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Misappropriation

No Fifth Chances: Ignoring Court’s Warning Leads to Terminal Sanctions

by Alexander Piala, PhD | Nov 9, 2023 | Trade Secrets

In an appeal from litigation-ending sanctions, the US Court of Appeals for the Fifth Circuit held that misconduct in the face of judicial warnings supports the use of litigation-ending sanctions and that evidence a party forgot about does not count as “new” evidence when remembered for the purpose of a motion for reconsideration. Calsep A/S v. Ashish Dabral, Case No. 22-20440 (5th Cir. Oct. 11, 2023) (Clement, Elrod, Willett, JJ.)

Insights Reservoir Consulting (IRC), a company owned by Ashish Dabral, was hired to make a computer program that assesses oil-well efficiency. To develop that software, Dabral turned to his college friend who worked at Calsep A/S, a software company that designs and sells oil-well assessment software. Dabral hired his friend away from Calsep, and IRC subsequently developed and sold its own oil-well efficiency software.

Surprised at the sudden appearance of a competitor, Calsep investigated and found that IRC had recently hired one of its former employees. Calsep conducted an internal audit and found that its former employee had absconded with trade secrets just before leaving. Calsep sued Dabral and IRC.

In discovery, Calsep requested the complete development history of IRC’s new software. Dabral resisted such disclosure as “overbroad,” but the district court ordered production of the requested materials. Shortly thereafter, the district court further entered an order specifically enjoining the parties from the “destr[uction] of any potentially relevant evidence, including electronically stored information.”

In response to the discovery request, Dabral only produced portions of the development history, and its produced history included sections that were either incomplete or manipulated. In response, Calsep filed another motion to compel. The district court ordered Dabral to “come clean” and comply “voluntarily” before the court resorted to sanctions. Dabral represented that the entire history had been produced and that it was missing only portions deleted before the lawsuit.

The district court held an evidentiary hearing, and Dabral admitted that many of the deletions actually occurred during the lawsuit. The district court levied terminal sanctions based on Dabral’s violation of four separate court orders and serial discovery misconduct. Seven months later, Dabral filed a motion for reconsideration based on new information he found in his storage unit in India. The district court denied the motion. Dabral appealed both the sanctions ruling and the denial of the motion for reconsideration.

The Fifth Circuit first analyzed the sanctions. It limited its analysis to sanctions under Rule 37, which (in the Fifth Circuit) requires four specific findings before terminal sanctions can be levied:

The violation was willful or bad faith.
The client was responsible.
The violation caused substantial prejudice.
A lesser sanction would not have the desired deterrent effect.

The Fifth Circuit held that Dabral’s pattern of conduct supported a finding of bad faith. Dabral admittedly deleted evidence, delayed discovery and ignored several court orders. And when the district court gave him a last chance to “come clean,” he instead deleted more data and made a false representation.

The Fifth Circuit also held that Dabral’s conduct [...]

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Head East: Contract Disputes Act Claims Must Be Filed in DC

by David Beach | Sep 28, 2023 | Trade Secrets

The US Court of Appeals for the Ninth Circuit concluded that the Contract Disputes Act (CDA) “impliedly forbids” federal contractors from bringing most trade secret misappropriation claims against federal agencies in district court. Instead, the CDA requires contractors to bring such claims before the US Court of Federal Claims or the agency board of contract appeals, both of which are located in Washington, DC. United Aeronautical Corp. v. United States Air Force, Case No. 21-56377 (9th Cir. Sept. 7, 2023) (Smith, Lee, JJ.) (Collins, JJ., dissenting).

United Aeronautical Corporation (Aero) develops firefighting products, including the Mobile Airborne Fire Fighting System for use in aerial firefighting. The US Forest Service contracted with Aero to develop an updated aerial system to assist the agency in fighting fires. The ensuing prototype necessarily incorporated significant amounts of Aero’s intellectual property. To protect that information, Aero and the Forest Service executed a Data Rights Agreement (DRA) providing that “the technical data produced . . . or used or related” to developing the prototype “shall remain the property of [Aero],” but specifying that the Forest Service “shall have unlimited rights to view and use the data required for the continued use and operation of the” prototype. The Forest Service proceeded to share Aero’s data with the Air Force, which developed an upgraded aerial firefighting system it marketed internationally.

Aero sued the Air Force for misappropriating its trade secret information. Procedurally, Aero brought its claims under the Administrative Procedure Act (APA), seeking a declaration that the Air Force’s actions violated the Trade Secrets Act and federal procurement law, and an injunction prohibiting any further use of that data to develop competing products. Although the Air Force believed it was permitted to use Aero’s trade secrets pursuant to the DRA, it also argued that Aero’s complaint must be dismissed for lack of subject matter jurisdiction. The district court agreed, concluding that the CDA vests exclusive jurisdiction over federal-contractor disputes with the Court of Federal Claims where, as here, the dispute is related to a procurement contract. Aero appealed.

The Ninth Circuit affirmed the dismissal. Aero argued that the APA permits any “person suffering legal wrong[s] because of agency action” to seek redress in a federal district court and that the Air Force’s misappropriation of Aero’s trade secret information—in violation of the Trade Secrets Act—was exactly that. The Ninth Circuit disagreed, concluding that the nature of Aero’s claims (misappropriation, not breach of contract) and the relief it sought (an injunction, not damages or specific performance) mattered little. What mattered was the existence of a contract between the contractor and an agency that “related to” the intellectual property at issue.

Under the APA, a private party cannot bring suit when its claims are “impliedly forbidden” by a different statute that vests exclusive jurisdiction with another tribunal. The Ninth Circuit concluded that the CDA “impliedly forb[ade]” Aero’s claims since it was enacted to create a dispute resolution system for claims concerning federal procurement contracts, vesting exclusive jurisdiction of these disputes with [...]

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Noncompulsory Counterclaims Don’t Confer Appellate Jurisdiction

by Kathleen Lynch | Aug 17, 2023 | Antitrust, Patents, Trade Secrets

The US Court of Appeals for the Federal Circuit determined that it does not have appellate jurisdiction to review noncompulsory patent counterclaims in a case otherwise unrelated to the originally asserted patents. Teradata Corp. v. SAP SE, Case No. 22-1286 (Fed. Cir. Aug. 1, 2023) (nonprecedential) (Lourie, Taranto, Hughes, JJ.)

Teradata makes and sells data warehouse systems and services. SAP develops and sells software. The two companies began collaborating while SAP was simultaneously developing its own database (HANA) and component software. SAP eventually informed Teradata that it would stop selling certain Teradata products. Teradata sued SAP, alleging misappropriation of trade secrets on the theory that SAP used Teradata’s proprietary information to create HANA. Teradata also alleged various antitrust violations, arguing that SAP “illegally tied” HANA and HANA’s supporting software. In response, SAP filed counterclaims against Teradata for allegedly infringing SAP patents related to database organization and optimization. On Teradata’s motion, the district court agreed to sever one of the four patent infringement claims but allowed the others to proceed. The district court reasoned that Teradata’s claims and SAP’s counterclaims all arose from “the same transaction or occurrence,” namely SAP’s development of HANA.

The district court granted summary judgment to SAP on Teradata’s antitrust and technical trade secret claims and stayed proceedings on Teradata’s business trade secret claim and to Teradata on SAP’s patent counterclaims. Teradata appealed to the Federal Circuit.

SAP moved to transfer the appeal to the Ninth Circuit. The Federal Circuit denied the motion but instructed the parties to address the jurisdictional issue in the merits brief. 28 U.S.C. § 1295(a)(1) grants the Federal Circuit exclusive appellate jurisdiction over final decisions in which a party claims or asserts a compulsory counterclaim related to patents. As it relates to this case, the issue was whether SAP’s patent infringement counterclaims were “compulsory,” meaning SAP would be unable to later sue on these patent infringement allegations “if it did not press them in this action.”

The Federal Circuit began by looking at Federal Rules of Civil Procedure 13(a), which states that a counterclaim is “compulsory” if it arises from the same transaction or occurrence as a plaintiff’s claim. The Court explained that it uses three tests to determine whether the transaction or occurrence is sufficiently related between the claim and counterclaim:

Whether the legal and factual issues are substantially the same
Whether the evidence will be substantially the same
Whether there is “a logical relationship between the claim and the counterclaim.”

Taken together, these tests essentially ask if there is substantial overlap between what the plaintiff and the defendant must establish to succeed on the claim and counterclaim, respectively.

The Federal Circuit found that the first two tests clearly weighed against SAP’s counterclaim being compulsory. While an understanding of the accused products and alleged trade secrets would be necessary for both the claim and the counterclaim, “same-field overlap” is not enough to make the issues or necessary evidence “substantially the same.”

As to the third test, the Federal Circuit found [...]

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Mootness Requires Covenant Not to Sue to Be Unconditional and Irrevocable

by Alexander P. Ott | Jun 29, 2023 | Trade Secrets

Addressing a district court decision finding no trade secret misappropriation, the US Court of Appeals for the Fourth Circuit agreed that the alleged trade secret holder had failed to moot the case because its covenant not to sue was both conditional and revocable. Synopsys, Inc. v. Risk Based Security, Inc., Case No. 22-1812 (4th Cir. June 15, 2023) (Agee, Rushing, Dawson, JJ.)

In early 2021, Risk Based Security (RBS) sent a cease-and-desist letter to Synopsys, its competitor in the software security industry, alleging intellectual property misappropriation, including use of RBS’s private database of source code vulnerabilities. Synopsys responded by filing a declaratory judgment action asserting that it had not engaged in trade secret misappropriation. RBS later issued a covenant not to sue in express reliance on certain pretrial representations made by Synopsys, including that Synopsys was not planning to use RBS’s database. RBS moved to dismiss the case as moot based on its covenant, but the district court denied the motion. The district court then ruled on summary judgment that RBS had failed to establish that its alleged trade secrets satisfied the requirements that they have an independent economic value derived from their secrecy and were subject to reasonable efforts to maintain their secrecy. RBS appealed.

The Fourth Circuit first affirmed the rejection of RBS’s covenant not to sue. The Court noted that the covenant was not unconditional and irrevocable because it was expressly premised on Synopsys’s planned future performance, which RBS could later claim was not being met. The Court also relied on the fact that the covenant was limited to the use of RBS’s private database and was thus narrower than the original cease-and-desist letter, which was explicitly not limited to that use. Finally, the Court concluded that there was a continuing live controversy, demonstrated by the fact that, after issuing the covenant, RBS added Synopsys to a pending trade secret case it had filed against Synopsys’s subsidiary. Accordingly, the Fourth Circuit affirmed the district court’s denial of RBS’s motion to dismiss.

On the merits, the Fourth Circuit agreed with the district court that RBS had failed to show that its alleged trade secrets met the independent value or reasonable secrecy elements required by statute. In particular, the Court agreed that RBS’s evidence regarding its value as a company and the revenue it derived from licensing its database could not show independent value for the specific alleged trade secrets contained in the database.

No Lost Value Damages Despite Trade Secret Misappropriation

by Jayita Guhaniyogi, PhD | Jun 8, 2023 | Trade Secrets

The US Court of Appeals for the Second Circuit vacated a damages award, finding that although there was liability for appropriating trade secrets, the trade secret proprietor was only entitled to compensatory damages under federal trade secret law, not avoided cost damages based on alleged estimated research and development or loss of value. Syntel Sterling Best Shores Mauritius, Ltd., et al. v. The TriZetto Grp., Inc., et al., Case No. 21-1370 (2d Cir. May 25, 2023) (Wesley, Raggi, Lohier, JJ.)

This case involved trade secrets concerning healthcare insurance software called Facets® that was developed by TriZetto and alleged misappropriation by a TriZetto subcontractor, Syntel Sterling. In 2010, TriZetto and Syntel entered a Master Service Agreement (MSA) under which Syntel agreed to support TriZetto’s Facets customers. In exchange, TriZetto granted Syntel access to its trade secrets related to Facets. In 2012, the parties amended the MSA to allow Syntel to compete directly with TriZetto for consulting services. A dispute arose in 2014 when Syntel’s competitor Cognizant acquired TriZetto. Syntel terminated the amended MSA and requested payment of rebates owed. TriZetto refused, raising concerns about Syntel’s continued use of confidential trade secrets post-termination.

Syntel filed suit for breach of contract in the Southern District of New York, and TriZetto counterclaimed. During trial, TriZetto proceeded on trade secret misappropriation counterclaims related to the Facets software under the Defend Trade Secrets Act (DTSA) and New York law. Syntel argued that the amended MSA authorized Syntel to compete for Facets services business while using TriZetto’s trade secrets.

During discovery, the district court issued a preclusion order that sanctioned Syntel for discovery misconduct, finding that “Syntel was actively creating a repository of [TriZetto’s] trade secrets on its own . . . to be used in future work.” Citing the preclusion order, the district court instructed the jury that Syntel had misappropriated two of 104 asserted trade secrets.

With respect to damages, TriZetto presented expert testimony that established that Syntel avoided spending about $285 million in research and development costs because of the misappropriation covering the period between 2004 and 2014, an amount that covered only a portion of TriZetto’s overall $500 million research and development costs. Syntel’s expert did not counter that amount. Instead, Syntel argued that these avoided costs did not apply here for several reasons: because the alleged misappropriation did not destroy the value of Facets since Syntel could have used Facets for free by entering a third-party access agreement with TriZetto because TriZetto continued to make millions using its Facets software, and because Syntel was not a software company but a competing service provider. The jury instructions included Syntel’s avoided development costs as one form of unjust enrichment that applied to the federal claims but not the state claims.

The jury returned a verdict in favor of TriZetto on all counts. The jury awarded TriZetto $285 million in avoided development costs under the DTSA as compensatory damages and double that amount in punitive damages. Following trial, Syntel renewed its motion for judgment as [...]

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Words Matter: Court Sides with Translation Company in Insurance Coverage Dispute

by Hannah Cohen | Dec 8, 2022 | Trade Secrets

The US Court of Appeals for the First Circuit concluded that a company’s general liability insurer was obligated to provide coverage for legal fees incurred in fending off a trade secret and defamation lawsuit brought by a competitor. Lionbridge Tech., LLC v. Valley Forge Ins. Co., Case No. 21-1698 (1st Cir. Nov. 21, 2022) (Kayatta, Selya, Thompson, JJ.)

Lionbridge and TransPerfect are competitors in the language-translation industry. TransPerfect sued Lionbridge for misappropriation of trade secrets and defamation. TransPerfect alleged that Lionbridge concocted a scheme through its corporate owner to feign interest in acquiring TransPerfect and, through this scheme, improperly gained access to TransPerfect’s trade secrets, which could be used to poach TransPerfect’s customers and otherwise undermine TransPerfect’s business.

Shortly after the lawsuit was filed, Lionbridge informed its liability insurance carrier, Valley Forge, about the litigation. Valley Forge initially indicated that it would provide Lionbridge with coverage for legal costs associated with the litigation. Valley Forge subsequently disputed the requested coverage based on both the reasonableness of the fees incurred and the nature of the suit. Lionbridge filed suit against Valley Forge seeking full coverage from Valley Forge for its defense costs. The dispute centered on whether the fees incurred could be considered injury arising out of “[o]ral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organizations goods, products, or services,” as provided by Lionbridge’s insurance policy. The district court granted summary judgment in favor of Valley Forge, finding that Valley Forge did not owe Lionbridge a duty to defend under the relevant policy provisions and exclusions. Lionbridge appealed.

The First Circuit reversed, explaining that an insurer’s duty to defend depends on whether the allegations in the underlying litigation are reasonably susceptible to an interpretation that the policy provisions apply. The focus of the inquiry is the source of the injury, not any specific theories of liability set forth in the underlying complaint. The Court explained that this inquiry required a comparison of the allegation made in the underlying litigation against the insurance policy provisions.

After analyzing the underlying complaint against the insurance policy, the First Circuit determined that the policy provisions applied because the allegations “roughly sketch[ed]” an injury arising from a defamation claim. TransPerfect’s claims were rooted in alleged reputational harm to its business, which fit within the relevant provision. The Court noted that complete overlap between the policy provisions and the claims was not required.

The First Circuit next considered whether any policy coverage exclusions applied to preclude coverage. The relevant exclusions fell into two buckets:

Injuries caused by an insured with direct knowledge that its actions would inflict injury, or injuries arising out of an oral or written publication that the insured knows is false
Trade secret misappropriation.

Valley Forge carried the burden of proving that either or both categories of exclusions applied. The Court concluded that the first category did not apply because Valley Forge failed to show that all allegations [...]

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A Healthy Dose of Seeds: Unique Combination Trade Secrets Entitled to Protection

by Anthony S. Ferrara | Nov 29, 2022 | Trade Secrets

The US Court of Appeals for the Sixth Circuit upheld a jury verdict finding a dietary supplement company liable for misappropriating another company’s research and development (R&D) related to broccoli-seed extract. Caudill Seed & Warehouse Co., Inc. v. Jarrow Formulas, Inc., Case No. 21-5354 (6th Cir. Nov. 10, 2022) (per curiam) (Moore, J., concurring in part and dissenting in part). The decision addressed several issues relating to so-called “combination” trade secrets.

Caudill manufactures and sells various nutritional supplements, including a supplement made using broccoli-seed extract. Caudill sued Jarrow Formulas for trade secret misappropriation after its Director of Research Ken Ashurst left Caudill and joined Jarrow. Ashurst had led Caudill’s R&D efforts for nine years, including extensively researching the development of broccoli-seed derivatives and assembling a large body of research related to broccoli seeds. After he joined Jarrow, Ashurst delivered a curated collection of broccoli product research to Jarrow and helped it bring its own competing broccoli-seed extract supplement to the market in just four months.

The case proceeded to trial. The jury found that Caudill had a protectable trade secret; Jarrow misappropriated said trade secret; and Caudill was entitled to more than $2 million in actual losses, more than $400,000 in unjust enrichment damages, and exemplary damages. Jarrow moved for judgment as a matter of law and for a new trial. After the district court denied the motions, Jarrow appealed.

Jarrow argued that Caudill improperly asserted a “kitchen-sink theory” of trade secrets by broadly defining all its research activities as a single trade secret. Jarrow also argued that Caudill failed to show that it had acquired the alleged trade secret. Finally, Jarrow challenged the damages awards on legal grounds. The Sixth Circuit rejected each of Jarrow’s arguments on appeal.

The Sixth Circuit first found that Caudill properly defined its alleged trade secret as its “research and development on supplements, broccoli, and chemical compounds.” The Court treated Caudill’s alleged trade secret as a “combination” trade secret (i.e., a collection of elements that individually are generally known but are unique in combination.) The Court concluded that Caudill demonstrated it had assembled a unique collection of processes and information relating to its R&D process, and therefore, Caudill properly defined its entire R&D process as a trade secret. The Court rejected Jarrow’s argument that Caudill’s alleged trade secret mostly consisted of public domain materials on the basis that the materials were unique in combination.

The Sixth Circuit also rejected Jarrow’s argument that Caudill failed to show that Jarrow acquired and used the entire combination trade secret. The Court noted differing authority on whether a plaintiff alleging a combination trade secret must show acquisition and use of the entire combination but concluded that trade secret law does not require proving acquisition of “each atom” of the combination trade secret. The Court reasoned that when a trade secret consists of a “mass of public information” that has been collected, the defendant will always be able to identify some minute detail of the combination that it did [...]

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Play It Again and Again (Sam): Meanwhile No Injunction, No Fees

by Paul Devinsky | Sep 15, 2022 | Trade Secrets

In its third opportunity to review the district court’s decision in this trade secret case involving flooring, the US Court of Appeals for the Eleventh Circuit again reversed, this time vacating a permanent injunction and an award of attorneys’ fees. The Eleventh Circuit noted that the district court failed to make the findings required to support an injunction and abused its discretion in awarding full fees notwithstanding prior reversal of relief awarded. AcryliCon USA, LLC v. Silikal GmbH, Case No. 21-12853 (11th Cir. Aug. 29, 2022) (Newsom, Marcus, JJ.; Middlebrooks, Distr. J.)

In an earlier appeal in this case, the Eleventh Circuit reversed a ruling on trade secret misappropriation rendered by the district court in favor of AcryliCon USA (AC-USA) and vacated the damages award. An aspect of the Court’s ruling was that the “permanent” injunction entered by the district court was only preliminary in nature (not permanent) and was, as a matter of law, dissolved because the district court did not include it in the original final judgment. On remand, the district court was ordered to determine the appropriate amount of attorneys’ fees the prevailing party should receive. However, the district court just entered the same amount of attorneys’ fees it had originally awarded and again entered a “permanent” injunction barring the use of the trade secret at issue, concluding that it was obliged to do so by the Eleventh Circuit’s ruling in the first appeal.

In the second appeal, the Eleventh Circuit held that AC-USA failed, as a matter of law, to prove its misappropriation claim and reversed the judgment entered in favor of AC-USA on that count. The Court also reversed the district court’s judgment that its $1.5 million damages award could be sustained on the basis of the contract claim once the misappropriation claim was reversed. The Court ruled that, as a matter of law, since AC-USA had failed to prove actual damages on its consequential damages theory, it could only recover nominal damages based on its breach of contract claim. Finally, the Court concluded that AC-USA was entitled to attorneys’ fees only on its breach of contract claim because, under Georgia law, even a nominal damages award would still materially alter the legal relationship between the parties.

In the second remand, the district court awarded essentially the same amount of attorneys’ fees ($1.3 million) to AC-USA but acknowledged that, since Silikal prevailed in vacating the award of compensatory and punitive damages, Silikal “was the prevailing party on the appeal under the terms of the [agreement]” and was entitled to almost $500,000 in attorneys’ fees for its successful appeal. The district court also awarded $100 in nominal damages to AC-USA for its successful appeal on the breach of contract claim. The district court then entered a permanent injunction enjoining Silikal “from disclosing or using in any way, directly or indirectly, the [ . . . resin . . . ] to anyone other than Plaintiff.”

Both parties appealed. AC-USA appealed the award of [...]

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A Window into Trade Secret Damages: R&D Costs Can Quantify Unjust Enrichment

by Kyle Sorenson, PhD | Sep 15, 2022 | Trade Secrets

The US Court of Appeals for the Third Circuit affirmed a district court’s finding of damages in a trade secrets case under Pennsylvania’s version of the Uniform Trade Secrets Act. The Third Circuit explained that it is appropriate to quantify damages under the unjust enrichment standard by considering the trade secret owner’s research and development costs as an indicator of the research and development costs that the defendant avoided but would have incurred if not for its misappropriation. PPG Indus. Inc. v. Jiangsu Tie Mao Glass Co. Ltd. et al., Case No. 21-2288 (3rd Cir. Aug. 30, 2022) (Jordan, Porter, Phipps, JJ.)

PPG is the maker of OpticorTM, a novel plastic for airplane windows. PPG sued Jiangsu Tie Mao Glass (TMG), asserting trade secret misappropriation, among other things. PPG alleged that TMG persuaded a former PPG employee to provide TMG with a treasure trove of trade secrets and that TMG used the trade secrets to begin making plans to produce Opticor-quality windows and to build a factory to manufacture its product. After TMG failed to appear in the case for more than a year, the district court entered a default judgement for PPG. Only then did TMG show up. The district court declined to set aside the default judgment and ultimately awarded damages for TMG’s unjust enrichment totaling about $9 million, which it then trebled to $26.5 million, and issued a permanent injunction against TMG. TMG appealed.

The Third Circuit began by analyzing whether TMG was unjustly enriched as a result of its acts. Trade secret damages are commonly determined either by calculating actual loss to the plaintiff or by quantifying the defendant’s unjust enrichment from the use of the trade secret. The Court found that although TMG did not sell products containing the Opticor technology, TMG was unjustly enriched by its use of the trade secrets. For example, TMG used PPG’s proprietary drawings (minus PPG’s name and logo) to ask a subcontractor to “manufacture for TMG the same molds that it did for PPG.” TMG also was building, or had plans to build, a production facility to manufacture its version of the Opticor technology. The Court determined that TMG was unjustly enriched because TMG used PPG’s trade secrets to completely skip the research and development phase of its version of the Opticor technology and instead move directly to the phase of preparing for production.

Next, the Third Circuit considered whether the damages amount awarded to PPG was appropriate. Unjust enrichment requires the defendant to pay the plaintiff the value of the benefit conferred from the use of plaintiff’s trade secrets. This benefit can be a cost that was avoided and may include development costs. The Court found it appropriate to consider the research and development costs PPG incurred in developing the Opticor technology as an indicator of the research and development costs TMG would have sustained to develop its own version of the Opticor technology in the absence of misappropriation. In short, “[t]he costs a plaintiff spent in development [...]

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Too Little Too Late: No Tenable Misappropriation Claim Based on 11-Year-Old Prototype

by Tessa Kroll | Aug 11, 2022 | Trade Secrets

In a dispute between an employer and a former employee, the US Court of Appeals for the Seventh Circuit affirmed a district court’s grant of summary judgment against an employer asserting trade secret misappropriation and breach of implied-in-fact contract claims relating to an 11-year-old prototype developed by a former employee. The Court also affirmed the district court’s finding of litigation misconduct by the former employer but vacated the lower court’s award of attorneys’ fees, remanding the case for a more detailed justification for the considerable award. REXA, Inc. v. Chester, Case Nos. 20-2953; -3213; -2033 (7th Cir. July 28, 2022) (Wood, Hamilton, Brennan, JJ.)

Mark Chester is a former employee of Koso America, a manufacturer of hydraulic actuators. Chester participated in a 2002 project at Koso that sought to develop a new flow matching valve for Koso’s actuators. While the project team failed to design a new flow matching valve, they did manage to develop an experimental prototype of an actuator with solenoid valves. Koso abandoned the new design because of the improbability of commercial success, and the prototype was disassembled. Chester—who had never signed a confidentiality or employment agreement with Koso—resigned from Koso in 2003 and later joined MEA Inc. in 2012. In 2013, 11 years after developing the Koso prototype, Chester helped MEA design a new actuator with solenoid valves and an improved motor. MEA filed a patent application in 2017 claiming the actuator, and the US Patent & Trademark Office issued a notice of allowance in 2018 based on the improved motor limitations.

REXA, a successor company to Koso, sued Chester and MEA for misappropriation under the Illinois Trade Secrets Act (ITSA) and for breach of an implied-in-fact contract. REXA alleged that MEA and Chester misappropriated the 2002 designs by filing the 2017 patent application and by incorporating the 2002 designs into MEA’s Hawk brand actuator, and that Chester breached an implied-in-fact obligation to assign any patent rights associated with the 2017 application to REXA. Chester and MEA accused REXA of improper conduct during discovery after REXA appended a confidentiality agreement that Chester had never received to Chester’s 2002 bonus letter and used the manipulated document during Chester’s deposition. The parties filed cross motions for summary judgment. The district court ruled for Chester and MEA and awarded them almost $2.4 million in attorneys’ fees for REXA’s litigation misconduct. REXA appealed.

Misappropriation of Trade Secrets

The Seventh Circuit first considered the trade secret misappropriation claim, specifically whether REXA had identified a trade secret with enough specificity. The ITSA requires that a plaintiff “present a specific element, or combination of elements, that is unknown to the trade and was allegedly misappropriated.” Applying this standard, the Court found that REXA had not identified any protectable trade secrets because it had broadly asserted that the “2002 designs” qualified as trade secrets without explicitly identifying an element that was not well known in the industry.

The Seventh Circuit further concluded that even if REXA had identified a specific and protectable trade secret, [...]

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