by Dennis Crouch
I expect that 2016 will be the year that Congress to creates a federal cause of action for trade secret misappropriation. Acting in rare unanimous fashion, the Senate recently passed the Defend Trade Secret Act (DTSA) with republican leadership. The house is expected to follow with President Obama also indicating support. In his most recent State of the Union Address, President Obama noted that “[n]o foreign nation, no hacker, should be able to . . . steal our trade secrets.”
Meanwhile, state-law trade secret and business tort claims continue to wield power.
In Epic Systems v. Tata Group, a W.D.Wisc. jury has awarded Epic just shy of $1 billion on state-law trade-secret misappropriation, computer-fraud (trafficking in passwords under the CFAA), breach-of-contract claims, and unfair competition. The damages included $240 million for compensatory damages and $700 million in punitive damages.
Tata Group (one of India’s largest companies) is accused of downloading documentation for hospital management software and then providing that documentation to its subsidiary Med Mantra. This appears to be a case of exceeding authorization. Thus, although Tata employees were permitted access the documentation, the breach came when the documentation was shared beyond what was contractually permitted. If it collects, the verdict will more than double Epic’s annual profits.
The verdicts:
Following any post-verdict decisions, the appeal will be handled by the 7th Circuit. The damages theory of the case is tricky — it is unclear to what extent Epic should be permitted to use Wisconsin (or US) law to collect for damages either caused or felt in India.
Seagate won more that $500 from Western Digital for theft of trade secrets. Seagate Technology v. Western Digital Corp., 854 N.W.2d 750 (Minn. 2014) link to scholar.google.com
“The arbitration agreement at issue arose out of an employment contract between
Mao and his former employer, respondent Seagate Technology, LLC. Seagate designs and manufactures hard disk drives for computers. In his role as senior director for advanced head concepts at Seagate, Mao worked on technology that involves incorporating tunneling magnetoresistance (TMR) into read heads,2 which, if done successfully, would allow for vastly improved storage capacity on hard disk drives.
…
Mao left Seagate in September 2006 and joined Seagate’s competitor, Western
Digital Corporation, in October 2006. After Mao joined Western Digital, Seagate
commenced a district court action seeking injunctive relief to prevent the disclosure of Seagate’s trade secrets and later amended its claim to allege actual misappropriation of trade secrets. Seagate’s primary allegation, in essence, was that Mao stole Seagate’s trade secrets and confidential information regarding TMR technology and provided it to Western Digital, which Western Digital then used to design and manufacture a TMR read head.
…
Western Digital invoked the arbitration clause of the employment agreement, and
the district court stayed the lawsuit pending arbitration. Before the arbitration hearing began, Seagate brought a motion for sanctions against Western Digital and Mao based on alleged fabrication of evidence.3 The fabrication related to documents submitted by Western Digital and Mao, which were intended to prove that three of Seagate’s claimed trade secrets, referred to as Trade Secrets 4-6, had been publicly disclosed before Mao left Seagate. Seagate alleged that Mao had inserted additional PowerPoint slides containing information on Trade Secrets 4-6 into his copy of a presentation that he had given at a conference while employed by Seagate to make it appear as if this information had been presented in public, and therefore did not qualify as trade secrets.
In the motion for sanctions based on fabrication, Seagate requested “a sanction
commensurate with the severity of the misconduct.” Specifically, Seagate requested an order precluding Western Digital and Mao “from presenting any defense to the trade secret misappropriation claims asserted against them, including barring [Western Digital and Mao] from (1) disputing the validity and misappropriation of any of Seagate’s eight asserted trade secrets, and (2) disputing Western Digital’s use of Seagate’s eight asserted trade secrets.” Seagate also requested compensation for “the costs and attorneys’ fees it was forced to incur to investigate and expose the document fabrication and to bring this motion to remedy it.” Western Digital and Mao responded by requesting sanctions against Seagate to “compensate the Claimants for the unnecessary fees and costs incurred in defending against Seagate’s frivolous charges.” Western Digital and Mao also asked the arbitrator to defer consideration of the sanctions motions until after the arbitrator had heard evidence “in the context of the full arbitration hearing,” and the arbitrator granted this latter request.
…Trade Secrets 4-6 were addressed separately, as the arbitrator first reviewed the motion for sanctions based on fabrication and determined that Mao fabricated the disputed slides for the purpose of litigation while working at Western Digital. The arbitrator stated: “The fabrications were obvious. There is no question that Western Digital had to know of the fabrications and yet continued to represent to the Arbitrator that Dr. Mao did in fact insert the disputed slides . . . at the time of the conferences.” The arbitrator concluded that “Dr. Mao’s fabrication of evidence and Western Digital’s complicity by submitting the obviously fabricated evidence to the Arbitrator is an egregious form of litigation misconduct and warrants severe sanctions.”
After determining that Seagate had established that Trade Secrets 4-6 qualified as
trade secrets and, consistent with the sanctions, that these trade secrets had been
improperly used by Western Digital, the arbitrator found in favor of Seagate on its claims arising out of Trade Secrets 4-6. The arbitrator also found that Mao’s testimony, in part due to the fabrication of evidence, lacked credibility and that Mao had breached his employment contract by disclosing confidential information, not returning company documents, and soliciting a Seagate employee for employment at Western Digital. The arbitrator calculated damages based on “the unjust enrichment method,” awarding Seagate compensatory damages of $525 million, prejudgment interest totaling nearly $96 million, and post-award interest. The arbitrator determined that Western Digital and Mao
are jointly and severally liable for the damages.”
District court reversed the arbitrator. The Appeals court reversed district court.
…
“The arbitrator’s ability to issue punitive sanctions is controlled by the arbitration
agreement. Law Enforcement Labor Servs., 527 N.W.2d at 824 (“The scope of an
arbitrator’s authority is a matter of contract interpretation to be determined from a reading of the parties’ arbitration agreement.”). Therefore, parties are able to include or exclude the use of punitive sanctions when constructing an arbitration agreement, either through express provision or through the incorporation of a particular set of arbitration rules.8
…
“The arbitration agreement empowered the arbitrator to settle “any dispute or
controversy arising out of or relating to any interpretation, construction, performance or breach” of the employment agreement, and the agreement states that “[t]he arbitrator may grant injunctions or other relief in such dispute or controversy.” The agreement also says that the arbitration will be conducted in accordance with the “the rules then in effect of the American Arbitration Association.” The American Arbitration Association Employment Arbitration Rules and Mediation Procedures (AAA Employment Rules) do not specifically address punitive sanctions, but they do authorize arbitrators to “grant any
remedy or relief that would have been available to the parties had the matter been heard in court including awards of attorney’s fees and costs.”
…
“These sources confirm that punitive sanctions qualify as “injunctions or other relief” as authorized by the arbitration agreement. The sanctions issued were also authorized by the AAA Employment Rules…
…
“We recognize that entrusting an arbitrator with broad powers over forms of relief could theoretically lead to unfair results in arbitration. Certainly Mao and Western Digital, implicitly if not explicitly, argue that the award here was a result of an out-of control arbitrator or was otherwise unjust. Some believe that arbitration has benefits, potentially including faster resolution and less expense than the judicial system as well as a high degree of confidentiality. … But the benefits come with costs, including significantly less oversight of
decisions, evidentiary and otherwise, and very limited review of the final award.
…
“Here, despite the best efforts of experienced appellate counsel to argue otherwise, Mao and Western Digital’s decision to demand arbitration necessarily limited the availability of the protections and advantages of the judicial system.
…
“Having concluded that the arbitrator did not exceed his authority or refuse to hear material evidence as provided in Minn. Stat. § 572.19, subd. 1, we affirm the court of appeals’ decision reinstating and confirming the arbitration award in full.
Affirmed.
I should have included this in the above:
“Because punitive sanctions were a permissible form of relief and because the arbitrator had discretion in fashioning a remedy, we hold that the arbitrator did not clearly exceed his authority in violation of Minn. Stat. § 572.19, subd. 1(3), by issuing punitive sanctions against Western Digital and Mao.”
The bottom line, WD believed it was not provided due process by the arbitrator. The Minnesota Supreme Court says that is the price one pays when one choose arbitration.
The moral of the story is that reduced cost is is a good reason to choose arbitration. But the out of pocket savings comes at a big price: the potential for denial of due process especially if the matter is within the scope of the arbitrators discretionary authority. His decision cannot be reviewed.
With the virtual death of the patent system (for the little guy anyway), skilled veterans are moving their practice to copyrights, trademarks and trade secrets.
With China, Taiwan and Malaysia fighting over the right to bring telephone fraudsters to justice, I see a new Paladin business model.
But, it is based on the extraterritoriality (nice word) issues. No sense suing if you can’t collect.
Meanwhile…
link to arstechnica.com
The Supreme Court on Monday declined (PDF) to hear a challenge from the Authors Guild and other writers claiming Google’s scanning of their books amounts to wanton copyright infringement and not fair use. …
Google’s book scanning project started in 2004. Working with major libraries like Stanford, Columbia, the University of California, and the New York Public Library, Google has scanned and made machine-readable more than 20 million books. Many of them are nonfiction and out of print.
Meanwhile….
Ok, and your point is…?
Dennis, do you have any information or links to the pleadings or other relevant documents relating to the damages issues? I take it from your comments that there is potentially an extraterritoriality issue here.
Tom – Sorry, I don’t have any further documents on it.
plainsite.org has some documents filed in the case, including the original complaint and an amended complaint.
link to plainsite.org
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