Trade Secret Misappropriation Defeats Maze of Copyright Preemption Claims

GlobeRanger is a software company that specializes in radio frequency identification (RFID) technology.  GlobeRanger RFID solutions focus on inventory management, allowing users to filter, process and store inventory information in real time.  Pursuant to a contract through the Department of Defense, GlobeRanger installed RFID technology solutions at three Navy bases.  The Navy then decided to consolidate into an enterprise-wide RFID solution to be run from one location.  The Navy awarded the contract to Software AG and ordered GlobeRanger to stop its work.  GlobeRanger sued Software AG for misappropriating its trade secrets, alleging that Software AG accessed some of GlobeRanger’s data, manuals and software while working on the Navy contract.

GlobeRanger initially filed its lawsuit against Software AG in federal court.  Software AG objected, arguing lack of federal court jurisdiction, so GlobeRanger dismissed its federal lawsuit and filed in state court.  Software AG then decided that the lawsuit belonged in federal court and removed the case to federal court.  The district court denied GlobeRanger’s motion to remand and ruled that GlobeRanger’s misappropriation claims were preempted by the Copyright Act.  GlobeRanger appealed that decision to the Fifth Circuit, which reversed and remanded the case to the district court. (GlobeRanger I).  Software AG appealed to the Fifth Circuit in the second appeal after a $15 million jury verdict in GlobeRanger’s favor.  Software AG argued that GlobeRanger’s trade secret claim was preempted by federal copyright right law, but that even if the trade secret claim was not preempted, the federal court lacked jurisdiction due to the lack of a federal law claim.  The Fifth Circuit ruled that GlobeRanger’s trade secret claim was not preempted, but that GlobeRanger’s dropped conversion claim was preempted and supported the required federal jurisdiction.

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Arguably Obsolete Trade Secrets Still Protected By Economic Espionage Act

Hanjuan Jin is a naturalized U.S. citizen of Chinese origin.  She earned a degree in physics from a Chinese university and master’s degrees in physics and computer science from American universities.  She worked as a software engineer at Motorola from 1998 to 2007.  Jin was chiefly involved in working on Motorola’s Integrated Digital Enhanced Network (iDEN).  iDEN technology allows cell phone handsets to also work as walkie-talkies. While on a prolonged trip to China, Jin solicited employment with Sun Kaisens, a Chinese company that develops telecommunications technology for the Chinese military.  After returning to the U.S., Jin bought a one-way plane ticket to China, downloaded thousands of internal, proprietary Motorola documents regarding iDEN and obtained $31,000 in U.S. currency.  She was intercepted by Customs agents at the Chicago airport while attempting to leave the country with the Motorola documents and the cash.

Jin was convicted at a bench trial of theft of trade secrets, under the Economic Espionage Act, 18 U.S.C. §1982.  The trial judge thought that Jin was guilty of economic espionage (§1831), with which she was also charged, but that her guilt had not been proven beyond a reasonable doubt at trial.  Jin was sentenced to 48 months in prison.  She appealed her conviction and sentence to the Seventh Circuit Court of Appeals, arguing that what she took was not a trade secret and that she neither intended nor knew that the theft would harm Motorola.  The Seventh Circuit affirmed the trial court’s decision.

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Trade Secrets Claim Results from Copyright Infringement Investigation

nexTUNE, a Washington corporation, provides digital music services to businesses and individuals.  Over a period of more than six years, nexTUNE developed music delivery technologies that it considered trade secrets.  EMI Music is a major music company.  EMI sent nexTUNE a cease and desist letter, which accused nexTUNE of copyright infringement.  EMI then requested information about nexTUNE’s music services in connection with its investigation of nexTUNE’s claim that a statutory license covered nexTUNE’s use of EMI’s copyrighted sound recordings.  nexTUNE agreed to provide the information requested, on the condition that it be kept confidential.  nexTUNE’s president met with EMI’s outside counsel, Buck McKinney and Christopher Harrison, in Austin, Texas, and provided the requested information.  In a phone conversation before the meeting, McKinney agreed to keep the information confidential.  At the meeting, nexTUNE’s president recognized Harrison as someone who was working for a nexTUNE direct competitor and had previously worked for other nexTUNE’s direct competitors.

nexTUNE sued EMI, McKinney and Harrison in the Western District of Washington, alleging non-infringement of EMI’s copyrights (a federal law claim) and misappropriation of trade secrets (a state law claim).  Harrison moved to dismiss the trade secret misappropriation claim against him for lack of personal jurisdiction (FRCP 12(b)(2)) and failure to state a claim upon which relief can be granted (FRCP 12(b)(6)).  McKinney moved to dismiss the trade secret claim against him for lack of subject matter jurisdiction (FRCP 12(b)(1)) and lack of personal jurisdiction.  EMI moved to dismiss the trade secret claim against it for lack of subject matter jurisdiction and failure to state a claim upon which relief can be granted.  The district court granted Harrison’s motion to dismiss for lack of personal jurisdiction, but denied McKinney’s motion.  The district court granted McKinney’s and EMI’s motions to dismiss for lack of subject matter jurisdiction without prejudice and with leave to amend the complaint.  EMI’s motion to dismiss for failure to state a claim was granted and the claim dismissed without prejudice.

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Trade Secrets Often Overlooked When Protecting Intellectual Property

Last week, I attended the Licensing Executives Society (LES) Spring Meeting, which was held in Seattle.  The theme of the meeting was “IP Matters in Every Deal.”  What is IP?  Many people that I talk to about IP (intellectual property) assume that IP means patents.  While patents are a type of IP, patents do not comprise the entire IP universe.  IP also includes copyright, trademark, trade secret and privacy law. 

Several speakers at the LES Spring Meeting spoke briefly about the potential value of keeping information as a trade secret, instead of filing a patent application based on that information.  Applying for a patent and keeping information as a trade secret are mutually exclusive.  With certain exceptions, the United States Patent and Trademark Office (USPTO) publishes patent applications 18 months after they are filed.  If a patent is not granted, the applicant has disclosed her invention information to the public without receiving the benefit of a patent.  Depending on the circumstances, the invention information may yield more value if kept as a trade secret than if disclosed through the patent process. 

This blog post addresses two questions:

1.  What is a trade secret?

2.  How are trade secrets protected?

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Cell Phone Picture Taking of Proprietary Machines Leads to Federal Convictions

This case involves the theft of trade secrets for the manufacture of tires for large earthmoving vehicles.  Currently, Goodyear, Michelin and Bridgestone manufacture such tires in the U.S.  Wyko Tire Technology, a Tennessee company, supplied Goodyear with parts for tire assembly machines to manufacture these huge tires.  HaoHua South China Rubber Company, a competitor to the U.S. tire companies, contracted Wyko to supply four tire-building parts so that it could manufacture tires for large earthmoving vehicles.  Wyko did not know how to make the parts it agreed to make, but knew that Goodyear used machines like Wyko needed to design and build.

Coincidentally, Goodyear asked Wyko to repair some of its tire-assembly machines and two Wyko employees, senior engineer Clark Alan Roberts and engineer Sean Edward Howley, went to Goodyear’s Topeka, Kansas plant.  Roberts and Howley signed secrecy agreements and were told that cameras were not allowed in the plant.  Despite that, when they were left alone for a few minutes, Howley used his cell phone to take pictures of the machines Wyko needed to design and build.  Howley and Roberts circulated the photos among Wyko employees by email.  Wyko’s IT manager spotted the photos and sent them to Goodyear.  Goodyear notified the FBI, leading to the indictment of Roberts and Howley.  A jury convicted Roberts and Howley of 7 counts of theft of trade secrets and 3 counts of wire fraud.  Roberts and Howley appealed to the Sixth Circuit Court of Appeals, which affirmed the convictions.

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Football Scouting Organization Files Suit for Copyright Infringement and Trade Secret Misappropriation Over Leaked Scouting Reports

National Football Scouting, Inc. (NFS) recently filed a complaint (pdf) in the Western District of Washington, Tacoma, for copyright infringement and misappropriation and dissemination of trade secrets against The Sports Xchange, Inc., (TSX) and Rob Rang, one of TSX’s employees.

The parties.  NFS is a scouting organization owned by nineteen National Football League clubs.  NFS prepares scouting reports for the clubs that own its shares.  The scouting reports “are proprietary and copyrighted trade secrets that belong exclusively to NFS.”  (Complaint pdf page 2).  NFS’s principal place of business is in Indianapolis, Indiana.

TSX is a corporation that publishes football scouting information and does business as NFLDraftScout.com.  TSX’s principal place of business is Sacramento, California.

Rob Rang is a sportswriter and employee of TSX.  He lives in Gig Harbor, Washington.

The alleged facts.  NFS institutes a number of measures to protect its trade secrets, including requiring the clubs that own shares to enter into written agreements acknowledging that the scouting reports are proprietary information and trade secrets belonging to NFS; prohibiting the shareholder clubs from disseminating the information to anyone other than employees who need access to it to do their work; posting terms of use on its website that come up after log on; requiring agreement to a confidentiality provision before a shareholder employee can download content; and requiring its own employees and technology vendor employees to sign confidentiality agreements.  “NFS takes every reasonable step to maintain and keep the Scouting Information confidential.”  (Complaint pdf page 4).  See my blog post entitled Not All Organizational Secrets are Trade Secrets for a more complete discussion of trade secrets. 

The information contained in the scouting reports is obtained by scouts who travel to college campuses throughout the country, then organized, evaluated and analyzed by NFS.  This is done at great expense to the shareholder clubs.  The scouting reports prepared by NFS give the shareholder clubs a competitive advantage over non-member clubs.

NFS registered its scouting reports with the Copyright Office as unpublished works.  This allowed NFS to register the works without disclosing their contents to the Copyright Office and without disclosing NFS’s proprietary information.  17 U.S.C. §408 and 37 C.F.R. §202.20 address registering unpublished works.

Even though NFS makes substantial efforts to protect its trade secrets, TSX and Rang have repeatedly obtained and published information in NFS’ scouting reports through cbssports.com.  TSX and Rang have received compensation for knowingly and willfully disseminating NFS’s trade secrets.  NFS has informed TSX and Rang that the scouting reports are confidential and proprietary, has demanded that TSX and Rang cease and desist from disclosing NFS’s scouting reports in publications and has demanded that TSX and Rang remove the offending material and return any copies of the materials to NFS.  TSX and Rang have not complied with NFS’s demands.  TSX and Rang continued to publish NFS’s scouting information on such college football players as Prince Amukamara, Dontay Moch, Jake Locker, Christian Ponder, Nick Foles, Juron Criner, Chris Owusu and Terrell Pryor. 

Trade secret count.  NFS alleged that “Defendants’ continued knowing publication of NFS’s trade secrets constitutes deliberate, intentional, and outrageous conduct, warranting an award of exemplary damages.”  (Complaint pdf page 9).  NFS alleged that, based on TSX’s and Rang’s past conduct, they will continue to unlawfully disseminate NFS’s trade secrets and that NFS has been irreparably harmed.

NFS requested a temporary and a permanent injunction,

  • Ordering the defendants to cease and desist publication or dissemination of NFS’s scouting information;
  • Ordering the defendants to remove the content from the Internet, weblogs and other media;
  • Ordering the defendants to return any copies of NFS’s materials;
  • Ordering the defendants to preserve all electronic data in their control, so that NFS can have computer forensics technicians remove NFS’s trade secrets found in it;
  • Order the defendants to allow NFS to inspect defendant’s email accounts so that NFS can investigate defendants’ sources of NFS’s information; and
  • Enjoin the defendants from engaging in such conduct in the future.

Trade secrets are protected by state law, not federal law.  Kewanee Oil Co. v. Bicron.  Washington State adopted the Uniform Trade Secrets Act, codified under Chapter 19.108.

Copyright count.  NFS alleged that the scouting reports prepared by it are original works that are owned by NFS.  NFS alleged that the defendants published portions of NFS’s scouting reports, without authorization, and in violation of the Copyright Act.  NFS alleged that the defendants deliberately and willfully infringed its copyrights in the scouting reports. 

NFS requested the court to require defendants to disgorge all of their profits from the infringements and award actual damages or statutory damages up to $150,000 for each copyright infringed.

This case is National Football Scouting, Inc., v. Rob Rang and The Sports Xchange, Inc., Case No. 11-05762-RBL, Western District of Washington, Tacoma.

Not All Organizational Secrets are Trade Secrets

Tech group wants Boy Scout ‘perversion files’ blocked is an article written by Nigel Duara that recently appeared in the Seattle Times.  The article describes how TechAmerica, a leading technology trade association, wrote a brief supporting the Boys Scouts of America in its attempt to prevent its “perversion files,” also called “ineligible volunteer files” from being made public.  The perversion files monitor those who violate the rules of the Boys Scouts of American and include files on suspected pedophiles.  The Boys Scouts uses this information to try to prevent those individuals from volunteering again.  The current controversy arose when “[a] Multnomah County Circuit Court judge ruled that 20 years worth of Boy Scouts’ ineligible volunteer files, from 1965 to 1985, could be used in court, and in June ruled that they should be opened to the public.”  The Boy Scouts appealed.  TechAmerica wrote a brief supporting the Boy Scouts, arguing that opening the files to the public eliminates judicial protection of trade secrets.  TechAmerica seems to consider the perversion files a trade secret of the Boy Scouts.

What is a trade secret?  Washington State, which adopted the Uniform Trade Secrets Act, defines a trade secret as “information, including a formula, pattern, compilation, program, device, method, technique, or process that:  (a) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”  According to the U.S. Supreme Court, ‘[t]he maintenance of standards of commercial ethics and the encouragement of invention are the broadly stated policies behind trade secret law.”

Do the perversion files actually derive independent economic value from not being generally known to other persons who can obtain economic value from their disclosure or use?  Do the perversion files give the Boy Scouts an economic advantage over its competitors?  Is this situation akin to a business protecting its source code by keeping it secret?  How does keeping the perversion files from the public maintain standards of commercial ethics and encourage invention?

Not all information a company or organization wants to keep secret rises to the level of trade secrets as defined above.  It seems that TechAmerica’s real argument is that corporate secrets should be protected, period.  That is not and never has been the law.