Monthly Archives: October 2012

No Dice: The Risks of Trade Secret Misappropriation

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October 29  |  Newsletter  |   david

Often the most important remedy in intellectual property litigation is an injunction.  If someone infringes your patent, copyright or trademark, you want a remedy that will require them to stop doing so.  It had long been held in intellectual property litigation that once an infringement was proven, an injunction would issue.

The Legal Background

The 2006 United States Supreme Court opinion in eBay, Inc. v MercExchange, LLC[1] changed that.  It was a patent infringement case and held that the requirements for obtaining a permanent injunction should be no different than the common law requirements for obtaining a permanent injunction in other types of cases which are that the plaintiff must prove (i) that it has suffered irreparable injury, (ii) that remedies at law (monetary damages) are inadequate to compensate for the injury, (iii) that considering the balance of hardships between the plaintiff and defendant, an injunction is warranted, and (iv) that the public interest would not be disserved by a permanent injunction.

In the years since eBay, there has been a great deal of discussion about the application of its holding to other types of intellectual property and other related areas of the law.  The decision in eBay specifically discussed the Copyright Act, and so it is easy to conclude that it also applies to copyright cases.  It has also been held to apply to trademark infringement cases[2] and to false advertising cases[3] brought under §43(a) of the Lanham Act (the federal trademark act); however, there has been some inconsistency in doing so.[4]

Now comes a trade secret case in Virginia.  A trade secret is a legally protected right of a business to its confidential, proprietary information.  Patent, copyright and trademark are ways for a business to protect its creative efforts.  Trade secrets provide another way.  For a general discussion of trade secret law, see Trade Secret Law.

The case is a big one.  It resulted in a $920 million judgment and a 20-year, world-wide injunction against the Korean manufacturer Kolon Industries, Inc. producing its competitive product.  The case is in the Richmond District of the United States District for the Eastern District of Virginia.  The court had personal jurisdiction over the South Korean defendant because some aspects of the misappropriation occurred in the United States and Kolon entered a general appearance in the case and filed a counterclaim (which was severed).  As would be expected in such a large case, every issue was contested which has resulted in numerous written opinions, including a 70-page opinion entered August 30, 2012 on DuPont’s post-trial motion for a permanent injunction.

The Factual Background

The following facts are from the court’s opinion.  They are egregious.  After a seven-week trial, a jury found that Kolon violated the Virginia Uniform Trade Secrets Act.  Using a fifty-one page verdict form, the jury specifically found that Kolon willfully and maliciously misappropriated and used 149 DuPont trade secrets for the manufacture of DuPont’s para-aramid fiber Kevlar®.

Kolon had attempted in the 1980s and 1990s to develop a commercial para-aramid product.  It was unsuccessful and in 1995 abandoned the effort.  In 2002, Kolon’s top executive directed that the company renew its efforts to produce para-aramid.  In 2005, Kolon announced that it soon would enter the para-aramid fiber market with its product Heracron®.  It did begin production but its efforts were less than successful.  Because it is a lucrative market, the company’s top management again made success in the manufacture of Heracron® a top priority.

Kolon continued its development efforts and was making some progress toward success, but it encountered significant problems in quality control and in efficient production, both of which kept Heracron® from being competitive in the market.  In its effort to become competitive, Kolon made the deliberate decision to acquire DuPont’s trade secrets and confidential information.

To achieve its objective, Kolon retained as “consultants” former DuPont employees whom it paid to divulge DuPont’s trade secrets.  Once such consultant, Mitchell, was a long-time former employee that DuPont had terminated in 2006.  Despite having entered into a non-disclosure agreement with DuPont, Mitchell divulged DuPont trade secrets to Kolon.  Apparently not satisfied that Mitchell was spilling all the beans, during a luncheon recess from a meeting in Korea, Kolon surreptitiously copied the hard drive of Mitchell’s laptop.

At trial, DuPont presented evidence that Kolon had incorporated the stolen DuPont trade secrets into Kolon’s own manufacturing facilities, including machine configurations that DuPont had used solely because of its need to fit machinery into limited space in its plant.

Kolon’s flagrant behavior didn’t end when the lawsuit was filed.  Kolon also engaged in some serious shenanigans during the trial.  DuPont discovered a number of screenshots that indicated employees of Kolon had deliberately deleted, overwritten or destroyed approximately 17,000 emails and other documents.  That resulted in Judge Payne granting an adverse inference instruction to the jury, meaning that the jury could infer that the documents destroyed were adverse to Kolon.

Whether eBay Applies to Permanent Injunction under Virginia Uniform Trade Secrets Act

Following trial, DuPont moved for a permanent injunction against Kolon using DuPont’s trade secrets.  In considering the issue of whether a permanent injection should issue against Kolon, Judge Payne conducted a comprehensive analysis which begins with the question of whether the eBay doctrine for issuance of an injunction, if applied to this case, would encroach upon the bedrock case of Erie R. R. v. Tompkins.[5]

Remember, the eBay case involved patent infringement – a violation of federal law for which the federal trial court had federal question jurisdiction.  The Kolon case involved trade secrets under Virginia law for which the federal trial court had diversity jurisdiction, not federal question jurisdiction.  As noted by Judge Payne, under the Erie doctrine, federal courts must apply the substantive law of the forum state in diversity of citizenship cases.  As he also notes, since Erie federal courts have struggled to distinguish substance from procedure.

Judge Payne then engages in a thoughtful analysis of the application of Erie to the issue of a permanent injunction, which courts and lawyers in other jurisdiction will find instructive.  He concludes that analysis by stating that there is a widely held perception the issue has not been resolved by the Supreme Court of the United States.

However, he then resolves the issue for the Kolon case by stating that the Fourth Circuit, which is direct authority for federal courts in Virginia, “has spoken directly on this admittedly complicated issue.…  In Capital Tool,[6] the Fourth Circuit concluded that the application of state law to the issuance of a final injunction in diversity cases is consistent with the principles announced in Erie when it articulated that:  ‘There is no reason to exclude form Erie state substantive law regarding the issuance of final injunctions. 837 F.2d at 172’.”

Judge Payne continues:  “(A) complainant need not allege or prove irreparable harm when it involves a statute that authorizes injunctive relief.  All that need be proved is a violation of the statute.” (Emphasis by Judge Payne) (citing Va. Beach S.P.C.A., Inc. v. S. Hampton Roads Veterinary Ass’n, 329 S.E.2d 10 (Va. 1985) and Envtl. Def. Fund., Inc. v. Lamphier, 714 F.2d 331 (4th Cir. 1983)).[7]

Judge Payne then holds:  “For the foregoing reasons, the Court finds that applying the standard for injunctive relief in eBay to DuPont’s request for a permanent injunction under the VUTSA would trench upon the rule of Erie.  Hence, the Court will apply Virginia’s principles as set forth in the decisions of the Commonwealth’s highest court.  Under those principles,  DuPont, having proved a violation of the VUTSA, does not have to prove irreparable harm or the lack of an adequate remedy at law to receive an injunction against the actual misappropriation of its trade secrets by Kolon.”  (Opinion p. 30)

Judge Payne then states:  “The conclusion that DuPont is not required to establish irreparable injury or the lack of an adequate remedy at law does not mean that DuPont is automatically entitled to injunctive relief.” (Opinion p. 31)   He then turned his attention to the factors under Virginia law which should be considered in determining whether to grant an injunction.

Injunction under Virginia Uniform Trade Secrets Act[8]

Kolon, relying upon Faiveley Transport Malmo AG v. Wabtee Corp.,[9] argued that the $920 million judgment against it makes in unnecessary and inappropriate to issue an injunction.  The Second Circuit in Faiveley commented that an award of damages often will provide a complete remedy for misappropriation absent a showing that, unless enjoined, the misappropriator will further disseminate the stolen secret.  Judge Payne gave Faiveley short shrift:  “That somewhat remarkable, overly simplified statement was made without the benefit of a full record, and it was dictum.”  (Opinion p. 33)

Judge Payne pointed to Kolon’s assertion that it could not afford the premiums on an  appeal bond and noted that they may have no assets in the United States forcing DuPont to attempt to enforce its judgment in Korea, to indicate there is no assurance DuPont will be successful in obtaining satisfaction of its judgment.   During the time DuPont would be required to spend in seeking to enforce its judgment, without an injunction, Kolon would be free to use the stolen trade secrets.  Judge Payne concluded that the $920 million monetary judgment would not preclude an injunction.

In balancing the equities between DuPont and Kolon, Judge Payne found that the equities strongly favored granting and injunction.  In considering the public interest in determining whether an injunction should issue, Judge Payne found that in a global economy where many international companies do not accord trade secrets the same respect and protection as they are granted under the Uniform Trade Secrets Act, which has been enacted by all states except Massachusetts, New York, North Carolina and Texas, it serves the public interest for those who violate the law to know that they will be caught, they will be prosecuted civilly, and they will not be able to profit from their stealing.  Judge Payne then found that injunctive relief will help serve as a deterrent to trade secret misappropriation.

Judge Payne thus found that the factors under Virginia law favor granting an injunction.  When granted, an injunction must be tailored to address properly the wrong that has been proved and to effectuate proper relief.

Type and Scope of Injunction

Judge Payne then addressed the type of injunction to issue – a “production” injunction or a “use” injunction.  DuPont requested an injunction prohibiting Kolon from making a para-aramid product altogether, not just prohibiting Kolon from using the stolen secrets in making the product.

Judge Payne determined that Kolon had not created a significant and comparable design for the product prior to stealing DuPont’s trade secrets.  He further determined that the misappropriated trade secrets are inextricably intertwined in Kolon’s production line and operating processes, and further that it would not be possible for Kolon’s employees to “unlearn” the secrets that were misappropriated.  He also determined that given Kolon’s flagrant misconduct, Kolon could not be trusted to police itself on an injunction that would prohibit only use of the stolen trade secrets.

The scope of the injunction deals with both its geographic scope and its duration.  DuPont requested a worldwide scope.  Judge Payne looked to the Restatement (Third) of Unfair Competition, authority from the Eleventh Circuit[10] and the Ninth Circuit,[11] and general principles of equity to conclude that an extraterritorial injunction is warranted.

Judge Payne considered the “independent development” standard in determining the duration of the injunction, but also cited with approval a treatise[12] which states that while the general principle and judicial preference is to limit injunctive relief to independent development time, courts seek to do equity and will enter an injunction for an arbitrary term if needed to accomplish an equitable result.  In this case, Kolon had not perfected the technology after almost 20 years of trying and the evidence was that it took DuPont 30 years to develop Kevlar.®

As a result, Judge Payne issued an injunction against Kolon prohibiting the production of any para-aramid fiber for 20 years, as well as a permanent injunction against the use of the trade secrets, and a permanent injunction against disclosure of the trade secrets not only to others outside Kolon but also against further disclosure to other employees of Kolon.

Footnote

On September 21, 2012, in a split decision a three-judge panel of the Fourth Circuit stayed the injunction pending Kolon’s appeal.

For his part, in 2010 DuPont’s former employee Mitchell was convicted of stealing numerous trade secrets concerning the making of Kevlar® and passing them to Kolon.

And now, on October 18, 2012, Kolon and five of its employees were indicted for their actions.  That may take some of the fight out of them.  Those employees could soon find themselves with a free one-way airplane ride to the United States, handcuffed to U.S. Marshalls.

What It All Means

For lawyers, the case is instructive because of its exhaustive analysis, first on the issue of a permanent injunction under the Uniform Trade Secrets Act.  It will be persuasive authority in all states, except the four which have not adopted the UTSA.  Perhaps more importantly, though, the case clearly sets cases brought under the UTSA, state law, outside the limitations of eBay on issuance of a permanent injunction when a statutory violation has been established.

For business men and women, the lesson is clear.  If you steal property of a competitor there is a significant downside if you get caught.  There is also a significant downside if you get caught later destroying evidence during the course of the trial.  No judge would take kindly to that.  It goes to the heart of being able to have a fair trial.  Kolon’s egregious misconduct permeates every aspect of this case and the court’s opinion.

Instead to taking their company to new heights and building an empire for themselves, the key executives of Kolon may instead be known for the company’s collapse.  They not only rolled the dice on the future of their company, they did so with no small amount of personal risk as well – time away from their families in a foreign country, living in the spartan accommodations of a U.S. prison.

Copyright 2012 David G. Harrison.  All Rights Reserved.

[1] 547 U.S. 388, 26 S.Ct. 1843,164 L.Ed.2d 625 (2006)

[2] See Audi AG v. D’Amato, 469 F.3d 534 (6th Cir. 2006);  North American Medical Corp. v. Axiom Worldwide, Inc., 522 F.3d 1211 (11th Cir. 2008); Voices of the Arab World, Inc. v. MDTV Medical News Now, Inc., 645 F.3d 26 (1st Cir. 2011)

[3] See PBM Products, et al. v Mead Johnson (4th Cir. 2011)

[4] See Reno Air Racing Association v. McCord, 452 F.3d 1126 (9th Cir. 2006); Abercrombie & Fitch Co. v Moose Creek, Inc., 486 F.3d 629 (9th Cir. 2007); Marlyn Nutraceuticals, Inc. v. Muchos Pharma GmBH & Co., 571 F.3d 873 (9th Cir. 2009)

[5] 304 U.S. 64 (1938)

[6] Capital Tool & Mgf. Co., Inc. v.  Maschinenfabrik Herkules, Hans Thoma Gmbh, 837 F.2d 171, 172 (4th Cir. 1988)

[7] Like Kolon,  Capital Tool involved the alleged violation of the Virginia Uniform Trade Secrets Act; but unlike Kolon, Capital Tool involved a request for a preliminary injunction, not a permanent injunction after a trial on the merits.  The trial court in Capital Tool denied the preliminary injunction which the Fourth Circuit affirmed.  The Virginia Uniform Trade Secrets Act provides that “(a)ctual or threatened misappropriation may be enjoined” (emphasis added).  Code of Virginia §59.1-337 A

[8] Code of Virginia §59.1-336 et seq.

[9] 559 F.3d 110 (2d Cir 2009)

[10] Nordson Corp. v. Plasschaert, 674 F.2d 1371 (11th Cir 1982)

[11] Lamb-Weston, Inc. v McCain Foods, Ltd., 941 F.2d 970 (9th Cir. 1991)

[12] Milgrim on Trade Secrets §15.02[1][e]