trade secret misappropriation

“No,” says the court in BladeRoom v Facebook et al.  “Yes,” says the court in O2 Micro v. Monolithic Power.

Can these different results be reconciled and can a rule for apportioning damages between trade secrets be derived from the inquiry? Yes and yes.

BladeRoom v. Facebook et al.

BladeRoom is ND of California case in which plaintiff BladeRoom asserted misappropriation of trade secrets under California’s version of the Uniform Trade Secret Act (CUTSA). The plaintiff’s damage expert’s opinion was that plaintiff should be awarded over $200 million lost profits and unjust enrichment damages resulting from defendant Emerson’s trade secret misappropriation. The defendant moved to exclude the opinion due to the expert’s failure to apportion damages on a trade secret-by-trade secret basis. The court denied the motion and allowed plaintiff to introduce the opinion at trial, stating:

It is true that under CUTSA, damages claimed for actual loss or unjust enrichment must be caused by the misappropriation alleged. Cal. Civ. Code § 3426.3. This portion of CUTSA does not require, however, that an expert assign damages amongst the trade secrets for his or her opinion to be admissible.

(Order, 5:15-cv-1370, Dkt. 745 at 14:1-4.)

Consistent with this ruling, the court rejected defendant Emerson’s proposed jury instruction that “[d]amages for misappropriation must be tied to each specific trade secret and to each specific combination of trade secrets.” (Dkts. 798 at 162:5-6 and 829 at 8:1-17.) Likewise, the verdict form given to the jury (which they ultimately returned in favor of plaintiff) did not require the jury to apportion damages between trade secrets.

(Jury Verdict, 5:15-cv-1370, Dkt. 867 at 3:12-16.)

O2 Micro v. Monolithic Power

O2 Micro is also a ND of California case in which plaintiff O2 Micro asserted misappropriation of trade secrets under CUTSA. The court granted a post-trial motion to vacate the jury’s award of $12 million unjust enrichment damages for trade secret misappropriation. In reaching this decision, the court cited the failure of plaintiff’s damage expert to assign damages between the 12 asserted trade secrets:

After the jury concluded that [defendant] did not misappropriate all of 02 Micro’s trade secrets, [O2 Micro’s damages] expert testimony regarding damages for misappropriation of all trade secret was useless to the jury.

O2 Micro Int’l Ltd. v. Monolithic Power Sys., Inc., 399 F. Supp. 2d 1064, 1077 (N.D. Cal. 2005) (emphasis added).

O2 Micro’s analysis is consistent with the comments to California’s model jury instructions, which state “[i]n cases involving more than one trade secret, the jury must answer all of the questions in the verdict form separately for each trade secret at issue.” CACI VF-4400 (Verdict Form for Misappropriation of Trade Secrets).

Can these two apparently opposing interpretations of trade secret damages be reconciled?

Yes. A damage expert is not required in every case to determine damages on a trade secret-by-trade secret basis. Whether they should be excused from doing so depends upon whether they are able to assume (i.e. rely on the jury finding) that misappropriation of any one or more of multiple asserted trade secrets could result in the same total amount of damages.

In BladeRoom, the damage expert based his opinion on the assumption that each of the asserted trade secrets was a “lock on the door” to defendant getting (and plaintiff losing) the construction deal at issue. Plaintiff’s counsel described the methodology in its brief as follows:

The technical experts have thus opined that each of these individual and combination Trade Secrets was a technical “lock on the door” to Emerson being awarded the Lulea 2 contract. Just as there can be multiple locks on a door, any one of which prevents the door from opening, there are multiple BladeRoom Trade Secrets or Combination Trade Secrets, any one (or more) of which would have prevented Emerson from entering into the Lulea 2 business with Facebook absent misappropriation. . . .

[M]isappropriation of any one or more of these “locks on the door” Trade Secrets by Defendants entitles BladeRoom to the full amount of damages flowing from that award of business to Emerson instead of to BladeRoom.

(Pl. Opp. Br., 5:15-cv-1370, Dkt. 559 at 10:16-11:4 (emphasis added).)

The court in BladeRoom allowed the damage expert’s testimony to go to the jury with the warning that plaintiff would be required to prove the hypotheses upon which the damage expert was relying. Based on the favorable jury verdict, the jury found that each of the asserted trade secrets served as a “lock on the door.” Whether the court deems the proofs sufficient to support these findings is yet to be determined – defendant Emerson has a pending JMOL motion challenging among other things the sufficiency of the evidence to support the damages award. (Def. Mot for JMOL, 5:15-cv-1370, Dkt 898 at 31.)

In comparison, in O2 Micro, the damage expert did not employ a “lock on the door” methodology. He did not assume that misappropriation of any one of the 12 trade secrets asserted in the case was a “lock” that would have prevented the “door” to defendant’s enrichment from “opening” absent misappropriation. He testified to a unitary sum for unjust enrichment damages in reliance on the jury finding misappropriation of all 12 trade secrets. When the jury found only 5 trade secrets to have been misappropriated, there was no evidence upon which the damage award could have been based.

The damage expert’s testimony in O2 Micro was rendered “useless” by his failure to assign damages on a trade secret-by-secret basis. But this does not mean O2 Micro is inconsistent with BladeRoom. Unlike his counterpart in BladeRoom, the damage expert In O2 Micro did not rely on foundational testimony showing that misappropriation of any one or more of multiple asserted trade secrets could result in the same total amount of damages. O2 Micro teaches that absent foundational testimony like that relied upon in BladeRoom, a damage expert will be required to apportion damages amongst trade secrets.

The Defend Trade Secrets Act (“DTSA”), on its face, creates a private action in district court for misappropriation occurring abroad.  Filing a DTSA claim in district court may in certain circumstances provide the best remedy for foreign trade secret theft over other alternatives such as filing a complaint with the International Trade Commission.  But over a year-and-a- half after the enactment of the DTSA, are there any decisions applying the DTSA to foreign trade secret theft? Not so much.

The relevant hypothetical is one where a U.S. company’s business partner in China has stolen the U.S. company’s trade secrets, as shown in this animated video:

(This video was first presented at “Trade Secret Theft Occurring Overseas: The Long(er) Reach of the ITC,” Computer History Museum, Mountain View, CA, Oct. 10, 2017, a joint CLE by Merchant & Gould and Adduci, Mastriani and Schaumberg (hereafter referred to as  “Foreign Trade Secret Theft CLE”).

As proposed in the animation, bringing a claim in the International Trade Commission (“ITC”) to block imports that use the trade secrets is a viable and in some instances the best solution.  However, there are factors that favor bringing a misappropriation claim in district court.

An ITC remedy may not be available because, notwithstanding a bona fide threat that misappropriation will occur, misappropriation has not yet happened – it is threatened as opposed to actual, or, because the misappropriated  trade secret is source code or other intangible digital media that does not qualify as a “good” within the meaning of ITC rules.  Even if the ITC remedy is available, it does not allow recovery of money damages, requires intense and expensive factual development prior to filing the complaint, and imposes potentially difficult to prove domestic industry and injury requirements.

Foreign Trade Secret Theft CLE

Whether a district court action asserting the DTSA is a viable alternative hinges on the whether the DTSA has extraterritorial reach. There is a presumption that U.S. laws do not apply outside the U.S. unless Congress expresses a clear intent otherwise.  The language of the DTSA and its related legislative history manifest the requisite Congressional intent and therefore overcome the presumption.

Foreign Trade Secret Theft CLE

But so far there is little if any evidence in reported decisions of courts extending the DTSA to cover foreign conduct in reliance on the statute’s extraterritoriality provisions.

The DTSA was applied to extraterritorial conduct in T&S Brass and Bronze Works Inc v Slanina (D.S.C. 2017) because the defendants were citizens or permanent resident aliens of the U.S., thus satisfying section 1837 subpart (1).  Research has not disclosed any other case applying DTSA extraterritorially based upon the U.S. citizenship of the defendants.

Likewise, research has not disclosed any decision applying DTSA to conduct outside the U.S. because “an act in furtherance of the offense was committed in the United States” within the meaning of section 1837 subpart (2).  Nonetheless, there is compelling basis for arguing that where, as in the hypothetical, the misappropriation includes importing, marketing or selling in the U.S. goods made overseas using the stolen trade secrets, there is an “act in furtherance” justifying extension of the DTSA to reach the overseas theft and use of the trade secrets.  In VIA Technologies Inc v ASUS Computer International (N.D. Cal. 2015), the district court interpreted California’s version of the Uniform Trade Secret Act (“UTSA”) as allowing a claim for misappropriation based upon marketing in the U.S. goods made overseas that embody the trade secret.  Since the DTSA and state court statutes based on the UTSA are deemed coextensive, it is therefore highly likely that a district court would similarly interpret what is meant my misappropriation under the DTSA.

Foreign Trade Secret Theft CLE

(It is important to note that California’s version of the UTSA (“CUTSA”) was not given extraterritorial application in Cave Consulting Group Inc v Truven Health Analytics Inc, such that the actionable misappropriation under CUTSA like that alleged in VIA Techs. is limited to the misappropriation occurring in the U.S. (the marketing and selling of the goods in the U.S.) and excludes the misappropriation occurring outside the U.S. (the improper acquisition and use of the trade secrets by a foreign competitor). In comparison, under the DTSA, not just the misappropriation committed in the U.S. (importing and marketing of LETSA cars) but also the misappropriation occurring in China (the acquisition and exploitation of the ALSET trade secrets by LETSA), is actionable.  The U.S.-based misappropriation is “an act in furtherance” of LETSA’s overall misappropriation that supports the extraterritorial reach of the DTSA to the conduct occurring in China.)

There are instances where the comparative benefits of bringing a DTSA claim to address foreign trade secret theft in a district court as compared to the ITC favor bringing a DTSA claim – assuming a DTSA claim can overcome the presumption against extraterritorial application.  The language and legislative history of the DTSA are sufficient to overcome the presumption in certain instances (where the defendant is a U.S. citizen or where an act in furtherance of the offense has been committed in the U.S.).  Yet well over a year-and-a-half after enactment of the DTSA, there are few if any reported decisions recognizing the DTSA as a viable theory of recovery for foreign trade secret theft.

Departing Employee imageAlarms sounded when John Absmeier, technical director of Delphi Automotive’s Silicon Valley autonomous vehicle project, announced he was leaving to join Samsung’s Silicon Valley innovation center where he would lead a self-driving car technology team.  They grew louder upon Delphi’s determination that Absmeier downloaded hundreds of thousands of company files and folders onto personal devices prior to giving notice, deleted tens of thousands of files of unknown subject matter on or before giving notice, and retained possession of tens if not hundreds of thousands of company files (contained on personal external hard drives or personal cloud accounts) after having left Delphi.

Delphi has thus far been able to identify some of what Absmeier downloaded—including over 100 gigabytes of data that appears to be the contents of his “My Documents” folder and his Outlook e-mail folder. These documents consist of many, if not all, of the work emails that Absmeier sent and received while a global executive. Those emails include confidential and sensitive information, and confidential and sensitive documents in the form of e-mail attachments. There was no legitimate reason for Absmeier to be downloading work-related documents and emails in the days and weeks before his resignation— and, in fact, there is no evidence that he had ever downloaded documents from his work computer onto external hard drives before October 15, 2015.

Delphi v Absmeier Am Cmplt

This conduct appeared to give Delphi a strong basis for asserting wrongful acquisition of its trade secrets and actionable trade secret misappropriation.  Delphi filed a lawsuit and moved for a preliminary injunction in federal court under the court’s diversity jurisdiction, but the court found that Delphi was unlikely to succeed on its trade secret misappropriation claims and denied injunctive relief on these grounds.

Luckily for Delphi, in addition to being able to assert trade secret misappropriation, it also had a signed non-compete agreement.  Doubly lucky for Delphi, choice-of-law rules dictated the application of Michigan law, which favored enforcement of the agreement over the competing policy favoring freedom of employees to seek new employment (recognized in other states like California).  Delphi was able to obtain an injunction enforcing the non-compete.

The game-changing combination of choice-of-law rules pointing to the law of jurisdictions enforcing non-competes is a subject for another day (and hopefully a separate post!).

For now, the interesting question is what was done by the departing Delphi engineer Absmeier and his counsel (no doubt in close coordination with new employer Samsung) to avoid trade secret misappropriation liability?  The answers provide something of a checklist for departing engineers and new employers on what they can do to mitigate the risk of liability for trade secret misappropriation.  In particular, in the Delphi case, the defense was able show:

#1 Departing employee was forthcoming about taking new job with potential competitor.

#2 Departing employee offered explanation for the challenged pre-departure downloads and  deletions, e.g., done as part of routine company file back-up, or to remove personal  documents and photos.

#3 Departing employee within approximately two weeks of notice returned all remaining  company devices (e.g., thumb drives) and company-related documents

#4 Departing employee and counsel retained a third-party forensic consultant to:

quarantine all personal storage devices that contained a mixture of company and personal information

sequester any personal cloud-based storage accounts (e.g. Dropbox) containing folders holding company information

sequester personal email (e.g., Gmail) and delete all emails relating to company as opposed to personal information

#5 Departing employee swore on oath that A) he no longer had any company information in  his possession and B) that he had not disclosed or used any Delphi data or documents in  course of his employment with Samsung.

#6 Defense counsel made available for inspection the data and devices sequestered with  third-party consultant.

These actions were described in detail in sworn declarations provided by the departing engineer, Absmeier (attached- Departing Enginner Absmeier Declaration), along with supporting declarations of his counsel and the forensic consultant.  Based on this evidence, Delphi was unable to meet its burden of showing “a significant lack of candor or willingness to misuse trade secrets,” and therefore Delphi was not entitled to enjoin Absmeier’s employment with Samsung based on alleged threatened misappropriation of Delphi trade secrets. (Preliminary Inj. Order attached-Delphi Automotive PLC v Absmeier)

The Delphi litigation falls within the category of cases holding that mere possession of company data subsequent to departure (absent additional evidence such as prior bad behavior, that the data was improperly acquired prior to departure, intent to disclose or use the data in the future, or refusal to return the data) will not be sufficient to establish liability for threatened trade secret misappropriation.  See, e.g., FLIR Sys., Inc. v. Parrish, 174 Cal. App. 4th 1270, 1279 (2009); Cent. Valley Gen. Hosp. v. Smith, 162 Cal. App. 4th 501, 528 (2008).