Seventh Circuit Archives

Seventh Circuit

Message Received: Trade Secret Law Damages Available for Sales Outside US

by Amol Parikh | Jul 18, 2024 | Copyrights, Trade Secrets

The US Court of Appeals for the Seventh Circuit affirmed, in a matter of first impression, a district court’s decision to apply trade secret law extraterritorially and award trade secret damages for foreign sales while also finding that the copyright damages award needed to be reduced to eliminate foreign sales. Motorola Solutions, Inc. v. Hytera Communications Ltd., Case Nos. 22-2370; -2413 (7th Cir. July 2, 2024) (Hamilton, Brennan, St. Eve., JJ.)

Motorola Solutions and Hytera compete globally in the market for two-way radio systems. Motorola spent years and tens of millions of dollars developing trade secrets embodied in its line of high-end digital mobile radio (DMR) products. Hytera struggled to overcome technical challenges to develop its own competing DMR products. After failing for years, Hytera hatched a plan to “leap-frog Motorola” by stealing its trade secrets. Hytera, headquartered in China, hired three engineers from Motorola in Malaysia, offering them high-paying jobs in exchange for Motorola’s proprietary information. Before the engineers left Motorola, acting at Hytera’s direction, they downloaded thousands of documents and computer files containing Motorola’s trade secrets and copyrighted source code. Hytera relied on the stolen material to develop and launch a line of DMR radios that were functionally indistinguishable from Motorola’s DMR radios. Hytera sold these DMR radios in the United States and abroad.

Motorola sued Hytera for copyright infringement and trade secret misappropriation. The jury found that Hytera had violated both the Defend Trade Secrets Act of 2016 (DTSA) and the Copyright Act. The jury awarded compensatory damages under the Copyright Act and both compensatory and punitive damages under the DTSA for a total award of $765 million. The district court later reduced the award to $544 million, which included $136 million in copyright damages and $408 million in trade secrets damages. Hytera appealed.

Hytera conceded liability and instead challenged the damages award under both the Copyright Act and the DTSA. Among other things, Hytera argued that copyright and trade secret damages should not have been awarded for its sales outside the US. With respect to the copyright award, the Seventh Circuit agreed that Motorola failed to show a domestic violation of the Copyright Act and therefore was not entitled to recover damages for any of Hytera’s foreign sales of infringing products as unjust enrichment. Specifically, to show a domestic violation of the Copyright Act, Motorola had asserted that its code was copied from servers based in Chicago. While the district court accepted Motorola’s argument, the Seventh Circuit found that this factual finding lacked adequate support in the record, citing Motorola’s expert’s admission that there was no evidence of downloads from the Chicago servers. The Court instead found that given the location of the employees in Malaysia, it was likelier that the code was downloaded from Motorola’s Malaysia server. The Court therefore reversed the $136 million copyright award and remanded with instructions to limit the copyright award to Hytera’s domestic sales of infringing products.

The Seventh Circuit affirmed with respect to the trade secret award. Like the [...]

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Family Feud: Counterclaims Too Little, Too Late

by Kathleen Lynch | Jun 27, 2024 | Copyrights

The US Court of Appeals for the Seventh Circuit affirmed a district court’s ruling that aggrieved family members’ counterclaims for various intellectual property matters were long overdue and subject to a laches defense. Sumrall v. LeSEA, Inc., Case No. 23-2833 (7th Cir. June 12, 2024) (Scudder, Pryor, St. Eve, JJ.)

During Lester Frank Sumrall’s life, he created a legacy that began as a church, later blossoming into the Lester Sumrall Evangelical Association (LeSEA). Through LeSEA, Sumrall delivered his ministry from Indiana to the rest of the world via television, travel, writings and media productions. These works, including books and films (many of which Sumrall registered for copyrights in his or LeSEA’s name) are the subject of dispute. Particularly in dispute was the ownership of the “Traveler Photo,” a picture that Sumrall’s grandson Lester took during a ministry trip to China while Lester worked for LeSEA.

Sumrall’s death raised issues regarding succession. After his death, Sumrall’s sons, Peter, Stephen and Frank, took over LeSEA. Peter and Stephen relayed to Frank and others that Sumrall left all his assets to the ministry. Eight years later, Lester researched Indiana’s intestate succession law. Believing that Sumrall died without a will, Lester thought Frank should have inherited one-third of Sumrall’s estate. Under this belief, Frank granted Lester power of attorney to legally pursue his interest in the estate. For 12 years, Lester took no further legal action.

After learning that Sumrall did indeed have a will, Lester petitioned an Indiana probate court to open an estate for Sumrall in 2017. One of Lester’s cousins produced the will that granted some personal items to Sumrall’s grandchildren, with the remainder of his estate divided among his sons equally. The probate court denied the petition, reasoning that the estate was devoid of assets.

This case began with LeSEA’s trademark infringement claims against Lester and a competitor Lester created, the LeSEA Broadcasting Corporation. Those claims were resolved after Lester stopped using LeSEA’s name and therefore were not on appeal.

At issue in the appeal were counterclaims brought by the Lester Sumrall Family Trust against LeSEA, LeSEA’s affiliate corporations, and Lester’s uncles and cousins who are currently involved in the ministry (collectively, LeSEA). Lester and the trust asserted that:

LeSEA unrightfully took ownership of Sumrall’s copyrights.
LeSEA unlawfully used the Traveler Photo in its materials.
The trust was entitled to damages for its state law claims.
LeSEA unlawfully continued to use Sumrall’s right of publicity.

The Seventh Circuit rejected the appellants’ assertion that they owned Sumrall’s copyrighted works. The Court ruled that the appellants’ copyright claim arose under the Copyright Act, which bars suits three years after they accrue. The Court explained that an ownership claim accrues “when plain and express repudiation of co-ownership is communicated to the claimant.” Here, repudiation occurred when Sumrall died 28 years prior to the counterclaim and Stephen and Peter declared in “plain and express” terms that LeSEA owned the copyrights and the remainder of the estate.

As for the Traveler Photo, the [...]

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Back in the USA: Seventh Circuit Lifts Sanctions, Anti-Suit Injunction Contempt

by Amol Parikh | May 2, 2024 | Copyrights, Trade Secrets

The US Court of Appeals for the Seventh Circuit stayed a district court’s contempt sanctions relating to an anti-suit injunction violation, finding that the adjudicated infringer had done all it could to withdraw from the other proceeding in China. Motorola Solutions, Inc. v. Hytera Communications Ltd., Case No. 24-1531 (7th Cir. Apr. 16, 2024) (Hamilton, Brennan, St. Eve., JJ.) (per curiam).

Motorola Solutions previously obtained a $500 million judgment against Hytera for trade secret misappropriation and infringement of copyrighted code used in Motorola’s two-way radio systems. Motorola subsequently brought contempt proceedings after Hytera launched a new line of two-way radio systems, asserting that the new radio systems also used the copyrighted code. As part of the contempt proceeding, the district court imposed an anti-suit injunction ordering Hytera to “refrain from further pursuing or enforcing in any way” a lawsuit that Hytera had filed in the Shenzhen Intermediate People’s Court in China seeking a declaratory judgment that the new line of radios did not infringe Motorola’s intellectual property.

After evidence emerged that Hytera continued to participate in the Chinese proceeding, the district court issued an order directing Hytera to withdraw from the Chinese proceeding. Just a few days later the district court issued an order finding that Hytera had violated the anti-suit injunction by continuing to participate in the Chinese proceeding and imposed contempt sanctions, including a worldwide suspension of Hytera’s sales of two-way radio products; a fine of $1 million per day; and worldwide notice of the sanctions and prohibitions to customers, distributors and others. A few days after the order issued, Hytera filed an appeal.

At the same time, Hytera filed a petition with the Chinese court seeking to withdraw the declaratory judgment action and seeking the return of all evidence from that court. Less than a week later, Motorola appeared before the Chinese court. Because of the anti-suit injunction, Hytera did not appear at the hearing. At the hearing, the Chinese court denied Hytera’s motion to withdraw. Later that same afternoon, the Chinese court summoned Hytera and thereafter issued a short order granting the motion to withdraw.

Despite the Chinese court’s decision to grant Hytera’s motion to withdraw, the district court did not lift the sanctions. The district court expressed concern about a scenario in which a written order “technically withdraws the action” but comes with “a whole series of other consequences that generates duplicative litigation . . . and thereby undermines the whole purpose of the anti-suit injunction and the subsequent contempt proceedings.” The district court also noted that Hytera had not yet produced a promised log of ex parte communications between it and the Chinese court, and thus the district court could not be sure that Hytera was not using the Chinese court’s ex parte procedure to push for a favorable written order behind closed doors. Under the pressure of the continued contempt sanctions, Hytera repeatedly asked the Chinese court to clarify the status and effect of the order granting its withdrawal.

On appeal before the [...]

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Don’t Cut, Paste, Copyright: Bonding over Borrowed Words

by Keval Amin | Jan 25, 2024 | Copyrights

The US Court of Appeals for the Seventh Circuit affirmed a district court’s award of attorneys’ fees and its determination that trivial additions to existing documents were not copyrightable. UIRC-GSA Holdings, LLC v. William Blair & Company, L.L.C., and Michael Kalt, Case Nos. 23-1527; -2566 (7th Cir. Jan. 12, 2024) (Brennan, Flaum, Kirsch. JJ.)

UIRC, a property management company overseeing leases for the US General Services Administration, sought copyright protection for two documents it produced related to a bond offering: a private placement memorandum (PPM) and an indenture of trust. UIRC did not create these documents from scratch but instead borrowed most of the language from the Idaho Housing and Finance Association. Nevertheless, UIRC secured copyright registrations by explicitly focusing on the “additional and revised text” it contributed, not the “standard legal language.”

While aiding UIRC in transactions utilizing its copyrighted documents, William Blair concurrently assisted a third party in a similar transaction. During that transaction, William Blair used UIRC’s copyrighted PPM and indenture of trust documents. In response, UIRC filed a copyright infringement suit against William Blair. The district court granted William Blair’s summary judgment motion, finding that UIRC’s documents lacked valid copyright protection because of the trivial nature of the language added to the bond documents, such as “facts, short phrases, and functional elements.” The district court also awarded attorneys’ fees to William Blair under 17 U.S.C. § 505, finding that three of the four factors from the 1994 Supreme Court of the United States decision in Fogerty v. Fantasy favored an award. UIRC appealed.

The Seventh Circuit affirmed, stressing that UIRC was not the original author of the copyrighted works since it did not independently create the PPM and indenture of trust documents. The Court explained that copyright protection requires original works with a minimal degree of creativity, a criterion UIRC failed to meet because its contributions resembled facts, fragmented phrases or language driven by functional considerations.

The Seventh Circuit heavily relied on the Supreme Court’s 1991 Feist Publ’ns v. Rural Tel. Serv. decision, drawing parallels to emphasize that UIRC’s bond documents, being “incredibly similar” to the Idaho Housing and Finance Association documents, lacked the necessary creative expression for copyright protection. The Seventh Circuit deemed trivial additions made by UIRC, which the Court categorized as “facts, short phrases, and functional language” ineligible for copyright protection. The Court highlighted the importance of independent creation using examples where even photographs of familiar characters were copyrightable due to the photographer’s “unique angle, perspective, lighting, and dimension.” In the present case, the Court found that UIRC’s contributions lacked the necessary creative expression. Accordingly, the Court concluded that UIRC’s bond documents were not protected by valid copyrights.

In addressing the attorneys’ fees award to William Blair, the Seventh Circuit applied the Fogerty factors:

Frivolousness of the Suit: The Court found that UIRC’s suit lacked merit, emphasizing the frivolousness factor in favor of William Blair.
Losing Party’s Motivation: UIRC’s lack of disclosure about the Idaho Housing and Finance Association documents was deemed [...]

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Grubhub Relishes Victory Against Trademark Preliminary Injunction

by Tessa Kroll | Sep 28, 2023 | Trademarks

Upholding the denial of a preliminary injunction motion in a trademark infringement dispute, the US Court of Appeals for the Seventh Circuit concluded that the district court did not err in finding that the trademark owner failed to show a likelihood of success on its reverse confusion theory. Grubhub Inc. v. Relish Labs LLC, Case No. 22-1950 (7th Cir. Sept. 12, 2023) (Lee, Jackson-Akiwumi, Wood, JJ.)

Relish Labs and the Kroger Company (Home Chef) create and deliver meal kits with pre-portioned ingredients that customers can cook at home. Home Chef began using its “HC Home Mark,” which is protected by five federal trademark registrations, in 2014. Home Chef has spent more than $450 million on advertising and reached $1 billion in annual sales in October 2021.

Grubhub is an online food ordering and delivery service that provides on-demand order management, dispatching and procurement. In June 2021, Grubhub was acquired by Netherlands-based Just Eat Takeaway (JET), an international food delivery company that typically combines its “JET House Mark” with the marks of its local brands.

Before finalizing its acquisition of Grubhub, JET filed an international trademark application for the JET House Mark. However, the US Patent & Trademark Office (PTO) examiner preliminarily rejected the mark, finding it to be “confusingly similar” to the HC Home Mark. JET did not respond and withdrew the application. After acquiring Grubhub, JET adopted the “Grubhub House Logo,” which combined the Grubhub logo with the JET House Mark. Grubhub introduced the new logo in July 2021 and has spent millions of dollars rebranding.

After receiving a cease-and-desist letter from Home Chef, Grubhub sued, seeking a declaratory judgment that its logo did not infringe Home Chef’s marks. Home Chef countered with a motion for preliminary injunction, which was referred to a magistrate judge. The magistrate judge recommended that the court grant Home Chef preliminary injunctive relief, but the district court rejected the recommendation and denied Home Chef’s motion, finding that it had not shown a likelihood of success on the merits. Home Chef appealed.

On appeal, the Seventh Circuit began by addressing which Grubhub mark was at issue: the JET House Mark alone or the Grubhub House Logo (which incorporated the logo portion of the JET House Mark). The Court noted that Grubhub had not used the JET House Mark without the Grubhub brand name in the United States and thus agreed with the district court that the accused mark was the Grubhub House Logo:

Turning next to Home Chef’s reverse confusion theory, the Seventh Circuit addressed the relevant four factors from its [...]

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Change in Law Leading to Case Dismissal Doesn’t Preclude Attorneys’ Fees

by Eleanor B. Atkins | Aug 24, 2023 | Copyrights

Addressing the symmetrical fee-shifting provision of the Copyright Act and whether a prevailing defendant was entitled to fees even when the plaintiff moved to dismiss the case in response to a change in law, the US Court of Appeals for the Seventh Circuit reversed the district court’s denial of attorneys’ fees and remanded the case for reconsideration. Live Face on Web, LLC v. Cremation Society of Illinois, Inc., et al., Case No. 22-1641 (7th Cir. Aug. 11, 2023) (Scudder, Kirsch, Jackson-Akiwumi, JJ.)

The Cremation Society of Illinois and its co-defendants (collectively, CSI) licensed software from Live Face on Web. Live Face on Web then sued CSI for copyright infringement, seeking damages of more than 1,000 times the initial license fee. Five years later, while summary judgment was pending, Live Face on Web moved to dismiss the case, arguing that the Supreme Court’s 2021 decision in Google LLC v. Oracle America, Inc. “made the defendants’ fair-use defense insurmountable.” The district court granted the motion to dismiss, and CSI filed a motion to recover fees. The court denied the motion for fees, in part because “awarding fees would neither encourage nor discourage other defendants from maintaining valid defenses against copyright claims.” CSI appealed.

The Copyright Act allows prevailing parties to recover costs and fees. The Seventh Circuit examined the nonexclusive factors that guide this analysis:

The frivolousness of the lawsuit
The losing party’s motivation for bringing or defending the lawsuit
The objective unreasonableness of the losing party’s claims
The need to advance considerations of compensation and deterrence.

The Seventh Circuit noted that the last factor relates to the purpose of the fee-shifting provision: “[b]y encouraging parties to stand on their rights, the Act’s symmetrical fee-shifting provision advances its core purposes.” A successful copyright infringement litigant “encourages others to use the copyright system, fostering further innovation,” whereas a defendant “who successfully protects his rights to use things in the public domain necessarily gives others a license to do the same.” The Court stated that prevailing defendants in particular benefit from a strong presumption that they are entitled to recover attorneys’ fees: “Without an award of attorney’s fees, a defendant faces pressure to abandon his meritorious defenses and throw in the towel because the cost of vindicating his rights (his attorney’s fees) will exceed the private benefit he receives from succeeding (a nonexcludable right to continue doing what he was already doing).”

In this case, the district court reasoned that CSI’s success was due to the change in the law rather than meritorious defenses and, therefore, awarding fees to CSI would not advance or deter any conduct. The Seventh Circuit disagreed, stressing that Live Face on Web did not demonstrate that it would have prevailed but for the Supreme Court’s decision in Google. Moreover, the Court noted that CSI had raised multiple other defenses that were not impacted by Google. In any event, the Court reasoned, “[i]n litigation, both sides accept that as the case evolves, the law might, [...]

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Nitpicking Allowed When Determining Statutory Damages

by Sarah Bro | Apr 13, 2023 | Copyrights

On the second round of a copyright dispute, the US Court of Appeals for the Seventh Circuit affirmed in part, reversed in part and remanded (again) to the district court to apply the “independent economic value test” handed down by the Court in the first iteration of the dispute to determine what constitutes as “one work” for purposes of calculating statutory damages where a jury finds infringement on multiple works registered in a single copyright application. Amy Lee Sullivan, dba Design King v. Flora Inc., Case No. 15-cv-298 (7th Cir. Mar. 31, 2023) (Flaum, Scudder, Eve, JJ.)

In 2013, graphic design artist Amy Sullivan sued herbal supplemental company Flora for copyright infringement after Flora used Sullivan’s illustrations in a manner exceeding the scope of the parties’ license agreement. The district court instructed the jury that Sullivan could receive separate statutory awards for 33 acts of infringement on 33 individual illustrations, which were the subject of two separate US copyright registrations, as compilations. The jury issued a statutory damages award of $3.6 million. Flora appealed.

In its decision on the first appeal, the Seventh Circuit adopted the independent economic value test to address the standard for determining whether multiple related works of authorship are each entitled to a separate statutory damages award, or if the related works constitute one compilation warranting only a single statutory damages award. Because the record in Sullivan’s case was insufficient to make that determination and assess proper damages, the Seventh Circuit remanded to the district court to determine whether Sullivan’s illustrations had standalone “distinct and discernable value to the copyright holder.”

On remand, the district court found that Flora waived several arguments challenging the independent economic value of certain of Sullivan’s illustrations, and therefore entered the same jury verdict. Flora appealed again.

After a lengthy analysis on the scope of remand, the Seventh Circuit found that the district court violated its mandate on remand because it did not put the independent economic value assessment to a jury, and instead decided the factual issue on the same record the appeals court had previously found insufficient. The Court then moved to its summary judgment analysis and reiterated the independent economic value test for considering whether Sullivan’s 33 illustrations constituted 33 individual works or instead were parts of two compilations. The Court articulated several relevant factors that went into its totality of the circumstances analysis, including whether the copyright holder marketed or distributed the works independently or as a compendium, whether the works were produced together or separately, how the works were registered for copyright protection and, ultimately, whether the market assigned value to the works.

The Seventh Circuit concluded that Flora raised facts and arguments relating to the independent economic value test that were within the scope of remand and not waived. Flora was not prohibited from arguing several primary positions. First, Flora noted that it provided Sullivan with only two invoices for both “illustration collections,” and Sullivan registered the illustrations in two compilation copyrights, [...]

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Color Me Unsurprised: No Preclusion of Plaintiff’s Claims

by Paul Devinsky | Oct 27, 2022 | Trademarks

The US Court of Appeals for the Seventh Circuit reversed the lower court’s order determining that the plaintiff’s federal lawsuit was barred under the doctrines of claim and issue preclusion, noting an Illinois law exception on claim preclusion and finding no issue preclusion. Creation Supply, Inc. v. Selective Ins. Co. of the Southeast, Case No. 21-3172 (7th Cir. Oct. 19, 2022) (Rovner, Hamilton, Scudder, JJ.)

Creation Supply is a producer of markers. In 2012 one of its competitors sued it for trademark violations. Creation requested that Selective Insurance provide coverage for the lawsuit, but Selective refused. Creation entered into a settlement agreement with its competitor that prevented Creation from selling one of its primary lines of markers. As a result, Creation lost much of its business and struggled financially.

Selective did not provide coverage for Creation’s legal defense. It also sought a declaration in Illinois state court that it owed Creation no duty to defend. Creation countersued, seeking a declaration that Selective did owe it a duty to defend. Creation also alleged that Selective breached the insurance policy between the parties. The Illinois circuit court entered partial summary judgment for Creation on its duty to defend the claim and finalized an award of incidental relief in October 2017.

In 2014, during the state court litigation, Creation filed a suit against Selective in federal court for breach of contract and a claim under the Illinois Insurance Code for vexatious and unreasonable conduct. In 2016, Creation requested voluntary dismissal of the state court breach of contract claim. The Illinois circuit court granted the motion and expressly reserved Creation’s right to maintain its federal action on its breach of contract claim. After the end of the state court litigation in 2017, the federal court case continued. The district court granted summary judgment for Creation on the insurance coverage question. After a bench trial on the Illinois Insurance Code claim, the court found for Creation and awarded almost $3 million in damages. On appeal, the Seventh Circuit reversed and remanded, instructing the district court to resolve the remaining issue of contract damages.

After the remand, Creation sought to amend the complaint to seek punitive damages. The district court denied that request. Selective then moved for judgment on the pleadings, contending that the doctrines of claim and issue preclusion barred Creation’s remaining contract claim. The district court agreed and entered judgment for Selective because the Illinois state courts had resolved the issue of Selective’s duty to defend. Creation appealed.

The Seventh Circuit affirmed the district court’s denial of Creation’s leave to amend, then turned to the issue of claim preclusion, a legal doctrine that prevents a party from repeatedly litigating the same cause of action against the same adverse party. Claim preclusion requires the following:

A court with proper jurisdiction must have issued a final judgment on the merits.
The claims in the two actions must be the same.
The parties in the second action must be the same (or in privity with) those [...]

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Yes, and It Counts! Single Purchase in Forum Establishes Personal Jurisdiction over Infringer

by Tessa Kroll | Sep 1, 2022 | Trademarks

The US Court of Appeals for the Seventh Circuit affirmed exercise of personal jurisdiction over a foreign online retailer for a trademark infringement claim where the trademark owner purchased the only allegedly infringing article sold in the forum. NBA Properties, Inc. v. HANWJH, Case No. 21-2909 (7th Cir. Aug. 16, 2022) (Ripple, Scudder, JJ.)

NBA Properties owns the trademarks for the National Basketball Association (NBA) and NBA teams. HANWJH is a China-based online retailer that sells allegedly infringing NBA branded products on a well-known e-commerce site. HANWJH offered 205 allegedly infringing products that were available for purchase in Illinois, the forum state. HANWJH’s only online order in Illinois was made by an investigator for NBA Properties who purchased a pair of basketball shorts for delivery to an Illinois address. The shorts were delivered to the Illinois address before NBA Properties filed suit against HANWJH.

NBA Properties sued HANWJH for trademark infringement and counterfeiting under 15 U.S.C. § 1114 and false designation of origin under 15 U.S.C. § 1125(a) in the Northern District of Illinois. NBA Properties sought and received a temporary restraining order and preliminary injunction, including a temporary asset restraint on HANWJH’s bank account. After HANWJH failed to timely answer the complaint, NBA Properties moved for default judgment. HANWJH moved to dismiss the case for lack of personal jurisdiction, arguing the following:

Operating a website is not sufficient on its own to establish personal jurisdiction.
A single transaction by the plaintiff cannot support the exercise of personal jurisdiction.
Even if the exercise of personal jurisdiction were otherwise appropriate, such exercise would offend the traditional notions of fair play and substantial justice.

The district court denied HANWJH’s motion to dismiss and entered a default. HANWJH failed to object to the motion for default judgment, and the district court entered a final judgment. HANWJH appealed.

The Seventh Circuit reviewed the “minimum contacts” International Shoe criterion before turning to a more recent line of cases applying this standard to online retailers. Citing its 2020 decision in Curry v. Revolution Laboratories, the Court noted that the minimum contacts requirement is satisfied if “the defendant reasonably could foresee that its product would be sold in the forum.” The Court reasoned that allowing customers to order products from a website to the forum and then fulfilling an order to the forum can form the basis of personal jurisdiction—even when the only orders to the forum were made by the plaintiff, as long as the orders were made before filing suit. Applying these principles, the Court found that HANWJH had purposefully directed conduct at Illinois by establishing an online store, demonstrating a willingness and capacity to ship goods to Illinois and intentionally shipping an infringing product to an Illinois address. The Court explained that it was irrelevant that only a single allegedly infringing article was sold in Illinois and that it was purchased by the plaintiff, because the proper focus of the analysis was on HANWJH’s purposeful conduct. The Court also concluded that HANWJH’s [...]

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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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