December 2011 Archives

Trade secret litigation: When does your proprietary information and technology qualify as a trade secret?

What trade secret is worth litigating over? The answer to that question will vary from business to business. As a trade secret litigator, I have seen litigation over software code, business methods, software/hardware requirements, SMS/cell phone technology, customer lists, medical devices and chemical formulas. That is a pretty broad list of technology and information, which raises the question: what do courts recognize as a trade secret?

Understanding the Power and Gravity of the Fiduciary Duty

The highest duty under the law is the fiduciary duty.  Some people are surprised when they learn that they owe their partners fiduciary duties.  When fiduciary duties apply to a business or personal context, the fiduciary may not engage in self-dealing and must treat his or her partners or other beneficiaries with utmost good faith and fair dealing. These duties can make all the difference on how decisions are made, what opportunities may be pursued and how money is distributed. Fiduciary relationships can include: A) Attorneys to the clients; B) Partners to each other; C) Agents to their principals; D) Escrow agents to both parties to the contract; E) Insurance agents to their insurers under agency contracts; F) Corporate officers to the corporations they serve; G) Joint venturers to each other; H) Securities brokers to their customers; I) Condominium board members to unit owners; and J) Employees to their employers. Further, a fiduciary relationship can sometimes be based on an informal relationship arising from a moral, social, domestic, or purely personal relationship of trust and confidence. See Meyer v. Cathey, 167 S.W.3d 327, 331 (Tex. 2005). A fiduciary duty litigation attorney will try to assert a fiduciary relationship where there is a strong basis in fact and law. Why does it matter if a fiduciary relationship exists?  Because fiduciaries owe the following general duties:  a) duty of loyalty and utmost good faith; b) duty of candor; c) duty to refrain from self-dealing; d) duty to act with integrity of the strictest kind; e) duty of fair, honest dealing; and f) duty of full disclosure, among others.  As a litigation attorney, I often ask questions of potential clients to determine first if a fiduciary relationship exists and second if there have been any breaches of the duties owed by that fiduciary.  These duties can become an important part of the claims asserted in any lawsuit. These issues and duties are relevant not only in fiduciary duty lawsuits, but also partnership disputes, minority shareholder oppression lawsuits, breach of contract lawsuits, misappropriation of trade secrets, tortious interference with prospective or current business relationships.  Damages for breach of fiduciary duty cases can vary but could include, out-of-pocket losses, lost profits and in some cases exemplary damages.  Like trade secret misappropriation cases, a litigator can seek equitable relief from the court in the form of constructive trusts and injunctions (See TEX. PROP. CODE § 114.008 (a) (2)). The form you choose for your business and the relationships you form can make a difference in the types of claims you can bring and as a business litigator I often look to these relationships for potential causes of action.

The Collision of the Entrepreneurial and Litigation World

Excited. Passionate. Devoted: the foregoing describe the relationship between the entrepreneurs I have had the pleasure of representing, and their ideas. I usually get to hear the longer version of their elevator pitch. I also get to hear about how excited they were to get the angel or venture capital funding and how their investors shared their vision for the future. Unfortunately, those good feelings and promises do not always play out the way the entrepreneur expects based upon the promises of the angel or venture capitalists. The evitable result is litigation. This litigation can take a variety of forms, including fights for control, partnership disputes, securities fraud, breach of fiduciary duty cases, minority shareholder oppression, breach of contract, fraud, fraudulent inducement, non-compete issues, trade secret misappropriation, and more. Breach of contract claims, for example, will depend on the terms contained in the contract upon which suit is brought. This cause of action can lead to the recovery of actual damages and attorneys' fees. See TEX. BUS. & COM. CODE § 38.001. Minority shareholder oppression claims may result in the appointment of a receiver and/or ordered buyout of the plaintiff's ownership interest in the company. See TEX. BUS. CORP. ACT ART. 7.05; and Davis v. Sheerin, 754 S.W.2d 375 (Tex. App.--Houston [1st Dist.] 1988, writ denied). Fraudulent inducement cases involve a claim that a party was induced to enter into an agreement based upon fraudulent statements. The relief usually sought in a fraudulent inducement case is to be returned to the position you were in prior to entering into an agreement. In a recent case the Texas Supreme Court held that in the case of a fraudulent inducement (essentially fraudulent statements made to induce someone to enter into an agreement) of a contract by a fiduciary (fiduciaries can include partners, joint ventures, board members, agents etc.) can lead to a forfeiture of the fraudulently induced contractual consideration (i.e. what was paid). ERI Consulting Engineers, Inc. v. Swinnea, 318 S.W.3d 867 (Tex. 2010). The court found that this relief may apply regardless of whether actual damages are proven. Id. at 873. As you can see from these many claims, the legal landscape on which entrepreneur/venture capitalist lawsuits are fought is very broad. We will be addressing other aspects of this very important legal landscape in future posts.

Patent Infringement Injunctive Relief

Patent infringement attorneys know that the opportunity to obtain an injunction against the infringer in patent infringement litigation is a powerful weapon. The U.S. Supreme Court's 2006 decision in eBay Inc. v. MercExchange, L.L.C. weakened this weapon somewhat through it's ruling that there was no presumption of irreparable harm, which is a prerequisite for injunctive relief, for the patent infringement plaintiff who prevails. In Robert Bosch LLC v. Pylon Manufacturing Corp., the Federal Circuit breathed new life into injunctive relief for patent infringement plaintiffs. In Bosch, the Federal Court reversed a trial court who had refused to issue a permanent injunction and ordered that such an injunction be entered against the infringer. Some of the facts that the Federal Circuit relied upon in its opinion were that the parties were direct competitors, the patent owner had lost market share and customer access, and the infringer did not appear to have the financial means to satisfy a monetary judgment. Patent owners should discuss with patent infringement counsel if the Bosch case can be used to support the issuance of an injunction against the infringer.

Patent Infringement: Standing to Sue

In patent infringement litigation, one threshold question is who must bring the patent infringement claim. The rule on patent infringement standing is that plaintiffs suing for infringement collectively must hold "all substantial rights" in the patent being asserted. Crown Die & Tool Co. v. Nye Tool & Mach. Works, 261 U.S. 24 (1923). Accordingly, if two entities jointly own the patent being asserted in the patent ligitation, both entities would need to jointly file the infringement action. It is critical, therefore, for the client to disclose to the patent infringement attorney all facts surrounding the ownership of the patent so that the correct plaintiff(s) will file the patent infringement ligitation.

Patent Infringement Damages

In a patent infringement representation, one of the most important consultations between client and the patent infringement attorney is how to establish a damage model. The minimum damage available to the patent infringement plaintiff who prevails is a reasonable royalty. In the words of the patent statute, a patentee is entitled to "damages adequeate to compensate for the infringement, but in no event less than a reasonable royalty." 35 U.S.C. § 284. A reasonable royalty can be calculated from an established royalty, the infringer's profit projections for infringing sales, or a hypothetical negotiation between the patentee and infringer based on the factors in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970). Lucent Techs. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed. Cir. 2009); Minks v. Polaris Indus., 546 F.3d 1364, 1372 (Fed. Cir. 2008). The hypothetical negotiation "attempts to ascertain the royalty upon which the parties would have agreed had they successfully negotiated an agreement just before infringement began," and "necessarily involves an element of approximation and uncertainty." Lucent, 580 F.3d at 1324-25 (citation omitted). Patent owners pursuing infringers must work closely with a patent infringement lawyer to construct a reasonable royalty damage model that satisfies the standards pronounced by the Federal Circuit Court of Appeals.

Trade Secret Misappropriation

In trade secret litigation it is a little known fact that a company can recover damages for trade secret misappropriation even if the party who took the trade secrets didn't profit from them. A defendant's lack of profits does not preclude the defendant's obligation to pay for what it misappropriated. University Computing Company v. Lykes-Youngstown Corporation, 504 F.2d 518, 536 (5th Cir. 1974). Trade secret misappropriate/theft damages can include, a plaintiff's lost profits, a reasonable royalty, costs of research and development and/or the fair market value of the misappropriated trade secret. University Computing Company v. Lykes-Youngstown Corporation, 504 F.2d 518, 536, 540 (5th Cir. 1974); Elcor Chem. Corp. v. Agri-Sul, Inc., 494 S.W.2d 204, 214 (Tex. App. - Dallas 1973, writ ref'd n.r.e.); Precision Plating & Metal Finishing Inc. v. Martin Marietta Corp., 435 F.2d 1262 (5th Cir. 1970), cert. denied, 405 U.S. 948 (1972). Another remedy that a trade secret misappropriation attorney may pursue is injunctive relief - an order from the court which prohibits some action/preserves the status quo. Injunctive relief can include but is not limited to, ordering a party to stop using the trade secrets, stopping work on a product or service that incorporates the trade secrets and/or ordering the party to preserve the confidential nature of the trade secrets, among others. Depending on how the injunctive relief is worded could severely impact a defendant's business if that defendant is found to have misappropriated a party's trade secrets. Trade secret cases require a "flexible and imaginative approach to the problem of damages . . ." University Computing Company v. Lykes-Youngstown Corporation, 504 F.2d 518 (5th Cir. 1974). There are many avenues and remedies that a court could order upon a finding that a defendant has misappropriated a party's trade secrets.

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