Half-Billion Dollar Arbitration Award in Trade Secrets Case Affirmed by Minnesota Supreme Court in Trade Secrets Dispute

Jackson Lewis Law firm

The Minnesota Supreme Court has affirmed an arbitrator’s eye-popping award of $525 million plus prejudgment interest totaling $96 million and post-award interest in a trade secrets dust up between Seagate Technology, LLC and Western Digital Corporation, et al. Seagate Technology, LLC v. Western Digital Corporation, et al and Sining Mao, No. A12-1994 (Minn. October 8, 2014).  The Court’s decision is replete with lessons about the legal boundaries, risks, and protections for litigants in arbitration. It is notable also for the magnitude of the award which was, in part, the consequence of falsified evidence.

Seagate designs and manufactures hard disk drives for computers. Sining Mao was a senior director for advanced head concepts at Seagate working on technology that involves incorporating tunneling magnetoresistance (“TMR”) in to read heads to improve storage capacity. When he was hired by Seagate, he signed an employment agreement which included a requirement to preserve the confidentiality of trade secrets and to return company documents. The employment agreement contained an arbitration clause which stated, in part, that the “arbitrator may grant injunctions or other relief in such controversy” arising out of the agreement.  Arbitration was subject to the rules of the American Arbitration Association (“AAA”).

Mao left Seagate in September 2006 to join Western Digital, a competitor. Seagate then commenced a district court action seeking injunctive relief and alleging misappropriation of trade secrets related to TMR technology.  Western Digital invoked the arbitration clause of Mao’s employment agreement with Seagate, and the district court stayed the lawsuit pending arbitration.

Things started to go south for Western Digital and Mao argued that three of the alleged trade secrets had been publicly disclosed before Mao left Seagate because they were included in a PowerPoint presentation he gave at a conference.  Seagate argued that Mao had fabricated and inserted additional PowerPoint slides containing the information after the fact to make it appear as if this information had been made public.  The arbitrator found that “[t]he 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 found that the fabrication and Western Digital’s complicity was an egregious form of litigation misconduct that warranted severe sanctions.

Specifically, the arbitrator precluded any evidence or defense by Western Digital and Mao disputing the validity of the three trade secrets or any defense to the allegation of misappropriation or use of the three trade secrets, which resulted entry of judgment on liability and monetary damages in the amount of $525 million, calculated based on an unjust enrichment method. Western Digital brought a motion to vacate the award in district court. The district court granted the motion in part, finding that the arbitrator exceeded the scope of his authority under the arbitration agreement.  The Minnesota Court of Appeals reversed the district court on the ground that Western Digital had waived its right to challenge the arbitrator’s ability to issue punitive sanctions by not raising the issue with the arbitrator himself (and because Western Digital had earlier sought sanctions against Seagate in the same matter).

The Minnesota Supreme Court affirmed the Court of Appeals although based on a different analysis. The Supreme Court held that Western Digital did not waive its right to challenge the Arbitrator’s authority under Minnesota statutes regarding arbitrations and requests for vacatur, specifically Minn. Stat. Section 572.19.   The high Court then went on to conclude that the arbitrator did have the authority to impose the disputed sanctions, looking at the employment agreement, AAA arbitration rules, and case law.

The Court noted that:

Some believe that arbitration has benefits, potentially including faster resolution and less expense than the judicial system as well as a higher 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.

It is unclear if a district court could have reached the same result as the arbitrator in the Seagate case, but the Minnesota Supreme Court’s decision suggests that arbitrators can have greater discretion than judges.  The case certainly highlights the fact that arbitration may not always be the best forum, depending on which side of the dispute you are on.

Jackson Lewis P.C. © 2014
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Supreme Court Hears Oral Arguments Regarding Limits on Class Arbitration Waivers in Federal Cases

Womble Carlyle

Recently, the United States Supreme Court heard oral argument in American Express Co. v. Italian Colors Restaurant, a case that will have a substantial impact on the enforceability of arbitration agreements that contain class action waivers.  Italian Colors picks up where the Supreme Court left off in AT&T Mobility, LLC v. Concepción when a sharply divided Supreme Court held that a state law purporting to invalidate class action waivers in arbitration agreements was preempted by the Federal Arbitration Act.

Here, the Supreme Court is confronting the question of whether, as the Second Circuit Court of Appeals put it, the “federal substantive law of arbitrability” can invalidate class action waivers in arbitration agreements when the underlying claims are based on federal law.  The Second Circuit Court of Appeals determined that federal law requiredthe invalidation of the class action waiver because the cost of litigation compared to the relatively minimal amount of potential damages would effectively prohibit plaintiffs from pursuing their federal claims.  Concepción did not compel a different result, according to the Second Circuit, because in that case there was no showing that ”the practical effect of the enforcement would be to preclude [the plaintiff class’s] ability to vindicate their statutory rights.”

The Supreme Court’s decision in this case will have a substantial impact on the viability of class action waivers contained in arbitration clauses.  If the Second Circuit’s ruling is upheld, it will provide plaintiffs with a way around the limitations of Concepción if they are able to show that litigating a matter on an individual basis would be prohibitively expensive.  A decision reversing the Second Circuit would give business owners a greater ability to avoid complex and expensive class action litigation through carefully worded arbitration agreements.

The Supreme Court is expected to decide the case before the end of June 2013.

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Not so Fast at the Eden Roc

The National Law Review recently published an article, Not so Fast at the Eden Roc, written by Nelson F. Migdal with Greenberg Traurig, LLP:

GT Law

 

Within hours of the appeals court’s ruling [Marriott International v Eden Roc 3-26-2013.pdf], there have been announcements about the demise of the long-term hotel management agreement and the hotel owner’s inviolate right to terminate (revoke) management agreements “at-will.”  But the wiser course might be to not speak too soon, but, rather, to ponder the consequences.  Remember that Judge Schweitzer’s prior ruling on October 26, 2012 granted Marriott’s request for a preliminary injunction to prevent the hotel owner from removing the hotel operator in another of a series of “midnight raids,” where the hotel owner sweeps in and removes the hotel operator.  The hotel operator at the Eden Roc chose to stand its ground, and the injunction order maintained the status quo.  In many situations, the parties are able to resolve their dispute, either on their own or with the assistance of a mediator.  In fact, the Judge urged the parties to do just that.

The parties were not able to resolve their differences, and on March 26, 2013, a New York appeals court vacated Judge Schweitzer’s injunction.  This is not a sweeping and staggering new law. Citing the 1991 Woolley case, the order merely confirms that a principal may freely remove its agent and terminate the agency relationship “at-will” (absent the presence of a “coupled interest” as part of the contract; see the attached link to our prior piece on the Turnberry decision).  (To this extent, I disagree with the appellate court’s dicta that the agreement in question is not an agency agreement; in fact it is). The order further confirms that certain contracts that have the characteristics of a personal services contract cannot be enforced by means of an injunction.  It is also not news that if a hotel owner desires to terminate its management agreement with the hotel operator in this manner, that the hotel owner may be answerable in damages to the hotel operator.  Some blog posts within the last 24 hours make reference to the recent Fairmont Hotels & Resorts termination at the Turnberry Resort.  Very few of those blog posts complete the factual story and note that the hotel owner ultimately paid Fairmont damages reported to be roughly $19,000,000, representing the approximate present value of expected future management fees. Depending on the performance of the hotel, an Owner’s summary revocation of a hotel management agreement could be akin to selling “puts”; you get to own the stock, but do you really want to own it that cost?

So, let’s just be more judicious here.  Hotel owners and hotel operators actually do talk with each other more often than not, and do enter into legally binding agreements for management of the owner’s hotel.  I will continue to advocate for good faith negotiation over litigation, and monitor the complete story, including the fact that terminating the hotel management agreement may grant an owner its wish to regain the hotel, but that will come at a price, and then, the next step is that the hotel owner will need to replace the removed hotel operator with yet another hotel operator – which hotel owners realize can add a significant expense for the owner.

©2013 Greenberg Traurig, LLP

The ABC’s of Government Contract Claims – 10 Ways to Maximize Your Chance of Success

Sheppard Mullin 2012

1. Understand the Basic Contract Requirement – Every contract lawyer will begin an assessment with a very simple, fundamental question, i.e., “What does the contract say?” Your obligation is to perform to the contract; nothing more; nothing less.

2. Identify Variances Between What the Contract Says and What You Actually Are Doing – If you are doing something other than what the contract actually says, you may be entitled to relief.

3. Ask Yourself “Why Am I Doing This?” –You cannot blame Uncle Sam for your or (generally) your suppliers’ inefficiencies and delinquencies, but there are many Government acts or omissions that might entitle you to relief, e.g., Government direction, a defective specification, an acceleration order, late or defective GFP/GFE/GFI, and Government delinquencies relating to contractually prescribed review periods.

4. Do a Disciplined “Root Cause” Analysis – You perform these kinds of analyses in reporting on discrepancies to the Government. Require no less when analyzing a possible claim. Do not accept the easy answer, e.g., “We missed it.” If that is the response, probe – “What did you miss exactly?” “Show me where it was.” “Let me see the documentation you missed.”

5. Notify the Contracting Officer – Tell the PCO, in writing, of the circumstance that you believe gives rise to a change. Deprive the PCO of the ability to claim, later on, “If only I had known, I would have told you to stop doing that.”

6. Accept No Substitutes – No one but the Contracting Officer has the authority to change the contract. COTR’s, contracting specialists, Program Managers, general officers – they all love to issue orders and they will jawbone you to follow them. Don’t. Report the order to the PCO and ask the PCO to confirm the order to you in writing.

7. Trust But Verify – This one is simple. Never act on an oral direction. Send a letter to the PCO asking for confirmation. 8. Read Your “Changes” and “Notification of Changes” Clause(s) – They impose time limits for notification of a change. Failure to comply can be overcome in many cases, but why take that chance?

9. Use Change Order Accounting – A valid changes claim is only as good as your ability to prove quantum. Establish separate job numbers to collect the costs of the changed work.

10. Earn Interest – An REA can linger without closure for months, and years. If there is no progress, transform the REA into a certified claim and start the accrual of interest. And remember, the statute of limitations for submission of a certified claim is six years from the date of its accrual.

And for those of you who read this far, here is your bonus eleventh tip:

11. Read Those Unilaterally Issued Change Orders – They invariably say the work is not a change and ask you to sign. Don’t.

Copyright © 2013, Sheppard Mullin Richter & Hampton LLP

Transitional Program for Covered Business Method Patents under the America Invents Act

Transitional Program for Covered Business Method Patents under the America Invents Act, an article by Lee Davis and Gregory L. Porter with Andrews Kurth LLP was recently featured in The National Law Review:

Andrews Kurth

The Leahy-Smith America Invents Act (AIA) includes expanded procedures for challenging patents administratively rather than through the courts. One of the new post-grant review procedures for challenging covered business method patents went into effect on September 16, 2012.

Post-grant review of covered business method patents is available to challenge any patent, even patents issued before the effective date of the AIA, and is handled by the newly created Patent Trial and Appeals Board (PTAB). For purposes of post-grant review, a “covered business method” (CBM) patent claims a method or corresponding apparatus for performing data processing or other operations used in practice, administration, or management of a financial product or service, except that the term does not include patents for technological inventions. Whether a patent claims a “technological invention” is considered on a case-by-case basis, and a technological invention is defined as claimed subject matter that as a whole recites a technological feature that is novel and unobvious over the prior art and solves a technical problem using a technical solution.

There are likely to be patents that fall on the outskirts of the definition of a covered business method patent. The Final Rules promulgated by the U.S. Patent and Trademark Office provide some guidance. For example, the Rules suggest that CBM patents subject to post-grant review are anticipated to be typically classified in Class 705 of the United States Patent Classification System. Class 705 is the classification for patents directed to data processing in the following areas: financial, business practice, management or cost/price determination. While the Rules specifically refer only to Class 705, they make clear that patents in other classifications, which fit the definition of business method patents, may also be subject to post-grant review.

To institute post-grant proceedings for CBM patents, the person challenging the patent must have been sued for infringement or have been charged with infringement under the patent. If post-grant review is sought, a party may seek a stay of any pending civil patent infringement action. In considering whether to grant the stay, the district court decides whether a stay will simplify the issues in question and streamline the trial, whether discovery is complete or a trial date has been set, whether a stay would prejudice the nonmoving party or present a tactical advantage to the moving party, and whether a stay will reduce the burden of litigation on the parties and the court. A party may take an immediate interlocutory appeal to the U.S. Court of Appeals for the Federal Circuit for de novo review of a district court’s decision. Affording immediate interlocutory appeal of the district court’s decision indicates the AIA’s strong preference for use of the new post-grant review proceedings for covered business method patents. Therefore, absent unusual circumstances it appears that most lawsuits in their early stages will be stayed.

Institution of post-grant review proceedings requires that the petitioner demonstrate that it is more likely than not that at least one of the claims challenged is unpatentable. If instituted, a trial proceeds only on the challenged claims for which the threshold standard has been met. The Board will enter a Scheduling Order concurrent with a decision to institute a trial that sets due dates for taking action and accounts for the complexity of the proceeding. The Scheduling Order sets out a sequenced discovery process where each party is provided respective discovery periods, beginning with the patent owner. The sequenced discovery is to allow meaningful discovery before motions and oppositions are submitted during trial. Thus, discovery before the PTAB is focused on what the parties reasonably need to respond to the grounds raised by their opponent. The types of discovery available under the Federal Rules of Civil Procedure can be sought by the parties, and requests for such discovery are considered under a “good cause” standard. The clear intent here is to reduce the scope and amount of discovery and its attendant costs from that in a district court case.

Each party to the proceeding is afforded an opportunity to present their case before at least three members of the PTAB at an oral hearing. Prior to any decision by the Board on the merits, the parties may agree in writing to terminate the proceedings. The PTAB will enter a final written decision not more than a year from the date trial was instituted, except that the time may be extended up to six months for good cause. A party dissatisfied with the PTAB’s final written decision may file a request for rehearing and/or an appeal to the U.S. Court of Appeals for the Federal Circuit.

Several petitions challenging a number of business method patents have already been filed since the new post-grant review procedures took effect. Based on today’s count, the PTAB Patent Review Processing System (PRPS) shows 10 pending petitions for post-grant review of alleged CBM patents. It is interesting to note that all of the patents are classified in Class 705, therefore we are unlikely to have an early ruling on a patent outside of Class 705. While the first petition was filed on September 16, 2012, as of about one month later, no trial has been instituted or scheduling orders entered for even the oldest petition. Thus, answers to what patents will be considered, what discovery will be sought and allowed, and the time to trial under these rules remain open.

In sum, only time will tell if the new post-grant procedures provide a more efficient, less costly manner of challenging business method patents.

© 2012 Andrews Kurth LLP

Court Grants Summary Judgment Against Coca-Cola in Breach of Collective Bargaining Agreement Claim by United Steel Workers

The National Law Review recently published an article by Bryan R. Walters of Varnum LLP regarding Coca-Cola’s Breach of Collective Bargaining Agreement:

Varnum LLP

 

In Local Union 2-2000 United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial, Chemical and Service Workers International Union v. Coca-Cola Refreshments U.S.A. Inc(W.D. Mich. Nov. 21, 2012), the Honorable Janet T. Neff granted summary judgment in favor of the United Steel Workers against Coca-Cola on a breach of contract claim concerning wage increases under the parties’ collective bargaining agreement. The opinion addressed two interesting legal issues.

First, the court rejected Coca-Cola’s statute of limitations argument under 29 U.S.C. § 160(b), which provides that “no complaint shall issue based upon any unfair labor practice occurring more than six months prior to the filing of the charge with the Board and the service of a copy thereof upon a person against whom such charge is made.”  Coca-Cola argued that, because the United Steel Workers had filed an unfair labor practice charge concerning their unpaid wages claim approximately nine months after becoming aware of the issue, Section 160(b) barred the union’s claim.  The court rejected this argument, concluding that it would be “inappropriate” to apply the six-month limitations period to what was a pure breach of contract claim.  Instead, the court held that the applicable statute of limitations was the six-year statute of limitations under Michigan law for breach of contract actions.  Op. at 13–15.

The second significant issue related to interpretation of the collective bargaining agreement.  The collective bargaining agreement included schedules for wage increases in “Year 1, Year 2, and Year 3” without further defining those terms within the primary contract document.  The court held that this contract language was ambiguous, requiring introduction of parol evidence of the parties’ negotiation history. The court found clear and convincing evidence in the negotiating history that the union’s interpretation of the “Years” was correct, in that “Year 1” referred to the first 365 days after the effective date of the contract, etc.  Id. at 19.

The court also concluded that there was clear and convincing evidence of a mutual mistake in the drafting of the final collective bargaining agreement. Coca-Cola listed specific dates for the wage adjustments in an appendix to the collective bargaining agreement. The court found that the dates listed in the appendix were not bargained for and never agreed to by the parties, rejecting as self-serving subsequent statements from Coca-Cola’s negotiators that Coca-Cola did not consider the dates unilaterally added to the appendix by Coca-Cola a “mistake.”  Id. at 20–21.

© 2012 Varnum LLP

When Can You Claim A Color As Your Trademark?

In its recent decision in Christian Louboutin S.A. v. Yves Saint Laurent America, Inc.the Second Circuit held there was no “per se rule that would deny protection for use of a single color as a trademark in a particular industrial context.”  The Court found that the single color red on the sole of a women’s shoe that contrasted with the color on the upper portion of the shoe could be protected as a trademark in the fashion industry. A Federal District Court in California ruled recently, that a company’s use of the color orange for markings and text on its medical syringe could not be protected as a trademark since the color was “functional” when applied to that product. It determined that the color orange was functional in the medical industry because it signifies that a device is for oral use. So, how does this color-as-a-trademark work?

Many companies have successfully obtained trademark protection for a single color, for example,  United Parcel Service’s registration for the color brown for transportation and delivery services, Reg. 2901090; Tiffany’s multiple registrations for a particular color of  blue used on bags, boxes and various other products and services, Reg. Nos. 4177892, 2359351, 2416795, 2416794, 2184128; 3M’s registrations for yellow as a trademark for telephone maintenance instruments and POST-IT® notes, Reg. Nos. 2619345, 2390667; and Owens Corning’s registrations for the color pink for masking tape, insulation, and other products used in the building and construction industry, Reg. Nos. 3165001, 2380742, 2380445, 2090588, 1439132.

In Qualitex Co. v. Jacobson Prods. Co., the U.S. Supreme Court held that color alone may be protected as a trademark, “when that color has attained ‘secondary meaning’ and therefore identifies and distinguishes a particular brand (and thus indicates its ‘source’).” The Court held color may not be protected as atrademark when it is “functional”. There are two types of functionality: “utilitarian” and “aesthetic.” A color is functional under the utilitarian test if it is essential to the use or purpose of the product, or affects the cost or quality of the product.  A  color is aethestically functional if its exclusive use “would put a competitor at a significant non-reputation-related disadvantage”.   If color “act(s) as a symbol that distinguishes a firm’s goods and identifies their source, without serving any other significant function,” it can be protected as a trademark. So, how do you know if a color you are using or plan to use in your business can be protected as a trademark to the exclusion of your competitors?

Protecting color as a trademark can be a very powerful advantage if the color has no particular function or meaning in the industry in which it is used. However, in order to claim color as a trademark, the color must be showcased as a source indicator for products or services in its marketing campaigns and advertising materials. Good examples of this are UPS’s reference to itself as “brown” in its advertising and Owen Corning’s blatant use of the color pink in its advertising.  Both companies very clearly highlight a color in their ads and identify it strongly with their respective products and services. This type of careful and clever planning, implementation, and marketing strategy is critical to developing a strong, unique and highly recognized color trademark.

Whatever color is used, it must not be “functional” in any respect in the industry in which it is used. Various “functionality” tests have been developed by the courtsover time, and  some include:

  • whether the design (or color) yields utilitarian advantage
  • whether alternative designs (or colors) are available
  • whether advertising touts utilitarian advantages of the design (or color), and
  • whether the particular design (or color) results from a comparatively simple or inexpensive method of manufacture.

Functionality is evaluated within the context of the specific industry in which the goods or services for which color is claimed as a trademark will be offered. Had the markings on the medical devices been red instead of orange in the case before the Federal District Court in California mentioned above, it is possible that there would not have been a finding of functionality. Thus, know your industry before selecting a color on which to focus your marketing and advertising efforts.

Thinking outside the box when selecting trademarks and planning marketing strategy is critical in any industry. The explosion of social media and changes in traditional advertising and marketing methods have changed the way products and services are recognized. Companies need more unique and  nontraditional approaches for a competitive edge. Promoting non-traditional trademarks such as a color, or other unique source indicators such as sounds, scents, flavor, and product shapes, may provide a fresh method to attract and entice a wider audience.

So, get out those color wheels and start plotting a new course.

©1994-2012 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.