The TMCA

A temporary restraining order (“TRO”) followed by a preliminary injunction is often essential for a company to maintain the trade secrets status of its information that is being misappropriated. Typically, once the information is widely disseminated it will lose its trade secret status, even if such dissemination was done by unlawful means. Thus, acting fast to “keep the genie in the bottle” is essential when a company learns that its trade secret information may have been misappropriated. A recent TRO victory for biotech startup Trilobio, Inc. (“Trilobio”) demonstrates the importance of acting quickly, and with credible evidence, to protect confidential information and thwart trade secret misappropriation efforts. On September 9, 2024, Trilobio filed suit against Keoni Gandall (“Gandall”), a former Trilobio employee, claiming, inter alia, that he breached his confidentiality agreement with the company and misappropriated highly-valuable trade secret information to launch his own biotech startup in violation of, inter alia, the Defend Trade Secrets Act (18 U.S.C. §§ 1836, et seq.) and California Uniform Trade Secrets Act (Cal. Civ. Code § 3426.1). In the Complaint, Trilobio stated it fired Gandall in February 2023 for poor performance. Prior to Gandall’s termination, Trilobio alleged Gandall accessed the company’s computer systems and data, without permission, and copied large amounts of confidential research, code and trade secrets to his personal devices. The trade secrets at issue concerned Trilobio’s proprietary methods of using robotics and machine learning in synthetic biology to decrease the cost of synthesizing sequences of genetic material for medical research, and improve the processes involved in genetic engineering with automation. Trilobio claimed Gandall then disclosed its confidential information to third parties and marketed its trade secret inventions as his own through his new startup company, Nanala LLC (“Nanala”). Less than three weeks after filing its Complaint, Trilobio filed a Motion for Temporary Restraining Order (the “Motion”) seeking to prohibit Gandall from, inter alia, using or disclosing Trilobio’s confidential information and trade secrets, and prohibiting Gandall from destroying, deleting or concealing evidence of such. The Motion also sought to conduct expedited discovery. On October 17, 2024, U.S. District Court Judge Jon S. Tigar entered an Order granting, in relevant part, Trilobio’s request for a TRO, effectively prohibiting Gandall (and Nanala) from using, disclosing or destroying Trilobio’s confidential information and trade secrets. The Order also required Gandall to identify any individuals or entities to whom he may have disclosed, transferred or otherwise marketed Trilobio’s confidential information. In granting the TRO, Judge Tigar found Trilobio had established a strong likelihood “to succeed on the merits” of its trade secret misappropriation claim, one of the legal standards litigants must satisfy for a TRO to issue. Judge Tigar stated: “The evidence shows that Gandall took confidential, trade secret information from Trilobio after his termination and has continued to use the information for Nanala’s benefit, despite Gandall having signed a confidentiality agreement while employed at Trilobio.” Trilobio’s use of a forensic expert to examine Gandall’s work-issued computer was key in demonstrating Trilobio could succeed on the merits of its trade secret misappropriation claim – a necessary element of which is demonstrating the improper acquisition, use or disclose of the trade secret(s) at issue. In the Motion, Trilobio stated its forensic expert analyzed the Trilobio desktop computer issued to Gandall, and found that shortly after Gandall was notified he was terminated, Gandall accessed: (1) Trilobio’s proprietary GitHub source code repositories, (2) Trilobio’s investor update slide decks; (3) Gandall’s Trilobio Google email account and Google drive; and (4) the Trilobio Google email and Google Drive of CEO Roya Amini-Naieni (including Gandall’s own performance review). The forensic expert further determined Gandall created a “backdoor” on his company-issued computer to remotely copy all Trilobio’s source code and documents to Gandall’s encrypted personal storage device, and he wrote a program to automatically upload confidential Trilobio investor and financial information to the same device. Judge Tigar noted Gandall admitted he downloaded Trilobio’s proprietary information onto his own computer, and found Gandall’s arguments that Trilobio’s CEO consented to this download prior to his termination “simply…not credible.” Judge Tigar also disposed of Gandall’s other arguments opposing the TRO. In response to the Motion, Gandall argued Trilobio’s procedures for combinatorial assembly of DNA using oligo pools, one of the trade secrets at issue, were, inter alia, well known and had no commercial value. Thus, Gandall contended they are not trade secrets since an element of a trade secret is that the information is valuable because it is not generally known. Judge Tigar held these arguments were not supported by the evidence. First, the articles Gandall submitted in support of his argument that Trilobio’s DNA procedures were well known did not discuss or reveal Trilobio’s proprietary methodologies or its source code, thus demonstrating the information was not well known. Second, “Gandall’s contention that the information has no commercial value is belied by his attempts to start a company using that same technology.” In addition to granting Trilobio TRO relief, Judge Tigar also granted its request for expedited discovery under Federal Rule of Civil Procedure 26(d)(1). The Order stated Trilobio “established ‘good cause’ to seek discovery before a Rule 26(f) conference” in order to protect Trilobio’s trade secrets from further disclosure and aid in the discovery of facts for the preliminary injunction briefing. Following the issuance of a TRO, expedited discovery is often essential in a trade secret dispute to support the basis for a preliminary injunction at the preliminary injunction hearing that follows the issuance of a TRO. Thus, trade secret plaintiffs should typically seek to move for expedited discovery in conjunction with a TRO motion to avoid being ‘behind the eight ball’ for the preliminary injunction hearing. Judge Tigar’s ruling is a good reminder that injunctive relief is an important tool for maintaining trade secret status of information. If a company does not move quickly after learning of misappropriation, the information may lose that legal status. In those circumstances courts may also reject a later request for injunctive relief, and instead limit the remedies to damages for the trade secret misappropriation. However, when moving quickly to seek a TRO, it’s important to present credible evidence to support claims of trade secret misappropriation. Trilobio’s presentation of compelling forensic evidence substantiating misappropriation was key in securing its TRO against Gandall.

The Digital Millennium Copyright Act (DMCA) is a section in the US Copyright Act that provides a safe harbor for internet service providers so long as they comply with a notice and takedown system. The way the DMCA works is a company, such as an internet website host, a search engine, or a website operator, registers an agent with the United States Copyright Office. Then, any individual or entity who finds content it owns that is protected by copyright (whether or not registered) on a website hosted by the internet service provider can submit a takedown request to the service provider’s DMCA agent that contains the information required by the statute. The requestor should consider issues like fair use before filing the takedown notice. Assuming the complaint is compliant with the statute and legitimate, the service provider may then remove the content and send a notice to the alleged infringer about the removal to avoid a contributory infringement claim. The alleged infringer is then allowed to submit a counter-notification explaining why the takedown is not justified. The service provider then forwards the counter-notification to the original complaining party, which then has 10-14 days to file a lawsuit over the content. If no lawsuit is filed, the content will be reinstated by the service provider. If a lawsuit is filed, then the content remains disabled until the lawsuit is resolved. In April of 2023, Nexon Korea Corporation, owner of video game Persona 3 (P3), sued Ironmace Co. Limited, Ju-Hyun Choi, and Terence Seungha Park for copyright infringement and trade secret theft. Choi and Park were former employees of Nexon and founded Ironmace, another Korean corporation, in 2021. Together at Ironmace, Choi and Park created Dark and Darker, which, like P3, is a Dungeons and Dragons inspired role playing fantasy video game. After the game went live, Nexon filed a takedown notice under the DMCA with Valve Corporation, the platform that hosted the game in the United States. Valve removed Dark and Darker from their platform. Ironmace went on to file a counter notice saying its game did not violate any of Nexon’s US copyrights, and then Nexon filed its lawsuit in Washington State, where Valve is based. According to the DMCA, when Ironmace filed the counter notice, it consented to personal jurisdiction in Washington. However, Ironmace filed a motion to dismiss on the basis of forum non conveniens, arguing that the litigation should occur in South Korea, where both Nexon and Ironmace are based, despite the fact that the lawsuit involves US copyright law and the Dark and Darker was targeted to a US audience. Korea has different pre-trial discovery procedures, which Nexon called “inadequate” in its response. The lower court granted Ironmace’s motion to dismiss. In July 2024, the Ninth Circuit affirmed the lower court’s decision, stating that the DMCA does not categorically preclude forum non conveniens and that when Ironmace consented to personal jurisdiction, it did not consent to venue, which is a separate issue. The court emphasized that Choi and Park both signed employment agreements electing the Seoul District Court as the venue for any work-related intellectual property disputes. Notably, this is the first time a court has ruled that a DMCA related claim would be better suited to be litigated outside of the United States. Foreign entities with US copyrights often rely on the DMCA to enforce their rights in the United States and rely on United States law to govern. While courts are known to use the doctrine of forum non conveniens sparingly, they have noted that foreign plaintiffs do receive less deference to their choice of forum than domestic ones (see, e.g., Piper Aircraft, Co. v. Reyno, 454 U.S. 235 (1981)). However, courts in the past have looked at similar issues and decided the other way. For example, in DFSB Kollective Co. v. CJ E&M America, Inc., a California district court ruled the forum should not be changed to Korea when DFSB, a Korean corporation with a license to distribute K-pop music, sued a US entity under the DMCA for distributing the music in the Unites States. The case involved both Korean and US law, witnesses had to appear from Korea, documents and evidence needed to be translated from Korean into English, and a prior settlement agreement from a Korean court was disputed. Nonetheless, the California court rejected the American defendant’s motion to dismiss under forum non conveniens, stating that it is an “exceptional tool.” It will be interesting to see how the new ruling from the Ninth Circuit affects foreign entities who wish to file DMCA takedown requests to attempt to enforce their rights in the Unites States. Dorsey will continue to monitor the impacts, and we will report on any interesting new developments.

Though litigants routinely enter into stipulated protective orders in the course of discovery that may involve sensitive company information (or even trade secrets), a recent ruling is a cautionary tale on the potential consequences of failing to abide by a protective order. In Allstate Ins. Co. v. Cruz, Allstate filed suit against Cruz, a former Allstate agent, alleging he breached his exclusive agency agreement and appropriated customers to start his own insurance agency in violation of the federal Defend Trade Secrets Act, and the Colorado Uniform Trade Secrets Act. The district court granted Allstate summary judgment on Cruz’s counterclaims, and before trial on Allstate’s remaining claims, the parties dismissed the action. Less than a month later, Allstate filed a Motion to Reopen and for Order to Show Cause and Enjoin, seeking to initiate contempt proceedings against Cruz for violating the parties’ stipulated protective order. Allstate claimed that Cruz published seven deposition transcripts designated as “Confidential” on websites linking Allstate to criminal activity by selling customers’ personal information. The court granted Allstate’s Motion in part, permitting further proceedings to determine whether Cruz should be held in contempt for disclosing Allstate’s designated confidential information. Though Cruz “allude[d] to the fact that many of the documents at issue are publicly available on” the court’s docket, the court noted that the protective order specified that “[i]n the event Confidential Information is used in any court filing or proceeding in this action, it shall not lose its Confidential status as between the parties through such use.” The court ordered Cruz to show cause by May 15, 2024, why he should not be held in contempt. Litigants may enter into protective orders where, as in Allstate, discovery may implicate confidential, proprietary, or private information. This includes trade secrets litigation where parties need assurance that a trade secret will not become public simply because it becomes the subject of litigation. Otherwise, the trade secret would ordinarily lose its value (and trade secret protection) because of such public disclosure. A standard protective order explains that discovery may require production of materials warranting special protection from public disclosure and using the materials for purposes other than the instant litigation. Various state and federal courts offer model protective orders that outline the process for designating materials as confidential and challenging another party’s confidentiality designations. The Northern District of California has a “Model Protective Order for Litigation Involving Patents, Highly Sensitive Confidential Information and/or Trade Secrets.” This order enables parties to designate documents as not just confidential but “HIGHLY CONFIDENTIAL – ATTORNEYS’ EYES ONLY,” and even includes specific protections and procedures for source code review in litigation. Other federal courts with model protective orders include the Northern and Southern Districts of Texas, the Western District of Washington, and the District of Oregon, among others. Though protective orders may be part and parcel of business and IP litigation, parties should not take them lightly. The reopening ruling in Allstate is just one illustration of the consequences of violating a protective order. Courts have found violations of protective orders even when the disclosure of confidential materials was not to the public but a more limited audience. For example, in SIMO Holdings Inc. v. Hong Kong uCloudlink Network Tech. Ltd., a patent infringement action in the Southern District of New York, the court found that plaintiff SIMO violated the parties’ protective order by sharing defendant uCloudlink’s confidential documents with attorneys SIMO had retained to represent a non-party in separate Chinese patent litigation. No. 18-cv-5427 (S.D.N.Y. Dec. 7, 2020). As to attorneys, SIMO and uCloudlink’s protective order prohibited disclosure of confidential material except to “counsel retained specifically for this action,” and “retained by a party to serve as an expert witness or otherwise provide specialized advice to counsel in connection with this action.” The court found that SIMO disclosed uCloudlink’s confidential material from the S.D.N.Y. patent litigation to attorneys who were not “retained specifically for [the instant] action,” in “clear” violation of the protective order. The court imposed $40,000 in sanctions on SIMO for violating the protective order, (i.e., $10,000 for each of the four documents wrongly disclosed). Another example occurred in Hsin Lin v. Solta Medical, Inc., where defendant Solta filed a motion to retain confidentiality of documents disclosed in violation of the parties’ protective order. Plaintiff’s counsel in this Northern District of California action provided Solta’s confidential documents to plaintiff’s counsel in foreign litigation, who then provided the confidential documents to the foreign district court. The court reiterated that plaintiff failed to follow the order’s procedures for producing confidential materials when compelled in another litigation and following an unauthorized disclosure of protected material. The court also noted that the protective order prohibited “[m]ass, indiscriminate, or routinized designations,” so Solta, too, violated the protective order by designating every document it produced as confidential. The court granted Solta’s motion to retain confidentiality of its documents, as they “showed ongoing business processes, procedures, and strategies by showing how Solta investigates and assesses potential product failures,” including for products currently on the market. Solta also explained that it “closely guarded” these documents internally, and exposing these documents publicly would give competitors insight into its internal processes. The court found that particularized harm would result from disclosure to the public and granted Solta’s motion. No. 21-cv-05062-PJH, 2024 U.S. Dist. LEXIS 66863 (N.D. Cal. Apr. 11, 2024). These rulings, including the forthcoming show cause decision in Allstate, are a reminder to read and adhere to all of the terms of a protective order, including the parameters on disclosing confidential materials. We will be monitoring the court’s contempt proceedings in Allstate. Stay tuned for further updates.

Last month, Vital Pharmaceuticals, Inc. (“Vital”), the manufacturer of the Bang energy drink, fell short in its post-trial challenge to a “monster” jury award in favor of Monster Energy Company (“Monster”). After nearly five years of litigation in the Central District of California, Monster’s Lanham Act, California Uniform Trade Secrets Act (CUTSA), Federal Defend Trade Secrets Act (DTSA), intentional interference with contract, and Computer Fraud & Abuse Act claims reached a jury in August 2022 that ultimately awarded Monster $293 million in damages. The parties filed post-trial briefing whereby Vital attempted to overturn or alternatively peel back the enormous award, while Monster sought, among other things, enhanced damages and attorneys’ fees. The court’s October 6, 2023 post-trial order ultimately upheld the jury award and awarded Monster nearly $21 million in attorneys’ fees under the Lanham Act’s, DTSA’s, and CUTSA’s heightened standards for fee shifting. Despite meeting this high burden for shifting fees and the jury’s finding that Vital’s trade secret violations were “willful and malicious,” the court declined to award exemplary damages under the CUTSA and DTSA. The court’s ruling demonstrates the high bar for obtaining exemplary damages in trade secrets cases. The jury awarded Monster $3 million in damages for its trade secrets claims, which was perhaps overshadowed by the $272 million lost profits award for Vital’s Lanham Act violations. (Monster’s Lanham Act false advertising claim alleged that Vital falsely advertised Bang as containing the supplement “super creatine,” which was neither a “super form” of creatine nor actual creatine with any health benefits.) Monster based its trade secrets claims on its contention that Vital recruited Monster employees to join Vital and bring with them Monster’s confidential and valuable business information in violation of the CUTSA and DTSA. Monster introduced evidence that Vital offered several Monster employees jobs with a significant salary increase, conditioned on providing Monster’s sensitive competitive information. Witnesses for Vital and Monster provided more details on this scheme, testifying that Vital interviewers asked Monster employees to bring confidential information with them, openly admitted to these recruiting practices, and circulated internal Monster documents, including about an unreleased product. Monster focused on its former Georgia regional manager who left Monster for Vital, gave Vital a link and password to Monster’s internal and proprietary database, accessed that database after leaving Monster, and took five Monster-branded USB drives containing hundreds of confidential files and gave them to Vital’s in-house counsel. Monster’s damages expert testified that Vital’s Georgia sales outperformed the rest of the United States by $4.175 million, attributable to those confidential documents, which contained information specific to Georgia. The jury found that Vital “maliciously and willfully misappropriated” Monster’s trade secrets and awarded $3 million in damages. The DTSA and CUTSA allow courts to award exemplary damages in an amount that is up to two times that of the damages award for “willful and malicious” trade secret misappropriation. Although exemplary damages are permitted by statute, the court has an independent obligation to consider the facts and calculate an equitable and constitutionally sound exemplary damages award. In determining the amount of exemplary damages, courts consider the nature of the misconduct, amount of compensatory damages, and the defendant’s financial condition. The court noted that the “largest exemplary awards are reserved for the most reprehensible acts.” And to determine if, and to what extent, misconduct is reprehensible, courts consider whether: the misconduct caused physical harm, the conducted disregarded the health or safety of others, the misconduct targeted a financially vulnerable party, the misconduct was repeated, and the harm resulted from intentional malice, trickery, or deceit, or mere accident. In light of the jury’s finding that Vital’s trade secret misappropriation was willful and malicious, Monster’s post-trial motion requested $3 million in exemplary damages, which would double Monster’s damages on its trade secrets claims. The court denied this request based on its analysis of the exemplary damages factors discussed above. The court found that Vital’s conduct “was not particularly reprehensible.” The evidence of Vital’s trade secret misappropriation, which the jury found “malicious and willful,” fell short of “reprehensible conduct” warranting exemplary damages. Specifically, Vital’s misconduct with regard to Monster’s trade secrets did not “cause physical harm, disregard the health or safety of others, or target a financially vulnerable party.” Thus, the court found that the jury’s $3 million award in trade secrets damages sufficiently “deters and punishes Vital” for misappropriating trade secrets and, accordingly, declined to award exemplary damages on Monster’s trade secret claims. The court’s denial of exemplary damages is notable because, in the same order, it granted Monster’s request for nearly $21 million in reasonable attorneys’ fees under the Lanham Act’s “exceptional case” standard and the CUTSA and DTSA’s “malicious and willful” standard. And, in finding that the case met the “exceptional case” standard for awarding fees under the Lanham Act, the court cited the jury’s unanimous finding that Vital’s false advertising was willful and deliberate (similar to the jury’s trade secrets finding) and the unreasonable manner in which Vital litigated the case. The unreasonable litigation conduct cited by the court included disparaging remarks and otherwise disrespectful conduct at trial by Vital’s CEO, and the CEO’s contradiction of his prior sworn testimony at trial, which Monster’s counsel impeached more than 50 times. Despite the court finding that this constituted an “exceptional case” in light of these circumstances, it nonetheless declined to award exemplary damages under the DTSA and CUTSA. While the DTSA and CUTSA leave open the possibility of exemplary damages for trade secret violations, the Monster ruling illustrates the difficulty in obtaining them, even where the fact finder explicitly determines that the misappropriation was willful and malicious.

Earlier this month, a federal court judge in the United States District Court for the Central District of Illinois denied a defendant’s motion to dismiss a plaintiff’s amended complaint for, among other claims, trade secret misappropriation, based on a theory of inevitable disclosure in the future. The plaintiff had admitted at oral argument that, after three years or so of discovery, it had no direct evidence of actual disclosure of its trade secrets by the defendant, and that it was instead relying in its amended complaint on the threat of future disclosure. The Court rejected the defendant’s position that a future disclosure threat as pled by plaintiff was insufficient to give the plaintiff standing to proceed, because the plain language of both the federal Defend Trade Secrets Act (“DTSA”) and the Illinois Trade Secrets Act (“ITSA”) expressly provide that actual or threatened misappropriation may be enjoined. The decision provides a useful illustration of the applicability of the doctrine of inevitable disclosure in the realm of trade secret litigation. The plaintiff Marquis ProCap System, LLC (“Marquis”) is a renewable energy company based in Illinois, and alleges that it operates the largest dry-mill ethanol facility in the United States. Marquis has developed proprietary processes, technology, and systems for processing the co-products of corn-to-ethanol production at the alleged cost of more than $30 million. For over a decade, defendant Novozymes North America, Inc. (“Novozymes”) had been a supplier to the Marquis companies, providing enzymes and microbes that Marquis used in its processes. For over a year or so, the parties explored forming a partnership. As part of this process, they entered into a mutual confidentiality agreement and, as claimed by Marquis, Novozymes was provided with Marquis’ trade secret information. Marquis alleged that, without any notice to it, and just four days after a knowledge-sharing meeting, Novozymes publicly announced that it was entering into an exclusive partnership with Green Plains, Inc. (“Green Plains”), Marquis’ competitor. Marquis claimed that the same Novozymes’ scientists worked on both the attempted partnership with Marquis and the partnership with Green Plains, and that Novozymes would not have been able to proceed with its partnership with Green Plains without misusing Marquis’ trade secrets. As a result, Marquis asserted trade secret misappropriation by Novozymes in violation of the DTSA, the ITSA, and the parties’ confidentiality agreement. After three years of discovery, Marquis amended its complaint to add allegations that Novozymes poses a future threat that it will inevitably use or disclose Marquis’ trade secrets, and Marquis even admitted during oral argument that it had no direct evidence that Novozymes had already shared its trade secrets with Green Plains. Rather, the plaintiff acknowledged that its focus was on the threat of future breach. Novozymes moved to dismiss the amended complaint arguing that Marquis lacked standing because of lack of evidence of actual misappropriation and because allegations of future threats of misappropriation are insufficient for establishing standing. The Court denied the motion, finding that Marquis had standing under both the ITSA and DTSA as both statutes allow the enjoining of not only actual but also threatened misappropriation. Relying on the Seventh Circuit decision in PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995), the Court recognized that a trade secret misappropriation claim could be established where a defendant’s new employment will inevitably lead him or her to rely on a plaintiff’s trade secrets. When determining if a defendant will inevitably disclose trade secrets in his or her new position, courts consider (1) the level of competition between the former and the new employer; (2) whether the employee’s new position is comparable to the position she or he held with the former employer; and (3) the new employer’s actions to prevent the employee from using or disclosing trade secrets of the former employer. The Court held that Marquis pointed to sufficient evidence at the motion to dismiss stage on each of these factors that: (1) Green Plains is Marquis’ direct competitor, (2) Novozymes is in a similar position of assisting Green Plains in improving its processes as when Novozymes was collaborating with Marquis, and (3) Novozymes failed to sufficiently protect Marquis’ trade secrets. In reaching its decision, the Court pointed to evidence that, while pursuing its partnership with Green Plains, Novozymes sent the same group of scientists who worked on the Green Plains project to learn about Marquis’ trade secrets and that Green Plains’ subsidiary filed a patent application pursuing protection for the same technology as Marquis without any explanation by the inventor as to how he came up with the invention, among other facts. The Court concluded that the facts as presented by Marquis at the motion to dismiss stage reflected that Novozymes would inevitably use Marquis’ trade secrets when partnering with Green Plains. The Court’s decision serves as a useful reminder of the importance of considering not just actual but also threatened misappropriation of trade secrets while asserting misappropriation claims, including the applicability of the inevitable disclosure doctrine. However, it is important to remember that the inevitable disclosure doctrine is applied differently (if at all) in various jurisdictions. In 2019, an Oregon federal court judge surveyed the status of the inevitable disclosure doctrine between the various states at the time, and found that: (a) seventeen (17) states appear to have adopted the inevitable disclosure doctrine in one form or another: Arkansas, Connecticut, Delaware, Florida, Indiana, Illinois, Iowa, Minnesota, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Texas, Utah, and Washington; (b) five (5) states appear to have rejected the doctrine: California, Colorado, Louisiana, Maryland, and Virginia; and (c) the remaining twenty-eight (28) states had not yet decided whether to follow the inevitable disclosure doctrine. Phoseon Tech., Inc. v. Heathcote, No. 3:19-cv-2081-SI, 2019 U.S. Dist. LEXIS 221633, at *30-31 (D. Or. Dec. 27, 2019). Since then, a Florida federal court has indicated that Florida has not adopted or declined to adopt the inevitable disclosure doctrine and an Oregon federal court has opined that Oregon would be unlikely to adopt the doctrine. Thus, an up-to-date canvassing of which jurisdictions recognize the inevitable disclosure doctrine is critical.

On January 5, 2023, President Biden ushered in the new year by signing into law the Protecting American Intellectual Property Act of 2022 (“PAIPA”), Pub. Law 117-336.1 PAIPA was passed with considerable bipartisan support in both houses of Congress. The new law mandates the collection of certain data on international trade secret theft so the U.S. Government can issue annual unclassified public reports listing foreign individuals and entities who knowingly take or abuse U.S. trade secrets.  PAIPA also requires the President to impose harsh legal sanctions against such named offenders, including on any entity owned or controlled by such a listed person. PAIPA reports will name foreign individuals and entities who have knowingly engaged in, benefited from, or materially assisted in the theft of U.S. trade secrets that pose “a significant threat to U.S. national security, foreign policy, or economic health.” The public PAIPA reports must also list the names of the foreign individuals who serve as the chief executive officers or board members of any listed foreign entity and of any entity that is owned or controlled by such a listed entity. Moreover, the Government’s published list must also explain the “nature, objective, and outcome of the theft of trade secrets” for each listed individual or entity. PAIPA also prescribes that any such public listing of an entity or individual as having engaged in such trade secret theft is to be an executive determination by the President and not an administrative finding of fact. However, the new law does not set forth any specific legal process or threshold of evidence to be found by the President before making such a determination. PAIPA requires the President to impose at least five different kinds of sanctions on a listed person but gives the President discretion to select from among those sanctions.2 More specifically, PAIPA allows the President to: block a listed person’s property-related transactions through economic sanctions enforced by the Office of Foreign Assets Control (“OFAC”) in the U.S. Department of the Treasury; place a listed person on the Entity List enforced by the Bureau of Industry and Security (“BIS”) in the U.S. Department of Commerce and thereby block such person’s access to any goods, software or technology that would be subject to the Export Administration Regulations (“EAR”); bar a listed person from access to any Export-Import Bank assistance; urge denial of loans to a listed person by any international financial institution of which the United States is a member; block any U.S. financial institution from lending to a listed person; if a listed person is a foreign financial institution, bar such listed person from being named as a primary dealer in U.S. government debt instruments or acting as a repository for any U.S. government funds; debar a listed person from being a federal contractor or a supplier of goods or services to the U.S. Government; block any listed person’s banking or foreign exchange transaction that is subject to U.S. jurisdiction; bar any U.S. person from investing in any equity or debt securities of a listed person; deny an entry visa to a listed individual or a corporate officer, principal, or shareholder who holds a controlling interest in a listed entity; or apply any of the above sanctions to the executive officers of a listed entity. PAIPA also states that it does not authorize or require the President to impose any sanctions on a listed person with respect to the importation of goods into the United States. Additionally, PAIPA provides the President with the power to waive the imposition of sanctions that would otherwise be required under the law if the President determines that the “national interest” would be served by such a waiver and notifies the relevant committees of Congress. Congress also inserted a “sunset” provision into PAIPA and so, unless reauthorized by Congress, this new law would expire in seven years. PAIPA contains a civil penalty provision applicable to any person who violates, attempts to violate, conspires to violate, or causes a violation of PAIPA or regulations issued under PAIPA. The amount of the PAIPA civil penalty is linked directly to the penalty prescribed under § 206 of the International Emergency Economic Powers Act (“IEEPA”),3 the amount of which was updated for inflation as of January 2023 to $356,579 per violation.4 Plainly, application of OFAC’s broad blocking powers against a PAIPA-listed person would then have immediate and profound implications for the international banking community in regard to international funds transfers by such a listed person, especially those involving U.S. dollar assets or payments made in U.S. dollars. Such banking effects would also potentially impact the payments or bank deposits of any other entities around the world that are owned or controlled by such a listed person. This new legislation thus continues a growing trend to expand the application of U.S. export control beyond the traditional and relatively circumscribed protection of export-controlled technologies for military or “dual-use” applications. As one other recent example, in October 20195 as we described here, BIS invoked its Entity List designation authority on 28 Chinese entities, including Dahua, Hikvision and several other leading electronics manufacturers for their roles in the suppression of human rights and in promoting electronic surveillance among Uyghurs and other minority Muslim populations in the Xinjiang Uyghur Autonomous Region (“XUAR”) of China. PAIPA also appears to continue another trend in which Congress requires Presidential action in certain prescribed circumstances rather than deferring to traditional Executive Branch discretion in the enforcement of laws enacted by Congress. Given the potentially dire consequences for a foreign entity or individual that could result from such a PAIPA listing, the new law may well provide a stronger deterrent to international trade secret theft committed against U.S. companies. However, it might also conceivably spur more legal disputes about whether the property allegedly stolen by a foreign person truly constitutes a “trade secret” of a U.S. company that can be subject to this law as a way to invalidate and reverse such a PAIPA listing. These new and severe consequences, along with the required publication of the details and effects of the underlying trade secret thefts, may also give U.S. companies some pause about exactly when, how and possibly even whether to report any suspected or known international trade secret theft to the U.S. Government. These annual public PAIPA listings will certainly fuel more corporate due diligence in the conduct of significant international business transactions and add to the growing family of such U.S. Government lists to be examined, such as OFAC’s Specially Designated Nationals List (“SDN List”) and Non-SDN Chinese Military-Industrial Companies List (“Non-SDN CMIC List”), the Department of Defense Section 1237 List, and the BIS Entity List. Finally, it seems virtually certain that some PAIPA-listed foreign entity or individual will eventually challenge its designation under this new law and raise due process concerns about the sufficiency of evidence considered by the President, which could lead to adoption of formal processes by which a listed individual or entity could raise a reasonable administrative challenge and seek its removal from the PAIPA listing. More may be known about the future implementation of PAIPA when and if President Biden issues a new Executive Order to delegate the duties and powers under PAIPA to other U.S. Government officials. One possibility in such an Executive Order might be to place the locus of PAIPA’s enforcement under the Secretary of Commerce (with input from other relevant senior officials such as the Attorney General and the Director of the Federal Bureau of Investigation). Historically, the Commerce Department has led in the field of intellectual property protection and has generally advocated on behalf of U.S. industries that rely on trade secrets in their intellectual property portfolios, and it is also the Cabinet department that includes the U.S. Patent and Trademark Office. 1 https://www.congress.gov/bill/117th-congress/senate-bill/1294 2 The PAIPA requirement for the President to impose five or more sanctions from all legally available legal sanctions follows the precedent of a similar mandate from Congress in the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRSHRA”), Pub. Law 112-158. 3 Pub. Law 95-223. 4 88 Fed. Reg. 2229, 2230 (Jan. 13, 2023). 5 https://www.federalregister.gov/documents/2019/10/09/2019-22210/addition-of-certain-entities-to-the-entity-list

In a recent trade secrets litigation in the United States District Court in the Northern District of California, a jury awarded the plaintiffs 40 million dollars, half of which was punitive damages. The Court also subsequently issued a permanent injunction enjoining the use of the misappropriated trade secrets. Though the defendant is currently seeking relief from the massive damages award and injunction, this case is a cautionary tale on poaching employees from a competitor in two aspects. First, in a “poaching” situation, a defendant can be enjoined from ever selling the product that uses the alleged trade secret and owe damages in the form of saved research and development (“R&D”) costs that it can no longer benefit from after the injunction takes effect. Second, it is a reminder of the vast discretion that juries have when awarding damages and their ability to award punitive damages in a “poaching” situation if they are left with a bad taste in their mouth from what appears to be a conspiracy to wrongfully take trade secrets. Background Plaintiffs Comet Technologies USA Inc., Comet AG, and YXLON International GmbH (collectively, “Comet”) sued Defendant XP Power LLC (“XP Power”) for misappropriation of its trade secrets under the Defend Trade Secrets Act (“DTSA”). Comet is a long standing player (over 70 years) in the semiconductor industry; whereas, XP Power is a newer player in the generator industry—entering this sector in 2017. In the lawsuit, Comet asserted that XP Power misappropriated its trade secrets associated with equipment used to manufacture semiconductor chips, specifically, Comet’s RF power generators (“RF Generators”) and electrical circuits referred to as impedance matching networks (“Electrical Circuits”). The RF Generators and Electrical Circuits are used to produce plasma chambers, which, in turn, are sold to silicon chip makers. So how did XP Power, a California based LLC, acquire the trade secrets of Comet, a Swiss company? Comet alleged that in late 2017, XP Power poached three Comet employees who were key members of the RF Generators and Electrical Circuits division. The poaching allegedly started with XP Power’s three hour interview with the first Comet employee to jump ship. During this interview, XP Power allegedly inquired about Comet’s trade secrets and then decided that it should also poach a supervisor in the same division. Comet claims the third employee later on participated in a group interview with the aforementioned employees before joining XP Power. After their new positions were secured at XP Power, Comet asserts that these employees surreptitiously collected and shared Comet’s trade secrets. This was allegedly done by (1) saving CAD drawings of Comet’s products as “resumes” to avoid detection, (2) downloading RF Generators and Electrical Circuits files onto external hard drives; and, when confronted, (3) misrepresenting to Comet that they did not save, download, or otherwise collect such files. XP Power purportedly not only was aware of, but also encouraged, this behavior. Comet asserted that XP Power ultimately misappropriated, among other types, trade secrets associated with the: (a) RF Generators; (b) Electrical Circuits; and (c) next generation of Electrical Circuits (“NexGen EC”) for use in the development of XP Power’s own line of competing generators and electrical circuits. Key Events at Trial XP Power did not enter the market before Comet instituted its action; therefore, there were no lost profits or sales to use as a basis for damages. Instead, Comet’s theories for damages was limited to either (1) unjust enrichment (quantified as the savings XP Power enjoyed by not investing time and money into R&D) or (2) a reasonable royalty. At trial, Comet’s damages expert testified about Comet’s R&D costs for the trade secrets associated with each of the RF Generators, NexGen EC, and Electrical Circuits. The approximate amount Comet spent on R&D for each trade secret was $5 million, $6 million, and $11 million, respectively. The expert also explained that the amount spent on R&D is not limited to the line item in the chart underneath each trade secret, but also the amount “that was the foundation that that [the] work was built on.” The expert then testified, that if the jury found that the NexGen EC trade secret was misappropriated, “it’s not just the 6 million, it’s everything because those were built upon all of that work.” Jury Decision and Permanent Injunction Ultimately, the jury found that XP Power improperly acquired the RF Generators, NexGen EC, and Electrical Circuits trade secrets, but that this improper acquisition was a substantial factor in causing damages to only the trade secrets associated with the RF Generators and NexGen EC. The jury awarded damages based on the unjust enrichment theory, i.e., how much money XP Power saved on its own R&D, and awarded $5 million for the RF Generator trade secret and $15 million for the NexGen EC trade secret. For punitive damages, the jury awarded Comet $20 million, resulting in a 1:1 ratio between compensatory and punitive damages. Shortly thereafter, the Court issued a permanent injunction against XP Power as to all three trade secrets, finding that though the jury’s award “compensated past harm, [it] did not address ongoing or future harm.” XP Power’s Current Request In its motion currently pending before the Court, XP Power claims that the jury’s damages award for the NexGen EC trade secret was not based on any evidence since it was $15 million and not the $6 million shown in Comet’s expert’s chart at trial. XP Power also offers a second argument that is focused on the permanent injunction the Court issued. The crux of the second argument is that, by issuing a permanent injunction against use of the RF Generator and NexGen EC trade secrets, the very same trade secrets that the jury already award compensatory damages for, this equates to a double recovery for Comet. XP Power states that it is undisputed that it never sold a generator or matching networks product. As such, it is inequitable and punitive to issue a permanent injunction since “Comet is effectively being compensated for benefits that XP [Power] never received,” i.e., the sale of the infringing products. Thus, either the permanent injunction should be vacated or there should be a new trial on damages. Comet has until December 2, 2022 to respond to XP Power’s pending motion. Practice Points Polling the jury would be the only way to definitively determine why they awarded $15 million in compensatory damages for the NexGen EC trade secret, instead of the $6 million in R&D costs put forward by Comet’s expert. However, the expert’s passing comment about “foundational R&D costs” in the damages calculation may very well have been the culprit. This serves as an important reminder to carefully listen to a damages expert’s testimony and refute any testimony that a jury may hone in on as a basis to award significant damages (which can at times be unpredictable). Additionally, XP Power’s pending request to vacate the permanent injunction may go a step too far. One of the salient tools in intellectual property law, and even more so when trade secrets are involved, is using an injunction to prevent your competitor from running off with your hard work. This prevents redundant litigation. It is also a recognition of the fact that there is something unquantifiable associated with riding on the coattails of a competitor’s intellectual property. It would be odd that after lengthy trade secret litigation, the infringing competitor could simply release its competing product in the market using the plaintiff’s trade secrets. Practitioners and business owners should always remember that there is a way to avoid a court ordered injunction in such situations: negotiate a licensing agreement. While the costs associated with a license could be steep, it does allow the company to theoretically stay in business. As this case has shown, it is possible to be out 40 million dollars and a product line where a company opts to misappropriate a competitor’s trade secrets instead. Finally, all companies should work with their counsel to create the best hiring practices and potentially a special protocol when bringing on an employee of a competitor, which should include a review, prior to hiring, of any restrictive covenants that the employee has with their former employer. These steps could serve as a safety measure ensuring that new employees are fully aware of the gravity of taking potentially proprietary information from their former employee without express permission.

A federal court judge in the U.S. District Court for the Southern District of New York recently denied the prevailing Defendants’ motion for $11.6 million in attorneys’ fees in a trade secret misappropriation case between two large competitors providing translation services. Despite the Court indicating that the lawsuit had not been filed and pursued in good faith, and also finding the Plaintiff’s overall litigation conduct to be “unsavory business,” the Court nevertheless ruled that the Defendants failed to meet the requisite standard of bad faith necessary to receive an award of fees under the Defend Trade Secrets Act (“DTSA”). The Court’s ruling is a useful illustration of the high bar that courts may set for establishing bad faith under the DTSA. The dispute goes back to August 2015 when the Delaware Court of Chancery ordered a court-supervised auction for the sale of Plaintiff TransPerfect Global, Inc. (“TransPerfect”), so that one of its co-founders could dissolve her relationship with TransPerfect and sell her ownership interest. Defendant H.I.G. Middle Market, LLC (“H.I.G.”), which acquired TransPerfect’s largest competitor—Lionbridge Technologies, Inc. (“Lionbridge”), a second defendant in the case—in February 2017, was one of the participants in the auction. As such, H.I.G. was given access to TransPerfect’s confidential information. TransPerfect claimed that H.I.G. was never a legitimate bidder in the auction, but instead used the auction to gain access to TransPerfect’s trade secrets and confidential information, including documents that a court-appointed TransPerfect Custodian erred in uploading in unredacted form, and then unfairly competed with TransPerfect. TransPerfect also alleged that Lionbridge changed its sales strategy, offered products and pricing to mirror those of TransPerfect, and used TransPerfect’s trade secrets to poach its clients. Accordingly, TransPerfect filed suit in 2019 against Lionbridge and H.I.G. alleging, among other claims, misappropriation of trade secrets under the DTSA and state law. TransPerfect sought injunctive relief and damages. Approximately two years later, and after significant discovery, Defendants moved for summary judgment on all of TransPerfect’s claims. The Court granted the motion, finding that TransPerfect had failed to show sufficient evidence to support its claims. In analyzing the trade secret misappropriation claims, the Court found that TransPerfect failed to show evidence that a majority of the documents identified by TransPerfect as allegedly containing trade secrets that were misappropriated by Defendants, were either accessed by Defendants or actually contained trade secrets. However, the Court confirmed that two categories of information that were accessed by H.I.G.—TransPerfect’s average payment to its freelance linguists in cents per word and its 2014 and 2015 revenues per customer—constituted trade secrets. But the open question before the Court was whether these trade secrets had been acquired by improper means so as to constitute misappropriation. The Court ruled that TransPerfect had failed to establish misappropriation. The Court reasoned that the parties had a confidentiality agreement explicitly permitting H.I.G. and its representatives to access information about TransPerfect to conduct due diligence and evaluate a potential acquisition of TransPerfect, and that the court-appointed TransPerfect Custodian’s error in uploading unredacted documents that included the trade secrets at issue was not in fact misappropriation by Defendants. The Court also stressed that TransPerfect had not requested the return or destruction of that information. Finally, the Court found that the confidentiality agreement permitted Defendants to use information about TransPerfect in connection with the auction and that TransPerfect has failed to demonstrate that its trade secrets were used for any other purpose. Having prevailed on their motion for summary judgment, H.I.G. and Lionbridge filed a motion for attorneys’ fees exceeding $11.6 million. In support of their motion, Defendants argued that TransPerfect had initiated the lawsuit solely to seek revenge against, and to harass Lionbridge, its largest competitor, and H.I.G., Lionbridge’s private equity sponsor, for their participation in the auction of TransPerfect, even though there was no supporting evidence for TransPerfect’s allegations. Under the DTSA, a court can award reasonable attorneys’ fees to the prevailing party when a claim of misappropriation is made in bad faith, which can be established by circumstantial evidence. Courts also have inherent power to award attorneys’ fees for bad faith, which requires the movant to show that the challenged claim lacks any legal or factual basis and was brought in bad faith, i.e., was motivated by improper purposes such as harassment or delay. A finding of improper purposes can be inferred when an action is so completely without merit so as to necessitate the conclusion that the action must have been undertaken for some improper purpose. In light of the summary judgment ruling, Defendants were clearly the prevailing party. Accordingly, the Court analyzed whether Defendants had demonstrated that TransPerfect filed the misappropriation claim in bad faith. First, the Court indicated that TransPerfect did not have a good faith basis to file the lawsuit initially, seemed to be conducting a search for a viable claim after commencing suit, and then continued to pursue its claims even after it became clear that it had not suffered any damages. Second, the Court looked at the conduct of TransPerfect’s CEO in other lawsuits against almost every other entity connected to the auction, in what was alleged to be an orchestrated campaign to undermine the auction, which the Delaware Supreme Court described as “reprehensible.” The Court stated that, “this is unsavory business” but the question remained whether Defendants had established TransPerfect’s “bad faith to the degree demanded by law.” The Court ultimately concluded that Defendants had made a strong showing of TransPerfect’s bad faith but had failed to reach the required standard, and thus denied their motion for fees. As this case demonstrates, the expense of trade secrets litigation can be very significant. Yet, prevailing defendants may nonetheless be left holding the bag for their fees, as establishing the bad faith required for fee shifting to occur under the DTSA may require extraordinary circumstances.  

Earlier this month, the U.S. Court of Appeals for the Federal Circuit reversed a $66 million dollar judgment against beauty industry giant L’Oréal for patent infringement, trade secret misappropriation, and a related breach of a non-disclosure agreement. While the Court remanded for a trial on patent infringement and damages on the patent infringement claim, it dismissed the trade secret misappropriation and breach of non‑disclosure agreement (“NDA”) claims in full, ruling that no reasonable juror could have found either trade secret misappropriation or breach of contract, and thus that the trial court should have granted L’Oréal’s motion for judgment as a matter of law (“JMOL”). The Federal Circuit’s ruling provides some useful reminders on important tenets of trade secret law. The underlying dispute involved plaintiff Olaplex’s discovery of the protective benefit of maleic acid during hair-bleaching treatments. In May 2015, Olaplex claimed that it met with L’Oréal to discuss a potential acquisition of Olaplex and to provide confidential information and documents pursuant to an NDA, including Olaplex’s then-unpublished patent application of the maleic acid invention. Then, instead of proceeding with the acquisition, Olaplex claimed that L’Oréal opted for “Plan B” of copying Olaplex’s patented method and launching competitor maleic acid products in August 2016. Olaplex filed suit in 2017 alleging claims of patent infringement, trade secret misappropriation, and breach of contract. After a lengthy and embattled litigation, including multiple intervening PTAB proceedings and Federal Circuit appeals, the Court made a determination of patent infringement on summary judgment, and the jury found for plaintiffs on patent-validity issues and the trade secret and breach of contract claims. The trial court then adjusted the damages award to avoid inconsistencies and prevent double recovery, and also award exemplary damages, attorney’s fees, and prejudgment interest, amounting to a total judgment of $66,167,843. On appeal, the Federal Circuit closely scrutinized the four groups of trade secrets asserted by Olaplex, which were generally described as: (1) information in an “unpublished patent” application; (2) “business information”; (3) “testing and know how” and (4) “dead ends and trials and errors” and found that as to each, the jury could not reasonably find sufficient proof of the elements of liability. With respect to the information in the unpublished patent application, Olaplex contended that the trade secret was “using maleic acid during bleaching.” The Federal Circuit found that Olaplex failed to establish that the information in the unpublished patent application was not readily ascertainable through proper means, a requirement that is expressly included in the definition of a trade secret. In so finding, the Court reasoned that L’Oréal put forth numerous prior-art references and expert testimony establishing that the prior-art references disclosed the alleged trade secret before the May 2015 exchange. The Court noted that information in published patents or patent applications is readily ascertainable by proper means, and went on to cite a number of cases establishing the general principle that disclosure of a trade secret in a published patent or patent application extinguishes the trade secret. The Court also noted that Olaplex’s own expert admitted that L’Oréal was using maleic acid in a method of bleaching as a pH adjuster before the alleged May 2015 information exchange, but ultimately decided it was not necessary to get into L’Oréal’s evidence of its own internal consideration of using maleic acid before it received the unpublished patent application to arrive at the Court’s conclusion that the claimed trade secret was not, in fact, a trade secret at the time of misappropriation. With respect to the second category of “business information,” which constituted Olaplex’s “financials,” the Court found that Olaplex failed to prove that the use of that information was without express or implied consent. Olaplex asserted that the business information provided insight into whether it was more cost effective for L’Oréal to acquire Olaplex or launch its own products (i.e. a “Build v. Buy analysis”). However, the Federal Circuit found that the parties’ NDA explicitly gave L’Oréal authorization to use the information in that way, as the very purpose of the agreement was to allow L’Oréal to evaluate a possible acquisition. As a result, L’Oréal’s use of the business information trade secret was not improper since it was consented to by Olaplex. With respect to the third and fourth trade secret categories of “testing and know how” and “dead ends and trials and errors,” the Federal Circuit found that there was an utter lack of proof that L’Oréal misappropriated anything secret within these groups. The Court reasoned that Olaplex described the categories with a high level of generality and never identified with specificity any particular information about testing, know how, dead ends or trial and error processes and evidence showing that L’Oréal made use of that information, let alone evidence of why that use was improper. Indeed, the Court noted that Olaplex addressed this information in a single sentence which indicated that these items yielded a dramatic change in L’Oréal maleic acid research. And, even the evidence relied upon for this assertion did not establish that L’Oréal misappropriated these buckets of “trade secrets” as opposed to the information contained in the unpublished patent application discussed above. The Court also found that, in part due to the absence of particularity provided by Olaplex describing these categories of purported trade secrets, the Court could not say that the evidence allowed a reasonable finding that the information was even a trade secret. The Court examined the expert testimony on these trade secret categories and found that “testing and know how” and “dead ends and trials and errors,” were not identified sufficiently to provide a concrete basis for finding that they were not readily ascertainable by proper means, including through prior literature on the topic. The Court finished its discussion of the third and fourth trade secret categories by articulating the general rule that a person claiming rights in a trade secret bears the burden of defining the information for which protection is sought with sufficient definiteness to permit a court to apply the criteria for protection and determine the fact of appropriation. As the Court explained, the requirement of reasonable particularity matters because a trade secret described in general terms will usually be widely known or readily ascertainable by proper means, and thus not a trade secret. Further, without particularity, there is an inadequate basis for a fair adjudication of what information was actually used by the defendants. And, courts and juries require precision because, especially where a trade secrets claim involves a sophisticated and highly complex system, the trier of fact will not have the requisite expertise to define what the plaintiff leaves abstract. The Court then concluded that Olaplex had failed to provide such particularity as yet another basis why Olaplex’s claim failed. Accordingly, the Federal Circuit concluded that the trial court should have granted L’Oréal’s JMOL motion. The Court also found that, in light of its trade secrets rulings, the breach of contract claim also could not survive because it was based on the same information that was purportedly given to L’Oréal under the NDA. Following the Federal Circuit’s decision, the parties shortly thereafter announced that they had settled the litigation on undisclosed terms. The Federal Circuit’s decision provides a useful reminder of several key principles of trade secret law. First, the Court points to a key tension in determining the method for protecting intellectual property, in that once a published patent application or patent discloses trade secret information, it generally extinguishes the information’s trade secret status. Thus, the decision of how best to protect trade secret information that is potentially patentable should be evaluated carefully. Second, although it seems obvious, misappropriation does not occur when the alleged infringer has express or implied consent to use the information in the manner in which it has used the information that is the subject of alleged infringement. Finally, to be successful in litigation, a trade secret needs to be disclosed with reasonable particularity. In fact, in trade secret litigation in certain jurisdictions, a particularized disclosure of the trade secret is a prerequisite to obtaining discovery of the adversary’s confidential proprietary information pertaining to the alleged infringement.

Earlier this month, the U.S. Court of Appeals for the Federal Circuit reversed a $66 million dollar judgment against beauty industry giant L’Oréal for patent infringement, trade secret misappropriation, and a related breach of a non-disclosure agreement. While the Court remanded for a trial on patent infringement and damages on the patent infringement claim, it dismissed the trade secret misappropriation and breach of non‑disclosure agreement (“NDA”) claims in full, ruling that no reasonable juror could have found either trade secret misappropriation or breach of contract, and thus that the trial court should have granted L’Oréal’s motion for judgment as a matter of law (“JMOL”). The Federal Circuit’s ruling provides some useful reminders on important tenets of trade secret law. The underlying dispute involved plaintiff Olaplex’s discovery of the protective benefit of maleic acid during hair-bleaching treatments. In May 2015, Olaplex claimed that it met with L’Oréal to discuss a potential acquisition of Olaplex and to provide confidential information and documents pursuant to an NDA, including Olaplex’s then-unpublished patent application of the maleic acid invention. Then, instead of proceeding with the acquisition, Olaplex claimed that L’Oréal opted for “Plan B” of copying Olaplex’s patented method and launching competitor maleic acid products in August 2016. Olaplex filed suit in 2017 alleging claims of patent infringement, trade secret misappropriation, and breach of contract. After a lengthy and embattled litigation, including multiple intervening PTAB proceedings and Federal Circuit appeals, the Court made a determination of patent infringement on summary judgment, and the jury found for plaintiffs on patent-validity issues and the trade secret and breach of contract claims. The trial court then adjusted the damages award to avoid inconsistencies and prevent double recovery, and also award exemplary damages, attorney’s fees, and prejudgment interest, amounting to a total judgment of $66,167,843. On appeal, the Federal Circuit closely scrutinized the four groups of trade secrets asserted by Olaplex, which were generally described as: (1) information in an “unpublished patent” application; (2) “business information”; (3) “testing and know how” and (4) “dead ends and trials and errors” and found that as to each, the jury could not reasonably find sufficient proof of the elements of liability. With respect to the information in the unpublished patent application, Olaplex contended that the trade secret was “using maleic acid during bleaching.” The Federal Circuit found that Olaplex failed to establish that the information in the unpublished patent application was not readily ascertainable through proper means, a requirement that is expressly included in the definition of a trade secret. In so finding, the Court reasoned that L’Oréal put forth numerous prior-art references and expert testimony establishing that the prior-art references disclosed the alleged trade secret before the May 2015 exchange. The Court noted that information in published patents or patent applications is readily ascertainable by proper means, and went on to cite a number of cases establishing the general principle that disclosure of a trade secret in a published patent or patent application extinguishes the trade secret. The Court also noted that Olaplex’s own expert admitted that L’Oréal was using maleic acid in a method of bleaching as a pH adjuster before the alleged May 2015 information exchange, but ultimately decided it was not necessary to get into L’Oréal’s evidence of its own internal consideration of using maleic acid before it received the unpublished patent application to arrive at the Court’s conclusion that the claimed trade secret was not, in fact, a trade secret at the time of misappropriation. With respect to the second category of “business information,” which constituted Olaplex’s “financials,” the Court found that Olaplex failed to prove that the use of that information was without express or implied consent. Olaplex asserted that the business information provided insight into whether it was more cost effective for L’Oréal to acquire Olaplex or launch its own products (i.e. a “Build v. Buy analysis”). However, the Federal Circuit found that the parties’ NDA explicitly gave L’Oréal authorization to use the information in that way, as the very purpose of the agreement was to allow L’Oréal to evaluate a possible acquisition. As a result, L’Oréal’s use of the business information trade secret was not improper since it was consented to by Olaplex. With respect to the third and fourth trade secret categories of “testing and know how” and “dead ends and trials and errors,” the Federal Circuit found that there was an utter lack of proof that L’Oréal misappropriated anything secret within these groups. The Court reasoned that Olaplex described the categories with a high level of generality and never identified with specificity any particular information about testing, know how, dead ends or trial and error processes and evidence showing that L’Oréal made use of that information, let alone evidence of why that use was improper. Indeed, the Court noted that Olaplex addressed this information in a single sentence which indicated that these items yielded a dramatic change in L’Oréal maleic acid research. And, even the evidence relied upon for this assertion did not establish that L’Oréal misappropriated these buckets of “trade secrets” as opposed to the information contained in the unpublished patent application discussed above. The Court also found that, in part due to the absence of particularity provided by Olaplex describing these categories of purported trade secrets, the Court could not say that the evidence allowed a reasonable finding that the information was even a trade secret. The Court examined the expert testimony on these trade secret categories and found that “testing and know how” and “dead ends and trials and errors,” were not identified sufficiently to provide a concrete basis for finding that they were not readily ascertainable by proper means, including through prior literature on the topic. The Court finished its discussion of the third and fourth trade secret categories by articulating the general rule that a person claiming rights in a trade secret bears the burden of defining the information for which protection is sought with sufficient definiteness to permit a court to apply the criteria for protection and determine the fact of appropriation. As the Court explained, the requirement of reasonable particularity matters because a trade secret described in general terms will usually be widely known or readily ascertainable by proper means, and thus not a trade secret. Further, without particularity, there is an inadequate basis for a fair adjudication of what information was actually used by the defendants. And, courts and juries require precision because, especially where a trade secrets claim involves a sophisticated and highly complex system, the trier of fact will not have the requisite expertise to define what the plaintiff leaves abstract. The Court then concluded that Olaplex had failed to provide such particularity as yet another basis why Olaplex’s claim failed. Accordingly, the Federal Circuit concluded that the trial court should have granted L’Oréal’s JMOL motion. The Court also found that, in light of its trade secrets rulings, the breach of contract claim also could not survive because it was based on the same information that was purportedly given to L’Oréal under the NDA. The Federal Circuit’s decision provides a useful reminder of several key principles of trade secret law. First, the Court points to a key tension in determining the method for protecting intellectual property, in that once a published patent application or patent discloses trade secret information, it generally extinguishes the information’s trade secret status. Thus, the decision of how best to protect trade secret information that is potentially patentable should be evaluated carefully. Second, although it seems obvious, misappropriation does not occur when the alleged infringer has express or implied consent to use the information in the manner in which it has used the information that is the subject of alleged infringement. Finally, to be successful in litigation, a trade secret needs to be disclosed with reasonable particularity. In fact, in trade secret litigation in certain jurisdictions, a particularized disclosure of the trade secret is a prerequisite to obtaining discovery of the adversary’s confidential proprietary information pertaining to the alleged infringement.

The impact of COVID-19 restrictions and precautions, combined with trending consumer preferences to shop online, is fueling bankruptcy filings of well-known brick-and-mortar brands. As customers bid farewell to fond strip mall haunts, savvy and imaginative purchasers reap the benefits by snapping up household names like RadioShack, Pier 1 Imports, and Toys “R” Us. The retail market is poised for a restructuring of its own kind—a shift of major brand names into exclusively ecommerce businesses. General Wireless Operations, Inc. dba RadioShack, Inc., which emerged from a bankruptcy in 2018, is a recent example. In November, Retail Ecommerce Ventures (“REV”) purchased the rights to use RadioShack’s brand, private label names, and website in the U.S. and certain other countries. REV has earned a reputation for acquiring distressed retail brands, like Pier 1 Imports, dressbarn, Modell’s Sporting Goods, and Linens ’n Things. Transformations from bankrupt brick-and-mortar to .com are often accomplished through the acquisition of a debtor retailer’s intellectual property from its bankruptcy estate. For instance: Last week, REV won a bankruptcy auction for the intellectual property, domain names, social media accounts, and other assets of Stein Mart with a $6 million bid. It announced plans to relaunch Stein Mart as online-only. Last year, Marquee Brands, purchased the ecommerce business, intellectual property, and other assets of Destination Maternity Corp., which includes the brands Motherhood Maternity and A Pea In The Pod, from Destination Maternity’s chapter 11 estate. Marquee partnered with liquidation specialists Gordon Brothers and Hilco Merchant Resources, on the winning $50 million bid, which included the rights to operate store-closing sales for all remaining physical locations. In 2018, lenders of Toys “R” Us acquired the intellectual property and other assets of the famed toy retailer after the assets were marketed in a bankruptcy sale process. With the exception of two shopping mall locations, Toys “R” Us now operates entirely online. In August, Hong Kong-based Newtimes Group purchased the assets of women’s clothing retailer and former bankruptcy debtor Coldwater Creek from the estate created by an assignment for the benefit of creditors. So-called “ABCs” are a state-law governed alternative to federal bankruptcy options. The Newtimes Group purchase agreement allocated over 93% of the $12.2 million purchase price toward intellectual property, with the remainder allocated toward inventory. As these sales illustrate, an insolvent, big-name retailer’s most prized asset is often its brand. Trademark-protected names, logos, patents, copyrights, trade secrets, and data have become more significant with the rise of ecommerce. The upside for purchasers who shell out millions for intellectual property and related assets includes generating income through licensing and royalty transactions, without the overhead associated with brick-and-mortar stores. Assets obtained through bankruptcy and other distress-type sales are often discounted, adding to the appeal of “brand shopping” for investors. Advantages specific to bankruptcy sales include the ability to acquire assets free and clear of most liabilities, the ability of the debtor to assign executory contracts (i.e., contracts where the parties have performance still outstanding) to a purchaser, a relatively quick sale process, and the protection of a federal bankruptcy court order. The sale process typically transpires in accordance with court-approved sale procedures, which contemplate marketing of the assets, a bid process, an auction, and approval of the sale through an order after a hearing, all with related deadlines. The bankruptcy court often approves sales of assets free and clear of liens, claims, and other encumbrances, provided that applicable non-bankruptcy laws permit such sales. The court’s order operates as an injunction that bars the debtor’s creditors from bringing claims against the purchaser. Bankruptcy debtors have the power to determine whether they will continue to perform and “assume” or refuse to perform and “reject” executory contracts. Assumed contracts can be assigned to third parties, even if—with some exceptions—those contracts contain non-assignability clauses. A debtor-seller’s assignment of assumed, favorable contracts to a purchaser facilitates the immediate continuation of operations and beneficial relationships upon closing of the sale. Conversely, bankruptcy debtor can reject an executory contract, which functions as a breach and leaves the counterparty with a claim it can file against the bankruptcy estate for damages arising from the breach. Notably, under the Bankruptcy Code and case law, most intellectual property licensees may continue using licensed IP for the duration of their license agreements, regardless of a debtor licensor’s rejection of the agreement. Prospective purchasers interested in capitalizing on brand sales in the wake of an online shopping surge, or otherwise considering purchasing assets from a distressed company or bankruptcy estate, should seek qualified counsel to navigate the sale process and negotiate and execute on their bids.

Earlier this month, the Fifth Circuit ruled that under the Defend Trade Secrets Act (18 U.S.C. § 1836, et seq.) (“DTSA”), a defendant is not the “prevailing party” by virtue of a plaintiff voluntarily dismissing a DTSA claim, where the dismissal is without prejudice.  The DTSA provides for fee shifting in favor of a “prevailing party” defendant in the event that “a claim of the misappropriation is made in bad faith, which may be established by circumstantial evidence.”  As a matter of first impression, in Dunster Live, LLC v. Lonestar Logis Mgmt. Co., LLC, et al. the Fifth Circuit determined that the defendants were not the prevailing party under the DTSA when a plaintiff voluntarily dismissed its DTSA claim shortly after the trial court denied plaintiff’s request for a preliminary injunction.  In affirming the lower court’s ruling that the defendants were not the prevailing party, the Court reasoned that federal authority in the context of other similar federal fee-shifting statutes establish that “[a] dismissal without prejudice means no one has prevailed; the litigation is just postponed with the possibility of the winner being decided at a later time in a new arena.” In Dunster, the plaintiff and defendants were formerly members of the same LLC that held a contract with the state of Texas to construct and build the blue signs seen on Texas highways advertising food, lodging, and gas stations located at approaching exits.  In the months leading up to the expiration of the contract, the defendants formed a new company without the plaintiff, and won the follow-on contract.  The plaintiff sued the defendants in federal court in Texas claiming that the defendants stole proprietary software and a database in violation of the DTSA, and also alleged related state law claims.  The plaintiff sought a preliminary injunction to stop the new company from taking over the contract, which was denied. Following the denial, the plaintiff sought permission to dismiss the case without prejudice, explaining that it no longer wished to pursue the federal trade secret claim, which was the only basis for subject matter jurisdiction.  The defendants opposed the motion on the ground that the plaintiff was engaging in “bad faith” by seeking to avoid an adverse ruling and liability for substantial attorneys’ fees.  The trial court rejected the defendants’ argument and allowed the dismissal without prejudice, not reaching the question of whether the misappropriation theory was raised in bad faith.  After the dismissal, the defendants sought an award of in excess of $600,000 in attorneys’ fees that they had incurred in the litigation.  The trial court denied the fee request, reasoning that a dismissal without prejudice did not make the defendants the prevailing party because the plaintiff is “free to resurrect its claims against the defendant[s] and may prevail at a later date.”  In fact, the plaintiff filed essentially the same lawsuit in state court, excepting the DTSA claim, just six days after the federal court dismissal. The defendants appealed the denial of their fee request, but did not appeal the trial court’s ruling that the dismissal could be entered without prejudice. The Fifth Circuit affirmed the trial court’s ruling on the fee request, finding that for a party to be eligible to obtain fees under the DTSA, they must (a) prevail; and (b) must do so under the listed scenarios provided under the statute that also require a showing of bad faith or malice.  Relying on federal authority interpreting other federal fee-shifting statutes, the Court held that a party does not prevail when the plaintiff dismisses its DTSA claim without prejudice.  In so ruling, the Court rejected defendants’ argument that this rule allows plaintiffs to evade paying the defendant’s fees by strategically seeking a dismissal without prejudice once a plaintiff realizes the suit is doomed.  The Court reasoned that this argument ignores the fact that, under FRCP 41(a), a dismissal without prejudice requires court approval unless the dismissal occurs very early in the game (i.e. prior to the defendant filing either an answer or a motion for summary judgment), and one of the reasons a court may deny such a request is bad faith on plaintiff’s part; if a court finds bad faith, it can require a dismissal with prejudice.  In such instances, the defendant may very well be the prevailing party.  The Court noted that Rule 11 also provides a check against bad faith litigation conduct, as sanctions can be levied against a party litigating in bad faith even where there is no prevailing party. The Court likewise rejected the defendants’ argument that they prevailed when the Court rejected plaintiff’s attempt to obtain a preliminary injunction.  Borrowing from a sport’s analogy, the Court quipped that “prevailing party status ordinarily requires being ahead when the final whistle blows in a case, not at halftime…. Taking the lead early in the lawsuit thus did not make the [d]efendants eligible for fees….  The dispute has now been rescheduled for state court, where the winner will be decided.  Because there was never a final score in this federal lawsuit, the [DTSA] does not allow attorney’s fees.” In light of the Court’s bright line ruling, defendants seeking recovery of their fees after a halftime voluntary dismissal of a plaintiff’s meritless or frivolous DTSA claim would be well-advised to put their eggs into the basket of arguing that the claim should be dismissed with prejudice, under a bad faith theory or otherwise.

Many IP owners wonder what they need to do to ensure the continued protection of their EU trade marks and Community Registered Designs after Brexit. Some attorneys, since the referendum, encouraged clients to file in the UK to secure those rights. This would have been an expensive strategy. This week, the UK government gave some reassurance on this issue through a ministerial statement in Parliament that promised that these registered EU rights will become UK rights automatically and at no cost when the UK leaves the EU system. See the report on the CITMA website here. Contrary to most issues surrounding Brexit, this one does not depend on an agreement being reached between the UK and the EU. How to deal domestically with EU registered rights after Brexit is purely a matter for the UK. So this announcement is quite significant. The statement given in Parliament is not detailed but unsurprisingly the UK government wishes to ensure a smooth transition and as little administrative burden as possible which is best achieved by giving full effect in the UK to all EU registered rights, automatically. There are many technical questions that remain open and which may be answered, partially or fully, once legislation is published in this regard. First and foremost the question concerning EU applications that are pending on the cut-off date. Other legal issues include the rules on non-use and reputation, etc. in trade marks and issues such as the availability of prior designs in the market in connection with the novelty and individual character requirements for CRDs. I expect after Brexit the “naturalised” EU registrations will be treated as if they were always UK registrations and subject to normal rules under UK law that treat the UK territory as the relevant market. This seems to be the simplest solution. If so, some of those EUTMs (probably the vast majority of those more than 5 years old) that will convert automatically to UK rights may become vulnerable overnight to non-use challenges (if they were not put to use in the UK). There will also be some questions for the EU to resolve post Brexit, the most obvious one whether use of an EUTM in the UK before Brexit will be relevant for non-use challenges and for assessing reputation of an EU registration after Brexit. Hopefully, the EU will pass legislation in due course to clarify the position on these kind of issues. We will not have many more details for at least several more months, but this announcement puts to rest the key concerns regarding the effect of Brexit on registered EU rights.