in the near future (or at least that’s what I learned on School House Rock).

The significance of these bills is that they finally extend Federal civil protection and regulation to trade secrets, currently the only category of intellectual property not so covered (copyrights, trademarks, and patents already have Federal protection).  The practical effect of these bills, if passed, will not be as game-changing as the casual observer might think, however.   The Uniform Trade Secrets Act (the “UTSA”) was first published in 1979, amended in 1985, and has been adopted by 47 states in some form, so civil remedies currently exist for trade secret theft and are similar to that offered in these two Federal bills.  Moreover, trade secret claims arising under state law often wind up in Federal Court based on diversity jurisdiction, so the access to Federal Courts is not as big of a deal as the bill sponsors might make it out to be.

Despite the similarities to the existing body of state statutes, however, the new bills, if passed, would certainly provide a new, improved hammer with which companies can pound unfair competitors and deceitful former employees. Some advantages of the proposed bills over the current state statutes based on the UTSA include the following:

  • Strong statement that trade secret protection is an important U.S. public policy;
  • Uniformity in trade secret law across the country;
  • Direct access to Federal Courts, regardless of the location of the parties or amount in controversy;
  • Longer statute of limitations;
  • Increased recoverable damages; and
  • Procedures for ex parte seizure of evidence.

BURR POINT: Rare bipartisan support, similar bills in both the House and Senate, and a quick and favorable reporting out of the House Judiciary point to Federal trade secrets legislation being something that this hamstrung Congress might actually be able to pass.

Ice Storms, My Secret Internet and Other Myths

Winter is around the corner.  On the calendar, however, it’s not yet here.  Surely Mother Nature is aware of this.  Still, an ice storm currently engulfs large swaths of our nation and is leaving many of us without power or heat.  If your new business was recently served with a lawsuit seeking an injunction against it to stop allegedly unlawful competition, then you can probably relate to those in the grips of the current storm.

The situation:  A successful closely held corporation sues a new competitor in its industry.  The complaint alleges that the new competitor hired a former employee with knowledge that the former employee and former employer had executed a non-competition agreement.  The complaint against the new competitor seeks an injunction.  If you’re familiar with this column, then you know that this scenario is rather commonplace.  Sometimes, however, the former employer/plaintiff can seek relief that a court deems unreasonable.  One such instance occurs with internet-based companies, or even with internet-reliant companies.

Here’s an example:  You own a company that sells goods over the internet.  You discover that your former employee is working for a new competitor seemingly in violation of his non-competition agreement.  Although there is no evidence that your business is damaged or will suffer damages as a result of the new competitor’s entry into the marketplace, your lawsuit seeks to enjoin the former employee from working for the competitor.  Your lawsuit also includes a claim against the new competitor for tortuous interference with your contract with the former employee.  So far, this legal action presents relatively straightforward issues.  Then you decide to make matters more complicated.

We often see former employers attempt to overreach when seeking damages.  You might, for instance, sue for alleged violation of trade secrets (claiming that the employee gave protected information to the new competitor).  Or you might sue for unfair and deceptive trade practices.  While this aggressive approach could potentially force the new competitor to agree to willingly close its business, it’s more likely than not that you’ve created a situation in which litigation (and associated litigation costs) could escalate.  Particularly with internet-based businesses, the capability to drive business to a particular website is seldom a secret.  While there are certainly professionals who claim that they can use unique search engine optimization (SEO) techniques to increase your exposure, many businesses discover that they can directly pay the search engines themselves to increase their traffic.  And that information is essentially available through the search engines for companies willing to pay for it.

As a result, your new competitor may actually get significant traffic to its website without ever attempting to steal your “trade secrets” in its efforts to do so.  Even if challenged, a “trade secret” that is dependent on information a search engine would otherwise make publicly available is difficult to uphold in court.  To some ˗ if your company is more financially capable of bearing the financial costs and personnel strain of the litigation storm ˗ this fight might seem worthwhile.  Consider, on the other hand, the possibility that if you lose in your efforts to prove unfair and deceptive trade practices you may actually have to pay prevailing party attorney’s fees and costs to the new competitor.  Why?  Because “deceptive and unfair trade practice” statutes usually contain clauses that allow courts to award prevailing party attorney’s fees and costs.  In other words, if the new competitor can hold on long enough to defeat your claim for deceptive and unfair trade practices, your company could end up paying your competitor’s legal bill (even if the court finds grounds to enter the injunction you sought).

Does that scenario denude or devalue your carefully drafted non-competition agreement?  No, it does not.  What the above scenario is intended to provide is a cautionary warning that when dealing with a pest, sometimes a fly swatter gives you a better result than a grenade.  Many times your well-pled motion for injunctive relief will achieve your business goals without having to prove the elements of the additional allegations.  Less cost to you, same effect on your newly-enjoined former-competitor.

Navigating the many laws and difficult language in the area of non-competition agreements can perplex even the most sophisticated business professionals.  This is the point in the blog when you are urged to seek refuge from this complexity with an attorney experienced in these issues and capable of both advising and litigating, if necessary.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Huge Verdict in Trade Secrets Case

It’s a little out of this blog’s Southeastern focus area, but a $22.7MM verdict in a Minnesota trade secrets and non-compete case, as reported by the West Central Tribune at wctrib.comshould be a reminder to all employees and employers that a violation in this area of the law can have disastrous consequences for a defendant. The plaintiff, a dairy and food processing equipment company, successfully argued that two former employees took confidential equipment designs from the company’s computer systems and used them on behalf of a Wisconsin-based competitor, Cheese Systems, Inc. The new employer was also found liable for interference with current or prospective contracts.

Maybe it’s just me, but my mental image of the defendants is this.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Seek Advice In Drafting Trade Secrets And Confidentiality Agreements

In an article recently posted at mondaq.com, Richard Stobbe provides several excellent examples of why employers should consult with their counsel when drafting trade secrets and confidentiality agreements, instead of copying cookie-cutter examples found on the internet.

In his article, Keeping Secrets: Trade Secrets and Confidentiality Agreements, Stobbe notes that many “off-the-shelf” agreements are drafted with terms that do not apply to the employer’s business or the specific transaction, or apply another state’s laws.  Also, many form agreements define key terms, such as “confidential information,” which an employer may not be aware of or understand.  The failure to strictly comply with these defined terms may render the agreement unenforceable.

The issues raised in Stobbe’s article are especially relevant for employers in Tennessee where agreements restricting trade are generally disfavored and strictly construed against the employer.  Rather than rely on form agreements, employers should consult with counsel to insure their non-compete, trade secrets, and confidentiality agreements comply with their state’s laws.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Why Go to the Movies?

Summer has arrived.  The Hollywood blockbusters are here.  New animated features hit the big screens this week.  Superman is flying once more.  Sure, if the movies are your cup of tea, then summer is your annual thirst quencher.  However if you’re looking for drama, you need only scan the internet to find your daily dose of serious corporate espionage and the criminal theft of trade secrets from American corporations.

Just yesterday the San Francisco Chronicle ran a story of a scientist working on solar cell technology who pled guilty to several counts of wire fraud in an indictment claiming he stole trade secrets from his employer “and tried to take them to a competitor in China.”  The prosecutors in the case “estimate the total loss from the theft of trade secrets at nearly $22.7 million.”  The Telegraph – a British newspaper – reported this week that cyber espionage is rampant in the UK with “foreign hackers” secretly working in some companies for up to two years “discreetly stealing intellectual property.”  American newspapers recently published articles that our government systems are under constant attack not only from rogue hackers but also from foreign governments utilizing sophisticated programs and systems in an effort to steal American secrets and military information.  Same thing for recent stories of Chinese manufacturer Sinovel and two if its executives, recently indicted for alleged theft of wind turbine trade secrets.  Alleged financial loss to the owner of the trade secrets: approximately $800 million according to SecurityInfoWatch.com.

The problem is rampant and unlikely to go away.  Nor is this something new.  Corporate espionage likely began soon after the first business incorporated.  Of course, victimized businesses take little comfort knowing that others victims also exist.  So what can your company do to avoid, eliminate or minimize this potential loss?  First line of defense, of course, is education.  Educate the people in charge of monitoring the transmission of technical data on the best means to detect the “discreet stealing.”  Depending on the value of the intellectual property (and the potential loss to your business if a competitor was to receive the trade secret information without a license or without compensation), the potential losses could justify the investment in employees whose role is to oversee the data transferred to and from your company’s system.

As most of you who read this post already know, Florida employment is at will.  While termination for a discriminatory purpose is unlawful, termination for violation of company policies (or termination for violation of State or federal law) is common.  However, as these events (and the dozens of other recently reported events) indicate, the most difficult task for American companies lies in screening employees so as to minimize the possibility of trade secret theft, while at the same time ensuring that all potential employees are given an equal opportunity to apply for a position for which they are potentially qualified.

If your company faces a patient, technically savvy and stealthy employee, like the ones described who steal trade secrets with stealth for two years before they are discovered, a well-written policy is not likely to act as a significant deterrent.  On the other hand, Florida law specifically allows employers to create written policies regarding the protection of its trade secrets and to enforce those policies against its employees as appropriate.  In most circumstances, employee education (and continuing acknowledgement) of the employer’s policies, in concert with a method for your business to monitor activity and to “police” itself, can deter most of the individuals who might consider trade secret theft.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Florida Court Reverses Preliminary Injunction on Restrictive Covenant

If you have followed this blog, then you likely already know that restrictive covenants are legal and enforceable in Florida.  You should also know that – although enforceable – restrictive covenants are strictly construed both with regard to their specific wording and with regard to the restraints set forth in Florida Statutes § 542.335.  Because of this, parties often initiate litigation to enforce restrictive covenants.  In many instances, heated proceedings lead courts to issue preliminary injunctions enforcing parties’ agreements to either keep a former employee from competing against a former employer for a limited period of time, or to keep a former employee from using the former employers’ trade secrets.

As usual with these restrictive covenants, the devil is in the details.  Which leads us to the recent decision of Zodiac Records Inc., et al. v. Choice Environmental Services (Fla. 4th DCA 2013).  The facts in Zodiac, although perhaps not unique, offer some insight into the often complicated analysis a restrictive covenant matter requires.  In a nutshell, Zodiac Records entered into a one-year consulting agreement with Choice Environmental in April 2008.  As part of the agreement, Zodiac agreed that for 36 months after the agreement terminated, Zodiac “would not compete with Choice by soliciting or influencing any of Choice’s customers to discontinue or reduce the extent of their relationships with Choice.” (See Zodiac.)  Zodiac also agreed to a 36 month confidentiality period to protect Choice Environmental’s trade secrets after the agreement terminated.

Zodiac’s principal consulted for Choice Environmental until he resigned in June 2011, at which point he formed a competing company and solicited Choice Environmental’s customers, among others.

Choice Environmental sued, claiming:

  • That Zodiac and its principal agreed to a 36-month restrictive covenant after termination;
  • That at the latest the one-year agreement terminated on its own terms (April 2009); and
  • That as a result Zodiac and its principal was subject to the terms of the agreement until April 2012.

Here’s the twist:  at the hearing on the motion for preliminary injunction, Choice Environmental stipulated that it would not rely on a misappropriation of trade secrets to support its motion for preliminary injunction.  The trial court enjoined Zodiac, its principal, and the competing company that the principal formed.  In April 2013, Florida’s Fourth District Court of Appeal reversed.  Among its analysis, the appellate court reasoned:

Generally, where “a restrictive covenant [is] sought to be enforced against a former employee” or independent contractor, “a court shall presume reasonable in time any restraint 6 months or less in duration and shall presume unreasonable in time any restraint more than 2 years in duration.” § 542.335(1)(d)1., Fla. Stat. (2011). However, “[i]n determining the reasonableness in time of a postterm restrictive covenant predicated upon the protection of trade secrets, a court shall presume reasonable in time any restraint of 5 years or less.” § 542.335(1)(e), Fla. Stat. (2011). In the present case, the consulting agreement expired on April 7, 2009. Therefore, unless the restrictive covenant was “predicated upon the protection of trade secrets,” the restrictive covenant was not enforceable beyond April 7, 2011—a date prior to [Zodiac’s principal’s] alleged violations of the non-solicitation provision. By contrast, if the restrictive covenant was “predicated upon the protection of trade secrets,” the postterm duration of thirty-six months was enforceable, which would allow Choice to enjoin appellants pursuant to the non-solicitation provision through April 7, 2012.

At the preliminary injunction hearing Zodiac argued that if Choice Environmental abandoned (or otherwise failed to prove) its claim that the customer list – and, therefore, the solicitation of customers – was a protected trade secret, then Choice was limited to a two-year enforceability period for the non-compete provisions of the parties’ agreement.  If the two-year period applied, Zodiac argued, then the non-compete provisions expired before Zodiac and its principal formed the new, competing company.  Choice Environmental argued that because the written agreement contemplated both 1) the enforcement of the restrictive covenant and; 2) the protection of trade secrets, the contractual three-year limit was statutorily reasonable, rendering the restrictive covenant was enforceable.  Based on the parties’ stipulation, the trial court received no evidence on the issue of whether Zodiac violated Choice Environmental’s trade secrets.

The appellate court’s reversal notes some interesting points for our clients to keep in mind:

  • A trial court may not grant a former employer’s motion for a temporary injunction against a former employee without first permitting the former employee “to put on its evidentiary case.” JonJuan Salon, Inc. v. Acosta, 922 So. 2d 1081, 1085 (Fla. 4th DCA 2006).
  • [T]he trial court could have determined that the customer relationships Choice sought to protect under its non-solicitation agreement were not trade secrets, and that the restrictive covenant was therefore unenforceable past April 7, 2011.1 See Estetique Inc. USA v. Xpamed LLC, 2011 WL 4102340, at *10 (S.D. Fla. Sept. 15, 2011) (rejecting movant’s argument that the five-year postterm restriction of section 542.335(1)(e) applied because movant “failed to show a substantial likelihood of success that its confidential customer information rises to the level of a trade secret”); Zupnik v. All Fla. Paper, Inc., 997 So. 2d 1234, 1238-39 (Fla. 3d DCA 2008).
  • The trial court also noted that “a former employer’s customer relationships do not automatically qualify as trade secrets, even if a party’s restrictive covenant attempts to characterize them as such. East v. Aqua Gaming, 805 So. 2d 932, 934 (Fla. 2d DCA 2001). To qualify as a trade secret, there must be evidence that a customer list “was the product of great expense and effort, that it included information that was confidential and not available from public sources, and that it was distilled from larger lists of potential customers into a list of viable customers for [a] unique business.” Id.

This case illustrates several important facets of the complexity of litigating restrictive covenants and violation of trade secrets cases in Florida.  First, as always, the parties’ written agreement will define whether and under what circumstances the restrictive covenant or agreed protection of trade secrets is enforceable.  Second, when litigating these cases, the nuances of the Florida statutes present complex issues that can result in a reversal of an injunction, even after a successful and lengthy evidentiary hearing at the trial court.  This is the point in the blog when I suggest that you contact me or any of the other qualified Burr & Forman LLP attorneys to assist you in drafting, reviewing or otherwise to discuss a restrictive covenant or agreement to protect a trade secrets and your business.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Does the Alabama Trade Secrets Act Limit Remedies for Theft of Information?

Alabama enacted the Alabama Trade Secrets Act (the “ATSA”) in 1987.  However, since that time, there have been relatively few reported court decisions analyzing the impact of the ATSA on common law claims.  A federal district court in Alabama recently grappled with these issues.  Relying on interpretations of other states’ laws based on the Uniform Trade Secrets Act, Judge Blackburn read the ATSA’s preemption provision broadly, holding that the ATSA preempted any common law claims based on “the same underlying facts.”  Madison Oslin, Inc. v. Interstate Resources, Inc., 2012 U.S. Dist. LEXIS 142082 (N.D. Ala., Sept. 30, 2012).

In Madison Oslin, the plaintiff was an Alabama-based paper-coating company who had developed a novel process for using polyester instead of wax to coat corrugated cardboard.  Whereas traditional wax-coated cardboard cannot be recycled, the new polyester-coated cardboard would be fully recyclable, saving landfill costs.

This Alabama paper-coating company was approached by a cardboard-box manufacturer with facilities in Maryland, and the two companies proposed forming a joint venture to manufacture polyester-coated corrugated cardboard boxes.  Under the proposed joint venture agreement, the box manufacturer would pay the paper-coating company an initial lump-sum fee of $6 million, and thereafter, the two would evenly split profits from the sale of recyclable boxes through the joint venture.

However, after the cardboard-box manufacturer signed a confidentiality agreement and had been allowed to observe the polyester-coating process during tours of the paper-coating company’s facilities in Alabama, the cardboard-box manufacturer allegedly began advertising (and manufacturing) a “recyclable corrugated box.”  The proposed joint venture agreement apparently remained unsigned, and the box manufacturer did not compensate the paper-coating company for use of its proprietary processes.  The paper-coating company, as plaintiff, then brought a multiple-count complaint against several defendants, including the cardboard-box manufacturer and its subsidiary in Maryland that operated the box-manufacturing facility.   The counts included a cause of action under the ATSA, as well as common law claims for conversion, unjust enrichment, breach of fiduciary duty, misrepresentation, and suppression, among others.

The defendants moved to dismiss the plaintiff’s common law claims, arguing that these claims were subsumed by the ATSA claim, and also moved to have the action transferred to Maryland.  In evaluating the motion to dismiss, Judge Blackburn noted that there was very little Alabama case law on point.  Thus, the court analyzed the comments to the ATSA and to the Uniform Trade Secrets Act and also examined other courts’ analyses of this issue under trade secrets statutes enacted in Georgia.  As noted in one of the Georgia cases, statutes protecting trade secrets are intended to encourage the free flow of information.  Under this analysis, claims involving “theft of information” should be limited to cases in which the information can be shown to be a trade secret; allowing claims for the theft of “non-proprietary” information or for the theft of “unguarded” proprietary information could arguably discourage this free flow of information.  Finding this reasoning persuasive, Judge Blackburn in Madison Oslin determined that the ATSA preempted any common law causes of action arising from the same factual allegations as ATSA claims and thus dismissed the plaintiff’s claims for conversion, unjust enrichment, breach of fiduciary duty, misrepresentation, and suppression.  The plaintiff was, however, allowed to proceed with its breach-of-contract claims, as well as its ATSA claims.  Because Judge Blackburn also granted the defendants’ request for a transfer, these remaining claims are now being litigated in Maryland.

A “take away” from the Madison Oslin decision is that an Alabama employer faced with the theft of information may want to begin its analysis of potential legal remedies by looking at the ATSA.

If you would like additional information on non-compete agreements and trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

Engineers Convicted for Theft of Trade Secrets

Two engineers were recently convicted under federal law for stealing trade secrets from Goodyear.  (United States v. Howley and Roberts, 2013 WL 399345 (Feb. 4, 2013 6th Cir.).)  Charles Roberts and Sean Howley worked as engineers for Wyko Tire Technology, a Tennessee Company.  Wyko supplied Goodyear with parts for tire-assembly machines.  Wyko also had an agreement with HaoHua South China Rubber Company to supply tire-building parts related to the swabbing-down process.  Unfortunately for Wyko, it had never built the parts it promised to HaoHua.  Goodyear, it turned out, was using machines like the ones Wyko needed to make.

Around the time Wyko entered the agreement with HaoHua, Goodyear asked Wyko to send a technician to repair some of its tire-assembly machines at a plant in Topeka, Kansas.  Instead of sending a technician, Wyko sent Roberts and Howley.  While Roberts and Howley were left unescorted for a few minutes, Howley used his cell-phone camera to take seven photos of a swabbing-down device on one of Goodyear’s tire-assembly machines.  When Howley returned to Tennessee, he sent the photos from his personal e-mail account to his Wyko account.  He then forwarded the photos to Roberts, stating that the photos were “not all great, but I think that they might tell us enough.”

Roberts, in turn, sent the photos to other members of Wyko’s design team.  He stated Goodyear was “somewhat guarded” because they knew Wyko was “working with competitors.”  He acknowledged that Howley was able to take the photos when Goodyear “left us on our own for a while.”  When Wyko’s IT manager discovered Roberts’ e-mail and pictures, he alerted Goodyear of the potentially illicit photos.  Goodyear notified the FBI which ultimately led to Roberts and Howley’s conviction.

Under federal law, a person who steals a trade secret that is produced or placed in interstate or foreign commerce can be fined and imprisoned up to 10 years.  (18 U.S.C. § 1832.)  A primary contention in the Roberts and Howley trial was whether the swabbing-down device Howley photographed was a “trade secret” covered by federal law.  Under federal law, information is a “trade secret” only if its owner has taken “reasonable measures” to keep the secret and the “information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public.  (18 U.S.C. § 1839(3).)

Roberts and Howley’s convictions were supported in large part by Goodyear’s efforts to protect the secrecy of its tire-assembly machine’s design, including the swabbing-down device.  These included:

  1. protecting its Topeka, Kansas facility with a fence;
  2. requiring visitors to pass through a security checkpoint;
  3. requiring visitors to obtain advance permission before visiting the facility;
  4. requiring visitors to sign confidentiality agreements and agree not to take photographs during their visit; and
  5. requiring its suppliers, including Wyko, to keep Goodyear’s proprietary information secret.

The Court also found information regarding Goodyear’s swabbing down device was economically valuable because it was not “readily ascertainable through proper means” by the public, and Robert and Howley’s conduct shows the information they stole was important.

As shown by the convictions of Roberts and Howley, a company should take reasonable measures to protect its proprietary information.  The Court noted in Howley and Roberts the “’reasonable measures’ requirement does not mean a company must keep its own employees and suppliers in the dark about machines they need to do their work.”  However, a company cannot claim information is a trade secret if it does not treat the information like a trade secret.

It should also be noted that the same statute used to convict Roberts and Howley also imposes a fine up to $5,000,000 against a company which steals trade secrets.  Had Wyko used the stolen trade secrets and not alerted the FBI, it could have faced the same criminal charges and suffered significant economic loss.

If you would like additional information on trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.