Category: Trade Secrets

NLRB Issues Memo on Non-competes Violating NLRA

On May 30, 2023, Jennifer Abruzzo, the general counsel for the National Labor Relations Board (NLRB), issued a memorandum declaring that non-compete agreements for non-supervisory employees violates the National Labor Relations Act. The memo explains that having a non-compete chills employees’ Section 7 rights when it comes to demanding better wages. The ­theory goes that employees cannot threaten to resign for better conditions because they have nowhere to go. Non-compete agreements also prohibit employees from seeking better working conditions with competitors and/or soliciting coworkers to leave with them for a local competitor.

Experts have yet to weigh in, but ultimately this issue will be decided by the federal courts. As an employer, if you employ any non-supervisory employees that are subject to a non-compete agreement, an unfair labor practice charge could be filed, and it appears the NLRB would lean towards invalidating the agreement, though all evidence would have to be taken into consideration.

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Unfashionably Late: Seventh Circuit Rejects Misappropriation Claim Premised On Prototype Created Eleven Years Prior

The Seventh Circuit recently affirmed summary judgment in favor of a former employee and his new employer on claims for misappropriation of trade secrets relating to a prototype of an actuator created eleven years prior, holding that the inference that the defendant used his knowledge of the prototype more than a decade later was “barely conceivable” and “exceptionally unreasonable.” REXA, Inc. v. Chester, — F.4th —, 2022 WL 2981167, at *6 (7th Cir. 2022) (internal quotation marks omitted).

In 2002, Mark Chester, an engineer at Koso America, Inc. (“Koso”), participated in a project to create a new valve for a hydraulic actuator. An actuator is a component of a machine that produces motion. While the project was unsuccessful, it did produce an experimental prototype of another actuator. Koso shelved the experimental prototype due to the improbability of commercial success. The following year, Chester left Koso.

After more than a decade had passed since Chester worked on the 2002 project for Koso, Chester and his new employer, MEA Inc. (“MEA”), built a new actuator prototype, later known as the Hawk. Chester and MEA filed a related patent application, which was approved in part. REXA, Inc. (“REXA”), a company affiliated with Koso, brought suit against Chester and MEA for misappropriation of trade secrets under the Illinois Trade Secrets Act (“ITSA”), among other claims. REXA argued that Chester and MEA’s actuator incorporated and disclosed confidential designs contained within the prototype Koso developed in 2002. The district court granted summary judgment in favor of Chester and MEA. REXA appealed.

On appeal, the Seventh Circuit affirmed summary judgment in favor of defendants on the misappropriation claims. First, the Seventh Circuit agreed that REXA failed to identify a concrete trade secret, as the Court was unable to determine which aspects of the 2002 designs are known to the trade, and which are not. The Court explained that several aspects of the 2002 actuator prototype are widely known in the industry, which by definition, is not sufficiently secret to qualify for protection under the ITSA.

Second, the Seventh Circuit held that even if REXA had identified a trade secret, REXA had not established that defendants misappropriated trade secrets when MEA filed its patent application or developed the Hawk actuator. With respect to MEA’s patent application, the Court explained that REXA’s allegations “rest on a series of untenable inferences.” Id. Indeed, eleven years had passed since Chester worked on the actuator prototype, and it was undisputed that he never saw or took any documents with him when he left Koso. Additionally, REXA did not cite any case where a court “inferred” a misappropriation of trade secrets despite a lack of evidence that the defendant seized or possessed documents, nor could the Seventh Circuit find any such case. As such, the Court found the lack of evidence, coupled with the eleven-year gap, “renders the inferences that REXA asks us to draw exceptionally unreasonable.” Id.

Regarding the design of MEA’s Hawk actuator, the Seventh Circuit held that the 2002 prototype did not include features of the patent application that made the Hawk both a non-obvious improvement over prior art and commercially valuable. Thus, Chester and MEA could not have misappropriated trade secrets contained within the 2002 prototype.

REXA serves as an important reminder that trade secret claimants must identify with specificity the elements that distinguish the alleged trade secret from general knowledge in the field or public domain. Additionally, REXA confirms that, at least in the Seventh Circuit, courts are hesitant to draw inferences supporting misappropriation claims without any evidence the defendant seized or possessed documents from the plaintiff, particularly if a significant period of time passes before the alleged misappropriation occurs.

Article By Mikela T. Sutrina and Jenna G. Crawford of Sheppard, Mullin, Richter & Hampton LLP

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Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.

U.S. Government Pursues More Aggressive Action to Curb Espionage at Universities

The U.S. Governmental Accountability Office (GAO) thinks the FBI and other agencies are not doing enough to address the espionage threat on U.S. university campuses. It issued a report, “Enforcement Agencies Should Better Leverage Information to Target Efforts Involving U.S. Universities” on June 14, 2022, urging the FBI, the Department of Homeland Security, and the Department of Commerce to step up their outreach efforts to address the threat. Commerce, DHS, and FBI have all concurred with GAO’s recommendations. As a result, U.S. colleges and universities to face yet another organizational risk: an increase in campuses visits by export control and law enforcement agents.

The threat: U.S. export control laws consider the disclosure to non-U.S. persons of technology, software, or technical data to be exports, even if the disclosure occurs in the United States.

The overwhelming majority of non-U.S. persons studying and working at U.S. universities are not security risks and are valued members of their academic organizations. But U.S. intelligence agencies have long warned that foreign state actors actively acquire sensitive national security data and proprietary technology from U.S. universities.

A lot of the technology flow abroad from U.S. universities is perfectly legal, for two reasons: First, most university research, even in cutting-edge technology, is exempt from export controls under an exemption known as “fundamental research.” Second, even in cases where the fundamental research exemption does not apply, it takes time for the U.S. government agencies to add new items to the export control lists they enforce; namely the U.S. Munitions List, administered by the U.S. Department of State, Directorate of Defense Trade Controls; and the Commerce Control List, administered by the U.S. Department of Commerce, Bureau of Industry and Security.

But at the same time, either through inadvertence or outright espionage, unlawful transfers of technology to foreign nationals take place. A 2006 report by the U.S. Office of the National Counterintelligence Executive found that a significant quantity of export controlled U.S. technology is released to foreign nationals in the United States unlawfully each year.

Clash of values: One important issue for higher education in addressing trade controls compliance is cultural in nature. U.S. universities value open, collaborative environments which drive and accelerate innovation. For those institutions, the idea of cutting off information flows conflicts with those cultural norms. By contrast, U.S. export controls aim to protect U.S. national security by hindering the flow of sensitive information to potential adversaries.

GAO’s recommendations: The GAO report recommends that U.S. trade control agencies take more aggressive steps to curb foreign access to sensitive technologies at U.S. universities. The recommendations include steps to enhance risk assessment and ranking of universities by risk, and steps to increase agency cooperation in planning and conducting outreach visits to universities. As a direct result of this report, U.S. universities are going to receive more visits from U.S. government agents.

Practical takeaways:

  • Universities: Consider reevaluating your risk. The threat has evolved, and the U.S. government response is also evolving. A risk evaluation using modern tools such as a premortem can help you know where to dedicate resources to update your export control policies, procedures, and training. Any unlawful escape of technology or technical data are much more likely to be detected and punished under the new regime, in part based on the GAO report. Organizations have to evolve with the threat.
  • Students, faculty, and administrators: Consider how to jealously guard your academic freedom, but be wary of the national security risks of sensitive technology falling into the wrong hands.
  • Research sponsors: More and more U.S. university research is sponsored by U.S. companies and government agencies. Research sponsorship agreements play a major role in striving for both national security and academic goals of the U.S. university system. Sponsors need to be sensitive to how these agreements are drafted. Sponsors must be aware of the espionage threat to their technology. But imposing too many restrictions in the contract may undermine the applicability of the fundamental research exemption and hinder the success of the project.

Conclusion: In the face of organizational threats, institutions do best when they heed their values. In the realm of protecting sensitive technology, we must constantly evolve with the threat. But we must also continue to carefully balance national security considerations with our bedrock values of academic freedom and openness.

Article By J. Scott Maberry of Sheppard, Mullin, Richter & Hampton LLP

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Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.

War and Peace at Rospatent: Protecting Trademarks in Russia

Yes, we shall live, Uncle Vanya. Could Anton Chekhov ever have imagined that his literary work would be used to sell hamburgers? In March, a controversial application for an “Uncle Vanya” mark in connection with “snack bars, cafes, cafeterias, restaurants, bar services, canteens, cooking and home delivery services,” incorporated the red-and-yellow golden arches logo of McDonald’s. It was just one in a series of recent applications in Russia that have caused serious pearl-clutching among intellectual property lawyers.

Since Russia invaded Ukraine on February 24, the country has faced numerous financial, trade and travel sanctions. It’s also been snubbed by major intellectual property partners. In a February 28 letter, a group of whistleblowers and staff representatives at the World Intellectual Property Organization (WIPO) called for the entity’s public condemnation of Russia’s invasion of Ukraine and the rapid closure of its Russia Office. The European Patent Office severed ties with Russia on March 1, and shortly thereafter the United States Patent and Trademark Office (USPTO) confirmed that it had “terminated engagement” with officials from Russia’s agency in charge of intellectual property, the Federal Service for Intellectual Property (Rospatent), and with the Eurasian Patent Organization.

In response, Russia has adopted an aggressive posture in the intellectual property realm where it once sought to peacefully engage with the world, an effort that began well before the collapse of the Union of Soviet Socialist Republics. When the USSR joined the Paris Convention in 1965, it eagerly sought to develop Soviet intellectual property. Yet in March, Russia issued Decree No. 299, which effectively nullifies the enforcement value of Russian patents owned by entities and individuals in “unfriendly” countries including the United States, European Union member states, the United Kingdom, Ukraine, Japan, South Korea, Australia and New Zealand.

Russian Prime Minister Mikhail Mishustin also greenlighted the importation of branded products without the brands’ permission, creating gray market headaches. As Boris Edidin, deputy chairman of the Commission for Legal Support of the Digital Economy of the Moscow Branch of the Russian Bar Association, clarified in a recent legal commentary published by Moscow-based RBC Group: “entrepreneurs have the opportunity to import goods of well-known brands, regardless of the presence or absence of an official representative on the Russian market.”

Russia, like the EU, had traditionally adopted a tougher stance than the United States on parallel imports. Now, however, “both by ‘anti-crisis’ measures and by cloak-and-dagger methods” Russia is sure to do all it can to keep its planes flying and its factories running, said Peter B. Maggs, research professor of law at the University of Illinois at Urbana-Champaign and noted expert on Russian and Soviet law and intellectual property.’

The increase in parallel imports makes trademark prosecution and maintenance more important than ever in Russia, but it’s not the only cause for concern. In March, as political tensions reached a crescendo, a Russian court declined to enforce the trademark rights for Peppa Pig, the famous British cartoon character, due to “unfriendly actions of the United States of America and affiliated foreign countries.” (See case No. A28- 11930/2021 in the Arbitration Court of the Kirov Region; an appeals court later overturned this holding, in a win for the porcine star.) RBC Group reported in March that it had tracked more than 50 trademark applications by Russian entrepreneurs and businesses for the marks of famous foreign brands, many in the fashion and tech sector. While most trademark applications were explicit copies of existing brands, in other cases applicants were content to imitate well-known trademarks and trade dress.

For example, a Russian entrepreneur from a design studio called Luxorta applied to register an IDEA brand that mimics the style and yellow-and-blue color schemes of famous Swedish brand IKEA. He told RBC that his business had suffered after IKEA suspended its Russian operations, and that he aspired to develop his own line of furniture and work with IKEA’s former suppliers. Other applicants RBC interviewed indicated they hoped to sell the marks back to foreign companies once those companies return.

On April 1, Rospatent published a press statement clarifying that “in case an identical or similar trademark has already been registered in the Russian Federation, it would be the ground for refusal in such registration.” More recently, the head of Rospatent, Yury Zubov, has responded with frustration to news coverage of trademark woes in Russia, noting that intellectual property legislation is unchanged and the “Uncle Vanya” hamburger mark had been withdrawn.

Prof. Maggs agreed that those trying to register or use close copies of foreign marks in Russia will likely fail. He cited a June 2 decision by the Court of Intellectual Property Rights to uphold lower court findings that the mark “FANT” for a carbonated orange soft drink violated unfair competition laws, because it was confusingly similar to the “FANTA” brand owned and licensed to third parties by Coca-Cola HBC Limited Liability Company. Russia’s consumer protection agency had originally brought the case.

The Court reasoned that “confusion in relation to two products can lead not only to a reduction in sales of the FANTA drink and a redistribution of consumer demand, but can also harm the business reputation of a third party, since the consumer, having been misled by the confusion between the two products, in the end receives a different product with different quality, taste and other characteristics.”

In addition, Prof. Maggs said, “the Putin Regime is and will be promoting Russian products as ‘just as good’ as foreign products. An example, obviously approved at high levels is the adoption of a totally different trademark for the sold McDonald’s chain,” he said, referring to the June 12 reopening of former McDonald’s restaurants in Moscow under the name “Vkusno & tochka” (“Tasty and that’s it”).

Brands should be wary of inadvertently jeopardizing their Russian marks by suspending local operations; a trademark may be cancelled in Russia after three years of uninterrupted non-use. While Article 1486 of the Russian Civil Code states that “evidence presented by the rightholder of the fact that the trademark was not used due to circumstances beyond his control [emphasis added] may be taken into account,” brands claiming infringement still risk being ineligible for damages or injunctive relief, because technically they are not losing sales while pausing business in Russia.

Moreover, if a company has suspended sales in Russia to show solidarity with Ukraine but seeks to stop sales in Russia by others, it may be accused of violating the good faith requirement of Article 10 of the Russian Civil Code, which states that exercising “rights for the purpose of limiting competition and also abuse of a dominant position in a market are not allowed.”

Russia remains a party to numerous intellectual property treaties, including the Paris Convention, the Agreement on TradeRelated Aspects of Intellectual Property Rights and the Hague Agreement. But as the Peppa Pig case illustrates, court decisions on intellectual property are not immune to political heat.

The question looming on the horizon is whether, if the current crisis escalates, the Russian government would outright cancel trademarks from hostile countries. It would not be the first time a state denied intellectual property rights during political conflicts. In the aftermath of the First World War, for example, the US government advocated for the “expropriation” of property, including intellectual property, of German nationals, perceived as responsible for the militarism of their government1. And in the 1930s, the German patent office removed Jewish patent-holders from its roster as part of its notorious “Aryanization” process. However, because Russia is not officially at war with the countries it has deemed “unfriendly,” these precedents are not directly on point.

Brands that have suspended business operations in Russia should monitor their trademark portfolios closely for infringement and consider how they can prove use of each mark during a prolonged absence from the Russian market. In other words: keep your eyes on Uncle Vanya.

FOOTNOTES

1 Caglioti DL. Property Rights in Time of War: Sequestration and Liquidation of Enemy Aliens’ Assets in Western Europe during the First World War. Journal of Modern European History. 2014;12(4):523-545. doi:10.17104/1611-8944_2014_4_523.

Article By Cynthia Martens of Katten

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©2022 Katten Muchin Rosenman LLP

The Way to Protect Your Business? What You Need to Know About Trade Secrets

What do Coca-Cola’s secret formula, McDonalds’ special sauce, and Google’s search algorithm have in common? Each is a protected trade secret. In other words, they are proprietary information vital to these companies’ survival and are among their most valuable corporate secrets.

A trade secret can be anything of value to your company that is unique and not known to persons outside the company. For example, a trade secret can be a recipe, process, formula, strategy, technique, or device that your competitors do not know, do not have, and cannot use.

Trade secret law can be less risky in some respects than other forms of intellectual property like patents, copyrights, and trademarks. The application process for a patent requires that a company disclose the secret itself. With that comes an inherent risk—should the application be denied, the secret is no longer a secret. While the protection afforded by trade secret law may be considered fragile, meaning constant vigilance is required to maintain secrecy, the secret remains a secret; while a patent, even after issuance, carries some risk of post-grant invalidation. By contrast, a trade secret owner may ultimately enjoy greater certainty by maintaining protection, potentially forever. However, a trade secret is entitled to protection only for as long as it is kept a secret. If the information is lawfully disclosed to the public, it is no longer confidential and loses its trade secret protection forever.

Governing Law: Both federal and state law recognize the time and money invested to gain competitive advantages like trade secrets and protect those advantages. Federal Law: Under the controlling federal legislation passed by Congress in 2016, the Defend Trade Secrets Act (“DTSA”) defines a trade secret as something used in a company’s business that (a) is not known or readily accessible by competitors, (b) has commercial value or that provides a competitive advantage in the marketplace, and (c) the owner of the information protects from disclosure through reasonable efforts to maintain its secrecy. Prior to the DTSA’s enactment in 2016, no federal statute promulgated a federal trade secret private right of action.

In addition to the DTSA’s rules regarding trade secrets, additional federal rules apply. The Economic Espionage Act of 1996 makes the theft of trade secrets a federal crime. The Act prohibits the theft of a trade secret by a person intending or knowing that the offense will injure a trade secret owner. The Act also makes it a federal crime to receive, buy, or possess trade secret information knowing it to have been stolen. The Act allows the government to punish thefts of trade secrets by imprisonment up to 15 years and/or fines up to $5 million, depending on whether the defendant is an individual or a corporation. A private party can still sue for trade secret theft even if the federal government files a criminal case under the Economic Espionage Act.

New York State Law: Prior to federal law, most states had some form of trade secret law that varied state to state. The Uniform Trade Secrets Act (“UTSA”) was published in 1979 and amended in 1985 to provide a uniform trade secret law. Many states, including Pennsylvania in 2004 and New Jersey in 2012, adopted the UTSA. Notably, New York did not adopt the UTSA and does not have its own state trade secret statute, and thus relies on the common law.

Under New York common law, “misappropriation” refers to the acquisition of a trade secret by someone who knows that the trade secret was acquired by improper means—theft, bribery, misrepresentation, breach, or inducement of a breach of duty to maintain secrecy. The New York statute of limitations requires that any action for misappropriation be filed three years from the date the misappropriation is discovered. Further, New York law requires that the use of the trade secret be continuous in the operation of a business, rather than one-time use.

Cartier v. Tiffany: Cartier recently filed suit against its luxury rival Tiffany & Co. in New York state court. Cartier v. Tiffany & Co., et al.,650925/2022 (N.Y. Sup.). Richemont-owned Cartier sets out claims against LVMH’s Tiffany & Co. for various contractual and tort claims and trade secret misappropriation against both defendants [Who is the other defendant?]. Cartier seeks preliminary and permanent injunctive relief to require defendants to refrain from using the allegedly misappropriated information and return it to Cartier, as well as a judgment for any “compensatory damages that may be caused by [Tiffany’s] wrongful conduct.”

The complaint states that Tiffany & Co. lured former Cartier employee Megan Marino away from her role as its Assistant Manager for Jewelry Merchandising to learn more about Cartier’s “High Jewelry” collection, where pieces typically cost $50,000 to $10 million.

Cartier claims Marino was bound by non-disclosure and non-solicitation agreements she had signed as part of her role at Cartier and that she breached those agreements by using Cartier’s confidential business information to benefit Tiffany. This information includes Cartier’s “very sensitive and valuable” internal company documents that Marino forwarded to her personal email. Specifically, Marino “referenced a [Cartier] Excel spreadsheet” that “detailed Cartier’s confidential, High Jewelry assortment information.” Based on that spreadsheet, Cartier alleges, Marino “created a new Excel document, derived entirely from Cartier’s confidential information,” including “the total number of High Jewelry pieces at various Cartier locations in the U.S.” Cartier maintains this information is “only accessible by a limited number of Cartier employees [and] not known outside of Cartier” and “allow[s] a sophisticated competitor to replicate key strategies and, with relative ease, to reverse engineer how Cartier allocates, merchandises, and prices its High Jewelry stock.” Cartier claims the proprietary and confidential nature of this information amounts to a trade secret-protected asset.

Cartier further claims Tiffany has a history of poaching employees and maintains a “disturbing culture of misappropriating competitive information.” Given the alleged pattern, Cartier asserts that Tiffany now possesses “a substantial amount of [its] confidential and trade secret information that it obtained from Marino and other former Cartier employees” as a result of their “unlawful taking of Cartier’s valuable confidential information and trade secrets.”

Even if Cartier successfully establishes that it maintains trade secret information that Tiffany misappropriated, the case is hardly straightforward. Establishing damages in cases like this is particularly challenging, as it is difficult to assign a dollar value to trade secret information that will compensate the plaintiff for the economic loss caused by the defendant’s misappropriation. As a result, courts generally have quite a bit of discretion in fashioning damages awards.

Article By David H. Siegel of Norris McLaughlin P.A.

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