Use of Infringing Product, Misappropriated Trade Secrets May Continue—for a Licensing Fee

By on September 3, 2020
Posted In Copyrights

The US Court of Appeals for the Sixth Circuit affirmed a district court’s stay of a permanent injunction against copyright infringement and trade secret misappropriation, permitting the infringer to continue use of an infringing product and misappropriated trade secrets but requiring the infringer to pay a licensing fee. ECIMOS, LLC v. Carrier Corp., Case Nos. 19-5436, -5519 (6th Cir. Aug. 21, 2020) (Boggs, J.).

Carrier sold HVAC systems. ECIMOS designed and sold a quality-control-testing system that assessed each HVAC unit at the end of Carrier’s assembly line. ECIMOS’s system consisted of a software program, associated hardware and a database that stored results of runtests performed by the system. Carrier paid ECIMOS to maintain and periodically upgrade its software system. ECIMOS licensed Carrier to use the system but prohibited unauthorized copying, distributing or creating derivative works based in whole or in part on the software.

Years into the relationship, ECIMOS upgraded its software to run on a new operating system. ECIMOS expected Carrier to agree to the proposed upgrade just as it had done previously. Unbeknownst to ECIMOS and without its consent, Carrier had already installed ECIMOS’s software directly onto the new operating system. Carrier started a venture with a third party, Amtec, to develop a new quality-control software and storage database to replace the ECIMOS system.

ECIMOS sued Carrier for violating the copyright on the ECIMOS system’s database, breaching the parties’ software-licensing agreement and misappropriating ECIMOS’s trade secrets. At trial, ECIMOS alleged that Carrier improperly shared ECIMOS’s copyrights and trade secrets with Amtec, allowing Amtec to develop a competing system. The jury agreed, finding that the competing system incorporated ECIMOS’s trade secrets. The jury determined that Carrier infringed the copyright on ECIMOS’s runtest database script source code, that ECIMOS held a trade secret in its software source code and its assembled hardware drawings and wiring diagrams, and that Carrier misappropriated those trade secrets by sharing them with Amtec. The jury awarded ECIMOS copyright and contract damages.

The district court also imposed a permanent injunction against Carrier’s use of the infringing Amtec database, but stayed the injunction until Carrier developed a noninfringing database. The court also enjoined Carrier from further disclosure of ECIMOS’s trade secrets, but did not enjoin Carrier from using those trade secrets. To the contrary, the district court appointed a special master to supervise the redesign and permitted Carrier to continue using the infringing database that incorporated ECIMOS’s trade secrets until the redesigned system was complete. The district court further required Carrier to pay ECIMOS the licensing fees that ECIMOS would have charged in the course of an ongoing, mutually agreeable licensing relationship. ECIMOS objected to the stay and appealed.

ECIMOS argued that the stay was an abuse of discretion, that the injunction should have prohibited Carrier from using (not just disclosing) ECIMOS’s trade secrets, and that the injunction should have prohibited Carrier’s disclosure and use of ECIMOS’s assembled hardware, not just the hardware drawings and wiring diagrams. The Sixth Circuit disagreed, affirming in full the district court’s decision regarding the injunction.

With respect to ECIMOS’s copyright claims, ECIMOS argued that Carrier acted in bad faith by dragging its feet and continuing to use the infringing Amtec database two years after the jury verdict. Carrier blamed its delay in developing a noninfringing database on ECIMOS’s “frivolous objections” in district court. The Sixth Circuit essentially deferred to the district court, finding no clearly erroneous findings of fact or improper application of the law.

Likewise, the Sixth Circuit held that the district court did not abuse its discretion when it refused to enjoin Carrier from using ECIMOS’s trade secrets. The Court noted that, although the jury found that Carrier misappropriated ECIMOS’s trade secrets in its hardware drawings and wiring diagrams, it also found that the misappropriation caused ECIMOS no compensable damages. Based on this finding, the Court concluded that enjoining Carrier’s further, temporary use of ECIMOS’s trade secrets—during which period of use it paid ECIMOS a license fee—would neither help ECIMOS nor prevent additional harm.

The Sixth Circuit also found that ECIMOS conflated intellectual property doctrines not intended to expand the right to protect trade secrets. ECIMOS argued that its assembled hardware—which was visible and palpable, unlike its compiled software source code—was a “derivative trade secret,” but the Court noted that “derivation” is a doctrine applicable only to copyright protection. The Court further noted that the hardware could not be a trade secret because it was publicly marketed and sold. ECIMOS also urged the Sixth Circuit to invoke the “safe-distance rule,” i.e., the concept that a court addressing trademark infringement can “proscribe activities that, standing alone, would have been unassailable.” The Court declined to import that trademark doctrine into trade secret law, noting that the safe-distance rule was crafted to address the fact that, in the trademark context, an infringing mark is likely to confuse consumers, and once an infringer has confused the public, that “confusion if not magically remedied by a name change.” Any new mark, therefore, must be “so far removed from any characteristic of the plaintiff as to put the public on notice that the two are not related.” The Court found no similar concern in the copyright or trade secret context.

Paul Devinsky
Paul Devinsky advises clients on patent, trademark and trademark litigation and counseling, as well as copyright counseling. He is also active in intellectual property (IP) licensing, transactions and due diligence, as well as post-issuance US Patent and Trademark Office (USPTO) proceedings such as reissues and inter partes review, covered business method patent review and post grant review, and appellate (Federal Circuit) advocacy. Read Paul Devinsky's full bio.