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March 31 / Blogs, Computing, Trade Secret

The Growing Concern Regarding US Corporate Trade Secrets

Abstract: Globalization has produced many benefits for United States corporations, but a significant detraction has been the emergence of trade secret theft. As technology advances, trade secret theft has become an even more persistent threat in the general marketplace. There are various ways trade secret theft can occur, but it is increasingly common for the theft to involve cyberspace, especially as these corporations expand into foreign markets. Consequently, Congress has taken a significant interest in curbing trade secret theft, as is evidenced by the various proposals before them today. These proposals offer varying solutions to trade secret theft, which range from creating a private cause of action in federal courts to specifically targeting foreign entities and governments engaged in cyber espionage, such as China. Before analyzing a number of current proposals, it is necessary to define trade secrets and understand their current legal status in the intellectual property landscape.

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February 9 / Patent, Trade Secret

Federal Circuit reviews the $1.5 billion judgment against Marvell

INTRODUCTION

In 2009, Carnegie Mellon University sued Marvell for infringement of U.S. Patent Nos. 6,201,839 and 6,438,180, relating to methods that reduce “noise” in magnetic recording systems.[1] The jury found that Marvell was in fact selling infringing, semiconductor products both domestically and abroad.[2] The jury awarded $1.17 billion in damages to Carnegie Mellon University, corresponding to 50 cents for each product sold.[3] Soon thereafter, the judge added $287 million in enhanced damages for willful infringement. The total judgment was $1.54 billion[4]; the largest judgment in the history of patent law. Marvell appealed.

On appeal, Marvell argued that the royalty rate was too high and should not have been applied to products sold outside of the United States.[5] On August 4, 2015, the Federal Circuit affirmed the judgment of infringement and validity; reversed the grant of enhanced damages; and vacated in part and remanded the royalty award.[6]

Analysis

The Federal Circuit threw out the enhanced damages under the governing willfulness standard.[7] Statute states “the court may increase the damages up to three times the amount found or assessed” upon proof of willfulness.[8] Willfulness requires “clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent” and “this objectively defined risk…was either known or so obvious that it should have been known.”[9]

In the instant case, Marvell’s defense to the infringement claims was “objectively reasonable” so the burden of proof for willfulness was not met.[10] In its defense, Marvell argued there was an invalidating prior art reference.[11] The Federal Circuit held there was uncertainty regarding what the reference disclosed such that the invalidity defense was objectively reasonable, though ultimately rejected.[12]

The Federal Circuit left $278.4 million in damages in tact because Marvell must pay royalties on the products that were imported and sold in the United States.[13] However, the award was vacated in part due to an issue of extraterritoriality.[14] Marvell had argued that the court cannot measure damages based on the total number of products sold worldwide; damages are calculated relative to the number of products sold in the United States.[15] The Federal Circuit agreed and ordered a new trial to recalculate the damages on products that were not imported into the United States.[16]

Statute mandates that anyone who “uses, offers to sell, or sells any patent invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent”.[17] Thus, the court must determine whether any of the activities listed in § 271(a) occurred in the United States.[18] For example, there was some evidence that Marvell had designed, tested, and marketed the infringing products in the United States.[19] Many of Marvell’s investors were companies based in the United States, including Google Inc., Microsoft Corp., and Broadcom Corp.[20] There was also evidence suggesting that Marvell made contractual commitments for specific volumes of products, signed in the United States.[21]

Implications

The day the Federal Circuit issued its opinion, Marvell shares dropped 2.4 percent in Nasdaq.[22] There will likely be a settlement between Marvell and Carnegie Mellon University because it is too expensive for either party to continue litigation.[23] It would be financially favorable for Marvell to license the technology from the university.

The outcome of this case is significant because domestic companies will now take extra measures to insulate foreign sales from United States patent law.[24] Domestic companies may be encouraged to move their design, testing, and marketing activities outside of the United States.[25] Alternatively, domestic companies may conduct all contract negotiations outside of the United States.[26]

[1] See Carnegie Mellon University v. Marvell Technology Group Ltd., 14-1492, *10, U.S. Court of Appeals for the Federal Circuit (Washington), https://www.bloomberglaw.com/document/X1Q6NDHQ1182/.

[2] See id. at *11.

[3] Id.

[4] Id. at *3.

[5] Id. at *11.

[6] Id. at *3.

[7] Id.

[8] 35 USC § 284

[9] Carnegie Mellon University, supra at *24 (quoting In re Seagate Tech., LLC, 497 F.3d 1360, 1371 (Fed. Cir. 2007)(en banc)).

[10] Id. at *25.

[11] Id. at *27.

[12] Id.

[13] Id. at *4.

[14] Id.

[15] See id. at *40.

[16] See id. at *38.

[17] 35 USC  § 271(a).

[18] Carnegie Mellon University, supra at *38.

[19] Id. at *15.

[20] Susan Decker, Marvell Gets Reduced Damages in $1.17 Billion Patent Verdict (2), BLOOMBERG NEWS ENTERPRISE, (August 4, 2015, 11:53 AM), https://www.bloomberglaw.com/ip_law/document/NSKETL6KLVRG/.

[21] Carnegie Mellon University, supra at *33.

[22] Jonathan Stempel, Marvell Technology wins cut in $1.54 billion Carnegie Mellon patent award, REUTERS, (August 4, 2015, 1:43 PM), http://www.reuters.com/article/2015/08/04/us-marvell-technlgy-carnegiemellon-idUSKCN0Q91K220150804/.

[23] See Decker, supra.

[24] See id.

[25] See id.

[26] See id.

November 25 / Blogs, Other Intellectual Property, Trade Secret

The Defend Trade Secrets Act: Arrival of the Trade Secret Trolls?

Abstract: In today’s world it is increasingly apparent that advancements in technology have allowed information to be shared, and to be stolen, more than ever before. This
encompasses simple tweets, as well as information guarded and seemingly protected by small businesses and large corporations alike. There have been expected downsides with these technological capabilities, namely state-backed cyber espionage and trade secret misappropriation. A new bill that is currently facing Congress, the Defend Trade Secrets Act, is aimed at creating a federal private cause of action under the Economic Espionage Act of 1996 (EEA). It is a bill that will, if passed, expand the EEA to provide federal jurisdiction for the theft of trade secrets. There is no question as to the degree of importance the protection of trade secrets is to United States businesses and society at large. The question is whether the well-intentioned DTSA will actually do more harm than good. There are a substantial number of legal professionals that have voiced their concern that not only will it fail to significantly hinder cyber-espionage, but it will open the door to a new breed of predators, trade secret trolls

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April 23 / All Articles, Copyright, Featured, Patent, Trade Secret

Intellectual Property Indemnity Clauses

The practices associated with intellectual property indemnity can be traced in part to Article 2 of the Uniform Commercial Code. At the dawn of the computer age, practitioners searched for legal models that they could use for transactions in intangible rights and products such as computer software. Although computer software did not fit easily into the “sale of goods” paradigm, analogies to the familiar rules governing sales of goods were inevitable.

Lurking in the lower reaches of Article 2 of the UCC, one finds an implied warranty of non-infringement in Section 2-312(2):

Unless otherwise agreed, a seller that is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer that furnishes specifications to the seller must hold the seller harmless against any such claim that arises out of compliance with the specifications.

In the context of a sale of goods at the time Article 2 was drafted, a non-infringement warranty made good economic sense. The only form of intellectual property likely to be of concern to the purchaser of goods was patent protection. In the mid-twentieth century, when Article 2 of the UCC was adopted, patents were the disfavored stepchildren of the federal courts. A high percentage of patents were held to be invalid, and the damages accorded to those found to be valid were often limited to a modest royalty. Furthermore, patent rights are—as a rule—exhausted upon the first sale of a product and far fewer patents were being issued. Additionally, products were less complex, typically falling into only a single engineering domain, with correspondingly fewer points of intersection with issued patents. For all these reasons, the risk that the ultimate purchaser of a product would be sued for patent infringement was very remote, and even if the purchaser were sued, the damages would be only a tiny fraction of the purchase price—the average and median for all products was between five and seven percent.

In this context, a product manufacturer could provide an implied warranty of non-infringement with very little risk beyond whatever modest risk of infringement the manufacturer had already incurred by manufacturing the product itself. Product purchasers did not typically insist on an indemnity beyond the implied warranty , perhaps because the risk was perceived as too remote to be worth worrying about. The exhaustion doctrine would—in many cases—cause the claim to be made against the manufacturer rather than the user. Therefore, they would assume—probably quite rightly—that the manufacturer would “stand behind its product” and obtain the required license if an infringement claim were actually made.

With this background, and without giving the matter too much additional thought, it did not seem unreasonable for the lawyers representing software and other technology providers to provide a warranty of non-infringement governing their clients’ products as well. Such a warranty was certainly consistent with established practice as embodied in UCC Article 2. It therefore would have met the expectations of the marketplace. Furthermore, the risk of infringement liability seemed manageable. At that time, virtually no one believed that computer software would be patentable, and absolutely no one imagined that business methods would be patentable. The risks of trade secret or copyright infringement liability are more uniquely within the control of the software provider since each of them requires an element of intent or a near equivalent. By adopting appropriate internal controls and standards, sometimes even including a “clean room,” a software provider ought to be able to minimize its infringement risk.

As licensors, software providers had an additional consideration of the desire to control litigation concerning rights in the product. At that time, protection for computer software was in a state of flux. Copyright in computer software expanded in the years following the Copyright Act of 1976, but doubt persisted as to the extent of its protection. For instance, in following decades, the courts were faced difficult questions regarding whether copyright protected operating systems that communicate only with machines and whether it protected the “look and feel” of the user interface generated by the software. These were considered weighty issues going to the heart of the value represented by computer software. Accordingly, the software providers did not want to risk having them decided in litigation against their licensees, whose interest in broad protection would likely be less than the interest of the software providers.

In response to this concern, software providers migrated the infringement issue from the warranty clauses of software license agreements to indemnity provisions. As quid pro quo for indemnity, the licensor obtained prompt notice of the claim and full authority to defend or settle the case on behalf of the licensee. To mitigate their risk, most software licensors further provided that their obligation—and the licensee’s sole remedy—was to (a) obtain for the licensee the right to use the licensed product; (b) modify the product to make it non-infringing; or—failing (a) or (b)—(c) to terminate the license and refund a pro-rated portion of the purchase price depending on how much of the license term had been exhausted at the date of termination.

Clauses along these lines became a de facto standard in the software industry and persisted for many years. They were hardly perfect from the standpoint of licensees. Option (c) could be very detrimental in the case of software that was critical to a business, Even if comparable non-infringing software were available, the end user would be in the position of having to find, implement, and migrate all data or customizations to the new system. This could be expensive, risky and time-consuming. If no comparable non-infringing software were available and the patentee refused to offer a license on commercially reasonably terms, a business that relied on the software could be crippled. Even option (b) could be problematic if the required modifications degraded functionality or compatibility. As a result, licensees with sufficient bargaining power would nibble at the edges of such indemnity clauses, sometimes allowing full refunds and often providing that (b) could only be exercised if functionality were not compromised. Nonetheless, the basic pattern—limited indemnity in exchange for control over litigation—became well-fixed in many practitioners’ minds.

As so often happens in the law, the basic practices that emerged in one field—the software industry—migrated to other industries as well. Intellectual property indemnification clauses were inserted into virtually any agreement in which the parties foresaw a risk of intellectual property infringement.

September 11 / All Articles, Trade Secret

Saving Trade Secret Disclosures On The Internet Through Sequential Preservation

Soft Corporation is a leading maker of software and operating systems. It undertakes great measures to protect the secrecy of its new products under development, plans to launch new products, technical product specifications, and product source codes, all of which it considers company trade secrets. A disgruntled employee, John Sneaky, one of the few persons with access to the source code to Soft’s soon to be released operating system, Win100, posts the source code (labeled “Confidential & mdash; Soft Proprietary Information”) on a members-only website critical of Soft, Softsucks.com.

 

Soft discovers the posting within six hours of its appearing on the site, and after informing the site operator that the information is a stolen Soft trade secret, it is immediately removed. Prior to its removal, however, Sam Quickbuck, had downloaded the source code. When he realized the next day that the source code was no longer available on Softsucks.com he decided to capitalize on the opportunity.

 

He posted a notice on his website offering the code for sale: “Win100 source code, original, (jacked from inside) available for sale. Get it here before it’s even released and stick it to Soft. If you wanna buy it ($50) I’ll give you a password to download it.”

 

Soft sues Quickbuck for misappropriation of trade secrets, seeking a preliminary injunction to prohibit his use and sale of the source code. After a hearing, the court denies relief to Soft, reasoning that despite Soft’s best efforts to keep the source code secret, it has lost its trade secret status by virtue of it appearing on the Internet, and that Quickbuck cannot be enjoined from using it. Soft now faces widespread use of its source code by other competitors and a resulting loss of market share for its Win100 operating system. As a result of the ruling, it can no longer claim the source code as a trade secret.

 

This hypothetical [1] introduces the problem and accompanying questions tackled by this Article. When, for instance, an employee discloses an employer’s trade secrets to the public over the Internet, does our current trade secret framework appropriately address the consequences of that disclosure? What ought to be the rule which governs whether the trade secret owner has lost not only the protection status for the secret, but any remedies against use by third parties? Should the ease with which the Internet permits instant and mass disclosure of secrets be taken into consideration in assessing the fairness of a rule which calls for immediate loss of the trade secret upon disclosure?

 

Elizabeth A. Rowe*

May 25 / All Articles, Trade Secret

Criminal Consequences Of Trade Secret Misappropriation: Does The Economic Espionage Act Insulate Trade Secrets From Theft And Render Civil Remedies Obsolete?

The enactment of the Economic Espionage Act of 1996 [1] (“EEA”) was greeted with great fanfare as an unprecedented and broad federal attack on foreign and domestic trade secret misappropriation. Negligent, even inadvertent conversions of trade secrets seemed subject to criminal prosecution in the broad wake of the statute. The statute’s draconian criminal penalties for individual and corporate offenders alike, coupled with its license to the Government to seek protective orders, civil injunctive relief, and forfeiture, were viewed as the preferred remedy for the victim of trade secret misappropriation. Yet the plain language of the threshold elements of EEA offenses, and the statute’s restrained interpretation and application by the United States Department of Justice, reveal a statute more limited in prosecutorial scope, with its application bound by significant legal obstacles.

The EEA does not criminalize every theft of trade secrets. Traditional notions of what a protected trade secret is and when a theft is actionable may not apply to an EEA prosecution. Ultimately, the EEA is not a panacea for the victim of a trade secret misappropriation. A civil cause of action that seeks injunctive relief and economic compensation remains the preferred and, perhaps, the most effective method for a victim to achieve an expedited and comprehensive remedy.

Indeed, the single published opinion by a federal appellate court involving an EEA prosecution sends clear warning signals to American private industry of the perils of referring suspected trade secret misappropriation to the Department of Justice for criminal prosecution. [2] The commencement of a federal criminal prosecution under the EEA may compel the disclosure of formerly confidential proprietary information to the defendant and defense counsel as part of discovery in the criminal case; the very same corporate secrets that the victim corporation sought to protect by making its referral to the Government.

United States v. Hsu, which was decided by a panel of the Third Circuit during the summer of 1998, raises troubling issues that corporations and their counsel should carefully consider when weighing the decision of whether to disclose an incident of trade secret theft to the Government or, alternatively, to pursue private remedies under available civil statutes or common law theories. [3] These private remedies, however, may not give comfort to a corporate victim that its proprietary information will be insulated from discovery in civil litigation.

Yet the EEA is not a sword of Damocles to the unknowing or unwitting corporate beneficiary of a rogue employee’s unlawful conversion of a trade secret. The multiple and substantial intent requirements of the statute would preclude the imposition of corporate vicarious liability for the ultra vires conduct of such an employee. [4] Nevertheless, corporate and other business organizations should take affirmative steps to avoid any exposure under the EEA to the risk of Government investigation through the implementation and enforcement of comprehensive and well-documented trade secret protection programs.

 

Mark D. Seltzer, Angela A. Burns *