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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.

 

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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