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DuPont v. Kolon: Judge Payne Issues Breathtaking 20-Year Worldwide Injunction barring Kolon from Making Body Armor Fiber for Theft of DuPont's Kevlar Trade Secrets

 
by John Marsh 31. August 2012 09:20

In a sweeping 70-page opinion issued late yesterday, U.S. District Court Judge Robert Payne imposed a breathtaking injunction against Kolon in its long-running and contentious trade secret dispute with DuPont, barring Kolon from making Heracron, the synthetic fiber that DuPont contended was inextricably built with its trade secrets for the fiber Kevlar, for 20 years.  The opinion is significant not only because of its breadth and scope, but also because of its reasoning, reasoning that could make it significantly easier for trade secret claimants to secure permanent injunctive relief compared to patent, copyright and trademark claimants.  (A PDF copy of the opinion can be found below).
 
Background:  DuPont secured a $920 million jury verdict last September against Kolon, a South Korean competitor, for stealing its trade secrets.  According to DuPont, Kolon had failed to come up with a synthetic fiber that could compete against DuPont's Kevlar, a para-aramid technology that is used in, among other things, law enforcement and military body armor.  In his opinion, Judge Payne found that, having failed to develop or perfect Heracron, Kolon set upon a deliberate path to steal DuPont's trade secrets, and did so by approaching a number of former DuPont employees, including Michael Mitchell, to gather and forward DuPont's trade secrets to Kolon.  Mitchell later pleaded guilty to the theft of DuPont's trade secrets and admitted to serving as a conduit for the theft of those secrets from other DuPont employees.
 
After DuPont sued Kolon, it discovered a number of screenshots that indicated that managers and other employees in South Korea had deliberately deleted, overwrote or destroyed a substantial number of documents regarding the development of Heracron and communications with Mitchell and others.  Judge Payne ultimately found that Kolon's employees intentionally destroyed approximately 17,000 email files and documents and he sanctioned Kolon by providing an adverse inference instruction to the jury that they could find that this was done to conceal damaging evidence.  After the jury's verdict, he awarded $350,000 in punitive damages to DuPont as well as its attorneys fees and denied Kolon's motions to set aside the verdict.
 
Key Holdings in Judge Payne's Opinion:
 
1.  The U.S. Supreme Court's decision in eBay does not apply to trade secret injunctions.  As many readers know, in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006), the U.S. Supreme Court found that irreparable injury had to be proven in a request for a permanent injunction in post-trial proceedings involving a patent.  Irreparable injury is the critical element in any request for an injunction and it generally means that a party must show that it needs relief that it could not secure through a traditional money damages dispute (i.e., damages are difficult to measure, the injury cannot be cured by money, the defendant cannot satisfy a money judgment).  In eBay, the Supreme Court emphasized that patent cases are no different than any other federal civil claim and that there should be no presumption of irreparable injury, even though a jury or judge may have found patent infringement.  The eBay decision has since been applied to trademark and copyright injunctions and it is generally believed that decision has caused a marked decrease in the number of permanent injunctions for those types of intellectual property.

Judge Payne was apparently troubled by the issue of whether DuPont was still being irreparably harmed, and as a result, whether the U.S. Supreme Court's decision would apply or whether Virginia law should apply, since DuPont's trade secrets claim arose under Virginia's Uniform Trade Secrets Act (UTSA).  Frankly, I am not quite sure why he was so concerned about this issue, as he ultimately found  that the elements of irreparable injury were present later in his opinion. Nevertheless, in an exhaustive analysis of case law and academic articles as to which law should apply, Judge Payne found that eBay only applied to federal statutes (patent, trademark and copyright) and that Virginia's version of the UTSA should govern. 

After deciding that the Virginia UTSA applied, Judge Payne then proceeded to find that DuPont was irreparably damaged when he balanced the harm that any injunction might have against Kolon against the harm to DuPont if it was not granted.  He rejected Kolon's argument that DuPont had been made whole by the $920 million judgment since Kolon had acknowledged it might not be able to satisfy that judgment and that it was having difficulty securing a bond in support of its appeal from that judgment.  Judge Payne also held that discerning the trade secrets' value might still be difficult.  Both of these rulings are consistent with traditional findings associated with irreparable injury.  Finally, he was troubled by Kolon's continued ability to benefit from the fruits of its crime, particularly since that injury could impact the next generation of para-aramid technology.
 
2.  Kolon's misconduct and Judge Payne's distrust of Kolon played a critical role.  As noted above, the theft of trade secrets and destruction of evidence had a profound effect upon Judge Payne's decision on the scope of the injunction.  Judge Payne considered, and rejected, an injunction barring Kolon from simply using the trade secrets.  He emphasized that Kolon had demonstrated that it could not be trusted and that it could evade a "use" injunction without detection by the court.  Judge Payne emphasized one fact on several occasions:  that Kolon had surreptitiously copied the contents of Mitchell's computer during a lunch recess when he was debriefing them on what he had collected.  In other words, Kolon stole trade secrets from the consultant that it engaged to steal trade secrets from DuPont. 

Judge Payne therefore concluded that the only way that DuPont could be sure that its stolen trade secrets were not used was imposing a ban on the production of body armor products.  He noted that DuPont had presented "persuasive evidence obtained from inspection of Kolon's manufacturing facilities and from Kolon's own documents that showed how Kolon had incorporated the stolen DuPont trade secrets into Kolon's own operations, including evidence that Kolon even had copied machine configurations that DuPont had used solely because of its need to fit machinery into limited space in its plant."  As a result, he found that the use of the stolen trade secrets was integral and essential to Kolon's manufacture of Heracron.

In addition, Judge Payne ruled that Kolon would have to return any information regarding those trade secrets, under his supervision.  While the order is not specific about how that will be implemented, given the contentious history of this case, and Kolon's poor relationship with Judge Payne (it requested that he step aside earlier this year), there will certainly be fireworks during that process.

3.  How did he come up with the 20 years?  Judge Payne noted that Kolon had unsuccessfully tried to develop Heracron over a period of 20 years and that it was only as a result of the theft of DuPont trade secrets that it was able to refine and perfect that fiber.  Using that time estimate as a baseline, Judge Payne imposed a 20 year ban.

Twenty years.  To put that in context, my three year old will be in graduate school (hopefully) by the time Kolon can begin any effort to re-enter this market.  Simply put, this injunction effectively puts Kolon so far behind DuPont that it amounts to a permanent ban on the development of any body armor product.

Why is this opinion potentially very important?  Leaving aside the fact that it is an extraordinary injunction in one of the highest profile trade secret cases in recent memory, this opinion could have tremendous implications throughout the U.S. and worldwide.  Let me explain. 

Like every state except Massachusetts, New York and Texas, Virginia is a Uniform Trade Secrets Act jurisdiction, meaning that states adopting the UTSA have done so for, among other reasons, uniformity.  Consequently, to the extent that the highest court in a state has not spoken on this issue, courts in other states who are considering this question under their versions of the UTSA are likely to look for guidance from this thorough and well-reasoned opinion. 

In addition, this decision has important extra-territorial implications.  Even though the misappropriation took place overseas, Judge Payne found that it had a substantial impact on a company based in the U.S.  Judge Payne noted that in the existing global economy, some foreign actors have not respected the IP rights of American companies and that it might be necessary to impose an injunction to protect those rights here in the U.S.  He also noted that foreign companies that submit to jurisdiction in the U.S. and cause injury to American companies can and should be subject to the laws of the U.S.

In sum, this means that in the context of a permanent injunction, courts applying the law of the 47 states that have adopted the UTSA may elect to dispense with the requirement of irreparable injury and could impose a ban on the manufacture of the production of competing products overseas.  This is a significant advantage, as many federal courts that have applied eBay have found that an underlying money award is adequate relief and have therefore declined to find irreparable injury and grant a permanent injunction.  This decision provides a substantial advantage in favor of trade secret protection, and is yet another sign that trade secret protection may be preferable to patent protection for some IP.

DuPont v. Kolon Permanent Injunction.pdf (2.35 mb)

 

Thursday Wrap-Up (July 26, 2012): Noteworthy Trade Secrets, Non-Compete and Cybersecurity Stories from Around the Web

 
by John Marsh 26. July 2012 17:45

Greetings from Rehoboth Beach!  Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week:
 
 
Noteworthy Trade Secret and Non-Compete Posts and Cases: 

  • The Northern District of California has ruled that federal authorities have not properly served Chinese defendants in the DuPont/Pangang Group criminal proceeding arising out of the alleged theft of trade secrets for DuPont's titanium dioxide process. The district court found that service of Pangang's U.S. subsidiary (of which it owns 75%) did not constitute proper service as there was insufficient evidence that Pangang controlled that affiliate (can't say that I understand that reasoning but will see if I can get a copy of the court's opinion). Prosecutors have until Aug. 16 to report back to the court on how they intend to proceed; it is being reported that this is a significant blow to the prosecution. As readers of this blog may recall, this case is one of the highest profile cases yet brought under the Economic Espionage Act because Pangang Group is owned by the Chinese government and one of the parties indicted by the government. (A special thanks to Janet Craycroft of Intel for reporting this development to me). 
  • Speaking of trade secrets and China, a recent survey of Chinese executives shows that 2/3rds of them have non-competes. It would be interesting to see how Chinese courts have responded to efforts to enforce them.
  • Pharmaceutical and medical device companies: Be careful what you share with the FDA as the Medical Device and Diagnostic Industry Blog is reporting that the FDA is now being accused of having improperly released trade secrets that were provided to it in an article, "How FDA Dumped Device Secrets in Cyberspace." The FDA has also taken a beating for allegedly spying on a number of its whistle blower employees whom it believed were disclosing trade secrets; The New York Times had a recent editorial, "The Spy Hunt for Whistle-Blowers," criticizing the FDA for those efforts.
  • It's not all "touchy feely" in the organic dairy market, as the gloves have come off in a trade secrets dispute between Horizon Organic and rival Organic Valley over the hiring of a former employee of Horizon. The employee, Larry Hansen, was dairy operations manager for milk quality and supply at Horizon for four years before taking a similar job at Organic Valley. Horizon claims that Hansen had access to its supplier list, which it keeps confidential, as well as its purchasing price “tolerances and strategies” and sales demand projections, which it also safeguards. Horizon believes that he is violating a non-disclosure agreement that he signed while at Horizon. 
  • What is the status of non-compete reform legislation in Massachusetts? Brian Bialas has an update in Foley & Hoag's Massachusetts Non-Compete Blog.
  • Memo to Florida employers hiring new employees with non-competes: Do NOT agree to indemnify them for any potential claims or litigation, warns Burr & Forman's Trade Secrets & Non-compete Blog.
  • For those in Connecticut, Daniel Schwartz's Connecticut Employment Law Blog has a practical post "Drafting the Restrictive Covenant to Protect Your Interest" under Connecticut law. 
  • Electronic discovery and litigation holds can be a prominent part of any trade secret case, so defendants are breathing a sigh of relief as the U.S. Court of Appeals for the Second Circuit has rejected District Court Judge Scheindlin's ruling that a failure to issue a litigation hold is reckless per se.  Peter S. Vogel's Internet, Information Technology and e-Discovery Blog details this recent ruling in Chin v. Port of Authority of New York, overturning a decision by Judge Scheindlin that has been criticized as utopian and impossible to meet.
  • Did the CEO of an Irish pharmaceutical-services company breach a non-disclosure agreement when he publicly stated that a rival was on the block? The Wall Street Journal is reporting this imbroglio in an article entitled, "Study in How Not to Keep a Deal Secret."

Computer Fraud and Abuse Act Posts:

  • Another district court from Michigan has adopted the reasoning of the Ninth Circuit in U.S. v. Nosal, reports Jessica Mendehlson in Seyfarth Shaw's Trading Secrets Blog. In Dana Ltd. v. American Axle & Mfg. Holdings, the district court found that several former employees did not exceed their authorized access when they erased a number of files that would have presumably shown that they were taking their employer's trade secrets with them.  

Cybersecurity Posts and Articles: 

  • For more on the pending cybersecurity bill, see The Wall Street Journal's article, "Cyber Bill Relies on Voluntary Security." The article indicates that the Obama administration is not happy with the present bill as Republican House members are resisting giving any further control over cyber issues to the Department of Homeland Security.
  • From The New York Times Bits Blog, "Hackers Demonstrate a Rising Vulnerability of Smartphones" according to experts speaking at the Black Hat security conference in Las Vegas.

News You Can Use:

  • Suffering from "Digital Overload?" The New York Times has some advice on how to take a deep breath and take a step away from your devices. Baby steps, people, baby steps.
 

Friday Wrap-Up (July 13, 2012): Noteworthy Trade Secrets, Covenant Not to Compete and Cybersecurity Stories from Around the Web

 
by John Marsh 13. July 2012 15:30

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week:
 
Noteworthy Trade Secret and Non-Compete Posts and Cases:
  • A Washington federal judge issued a writ of garnishment on behalf of DuPont last week against Kolon Industries Inc., ordering an associated company to become a garnishee following DuPont's $920 million trade secret verdict against Kolon last fall, Law360 is reporting. A PDF copy of the order can be found below. The parties are waiting on a ruling on DuPont's motion for permanent injunction from U.S. District Court Judge Robert Payne back in Richmond Virginia. For more on the DuPont v. Kolon case, see my previous posts here and here. 
  • An Illinois court has recently found that breach of an agreement must be material to void a non-compete reports Epstein Becker's Trade Secrets and Noncompete Blog.  The case, InsureOne Indep. Insur. Agency v. Hallberg, involved the enforcement of a non-compete that accompanied a sale of a business.  For what it is worth, in my experience, courts tend to be less forgiving of a breach by an employer in non-competes involving an employee.
  • Michigan is the latest state to consider scaling back its enforcement of non-competes. Senate Bill 786, which was introduced in late 2011, would require Michigan employer to advise a potential employee of the requirement to sign a non-compete agreement as a condition of employment. This requirement is gaining traction nationally, as New Hampshire recently adopted a similar statute imposing a similar requirement upon its employers, which becomes effective tomorrow. 
  • What are the risks and benefits of suing the company that hires a former employee with a non-compete? The Delaware Non-Compete Blog has a practical post outlining the practical considerations every company should weigh before joining a competitor in a dispute over a covenant not to compete. 
  • For those interested in working through the legal thicket of garden leave provisions -- i.e., provisions that pay an employee for a post-employment waiting period so that he/she does not compete -- check out the Burr & Forman Non-Compete and Trade Secrets Blog's recent post, which provides a good summary of the caselaw construing these provisions.

Computer Fraud and Abuse Act Cases and Posts:

  • The Solicitor General has been granted a 30 day extension so he can continue to evaluate whether he wants to appeal from the Ninth Circuit's en banc decision in U.S. v. Nosal, reports Seyfarth Shaw's Trading Secrets Blog.  That decision narrowly applied the CFAA, finding that a violation of a computer use policy was insufficient to trigger that statute.  For more detail, see my earlier post.
  • A New York state court has recently decided to follow Nosal's holding in a short decision dismissing a CFAA claim, reports Foley & Hoag's Massachusetts Non-Compete Blog. The opinion MSCI Inc. v. Jacob, 2012 N.Y. Slip. Op. 05107 (N.Y. App. Div., 1st Dep't June 26, 2012), provides little detail but signals the growing divide over the scope of the CFAA. 
  • Littler's Unfair Competition & Trade Secrets Counsel Blog has a post about another recent CFAA decision, Del Vecchio v. Amazon, where the plaintiff's CFAA claim was dismissed because it failed to provide specific facts showing the actual value of the trade secrets at issue or the actual profits lost as a result of the theft.

Cybersecurity Posts and Articles: 

  • The big news this week was the breach of 400,000 Yahoo accounts but The New York Times is reporting that the breach extends beyond Yahoo to Gmail, Hotmail, and AOL Users. 
  • "Cybercriminals Sniff Out Vulnerable Firms" advises The Wall Street Journal
  • Forbes' Andy Greenberg details the plan on "How To Hijack 'Every iPhone In The World.'"
News You Can Use: 
  • Can this relationship be saved? "He Texts, She Tweets—Are They E-Compatible? Setting Digital Ground Rules to Become E-Compatible With Family and Friends" writes Elizabeth Bernstein in The Wall Street Journal.

 Dupont v Kolon - Writ of Garnishment.pdf (86.82 kb)

 

From China with Love: Front Page Article in The Wall Street Journal Highlights Liew and Pangang Group Spying Prosecution

 
by John Marsh 9. March 2012 10:55

The Wall Street Journal has a fascinating story today about how the investigation of Walter Liew and Pangang Group Company Limited unfolded last year.  This case is rapidly becoming the highest profile prosecution in the relatively short history of the Economic Espionage Act -- a prosecution that has expanded to include the Pangang Group, a company owned and controlled by the Chinese government.  

As I wrote last month, in essence, the U.S. Attorney for the Northern District of California indicted China for the theft of DuPont's trade secrets for the process and manufacture of titanium dioxide (TiO2).  Titanium dioxide is a commercially valuable white pigment that is used in a large number of materials ranging from paints to plastics to paper and is particularly valuable in military and aerospace applications. 

The Wall Street Journal article provides further detail about the investigation and documents that led to the indictment of Pangang Group, including the description of documents confiscated from Liew's home.  According to the Wall Street Journal, in a letter written by Liew to Pangang, "he stated that a high-ranking Chinese Communist Party leader asked him in 1991 to bring the titanium-dioxide-making secrets back to China."  Liew has since filed an affidavit disavowing the contents of those documents and claiming that they "are not accurate or reliable."

Liew reportedly received more than $12 million from a Pangang subsidiary between 2009 and 2011 for his efforts.  He recruited former DuPont employees, including Tim Spitler, an engineer from Reno, Nevada, and Tze Chao, a 36-year DuPont employee, to allegedly provide him with DuPont's titanium-oxide trade secrets. Chao pleaded guilty to conspiracy to commit economic espionage last week and he is quoted in the article as saying that Chinese officials led him astray by "overtly appeal[ing] to my Chinese ethnicity and ask[ing] me to work for the good of the [People's Republic of China]."

Unfortunately, the story does not shed any further light on two of the more interesting features of the case.  First, there is no explanation for the release of two unidentified senior Pangang Group executives who were detained during a visit to California to meet with Liew.  They were initially held as material witnesses while the FBI reviewed and translated documents retrieved from the Liews' home.  According to the article, prosecutors decided they could no longer hold the men as witnesses and allowed them to return to China.  Why they were not charged, when the FBI had discovered the trove of documents, still remains a mystery.  Second, there is no detail surrounding the apparent suicide of Spitler, who had agreed to serve as an important witness in the government's case and killed himself just before the indictment of Pangang Group last month.

The story is important in three respects:  (1)  It emphasizes that international economic espionage should be an issue of grave concern for companies doing business outside the U.S.; (2) It reinforces the importance of the pending legislation to add a civil cause of action to the Economic Espionage Act, an amendment that would provide U.S. businesses with a powerful tool to combat international misappropriation of their trade secrets; and (3) It serves as yet another reminder of the importance of aggressively safeguarding your trade secrets.  While DuPont is lauded for its vigilance (it commenced a civil action against Liew and promptly notified federal authorities), the FBI is concerned that the problem is growing despite its efforts to raise the awareness of companies to this threat.

 

U.S. v. Liew: Feds Expand Indictment to Include Chinese State-Owned Pangang Group

 
by John Marsh 10. February 2012 14:30

In an unprecedented move, federal prosecutors have indicted Pangang Group Company Limited, a company owned and controlled by the Chinese government, as well as and one of its Chinese executives, in a high profile criminal trade secret case in San Francisco.  In essence, the U.S. Attorney for the Northern District of California has decided to indict China for the theft of DuPont's trade secrets for the process and manufacture of titanium dioxide (TiO2), a commercially valuable white pigment that is used in a large number of materials ranging from paints to plastics to paper and is particularly valuable in military and aerospace applications. 

The indictment quickly follows the U.S. government's successful opposition to the release of Walter Liew, a California businessman whom the government has also indicted for, among other things, conspiracy to steal trade secrets, attempted economic espionage and witness tampering.  I have attached a copy of the 77-page amended indictment below, as well as the original indictment against Liew and his wife, Christina Liew.
 
If there is any doubt that this is a cannon shot across the bow, one need only read the opening sentence of the amended indictment: "The People's Republic of China publicly identified the development of chloride-route titanium dioxide (TiO2) production as a scientific and economic priority."  The indictment goes on to describe Pangang Group as a state-owned enterprise controlled by government agencies of China and run by officials of the Communist Party of China.
 
The case unfolded shortly after DuPont sued Liew in Northern California last April and notified federal authorities of its concerns.  On August, 23, 2011, federal prosecutors indicted Liew and his wife, accusing them of providing false statements to federal authorities and obstructing justice in connection with their investigation of the possible theft of DuPont's titanium dioxide.  During the course of the search of the Liews' home, the FBI found a "trove" of letters and correspondence establishing that Liew was in the process of securing DuPont's TiO2 processes and data to sell to Chinese companies.  It is this trove that led to the amended indictment against the Liews, Pangang Group, its subsidiaries, and its Vice President of the Chloride Process TiO2 P roject Department, Hou Shengdong.
 
According to one of the prosecutor's filings, Liew "was tasked by representatives of the [Chinese] government to obtain technology" for building titanium factories, and "obtained that technology from former DuPont employees and sold it to companies controlled by the [Chinese] government."  Liew is alleged to have paid former DuPont engineers for assistance in designing the TiO2 processes at issue, and in turn secured contracts with Pangang Group and others for $5.6 million, $6.2 million and $17.8 million.
 
In addition to naming a state-owned manufacturer, there are a number of other interesting twists to this case.  For example, according to the Wall Street Journal and Reuters, one of the key witnesses killed himself last week. That witness, Tim Spitler, was a former DuPont engineer who had testified that he discussed secret DuPont documents with Liew.  In addition, according to the Wall Street Journal, two executives of Pangang were detained and prevented from leaving the U.S. so that the government could obtain testimony about the Liews.  However, they were released to return to China after securing their testimony, a curious decision given the undeniable thrust of the indictment directed toward Pangang Group and the Chinese government.
 
As I noted yesterday in briefly describing media reports of the indictment, I can't recall a criminal case that so directly asserted that the Chinese government had a role in the trade secret allegations at issue, let alone one that actually indicted a state-owned company.  Most, if not all, of the recent prosecutions have been against individuals.  The timing of this decision is of equal significance.  Vice President Xi Jinping, who is widely expected to be promoted to the Chinese Communist Party chief later this year, is visiting the U.S. next week to discuss a host of diplomatic, economic and policy differences with President Obama and others. 

The Obama administration has not been shy about expressing its concerns about China's role in economic espionage: Last October's report by the Office of the National Counterintelligence Executive found that China was the largest source of attacks on U.S. businesses, and accused Chinese intelligence of being a "persistent collector" of data stolen from U.S. companies.  It also follows the conviction of Hanjuan Jin, a Chinese-born American, on Wednesday, February 8, 2012, for the theft of trade secrets from Motorola (the court, after a bench trial, rejected the government's Economic Espionage Act charges).
 
So what does all of this mean? At minimum, it signals an escalation in the increasingly bitter charges and counter-charges that the U.S. and China have lobbed against one another over the past decade. It will be interesting to see what the next step is in the criminal proceeding, as well as in the broader dialogue between the two governments.

United States of America v- Walter Lian-Heen Liew- et al-0-002.pdf (3.07 mb)

United States of America v- Walter Lian-Heen Liew- et al-0-001.pdf (346.27 kb)

 

Thursday Wrap-Up (Feb. 2, 2012): Noteworthy Stories on Trade Secrets, Non-Competes and Cybersecurity on the Web

 
by John Marsh 2. February 2012 17:00

 

Here are some noteworthy articles, cases and posts from the past week:
 
Trade Secrets and Non-Competes:

  • Todd Sullivan's Trade Secrets Blog is reporting that Motorola and Lemko have settled their long-running trade secret dispute. On January 13, 2011, the Northern District of Illinois denied Lemko's motion for summary judgement, paving the way to trial and presumably putting greater pressure on the parties to settle. Motorola filed the lawsuit four years ago against Lemko, a company formed by several former Motorola employees, and former Motorola software engineer Hanjuan Jin. Jin was about to board a one-way flight to China in 2007 when she was subjected to a random search at O’Hare Airport that turned up hundreds of documents from Motorola.
  • In another high profile trade secret case in Chicago, Groupon's two former managers have filed counterclaims against Groupon claiming that the complaint is abusive and specious. I wrote about this case last November, which was filed with a flourish just before Groupon's IPO. Groupon has accused the two employees of improperly using its trade secrets after they left to join Google Offers. Lawyers for the managers are now accusing Groupon of using “sham litigation” to bully and silence these former employees and obtain intelligence on a burgeoning competitor. This tactic worked famously well here in Columbus, Ohio in American Chemical Abstracts v. Leadscope, to the tune of over $25 million for the counterclaimants (the case is on appeal before the Ohio Supreme Court). 
  • Bloomberg's Business Week has an article this week emphasizing the increasingly large verdicts in trade secret cases, and details the DuPont v. Kolon and St. Jude Medical disputes. The article notes, among other things, the growth of trade secret litigation and the factors contributing to its growth (employee mobility, technology making it easier to copy or download information, etc.).
  • Speaking of DuPont, a federal criminal case brought in connection with the alleged theft of trade secrets relating to titanium dioxide, an ingredient used in paints and other industrial materials, is back in the news. The Wall Street Journal is reporting that federal prosecutors successfully opposed bail for Walter Liew, a Chinese national who has admitted to obtaining DuPont's trade secrets and selling them to companies affiliated with the Chinese government. Liew has been charged with providing false statements to authorities and obstruction of justice, and he is expected to be indicted on trade secret theft charges soon as well.
  • Neil Weinrich has done a fine post in the Georgia Non-Compete & Trade Secret News Blog cautioning defendants against removing an injunction case to federal court that does not specify the amount in controversy. Neil's post discussed a recent decision from the Northern District of Georgia that remanded the non-compete case back to state court, reasoning that evidence of the employee's past salary was too speculative to establish the amount in controversy. I believe the standard in the Sixth Circuit (where I frequently practice) is a little more lenient in injunction cases but this is a useful post for those considering removal of a case in the Eleventh Circuit.
  • The Technology Law and Marketing Blog has reported that the remaining claims for intentional and negligent interference in the PhoneDog v. Kravitz dispute have recently survived a motion to dismiss. This case has generated tremendous media and blogosphere interest; last month, the district court found that the other claims, including a dubious misappropriation of trade secrets claim, were sufficiently plead to survive an earlier motion to dismiss. PhoneDog has sued its former employee Noah Kravitz over the ownership of a high profile Twitter account (17,000+ followers).
  • In the patent and trade secret context, Dennis Crouch of Patently O testified before Congress yesterday about the prior commercial use defense under the America Invents Act. As readers of this blog will recall, James Schweikert and I have written several posts about the impact this new defense may have on trade secret protection. Dennis' take? He planned on testifying that it was "unlikely to have any real or measurable impact on the market for U.S. patents, demand for innovation, or process of patent litigation." As a review of the comments accompanying that post indicate, many of his readers disagree.

Cybersecurity:

  • I recently stumbled across a website called Cyberscrime Review launched last year by Jeffrey Brown, an enterprising third-year law student from the University of Mississippi. The blog provides a good summary of Computer Fraud and Abuse cases and other cybersecurity issues and is worth following.

News You Can Use:

  •  For those worried about the security of their smartphones, the New York Times' Personal Tech site has a good article on precautions you can take to protect you and your phone.
  • For those not suffering from post-SOPA fatigue, take a look at Jesse Saviar's solid analysis of both sides' arguments in "No SOPA for you! Why SOPA Led to Such an Acrimonious Fight and What We Can Learn from It."
 

DuPont v. Kolon Update: Judge Payne Rejects Kolon's Post-Trial Motions, and Motions for Sanctions and Recusal Fly Back and Forth

 
by John Marsh 30. January 2012 14:00

There has been a fair amount of activity in the DuPont v. Kolon dispute pending in the U.S. Eastern District of Virginia over the past few weeks.  On Friday, January 27, 2012, U.S. District Court Judge Robert Payne denied Kolon's post-trial motions seeking to set aside the $920 million jury trade secret verdict against it last September. 

Judge Payne summarily rejected Kolon's Motions for Judgment Notwithstanding the Verdict, Motion for Remittitur and Motion for a New Trial through a pair of short orders, links to which can be found below.  As DuPont's post-trial request for punitive damages was addressed last fall (Judge Payne limited the punitive award to $350,000 under Virginia law), the case now appears ready for appeal.
 
Meanwhile, DuPont and Kolon continue to bitterly fight on other fronts.  In a litigation that threatens to become even more acrimonious than the trade secret case, the parties continue to exchange body blows in the remaining antitrust litigation brought by Kolon.  When DuPont brought its trade secret case in February 2009, Kolon counterclaimed, asserting that DuPont had monopolized the body armor market through improperly restrictive agreements with its customers.  Judge Payne dismissed the claim in 2009 but it was reinstated by the Fourth Circuit.

Alyson Frankel's "On the Case" Blog has a solid summary of the acrimonious antitrust litigation. Since its reinstatement, Kolon has been sanctioned and moved to disqualify Judge Payne based on his former partnership with DuPont counsel McGuire Woods (links to those pleadings can be found on Alyson's article).  Last week, DuPont filed a Motion for sanctions under Rule 11, arguing that the entire antitrust litigation was baseless and filed for no other reason than to distract DuPont, the Court and the public from Kolon's misappropriation of DuPont's Kevlar trade secrets.

Last summer, I likened this case to the East Coast version of the Mattel v. MGA litigation, which has been become the standard-bearer for bare-knuckles, bet-the-company trade secret litigation.  Given the developments of the past few weeks, DuPont v. Kolon may become the new champ.

DuPont Order No. 1.pdf (53.73 kb)

DuPont Order no. 2.pdf (262.92 kb)

 

The Year in Review: The Top 3 Decisions that Shaped Trade Secret and Non-Compete Law in 2011

 
by John Marsh 4. January 2012 20:30

Now for the top three decisions and cases for 2011:

3.  Syncsort Inc. v. Innovative Routines Int'l, Inc.  (U.S. District Court for New Jersey)
At the start of the year, the rise of social media and the nihilism of WikiLeaks were both perceived as looming threats to trade secrets.  Both phenomena were intertwined with the speed, transparency and ease of use arising from the Internet. 

Syncsort brought a thorough and thoughtful approach to what degree a trade secret posted on the Internet may lose its protection.  In Syncsort, the defendant Innovative Routines (IR) identified six separate posts of some or all of the trade secrets on different websites.  However, rather than apply a formalistic rule -- i.e., if information is ever posted on the Internet, it is no longer secret -- U.S. District Court Judge Walls applied a fact-based inquiry that looked at the circumstances surrounding each of the posts at issue.  (For a more detailed analysis of Judge Wall's reasoning and a link to the opinion, please see my August 27, 2011 post).  
 
In short, Judge Walls provided the same analysis to postings on the Internet as he would have if there were allegations that trade secrets were disclosed to third parties, to the government, or to independent contractors.  He looked at the circumstances of each post, how much information was disclosed, the nature of the website in question, how long it was up, whether there was proof that the defendant or anyone else looked at the information, and the plaintiff's efforts to remove the trade secrets from those websites.
 
As the accessibility and ease of the Internet only increase (social media, personal devices, etc.), it is inevitable that many future trade secret cases will involve situations where some of the trade secrets in dispute made their way to the Internet.  The rational, factual approach by Judge Walls should be applied by courts applyin those future disputes.
 
2.  TianRui Group v. International Trade Commission (U.S. Court Appeals for the Federal Circuit)
If the No. 1 ranking was based solely on what decision has generated the most buzz, then TianRui Group v. ITC would be the hands-down winner.  It is easily the most discussed trade secret case of the year.  (Law 360 and Lexology have featured what seems like nearly a dozen or so articles about this decision in the two months since it was issued).  This decision has probably garnered this attention because of the mounting level of frustration over the challenges of protecting intellectual property in China.
 
In TianRui Group, the Federal Circuit upheld a decision by the ITC to ban the defendant TianRui Group from importing steel cast wheels into the U.S. due to its misappropriation of an American company's trade secrets in China.  As the dissent noted, nearly all of the circumstances giving rise to the case took place in China.  While the bulk of the opinion is devoted to whether the ITC had the authority under Section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337, to impose the ban on these facts, it is a significant decision because of the extraterritorial application of this U.S. law.   

Why is this decision No. 2?  What cut against it was the relatively narrow subject matter of the opinion.  Although it is a fascinating decision with potentially far-reaching implications for many U.S. companies doing business overseas, the reality is that most trade secret lawyers outside of Washington, D.C. and New York probably won't find themselves litigating a Section 337 claim before the ITC. 

In addition, while I certainly don't profess to be an expert in Section 337 proceedings, I have some concerns about TianRui Group's future viability.  The extraterritorial breadth of this holding gives me some pause about whether it will be followed, or perhaps even reversed.
 
As a result, the No. 1 trade secret case of the year is . . .
 
1.  E.I. Du Pont de Nemours and Company v. Kolon Indus., Inc. (U.S. District Court for the Eastern District of Virginia and U.S. Court of Appeals for the Fourth Circuit)
This is a remarkable and important case on a number of fronts.  It is a major case involving the misappropriation of trade secrets by a foreign competitor, an important element given the increasingly international character of many trade secret disputes.  It features not one but two important spoliation of evidence opinions, another issue common to trade secret litigation.  It involves allegations of intrigue between the plaintiff, DuPont, and the federal government resulting in an important opinion by the Fourth Circuit clarifying the scope of concurrent criminal and civil actions.  Finally, and perhaps most notably, it resulted in an enormous jury verdict -- $920 million.  For these reasons, DuPont v. Kolon gets my vote as the case that shaped trade secret law most profoundly in 2011.

For those who have missed the fun, DuPont sued Kolon, a South Korean company, in February 2009, claiming that Kolon had misappropriated trade secrets relating to the body armor, Kevlar, after Kolon hired a former DuPont employee, Michael Mitchell.  While working with Kolon, Mitchell served as a go-between with other former DuPont employees and he ferried various DuPont trade secrets to Kolon.  After DuPont discovered Mitchell's actions, it notified the FBI and Department of Commerce, who then launched their own investigations.  Mitchell ultimately pled guilty to theft of trade secrets and obstruction of justice.  

Now to its holdings.  Spoliation has become the issue du jour in many trade secret cases and this case will provide a roadmap to many future litigants.  In DuPont, U.S. District Court Judge Payne ruled on duelling spoliation motions, ultimately rejecting Kolon's motion and granting DuPont's motion.  He ordered that an instruction be provided to the jury that Kolon executives deleted  information and allowing the jury to draw an inference that the missing information would have been helpful to DuPont and harmful to Kolon.  (For greater detail on these decisions, see my post last summer as well as a couple of fine posts by the E-Discovery Law Alert Blog). 
 
As noted above, this case is also noteworthy because of unsuccessful efforts by Kolon to quash a subpoena served on it by the Justice Department in a parallel criminal action.  In In re: Grand Jury Subpoena, 646 F.3d 159 (4th Cir. 2011), the Fourth Circuit rejected Kolon's claims that Justice Department had improperly colluded with DuPont and directed DuPont to collect discovery that the government could not have otherwise secured through that subpoena. 
 
Finally, the impact of the enormous $920 million verdict in this case reinforces its importance.  Although last month Kolon successfully fended off DuPont's efforts to get around Virginia's $350,000 punitive damages cap, Kolon will face a multi-million dollar attorneys fee award.  Given the vast numbers at issue in this case, one can reasonably expect that this case will be the subject of further motion practice and appeals well into 2012 and 2013.
 
***

As I noted in my initial post on the 2011 Top Ten, there were a number of other cases that were worthy of mention, but just didn't quite make the cut.  They include, in no particular order: 

  • AvidAir Helicopter Supply, Inc. v. Rolls-Royce Corp. (U.S. Court of Appeals for the Eighth Circuit) -- reiterating that trade secret law does not require novelty, only that it would require effort to replicate trade secrets;
  • Office Max v. Levesque (U.S. Court of Appeals for the First Circuit) -- holding non-compete that did not include successor was no longer enforceable;
  • Figueroa v. Precision Surgical (U.S. Court of Appeals for the Third Circuit) -- holding that company's failure to fulfill terms of non-compete precluded its enforcement;
  • Wrig v. Junkermeir (Montana Supreme Court) -- holding that employer cannot restrain a fired employee without cause;
  • Lucht's Concrete Plumbing, Inc. v. Horner (Colorado Supreme Court) -- holding continued employment qualifies as consideration for non-compete;
  • Eastman Chem v. Alphapet (2011 US. Dist. Lexis 127757 (D. DE Nov. 4, 2011)) -- applying Iqbal and Twombly standards to trade secret claims; 
  • Amylin v. Eli Lilly (U.S. District Court for the Southern District of California, Los Angeles) -- applying a more intensive application of what constitutes "irreparable injury" and finding absence of proof of direct misconduct weighs against application of injunction;
  • Home Paramount Pest Controls v. Shaffer (Virginia Supreme Court) -- finding overly broad non-compete will not be enforced; and
  • St. Jude Medical v. Zou (Los Angeles Superior Court) -- $2.3 billion award entered against absentee defendant for trade secret misappropriation.

* * *
I want to thank David Almeling, Victoria Cundiff, Mark Halligan, Wil Rao and Dan Westman, all of whom took time from their busy practices to provide me with their feedback on my list and share their own thoughts about what they thought were the top cases of 2011. 

All in all, a very turbulent but exciting year.  2012 may prove up to the task as well, as many of these cases will likely involve appeals and as trade secret and non-compete litigation continues at its torrid pace.

 

Trade Secret Notes from the AIPLA's Annual Meeting

 
by John Marsh 22. October 2011 13:45

At this morning's plenary session, Wil Rao of McAndrews Held & Malloy in Chicago presented "Illuminating the Dark Side of IP: A Practitioner’s Look at Recent Thefts, Crimes and Other Developments in Trade Secrets Law in 2010-2011." It was an excellent summary of the significant developments in trade secrets law over the past year. Wil covered all the bases -- the high profile cases (including the Mattel/MGA and DuPont/Kolon verdicts), the legislative developments (the recent proposed amendment of the Economic Espionage Act and proposals in New Jersey and Massuchusetts to adopt the UTSA), the many recent criminal convictions, and, of course, the many important civil cases (including the SyncSort, Tewari, Faiveley and TianRui Group cases, among others). I will write a post or two in the coming weeks discussing some of the other developments Wil raised.
 
Also, I joined a fine panel on Thursday afternoon entitled "Ten Things In-House Counsel Would Like to Tell Outside Counsel about Trade Secrets and Vice Versa." Dan Westman of Morrison & Foerster, Chair of the Trade Secret Law Committee, moderated the panel, which included Phil Petti, Chief Intellectual Property Counsel for USG Corporation and member of AIPLA's Board of Directors, Dewayne Hughes, and experienced IP lawyer and currently IP counsel at Drager, and Warrington Parker of Orrick Herrington, an experienced trade secret litigator. It began as a standing-room-only presentation and the vast majority of the audience stayed for the entire 2 hour presentation. Thanks to those who attended and for your thoughtful questions, and a special thanks to Dan for organizing the presentation and panel (and, not the least of which, inviting me).
 
For us outside counsel, the key takeaway was the importance of providing objective advice to your in-house clients. The panel made clear that in-house counsel do not want their outside counsel serving as cheerleaders; instead, they want direct and straight evaluations of the litigation, with the risks and rewards stated plainly so they, as business advisors, can in turn advise their management and board. The panel also agreed that efforts by outside counsel to work with other officers or managers within the client's organization (IT, sales, management) are important. They reinforce the 'team" approach in litigation and provide an opportunity for other employees to become familiar with the status and responsibilities of that litigation.
 
Budgeting, as you would expect, remains an important tool. The development of project management skills to accurately predict and control costs was suggested as a course that should be offered in law school, or by law firms. One of the panelists noted that the most important communication an attorney has with his/her client is the invoice. As a result, we, as outside lawyers, need to make sure that it accurately explains and conveys the value that the client expects. In-house counsel also recognize that there may be unexpected developments in the litigation that require a budget's adjustment; that being said, it is important for outside counsel to promptly advise in-house counsel of that possibiity to minimize any surprises. Finally, Dan made the inspired point that it might be prudent to budget senior management's time so they fully appreciate the commitment that they will need to make in discovery and trial preparation.

Finally, there was an awful lot of discussion about the impact of the America Invents Act on the future of patents and trade secrets protection throughout the Annual Meeting. For brevity's sake, this will be the subject of a future post.
 
All in all, a very productive few days. 

 

DuPont v. Kolon Industries: Deletion of E-mails Leads to Sanctions and Spoliation of Evidence Instruction

 
by John Marsh 25. July 2011 17:00

Charges of spoliation of evidence are frequently levelled in trade secret cases but rarely result in formal judicial findings of misconduct and sanctions. That may be changing. Last week, on the eve of jury selection, the U.S. District Court for the Eastern District of Virginia in Richmond found that key employees of the defendant, Kolon Industries, Inc., deliberately deleted emails and other evidence and engaged in prolonged efforts to conceal that conduct. The district court has sanctioned Kolon by ordering that an adverse inference instruction will be given to the jury and has awarded DuPont its attorneys fees in connection with the motion. (A special thanks to Mark Klapow for bringing this ruling to my attention).
 
This case has been the subject of significant media coverage already and is shaping up to be the East Coast version of the Mattel/MGA dispute. For the uninitiated, DuPont sued Kolon, a company with its headquarters in South Korea, in February 2009, claiming that Kolon had misappropriated trade secrets relating to the body armor, Kevlar, after Kolon hired a former DuPont employee, Michael Mitchell. 

While working with Kolon, Mitchell served as a go-between with other former DuPont employees and he ferried various DuPont trade secrets to Kolon. After DuPont discovered Mitchell's actions, it notified the FBI and Department of Commerce, who then launched their own investigations. Mitchell ultimately pled guilty to theft of trade secrets and obstruction of justice. 
 
The Virginia ip Law Blog has a thorough summary of the case, which has generated over 1,200 pleadings and orders. There have been a number of noteworthy rulings that have garnered commentary, ranging from rulings relating to the viability of Kolon's antitrust claim against DuPont to a recent decision finding the Department of Justice and DuPont did not improperly collude in connection with subpoenas used to gather evidence for the prosecution.

Not surprisingly, given the scope of this case, the July 21, 2011 Order (a link for which is below) is not light reading and spans 91 pages. After finding misconduct by a number of key employees, the district court declined to enter a default against Kolon because of two relatively prompt litigation holds and because the company itself had not systematically engaged in the misconduct. Nevertheless, the district court did find that a number of key employees who interacted with Mitchell deliberately, willfully and in bad faith deleted a substantial amount of emails immediately after the filing of the complaint; it further found that they also set upon a course to conceal their conduct from the court and DuPont. Balancing the fact that many of the emails were recovered while many others were not, the court found that there was more than adequate grounds for a spoliation jury charge.

On these facts, the district court concluded that the best remedy was "to inform the jury that certain Kolon executives and employees, after learning that DuPont had sued Kolon, deleted much electronically stored information that would have been available to DuPont for use in presenting its case." The district court further held that the "jury then should be allowed to infer that the recoverable deleted information would be helpful to DuPont and harmful to Kolon." Finally, the district court ordered that "jury should be told that the fact of deletion, without regard to whether the deleted material was recovered, may be taken into account in assessing the element of Kolon's intent and knowledge" (Opinion at pp. 87-88).

The takeaway? Litigation holds may provide a corporate defendant with some protection but there needs to be follow through within the company to ensure that the litigation hold is not only distributed to the appropriate employees but that it is also followed by those employees. Special care may also need to be taken with key employees located outside the U.S., who may not be as familiar with the severe consequences of preserving email and other electronic information in U.S. litigation.

 DuPont v. Kolon Spoliation Order.pdf (2.24 mb)

About John Marsh

John Marsh Hahn Law AttorneyI’m a Columbus, Ohio-based attorney with a national legal practice in trade secret, non-compete, and emergency litigation. Thanks for visiting my blog. I invite you to join in the conversations here by leaving a comment or sending me an email at jmarsh@hahnlaw.com.

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