Eight-Figure Judgments in Trade Secret Cases – Do We Have Your Attention Now?

The conventional wisdom among attorneys and litigants in the noncompete and trade secret arena is that the cases are all about the injunctions, usually at the TRO and interlocutory injunction stage.  Some judgments handed down around the country in the last month, however, prove that the damages portion of these cases can be just as devastating to a defendant deemed to be unfairly competing.

In my home state of Georgia, a Savannah jury rendered a $30 million verdict in favor of an energy services company in a suit against its former president and other executives.  The plaintiff alleged, and the jury obviously agreed, that some of the defendants stole trade secrets and wrongfully solicited customers as part of a conspiracy to “hit the ground running” upon jumping ship to their former employer’s rivals.

In St. Louis, a state court judge slammed a husband-wife team with a judgment of $10MM — $1.6MM in compensatory damages and $8.4MM in punitives — for misappropriating trade secrets from the husband’s former employer and working with a Chinese company to make and sell imitations of the plaintiff’s products — coatings for microchips.  The plaintiff and their attorneys, however, should hold off on the down payments for the victory Porsches — the defendants are reportedly nowhere to be found and may have left the country, most likely with pockets full of coated microchips.

Finally, a long-running, tank battle-like suit between two rival software companies finally ended (not counting the likely appeal) with the original plaintiff getting hit by a Nebraska jury with a $43.8MM award on the defendant’s counterclaim.  The plaintiff started the litigation by suing its rival for alleged software pirating, and those claims were rejected by a jury last year.  The defendant counterclaimed for breach of a nondisclosure agreement (entered, ironically, to try and head off the plaintiff’s pirating claims), antitrust violations, and tortious interference with business relationships, resulting in the crippling verdict. The moral of this story is that if you pick a fight, as the plaintiff did here, you better be prepared to finish it.

BURR POINT:  Former employees and businesses who are inclined to push the envelope on restrictive covenant agreements (“I’ll just do it until a judge shuts me down”) should be mindful of the potential exposure for tens of millions of dollars in compensatory damages, attorney’s fees and punitive damages to a party who thinks they’ve been wronged.

Supreme Court Considers New Defense to Inducing Infringement

Commil USA, LLC v. Cisco Systems, Inc. (No. 13-896)

On March 31, 2015, the Supreme Court heard oral argument in Commil USA, LLC v. Cisco Systems, Inc. (No. 13-896), which relates to whether a defendant can be liable for inducing infringement if the defendant had a good faith belief that the asserted patent is invalid. Under 35 U.S.C. § 271(b), one is liable for inducing infringement if it knowingly induced infringement and possessed specific intent to encourage another’s infringement. Inducement differs from direct infringement under 35 U.S.C. § 271(a) in that direct infringement is a strict liability offense, whereas inducement includes an additional intent requirement. Courts have traditionally held that an alleged inducer’s good faith belief that it (or the party it is inducing) is not infringing the asserted patent is a defense to an inducement claim. Under this theory, if the inducer does not believe it is infringing, it cannot have a specific intent to encourage another party to infringe.

Commil raises the question of whether the alleged inducer’s good-faith belief that the patent is invalid also serves as a defense to inducement liability. In the court below, the Federal Circuit for the first time answered this question in the affirmative. However, infringement and invalidity have traditionally been viewed as separate issues, such that using invalidity as a defense to infringement would conflate two issues that are generally separate. In addition, the Patent Act states that all issued patents carry a presumption of validity. Allowing an accused infringer to avoid inducing infringement based on its good faith belief that the patent is invalid would seem to undercut the statutory presumption of validity.

During oral argument, Justice Scalia likened inducement to aiding and abetting, which requires wrongful intent, suggesting that a belief that the patent is invalid may negate the wrongful intent. Justice Kagan also suggested that infringement and invalidity are two sides of the same coin, such that if a good faith belief of non-infringement is sufficient to defeat inducement liability, a good faith belief of invalidity should also be sufficient. On the other hand, Justice Sotomayor questioned how the presumption of validity can be reconciled with a defense based on a good faith belief of invalidity, suggesting that there may be a split among the justices.

This case is potentially very important for defendants facing claims of inducing infringement. If the Federal Circuit decision is upheld, defendants would have a strong new weapon for avoiding liability for inducement. When defendants receive notice accusing them of inducing infringement of another’s patent, in addition to conducting a non-infringement analysis, they may also want to consider seeking an invalidity opinion of counsel to undercut a potential inducement claim.

A Short Primer on Tennessee’s Trade Secrets Law

In recent postings, we have discussed cases involving claims that a former employee wrongfully used the employer’s confidential information and trade secrets.  In TNA Entertainment, LLC v. Wittenstein and World Wrestling Entertainment, Inc., Davidson County Chancery Court, Docket No. 12-746-III, the employer alleged that its former employee used confidential information concerning wrestling talent to gain an unfair competitive advantage.  In Veit v. Event Logistics, Inc., Davidson County Chancery Court Docket No. 12-945-III, the former employee sued her former employer to determine whether her skills as an events coordinator and the identity of customers of event planning services were trade secrets under a separation agreement.

These cases are based on the principle that an employee has a general duty to not disclose confidential information or trade secrets belonging to her former employer.  In many cases, this general duty is memorialized by a written agreement which may include a non-compete agreement, though a contract is not required to protect trade secrets.  If the former employee violates her general duty and contractual obligations, the former employer may seek damages against her.

In Tennessee, the protection of trade secrets has been codified in the Uniform Trade Secrets Act (“UTSA”) found at Tenn. Code Ann. §§ 47-25-1701 et seq.  Under the UTSA, an employer may sue a former employee for the misappropriation and disclosure of trade secrets.

A “trade secret” is information in any form which gives a business a competitive advantage over other businesses which do not have that information.  Trade secrets include technical and nontechnical information, financial data, patterns, compilations, programs, devices, methods, techniques, processes, or plans that have economic value due to the fact that they are secret.  Confidential information is often treated as trade secrets.  One of the best known examples of a trade secret is the formula for Coke.  In TNA Entertainment, LLC, the trade secret at issue was contractual information related to wrestling talent.  In Veit, the trade secrets at issue were event coordinating skills and customer information.

An employee violates the UTSA when he discloses his employer’s trade secrets which he acquired by improper means (theft, bribery, or misrepresentation) or in violation of his duty to maintain its secrecy.  A new employer may also violate the UTSA if it uses the former employer’s trade secret which was improperly acquired or disclosed by the former employee.  Such an allegation was made in TNA Entertainment, LLC.

The UTSA gives an employer broad remedies if its former employee and the new employer acquires and uses its trade secrets.  These include injunctive relief, a court order requiring the return of and prohibiting the use of the former employer’s trade secrets.  In some cases, the court may award the former employer its actual damages and damages for unjust enrichment received by the defendants.  Punitive damages up to twice the award for actual damages and unjust enrichment along with attorney fees may be awarded in cases of willful and malicious misappropriation of trade secrets.

Tennessee law recognizes the need for fair competition in the marketplace.  However, it also recognizes and prohibits unfair competition arising out of the wrongful acquisition and use of trade secrets.  If you would like additional information on trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

How To Avoid Trade Secret Disputes

Although non-compete and trade secret litigators by definition make our living from disputes involving unfair competition, often the most useful part of our practice involves advising clients on how to avoid litigation.  John Marsh of Hahn Loeser has compiled an excellent list for employers and their new hires, of things not to do when the employee leaves the old job, titled The Trade Secret Litigator’s 7 Deadly Sins of Departing Employees in Trade Secret and Non-Compete DisputesThis should be required reading for any transitioning employee; if universally followed, it could put trade secret lawyers out of business!