Trade Secrets Review: Key 2019 Decisions and Trends (Part I)
“The Court in CMI Roadbuilding, Inc. explained: “At the point [plaintiff] was on notice there was a possible problem, it had a duty to investigate, regardless of its exact knowledge.” In other words, the statute of limitation begins to run under the Defend Trade Secrets Act as soon as a party is on notice that its trade secrets are being misused.”
In general, a trade secret is any information used in business if the owner has taken reasonable measures to keep such information secret, and the information derives independent economic value, from not being generally known to, and not being readily ascertainable through proper means by the public. Almost every state has adopted some form of the Uniform Trade Secrets Act. In addition, with the enactment of the Defend Trade Secrets Act of 2016 (DTSA), trade secrets are also protected under civil and criminal federal law. See 18 U.S.C. § 1831, et seq. Due to the enactment of this Act and the weakening of patent protection in the United States, trade secrets are becoming an increasingly important means for companies to protect their intellectual property.
This article provides a summary of important 2019 trade secret decisions and trends.
1. Food Marketing Institute v. Argus Leader Media
On June 24, the Supreme Court held in Food Marketing Institute v. Argus Leader Media, 139 S.Ct. 2356 (2019) that commercial or financial information that is customarily and actually treated as private by its owner and provided to the government under an assurance of privacy is “confidential” under exemption 4 to the Freedom of Information Act (FOIA) and is therefore shielded from disclosure. While FOIA generally requires the government to disclose, upon request, previously unreleased information and documents that it has collected, there are certain exceptions, including exemption 4 that protects from disclosure “trade secrets and commercial or financial information obtained from a person [that is] privileged or confidential.”
In Argus, a South Dakota newspaper, Argus Leader, filed a FOIA request for data collected by the U.S. Department of Agriculture (USDA) seeking the names and addresses of all retail stores that participate in the Supplemental Nutrition Assistance Program (SNAP) and the participating store’s annual SNAP redemption data. In response, the USDA provided the former but did not provide the “store-level data” that Argus Leader had requested claiming that this information was protected under exemption 4. Argus Leader sued the USDA to compel release of the withheld information. After a two-day trial, the district court applied the Eighth Circuit’s “competitive harm” test that the Circuit had “grafted’ onto exemption 4 and found that disclosing store-level redemption data would not cause substantial competitive harm to the affected stores and therefore ordered the USDA to supply that information. The USDA declined to appeal the district court’s decision, so Food Marketing Institute (a trade association for grocery retailers) intervened before the Eighth Circuit, which affirmed the district court decision.
The Supreme Court reversed, finding that because “confidential” was not defined by Congress when it enacted FOIA, the “ordinary, contemporary common meaning” of that term at the time of enactment should apply. According to contemporary dictionaries, “the term ‘confidential meant then, as it does now, ‘private’ or ‘secret’ and “two conditions might be required for information communicated to another to be confidential.” First, in one sense, “information communicated to another remains confidential whenever it is customarily kept private, or at least closely held, by the person imparting it.” In a second sense, “information might be considered confidential only if the party receiving it provides some assurance that it will remain secret.” Thus, according to the Supreme Court, since store-level redemption data is not customarily disclosed to the public and because the USDA promised the participating stores to keep their data private, under both conditions it is “confidential,” which exemption 4 protects from disclosure.
The Supreme Court also rejected the requirement that “the government must prove that the disclosure of a source’s information would result in financial harm” finding that it was based on the D.C. Circuit’s “selective tour through the legislative history” of FOIA and noting that it “cannot approve such a casual disregard of the rules of statutory interpretation.”
2. Trade Secrets Cases Dismissed on Statute of Limitations Grounds
Courts in the United States have dismissed trade secrets claims on timeliness grounds. For example, In CMI Roadbuilding, Inc. v. Iowa Parts, Inc.,920 F.3d 560 (8th Cir. 2019), the Eighth Circuit affirmed summary judgment defendant on the ground that plaintiff failed to assert a timely claim under the DTSA’s three-year statute of limitations. See U.S.C. § 1836(d). The Court found that the plaintiff, CMI, knew that its component part technology was being utilized by the defendant, Iowa Parts, as early as 2002. However, CMI did not bring suit against Iowa Parts until 2016, when Iowa raised its prices on competing products. The Court noted several instances from 2002 to 2014 where it concluded that CMI either knew or should have known that its technology was being utilized and advertised by Iowa. The Court concluded that CMI’s delay in filing from 2002 to 2016 extinguished all of its potential DTSA claims, explaining: “At the point [plaintiff] was on notice there was a possible problem, it had a duty to investigate, regardless of its exact knowledge.” In other words, the statute of limitation begins to run under the DTSA as soon as a party is on notice that its trade secrets are being misused.
3. Improper Acts for Unclean Hands Doctrine Must Be Related to Misappropriation Claim
In Scherer Design Group LLC v. Ahead Engineering LLC, Scherer Design Group, 764 Fed App’x 147 (3d Cir. 2019), an engineering firm providing telecommunications services to wireless carriers and other vendors sued four former employees who left to start new ventures for, among other things, misappropriation of trade secrets, breach of duty of loyalty and tortious interference. During the investigation of the four individuals, SDG was able to gain access to one of the individual’s Facebook accounts (though this action was “hotly dispute[d],”) and SDG then installed software that allowed it to monitor activity on this account without being detected. Messages in the account revealed Defendants’ plans and actions to take SDG’s client information and intellectual property.
SDG received a temporary restraining order and sought a preliminary injunction to prevent the defendants from contacting SDG’s clients and require that the defendants destroy information taken from SDG. Without resolving how SDG obtained access to the Facebook account, the district court determined that it may be reasonable for an employer to access content that is password protected on a company laptop, and that SDG’s conduct was “arguably not related to the litigation” because the alleged wrongdoing, including misappropriation of trade secrets, predated SDG’s alleged conduct and did not affect the defendant’s alleged violations.
The defendants appealed, arguing that the unclean hands doctrine barred the injunction because SDG surreptitiously monitored the Facebook activity. The Third Circuit affirmed, holding that a court retains the jurisdiction to grant equitable relief even if the elements of the unclean hands doctrine are met. In addition, according to the court, the conduct was not “related” to the misappropriation claim because: (1) SDG monitoring of the Facebook messages was not related to whether the defendants stole the trade secrets, (2) SDG did not dirty its hands to obtain the trade secret rights, and (3) any alleged privacy violation is governed by a separate body of law that provides its own separate remedies for misconduct. Therefore, the district court did not abuse its discretion in declining to apply the unclean hands doctrine.
4. DOJ’s Continued Focus on Theft Involving a Chinese Connection
On November 5, 2018, then Attorney General, Jeff Sessions, ordered the creation of a “China Initiative” targeting economic espionage committed by companies based in the People’s Republic of China and individuals having a connection to that country. Since the announcement of this initiative, the government has announced the indictment or conviction of approximately 11 cases against two companies and 13 individuals (all occurred in 2019):
- In January, a grand jury indicted two affiliates of Huawei Technologies (Huawei), one of the world’s largest communications equipment manufacturers, for stealing trade secrets from a competitor company.
- On February 14, the Department of Justice (DOJ) obtained an indictment against former Coca-Cola scientist Xiaorong You of Lansing, Michigan and Liu Xiangchen of Shandong Province, China for conspiring to steal trade secrets regarding the expensive and difficult-to-develop formulations for bisphenol-A-free (BPA-free) coatings used to line soda cans.
- On February 25, a jury in Chicago, Illinois, convicted an employee of a cast-iron manufacturing firm on seven counts of trade secret theft. The employee was found guilty of stealing the trade secrets in order to supply them to his new Chinese employer.
- On April 18, federal prosecutors in New York unsealed a 14-count indictment that charges Zheng Xiaoqing, former senior engineer for steam turbine design at General Electric and a Chinese businessman, with conspiring to steal GE’s design data and models, engineering drawings, material specifications, configuration files, and other proprietary trade secret information related to GE’s turbine technology for the benefit of the government of the People’s Republic of China (PRC) and other entities owned or controlled by the Chinese government;
- On August 21, a grand jury in the District of Kansas charged Feng Tao, a Chinese scientist conducting research at the University of Kansas with failing to disclose an active affiliation with a Chinese university on a KU conflict-of-interest form that Tao was required to file with the university Board of Regents. The indictment alleges that this omission allowed Tao to continue to collect his KU salary while also receiving grant funds from the Chinese government;
- On August 28, the government charged Bo Mao in the Southern District of New York with conspiracy to steal information from a California technology company, in a case that is related to the allegations that Huawei stole intellectual property from semiconductor startup, CNEX Labs Inc.;
- On September 16, a federal grand jury in the Southern District of Ohio charged that Yu Zhou and Li Chen conspired to, attempted to, and did steal scientific trade secrets related to exosomes and exosome isolation from Nationwide Children’s Hospital’s Research Institute for their own personal financial gain. The trade secrets allegedly stolen concern the research, identification and treatment of a range of pediatric medical conditions;
- On November 12, a federal jury in Washington, D.C. convicted Shan Shi of conspiring with others to steal trade secrets from a Houston-based company, Trelleborg Offshore, relating to syntactic foam, a strong, lightweight material with commercial and military uses that is essential for deep-sea oil and gas drilling.
- On November 12, Hongjin Tan, a Chinese national, pleaded guilty in the Northern District of Oklahoma to theft of trade secrets, unauthorized transmission of a trade secret, and unauthorized possession of a trade secret from his employer. The trade secrets related to the manufacture of a “research and development downstream energy market product” that is worth more than $1 billion;
- On November 21, a grand jury in the Eastern District of Missouri indicted Haitao Xiang, an engineer at the Climate Corporation, which is a subsidiary of the Monsanto Corporation, with stealing trade secrets relating to a digital, online farming software platform that is used by farmers to collect, store, and visualize critical agricultural field data and increase and improve agricultural productivity for farmers. According to the indictment, the FBI arrested Xiang at the St. Louis airport where he was traveling on a one-way ticket to China; and
- On December 30, Zaosong Zheng, a Harvard University medical student and cancer researcher who allegedly tried to smuggle stolen scientific material into China was charged with making false statements after being arrested and found with 21 vials wrapped in a plastic bag and hidden in his sock in his luggage as he prepared to board a flight at Logan International Airport bound for Beijing on Dec. 9, 2019. The false statements relate to the contents of these items. Zheng was a cancer researcher with Beth Israel Deaconess Medical Center in Boston, Mass.
5. Third Circuit Affirms Confirmation of Arbitrator’s Award of “Head Start” Damages.
The Third Circuit in Sabre GLBL, Inc. v. Shan,779 Fed. App’x 843 (2019) affirmed an arbitrator’s award of $1.1 million in “head start” damages, “representing the benefit Shan received from her misconduct based on her equity interest in Pi-Solution Hangzhou, which obtained an unlawful development and operations head start as a result of Shan’s misconduct.”
The defendant, Shan, was an employee of plaintiff Sabre which is a technology solutions provider to the global travel and tourism industry. In 2013, Shan became a consultant and she signed an agreement that prohibited her from, among other things, disclosing or using Sabre’s confidential information for her own benefit or to benefit a third party. While at Sabre, Shan started a competing Chinese company and acquired a majority ownership interest in the business. Shan resigned from Sabre in 2014 and returned to China, where she continued to develop the competitor company. After her departure, Sabre initiated an action against Shan and asserted, among other things, a claim under the New Jersey Trade Secrets Act and a claim for breach of fiduciary duty premised on Shan’s misuse of Sabre’s confidential information and trade secrets.
At arbitration, Sabre pursued a “head start” damages theory to quantify Shan’s unjust enrichment and presented evidence that showed the benefit to Shan of the increase in the value of the competing venture, which was two years further along in its development and commercialization than it would have been absent her use of Sabre’s confidential information and trade secrets. The arbitrator awarded $1.1 million in “head start” damages. The Third Circuit affirmed the district court’s confirmation of the arbitration award, finding that the arbitrator did not manifestly disregard the law by awarding the “head start” damages. The court also distinguished “head start” damages from “saved development costs” which represent the benefit to Shan in avoiding incurring certain research and development costs. In affirming the lower court’s confirmation of the award, the Third Circuit, among other things, rejected Sham’s argument that “head start” damages were impermissible under applicable law, noting instead that litigants in trade secrets cases have the flexibility to tailor damages theories to the facts of their cases.
Part II of this article will examine the extraterritorial reach of the DTSA, examples of types of “offbeat” information that plaintiffs asserted constituted a trade secret in 2019, and recent International Trade Commission investigations of trade secrets misappropriation, among other topics.