Archive for the ‘Trade Secrets’ Category

So You Think Your Trade Secrets Are Protected…

Wednesday, July 31st, 2013

safe It’s time for a story.  We’ll start with the moral – read your non-disclosure agreements and comply with ALL of the requirements of the agreement to keep your information secret.  Back to the story:

In license negotiations for an invention,  Convolve and another party signed a non-disclosure agreement.   Like many non-disclosure agreements, the agreement required that the person disclosing secret information designate the information as confidential.   Convolve revealed trade secrets to the other party in reliance on the agreement, but failed to designate the trade secrets as confidential.   The license negotiations fell through and, predictably, the other party used the trade secrets.   Convolve sued, arguing that the trade secrets were protected by the non-disclosure agreement and also by trade secret law.

Convolve  lost on the trade secret claims, both at trial and on appeal.   The Federal Circuit Court of Appeals held that Convolve’s failure to designate the trade secrets as confidential according to the agreement meant that the trade secrets were not covered by the agreement.  The other party was free to use the trade secrets in any way that it desired.

Convolve also lost on its trade secret law claims.  The Federal Circuit held that the agreement trumped trade secret law.   In short, Convolve waived its other trade secret rights by signing the non-disclosure agreement.

In the give-and-take of a business negotiation, information can be disclosed in all sorts of ways – verbally over lunch, in e-mails or texts, in demonstrations and plant tours.   Some of the information disclosed will be confidential and some will not.  You and every person on your team who communicates with another party under a non-disclosure agreement MUST be aware of what information is confidential and the necessary steps to protect the confidential information under a non-disclosure agreement.

If you are the party disclosing information, another way to protect yourself is to make sure that the agreement protects all disclosed information without requiring a specific designation and that the rights of the disclosing party are in addition to its rights under trade secret law.

— Robert Yarbrough, Esq.

Trade Secret Theft is a Crime

Saturday, April 30th, 2011

jail birdAs Mike Yu learned, industrial espionage can earn you hard time.  Mr. Yu is a Chinese national with permanent residency status in the U.S.  He worked as an engineer for Ford Motor Company for ten years.  Before departing Ford in 2007, Mr. Yu purloined computer files containing several thousand of Ford’s sensitive documents, including design documents relating to engines, transmissions and electrical power systems.  He shopped the computer files to four Chinese auto makers as part of a job search and eventually worked for two of the Chinese auto makers.

Mr. Yu was arrested in 2009 upon his return to the U.S.   He subsequently pled guilty to two counts of theft of trade secrets.  On April 12, 2011 the U.S. District Court for the Eastern District of Michigan sentenced Mr. Yu to almost six years in Federal prison.  In the sentencing memorandum, Mr. Yu agreed that the stolen trade secrets were worth between 50 and 100 million dollars.   Mr. Yu’s conviction and sentence are cold comfort to Ford, whose trade secrets still are in the hands of its competitors.

— Robert Yarbrough, Esq.

Is Coca-Cola’s Trade Secret Recipe Still a Trade Secret?

Monday, February 28th, 2011

coca-cola The recipe for Coca-Cola® is one of the most valuable trade secrets in the world.  As a trade secret, it is not protected by patent, copyright, trademark or any other government-granted monopoly.   The recipe is a trade secret only because The Coca-Cola Company keeps the information secret.

According to the radio show ‘This American Life,’ the cola cat is out of the bag.  According to the show’s producers, a photograph of the original 1886 recipe appeared in the Atlanta Journal-Constitution in 1979 and is fully legible.  Does publication of this 125 year old recipe destroy The Coca-Cola Company’s trade secret?

Hmm.  John S. Pemberton, who invented Coca-Cola®, was a wounded Confederate veteran, pharmacist and morphine addict.  After the Civil War, Pemberton sold an alcoholic product that included caffeine and cocaine as a medication for, among other things, morphine addiction.  He changed the recipe in 1886 to remove the alcohol in response to temperance laws and changed the name to “Coca-Cola®.”   Pemberton sold his rights and died in 1888.  The cocaine was gone from the recipe by 1903, but the caffeine remains.

So what about the secret recipe for Coca-Cola?

In general, a trade secret is entitled to protection in the courts only so long as the owner of the trade secret takes reasonable precautions to keep the information secret.  If someone else acquires the information, then that person is free to use the information, so long as the person did not acquire the information through improper means, as a result of a breach of confidence, or as the result of a mistake.  For example, stealing the recipe would be improper means .  Acquiring the recipe by hiring a Coca-Cola Company executive who knows the trade secrets would be a breach of confidence.

The Coca-Cola Company has made no allegation that the original 125 year old recipe was stolen or acquired by anything other than proper means.  The old recipe is not subject to trade secret protection and may be copied freely- just don’t expect to mix up a modern Coke®.  The modern recipe is still a trade secret.

— Robert J. Yarbrough, Esq.

To Hold or Not to Hold

Thursday, January 27th, 2011


A popular method for protecting and managing intellectual property (“IP”) assets — high valued assets, in particular — is to transfer them to a special company created for the purpose of creating, protecting, licensing, and monitoring, IP. Typically, a corporation may create a subsidiary to hold its IP, which it may license back to the parent and, perhaps, to third-party licensees.

Assuming that the holding company’s relationship with its parent is arms’ length and that it obeys all the appropriate corporate formalities, isolating the intellectual property protects the holding company from lawsuits against the parent, claims of the parent’s creditors, and the parent’s insolvency. It might also protect the IP from hostile takeovers of the parent company. Placing IP in a separate holding company may also provide an objective measure of its value, uncluttered by the operations of the parent. This may be of particular importance for obtaining financing and eventually selling the IP to a third party. From the income tax perspective, the Parent may deduct the royalties it pays to license the IP. Relieving itself of IP ownership may also reduce tax consequences based upon the parent’s net worth such as franchise taxes. Of equal importance is that the holding company subsidiary may not be liable for state income tax solely because it is a holding company. At the same time, the holding company is available to offer services to the parent as well as make loans and pay dividends.

Sound too good to be true? You may be right. States generally have an aversion to IP holding companies because they perform services but do not generate taxable income. Some states aggressively audit IP holding companies, hoping to “pierce the corporate veil” by proving that the holding company is the alter ego of its parent. Should the state require combined reporting for parent and sub as a result of an audit, it would eliminate the tax benefits of the arrangement altogether. North Carolina and some other states have enacted anti-passive investment company laws designed to eliminate the tax benefits of the intangible holding company. In recent years, IP holding companies have been challenged in Connecticut, Maryland, Massachusetts and New York. State legislative bodies in Connecticut, New York, Alabama, Mississippi, New Jersey, North Carolina, and Ohio have enacted so-called “Add Back” statutes. The Model Add Back statute provides that

For purposes of computing its net income under this chapter, a taxpayer shall add back otherwise deductible intangible expense directly or indirectly paid, accrued or incurred in connection with one or more direct or indirect transactions with one or more related members.

The bottom line is that if you believe that creating an IP holding company may be of benefit to your organization, you should be wary of the tax consequences, and plan to operate the holding company in accordance with state statutes to gain the expected benefits. Be sure to contact your tax professional as well as your lawyer to determine if having an IP holding company is right for your situation. Let us know if Lipton, Weinberger & Husick can help.

— Adam G. Garson, Esq.

The Secret of the Nooks and Crannies

Friday, August 27th, 2010

muffinTraditional methods of intellectual property protection have their limitations, particularly for protecting ideas. Patents only protect new, useful and nonobvious ideas, the details are public, and protection last only for a fixed term of 17 or 20 years years, depending upon the filing date; and trademark and copyright law do not protect ideas at all. It’s no wonder that some companies resort to the time-tested method of secrecy for protecting valuable ideas.  But secrecy may not be the best option for protecting ideas whose value derives from communicating them to the public. On the other hand, commercial recipes, formulae, and algorithms not only derive their value from confidentiality but their value may actually be enhanced by a cloak of secrecy. The “Coca-Cola” recipe is one of the best known and oldest trade secrets whose value is probably worth billions.

In a recent article in the Daily Finance website, Bruce Watson listed the 10 most valuable trade secrets today. It’s a familiar list:

1. Thomas English Muffins;

2. Coca-Cola’s secret recipe;

3. Google’s search algorithm;

4. KFC’s Fried Chicken recipe;

5. The WD-40 formulation;

6. The mechanics of how the New York Times Best Seller List is created;

7. Auto-Tune algorithms;

8. The recipe for Chartreuse;

9. The recipe for Mrs. Fields’ Chocolate Chip Cookies; and

10. Starwood Hotels’ formula for luxury service.

It’s interesting that Thomas’ English Muffins holds the number one position. A recent New York Times article described litigation between Chris Botticella — former vice president in charge of bakery at Bimbo Bakeries — and Bimbo Bakeries, the owner of the Thomas’ English muffins brand.  Apparently, Bimbo accused Botticella of stealing company secrets when he left the company in January 2010 to accept a job with rival baker, Hostess Brands. Legal documents showcased the company’s methods of maintaining the secrecy of the Thomas English muffins recipe.  Recipe manuals were referred to as “code books” and valuable information was shared on a need-to-know basis to protect it from disclosure. To quote the New York Times,

The secret of the nooks and crannies was split into several pieces to make it more secure, and to protect the approximately $500 million in yearly muffin sales. They included the basic recipe, the moisture level of the muffin mixture, the equipment used and the way the product was baked. While many Bimbo employees may have known one or more pieces of the puzzle, only seven knew every step.

Disclosing a secret to employees as component parts of a larger secret may seem like overkill  — like multiple launch keys to a nuclear warhead —  but to make a product, lots of people must understand the process, or at least the part for which they are responsible.  Thus, it makes sense and certainly achieved the desired trade secret protection.  Ask Mr. Botticella; he was ultimately barred from starting his new job by the U.S. Court of Appeals for the Third Circuit.

— Adam G. Garson, Esq.

Don’t Forget Trade Secrets

Friday, May 29th, 2009

safeAsk a knowledgeable layperson to define “Intellectual property” he or she typically lists patents, trademarks, and copyrights.  A fourth type of intellectual property, “trade secrets,” should not be ignored.  Trade secrets consist of any idea, process, formula or other information that a company or individual wishes to protect from infringement (i.e., from being stolen) by maintaining it as a secret.  Lawyers will tell you that to maintain trade secret protection, you must keep it secret.  For some companies, that is not a problem.  The Coca Cola Corporation, for example, has maintained the secrecy of its Coke formula for over a hundred years.  For others, trade secret protection simply does not work.  Disclosure of the “secret” process, idea or information is critical to their business model.  Such companies seek patent, copyright or trademark protection.

Unlike its patent, trademark and copyright brethren — creatures of federal law — trade secret protection is controlled by state law.  Until recently, this meant that the law of trade secrets was a patchwork of judge-made law (“common law”), which differed from state to state.  The situation, however, has changed for the better.  During the past 20 years, Pennsylvania (in 2004) and a majority of other states have adopted the Uniform Trade Secrets Act (“UTSA” or “Act”), which has added predictability to how trade secrets are treated under the law, making it a much more valuable tool for intellectual property protection, particularly for businesses involved in inter-state commerce.  See 12 Pa. C.S.A. § 5301

The UTSA has standardized the definition of trade secret, the factors related to misappropriation of trade secrets, and the available remedies for violation of the Act.  Under the Pennsylvania Act, a trade secret consists of  “information, including a formula, drawing, pattern, compilation including a customer list, program, device, method, technique or process that derives independent economic value… from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use.”  Importantly, for businesses in Pennsylvania, the definition includes customer lists, which in some states are not considered trade secrets.  Customer lists are frequently at the center of disputes between former employees and employers so the Pennsylvania UTSA provides businesses with another tool to defend their ownership rights so long as the lists are maintained in secrecy.

The Act requires that a trade secret be “subject of efforts that are reasonable under the circumstances to maintain its secrecy.”  So, if you have a customer list or any other type of trade secret you must use reasonable efforts maintain its secrecy.  This means that access to the secret must restricted in a guarded location.

The UTSA provides remedies for the aggrieved party, including money damages and injunctions. Money damages may consist of defendant’s unjust enrichment or plaintiff’s lost profits.  Alternatively, the UTSA also provides for reasonable royalties. In addition, punitive damages may be awarded for willful and malicious misappropriation.  Under the Act, the prevailing party may also be awarded attorneys’ fees.  Finally, the UTSA provides criminal penalties and makes obtaining trade secrets “willfully and maliciously” through a computer or computer system a second-degree felony.  See 18 Pa. C.S.A. § 3930

— Adam G. Garson, Esq.

$9.7 Million Judgment in Trade Secrets Case

Friday, May 29th, 2009

dollarThe United States District Court for the District of Utah Central Division has issued permanent injunctions and issued a judgment for approximately $9.7 in a case dealing with theft of trade secrets.

Clearone Communications alleged that two individuals appropriated computer code known as “honeybee code” in violation of an asset purchase agreement and in violation of an employment agreement.  Wideband Solutions, a company in which the individuals participated, received the purloined code and licensed the code to Biamp Systems.

After a jury trial, the Court found for plaintiffs.  Applying the Utah version of the Uniform Trade Secrets Act, the Court awarded actual damages and punitive damages to Clearone and issued injunctions against the defendants.  Defendants Wideband and Biamp have announced their intent to appeal.

— Robert J. Yarbrough, Esq.