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There Should Be No Secret about Scope of Trade Secret Injunction

In the context of an interlocutory appeal, the US Court of Appeals for the Federal Circuit vacated a portion of a preliminary injunction in a case involving alleged misappropriation of trade secrets for failing to provide sufficient specificity as to what it prohibits. Carl Zeiss Meditec, Inc. v. Topcon Medical Systems, Inc. et al., Case No. 2021-1839 (Fed. Cir. May 16, 2022) (Hughes, Linn and Stoll, JJ.)

Topcon Medical filed an interlocutory appeal, seeking vacatur of a preliminary injunction granted by a district court in the Northern District of California. Topcon asserted that the injunction failed to satisfy Federal Rule of Civil Procedure 65(d) because it did not provide an adequate description of what specific acts are prohibited. Topcon argued that the injunction is ambiguous as to whether it applies to all of its platform or only to a certain module. Topcon further argued that the ambiguities are exacerbated by the district court’s misunderstanding of evidence presented from a declaration and deposition in the case and the court’s use of that evidence to draw conclusions about the misappropriation of trade secrets.

The Federal Circuit agreed with Topcon that the preliminary injunction failed to provide any notice required under Rule 65(d) as to whether—and to what extent—Topcon’s continued use of the platform and modules is outlawed. As to the basis for the injunction, the Court noted that “the district court did not address whether all [the] information [asserted in the complaint] was confidential, or whether it was acquired, used, or disclosed improperly. Second, as Topcon convincingly argues, the scope of the asserted trade secrets captured under CZMI’s argument is staggering, including unspecified software architecture, unnamed user interfaces, generically noted research, and other information simply identified as trade secrets.” The Court explained that Rule 65(d) expressly requires that the injunction order must “describe in reasonable detail—and not by referring to the complaint or other document—the act or acts restrained or required.” The Court further agreed with Topcon that the district court’s reference to declaration evidence related to data that was not the data on which the misappropriation claim was based, which “exacerbate[d] the ambiguity of the injunction and in no way support[ed] extending the injunction to cover [other parts of the accused] platform or …decoder.”

Because the grant of injunction did not identify the specific acts prohibited, the Federal Circuit vacated and remanded the injunction to the district court to clarify the scope of the injunction.




Self-Dealing Lawyer Held Jointly and Severally Liable in Trade Secret Misappropriation

The US Court of Appeals for the Fifth Circuit affirmed a judgment holding a lawyer jointly and severally liable for trade secret misappropriation and fraudulent transfer and enjoining any further use of the trade secrets until a money judgment against the lawyer-purchased client business was satisfied. Thomas v. Hughes, Case No. 20-50671 (5th Cir. Mar. 3, 2022) (Wilson, J.)

James Pearcy founded Performance Products, Inc., (PPI) to develop and sell probiotics for livestock. In 2006, Pearcy sold PPI to his lawyer, Lou Ann Hughes. Hughes paid cash for PPI’s stock and agreed that PPI would pay Pearcy a 14% licensing royalty for use of his proprietary formulations, up to $1.35 million over five years, at the end of which PPI would have the option to purchase Pearcy’s formulations for $100,000. When PPI did not fully pay the royalties, Pearcy brought a Texas state court action against Hughes and PPI for breach of contract, misappropriation of trade secrets and breach of fiduciary duty. The jury found for Pearcy, and the Texas court entered judgment against PPI in the amount of $1 million. Hughes and PPI appealed the Texas judgment and posted a supersedeas bond, but the appeal was unsuccessful. Pearcy received the supersedeas bond, but PPI never paid the balance of the judgment. Pearcy sought post-judgment discovery and set a hearing on a motion to compel. The day before the hearing, PPI filed for bankruptcy.

Earlier, in 2006, Hughes had formed a second entity called Performance Products International, LLC. At the time of the Texas judgment, the LLC had no assets. During pendency of the Texas appeal, Hughes changed the second entity’s name to Performance Probiotics, LLC, and obtained a license to sell and distribute commercial livestock feed. In January 2012, Hughes ceased selling products through PPI and began selling them through the LLC. Hughes also formed a third entity called Advance Probiotics International, LLC (API).

Shortly after PPI declared bankruptcy, Pearcy’s widow (also Pearcy) and PPI’s bankruptcy trustee (Thomas) sued Hughes, Performance Probiotics and API in federal court for misappropriation of trade secrets and fraudulent transfer of PPI’s assets in violation of the Texas Uniform Fraudulent Transfer Act (TUFTA). The plaintiffs sought to pierce the corporate veil of both Performance Probiotics and API, alleging that Hughes had used them to commit fraud. Thomas further alleged that Hughes had breached her fiduciary duty to PPI. At trial, the jury found for Pearcy and Thomas, awarding about $1.4 million plus interest in actual damages, which was derived from the amount then due under the Texas judgment. The jury further awarded $1.2 million in exemplary damages., The district court entered final judgment, further ordering Hughes to disgorge $860,000 in compensation from Performance Probiotics. The district court enjoined Hughes and Performance Probiotics from using Pearcy’s trade secrets until the judgment was fully satisfied and held Hughes and Performance Probiotics jointly and severally liable for “all relief granted” and “all amounts due” under the Texas judgment. The district court retained jurisdiction over API in case [...]

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Precision Is Paramount: Court Enforces Terms of Email Agreement in Settlement

The US Court of Appeals for the Federal Circuit reversed a district court order enforcing one party’s version of a settlement agreement, finding that version unsupported by the record. The Court found that the other party’s version accurately reflected the parties’ understanding. PlasmaCam, Inc. v. CNCElectronics, LLC, Case No. 21-1689 (Fed. Cir. Feb. 3, 2022) (Dyk, Reyna, JJ.) (Newman, J., dissenting).

PlasmaCam and CNCElectronics (CNC) both operate in the precision cutting industry. PlasmaCam is the exclusive licensee of a patent related to precision cutting equipment, and it sued CNC for allegedly infringing the patent. In December 2019, the parties notified the district court that they had settled the case but disputes arose in the process of drafting a formal agreement, particularly with respect to the scope of “covered products” under the settlement license and the scope of a “mutual release.” Although the parties eventually advised the district court that they had reached a complete agreement, disputes remained as to the scope of covered products. On PlasmaCam’s motion, the district court ordered CNC to execute PlasmaCam’s version of the agreement, execute a promissory note contemplated by the agreement and pay any unpaid settlement funds. CNC appealed.

The Federal Circuit first evaluated whether it had jurisdiction. The Court found that it had jurisdiction because the district court’s order was an injunction (since it ordered CNC to specifically perform an action, i.e., execute an agreement and promissory note, and not merely to pay money) and a final judgment (because it resolved all substantial issues between the parties).

The Federal Circuit next considered the negotiations between the parties with regards to the settlement agreement. As to the scope of covered products, the Court found that the parties had reached agreement regarding a definition of “covered products” in an email, even though the scope of the mutual release was still being negotiated. However, the Court found that the agreed definition of “covered products” was different from the one PlasmaCam provided to the Court and the one which the Court had subsequently ordered CNC to adopt. The Court also recognized the parties’ subsequent agreement regarding the mutual release, which both parties had confirmed to the district court. Because the district court had clearly erred by adopting a definition of “covered products” different from the one that was agreed by the parties, the Court reversed the district court’s order and remanded for further proceedings consistent with the parties’ actual agreement.

Judge Newman dissented. In her view, no agreement had been reached at all, as the parties had apparently continued to disagree as to the scope of key terms.

Practice Note: In this case, the parties’ statements to the district court that they had reached an agreement played a large role in establishing that an agreement had been formed even though there was no single signed document that reflected the agreement and, in some views, there continued to be disputes about important terms. Litigants should be careful not to represent to a court that an agreement has been [...]

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Can’t Overturn Jury Verdicts Based on Reasonable Inferences, but Broad Injunction Is Nonstarter Even for Willfully Misappropriated Trade Secrets

In a rare appellate trade secret opinion, the US Court of Appeals for the Eleventh Circuit affirmed a district court’s denial of a defendant’s request for a new trial on liability and its refusal of the plaintiff’s requested injunction. It also reversed in part the district court’s denial of judgment as a matter of law (JMOL) on damages for clear error because the plaintiff failed to deduct marginal costs when calculating lost profits. Financial Information Technologies v. iControl Systems, Case No. 20-13368 (11th Cir. Dec. 22, 2021) (Jordan, Newsom, JJ., and Burke, Distr J.).

Competitors Financial Information Technologies (Fintech) and iControl Systems both sell software that processes alcohol sales invoices within 24 hours. Fintech was a lone operator for several years until iControl started servicing the alcohol industry and began selling a very similar product at a lower price point. After Fintech lost its vice president of operations (who was very involved in designing Fintech’s software), a sales representative and several customers to iControl, Fintech filed suit alleging misappropriation of trade secrets. The jury ruled in Fintech’s favor and awarded compensatory and punitive damages. iControl sought a new trial on liability, contending that Fintech’s alleged trade secrets were readily ascertainable and not “secret,” and JMOL on damages since Fintech hadn’t proved lost profits because it hadn’t deducted fixed and marginal costs from its lost revenue calculations. Fintech sought a permanent injunction prohibiting iControl from using either company’s software. The district court denied all three motions, and both parties appealed.

As to the jury verdict, the Eleventh Circuit noted that jury liability findings are generally difficult to overturn, and that the verdict was general and nonspecific regarding which of the seven alleged trade secrets iControl had misappropriated, so Fintech only needed to show evidence under the Florida Uniform Trade Secrets Act (FUTSA) of misappropriation as to one. iControl also did not move for JMOL on liability, and therefore, under the abuse-of-discretion standard of review, the Court could only overturn if “there is an absolute absence of evidence to support the verdict.” However, the Court found that Fintech and its witness presented sufficient evidence at trial to permit a reasonable jury to find that Fintech possessed at least one of the seven alleged trade secrets and that it was misappropriated. The evidence included emails indicating that its former vice president helped iControl discover Fintech’s internal processes to aid software developments, assisted iControl’s chief technology officer in troubleshooting issues in a manner similar to Fintech, shared screenshots of Fintech’s user portal and prompted customers to switch to iControl.

Similarly, the Eleventh Circuit found that the jury reasonably could have inferred from the evidence that iControl schemed to hire Fintech employees to misappropriate Fintech’s software features—an act that demonstrated willfulness.

After assessing the meanings of fixed and marginal costs and the properly fact-intensive revenue and profits figures of the businesses, the Eleventh Circuit agreed that the jury was not required to deduct Fintech’s fixed costs from its revenues to arrive at a proper “actual [...]

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