Austin Technology Law Blog : Texas Technology Lawyers & Attorneys for Copyright, Trademarks & Software Licensing in Houston, Dallas & Austin TX

Texas has become the 48th state to adopt a uniform trade secrets act.  This legislation was signed by Governor Perry and will become effective September 1, 2013.  A text of the act as passed may be found here.

Notable provisions of TUTSA include the following:

• The Act permits "reverse engineering" unless "prohibited", which prohibition presumably can be accomplished by contractual prohibitions.
• "Reasonable" efforts must be made to keep the information secret in order that it may be treated as a trade secret.  See our immediately preceding post.  Yeah, the one with the monkey and the assault rifle.
• An injunction may be ordered in the event of actual or threatened misappropriation.  In addition, "affirmative acts" may be ordered to protect a trade secret.  This codifies a court's authority to compel both the prohibition of an act or the commission of an act to protect a trade secret.
• In addition to injunctive or affirmative relief, damages can be awarded, which can be based on actual loss, unjust enrichment or a reasonable royalty.
• If "wilful and malicious" actions are proven by "clear and convincing" evidence, punitive damages may be awarded up to two time direct damages.
• Attorney's fees may be awarded to the prevailing party if a claim of misappropriation is made in bad faith, a motion to terminate an injunction is made or resisted in bad faith or wilful and malicious misappropriation exists.
• Lists of actual or potential customers or suppliers are explicitly mentioned as possible trade secrets. 

This Act codifies what was covered under case law before and should help in the preservation of the trade secrets of Texas businesses.

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As we all know, most intellectual property is protected by patent, copyright or trade secret or some combination of the three.  Because of the expense and long lead time for patents, a lot of companies (tech and otherwise) rely on trade secret protection for the "crown jewels" of their business.

Also, as we all know, in order to have a court treat your crown jewels as trade secrets, you have to show that you treated them as such.  In court speak, you have to make "reasonable efforts" to preserve the secrecy of the information.  If you haven't taken such efforts, then you can't get a court to treat them as secrets.  The processes that are used to document "reasonable efforts" are referred to by some as the "trade secret dance".  In other words, you have to take steps to behave in a way that demonstrates your "reasonable efforts" to maintain secrecy.  We have discussed this before (see here and here).

A court in Connecticut reaffirmed this requirement recently in the aerospace industry when it found that a company had not taken such reasonable efforts to protect its rubber injection molds, the injection apparatus and the company's prices and hence, could not get an injunction against a competitor to prohibit such competitor from using similar information.

The court cited the company's practice of conducting tours of the facility for the public and even competitors in which the participants in the tours were afforded unrestricted views of the molds and the machines from as close as six feet.  The process was explained and at no time were the participants in the tours notified that anything they saw was confidential nor were they obligated to sign any confidentiality agreements. It was apparently also common practice for the company to quote prices for their products to anybody that asked without any indication that the prices were confidential.

For this and other reasons, the court found that the company had not taken reasonable efforts and declined to grant an injunction in their favor.  This was most unfortunate for the company as it was in bankruptcy, which it claimed was due in large part to its loss of the trade secrets.

This is not a groundbreaking or shocking opinion and is in line with established trade secret law but it does reaffirm for all of us that are counting on trade secret law to protect our stuff, we better make sure that we keep our stuff secret.  This starts with doing an intellectual property inventory and continues through the establishment of a intellectual property protection program that must include as a very important component, a trace secret protection process (i.e. the dance).

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I'm an old guy.  One of the first musical purchases I ever made was a 45 rpm (that's revolutions per minute for those of you that have never seen a phonograph) recording of Bobby Vee's "The Night Has A Thousand Eyes".  If I still had that physical record, I could sell it to you without fear of violating anyone's copyright because of a little something called the "first sale" doctrine.  We have mentioned that several times in this blog (see here, here and here).  The first sale doctrine says that after the first sale of a copyrighted work, the copyright holder loses its right to restrict further sales.  This is the reason that stores that sell used books, records, CDs, DVDs, etc. can exist.

Now, if I could find that particular song on ITunes, I could buy it, download it to my computer or MP3 player and listen to it all I want.  If I tired of that, I could use the services of a company called ReDigi.  In doing that, I would download an application called Media Manager  and then use that to upload the digital file of the recording to ReDigi's remote server in Arizona, which they call the "Cloud Locker".  Media Manager then prowls the hard drive of my computer and connected devices to determine if I have retained a copy.  If it detects one, it prompts me to delete it.  When that happens, only one copy of this particular recording exists and it exists only on the Cloud Locker.  I then can either continue to listen to it from the Cloud Locker or I can opt to sell it.  If I opt to sell it, ReDigi makes it impossible for me to continue to listen to it.  So, now I can use ReDigi to sell that particular recording to you.  The exchange is made for credits that you can get by uploading other music.  When it is transferred to you (automatically, without human intervention by ReDigi), you can store it, stream it, sell it or download it to one of your devices to listen to it.

In both instances, the result is the same.  I bought a copy of "The Night Has A Thousand Eyes" legally.  I have transferred it to you.  I no longer have a copy.  I can't sell it again.

Cool, right?  Everybody's happy.  I can buy more music with my credits.  You are in possession of a great piece of nostalgia and I have no more copies to sell to undercut the copyright holder's income stream.  The Southern District of New York says: "Not so fast, my friend".

In a case styled Capitol Records, LLC v. ReDigi Inc., the court held that the first sale doctrine can not apply to non-physical (i.e. digital) recordings.

The First Sale Doctrine is codified in Section 109(a) of the Copyright Act and states in pertinent part: "...the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord."

The Court held that ReDigi had several problems under this provision.  First, it said that ReDigi had violated Capitol's reproduction rights (another right under the Copyright Act), therefore it was not "lawfully made under this title".  The Court also said that the Act only protects distribution by the owner of a particular copy or phonorecord...of that copy or phonorecord". (Emphasis added by Court).  So, the transfer of the files requires copying on ReDigi's server, which violates the reproduction rights and because the sale is not a sale of that particular copy, the first sale doctrine does not provide a defense.  The Court specifically said that the first sale defense is limited to "physical" items.  To comply with this, you would have to sell and transfer your computer or MP3 player with the file on it.

This ruling was part of an opinion resulting from Capitol's Motion For Summary Judgment and other matters still remain to be decided, but the Court left little doubt about where it stood on this issue.

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We have previously written about the contentious nature of the battle among Apple, Amazon, Microsoft and others in regard to the use of the term "App Store".  See here and here.

One of the salvos launched by Apple in its suit against Amazon involved a claim for false advertising.  Amazon moved for summary judgment on this claim and on the first business day of the new year, the United States District Court for the Northern District of California granted Amazon partial summary judgment.

The Court found "..Apple has failed to establish that Amazon made any false statement (express or implied) of fact that actually deceived or had the tendency to deceive a substantial segment of its audience. The mere use of “Appstore” by Amazon to designate a site for viewing and downloading/purchasing apps cannot be construed as a representation that the nature, characteristics, or quality of the Amazon Appstore is the same as that of the Apple APP STORE."

The Court held that "...if an advertisement is not false on its face (i.e., if there is no express or explicit false statement), the plaintiff must produce evidence, usually in the form of market research or consumer surveys,showing exactly what message was conveyed that was sufficient to constitute false advertising."  Apple failed to do so in this case.  Round one to Amazon.

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Having solved all the other problems in Texas, including the problem of gun violence (prayer) and the problem of uninsured citizens (cutting Medicaid) the Texas legislature has turned to the burning issue of employers requiring employees to provide access information to employee's private social media accounts.

House Bill 318 has been introduced to make it an "unfair employment practice" if an employer "...requires or requests that an employee or applicant for employment disclose a user name, password, or other means for accessing a personal account of the employee or applicant, including a personal e-mail account or a social networking website account or profile, through an electronic communication device."

This bill still allows "monitoring" employee usage of employer provided media and also allows employer policies prohibiting use of company provided resources for personal use.  It doesn't provide for a specific remedy or a damages cap and it will likely be amended substantially before it passes, if it passes at all.  This would make Texas one of a handful of states that has jumped on this burning issue.  Crisis averted.

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In December of last year, several banks' (Bank of America, Citigroup, Wells Fargo, U.S. Bancorp, PNC, Capital One, Fifth Third Bank, BB&T and HSBC) websites were inundated by DDoS (distributed denial of service) attacks.  DDoS attacks generally do not seek to penetrate the sites or to obtain information or steal anything but try to overwhelm the capacity of the website to respond to the traffic directed toward them.  The attacks in December were launched by an entity that had access to multiple computers, such as in a data center, and exceeded the capabilities usually found in your standard run of the mill hackers.

Today, the New York Times ran an article that lays the attacks at the doorstep of Iran.  An independent hacker group called Izz ad-Din al-Qassam Cyber Fighters has tried to take credit for the attack, saying it was retaliation for the anti-Muslim movie that prompted riots throughout the Muslim world and which was involved in the Benghazi consulate attack.  Izz ad-Din al-Qassam called it Operation Ababil, referring to Allah sending birds to drop bricks on elephants sent by the King of Yemen to Mecca.  However, U.S. officials think it is the work of Iran and is in retaliation for economic sanctions and the release by the U.S. and/or Israel of the Stuxnet, Flame and DuQu malware. 

Whatever it is, the DDoS attacks spewed 70 gigabits per second at the sites, which included a new wrinkle involving requests for encryption, and which adversely affected the sites' performance.  The attacks used a readily available malware toolkit called Itsoknoproblemobro. 

It is certain that the attacks that we have heard of are only the tip of the malware iceberg and it is probably as certain that these attacks and counterattacks will continue to escalate.  Warriors on the front lines of these wars will be keyboard commandos and may someday sport the malware marksman ribbon on their dress uniforms.  This is war.

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The Federal Trade Commission has been investigating Google's practices in regard to patent licensing, search results and other matters for about two years.  The FTC sought to determine if Google's practices in these regards were anti-competitive.  The FTC ended their investigation the first week of this year and entered into an agreement with Google in exchange for the FTC agreeing not to pursue the matter further.

Part of the analysis by the FTC was a investigation into whether Google manipulated its search algorithms such that websites that competed with Google's "vertical" results (i.e. sponsored Google sites) were moved down in the search results with concomitant  damages to the click through rate to such competing sites.  The FTC found that even though "...some of Google’s rivals may have lost sales due to an improvement (sic) in Google’s product...(t)he totality of the evidence indicates that, in the main, Google adopted the design changes that the Commission investigated to improve the quality of its search results, and that any negative impact on actual or potential competitors was incidental to that purpose."  The Commission went on to say "...these changes to Google’s search algorithm could reasonably be viewed as improving the overall quality of Google’s search results because the first search page now presented the user with a greater diversity of websites."

Needless to say, not all were enamored with the FTC's actions.  Microsoft, having been kicked around by the FTC for years, bemoaned the actions as "weak".  Others found it to be totally justified.

Whatever your view, this is a win for Google and clears up their docket to proceed with their pursuit of world domination.  Not that there's anything wrong with that.

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Almost every technology company of any variety has a couple of standard provisions in the documents that their employees sign as part of the employment on-boarding process.  Those are, of course, provisions that require the employee not to divulge certain information that they learn as a result of their employment and that provide that any intellectual property developed by the employee during the employment (and often for a period thereafter) and based on information provided by the employer, belongs to the employer.  Some agreements also contain non-compete provisions, which purport to prohibit the employee from engaging in certain kinds of employment activity after the present gig ends.

Mr. Morin went to work for Milliken & Company in South Carolina as a research physicist and worked for Milliken for nine years developing fibers.  Apparently, Mr. Morin began to make plans for his own company prior to leaving the employee of Milliken and filed for a patent on a new fiber within a few months after resigning from Milliken.  Milliken thought such behavior was untoward and filed a suit against Mr. Morin for breach of the confidentiality provisions and the breach of invention assignment provisions in his employee contract, among other things.

The appeal of this case recently found its way to the Supreme Court of South Carolina.  One of Mr. Morin's principal arguments was that the confidentiality provisions and the assignment of inventions provision were restraints of trade and as such, should be reviewed under the same standard as a non-compete provision, i.e. not favored by the courts and construed against the employer unless certain very stringent requirement were met.

The South Carolina Supreme Court disagreed with Mr. Morin and found that such provisions (confidentiality and invention assignment) were not restraints of trade and as such, were to be reviewed under the reasonableness standard, i.e. to be enforced as an ordinary contract provision unless the provisions exceeded what was necessary to protect the legitimate interests of the employer.  The court held: "We therefore hold confidentiality and invention assignment clauses are not in restraint of trade and should not be strictly construed in favor of the employee."

This confirms what most of us in this industry believed to be the law and should make it easier for well crafted provisions of this nature to be enforced in the future.

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