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A Clear Need: To Allege Misappropriation, Identify Trade Secret

by Jodi Benassi | Oct 29, 2020 | Trade Secrets

The US Court of Appeals for the Ninth Circuit reversed a district court’s grant of summary judgment, finding that the plaintiff had sufficiently pled trade secret misappropriation by identifying its trade secrets and how they were protected with sufficient particularity. InteliClear, LLC v. ETC Global Holdings, Inc., Case No. 19-55862 (9th Cir. Oct. 15, 2020) (Gould, J.).

In 2004, InteliClear began development on a comprehensive electronic system for managing stock brokerage firm accounting, securities clearance and securities settlement services using a Structured Query Language relational database designed to handle millions of trades each business day. It named the program the “InteliClear System.”

In 2008, ETC’s predecessor signed a software license agreement with InteliClear and obtained a license for the InteliClear System. The license agreement acknowledged that all information InteliClear provided was confidential, proprietary and copyrighted, and ETC agreed to maintain that information in confidence “during and after” the terms of the agreement.

In 2017, InteliClear sent ETC a notice terminating the license agreement. ETC committed to remove the InteliClear database from its systems by February 26, 2018. On March 5, 2018, ETC certified that the InteliClear System had been removed from all ETC servers and that all copies had been destroyed. But, before the license agreement ended, ETC had already begun building its own securities clearance software. Around the same time that InteliClear terminated the license agreement, ETC launched its own electronic trading system. InteliClear immediately contacted ETC about its suspicion that ETC had improperly used the InteliClear System to build its own system, and, after months of negotiations, ETC agreed to allow a computer forensics company to compare the two systems and investigate. The forensics company found an abundance of evidence that the elements of each system were identical.

InteliClear sued ETC for trade secret misappropriation under federal and state law and for unfair competition. The district court dismissed the claim for unfair competition, reasoning that it was preempted by the California Uniform Trade Secrets Act. One day into discovery, and before any discovery had been requested or provided, ETC moved for summary judgment, asserting that InteliClear failed to identify its trade secrets with sufficient particularity and that InteliClear did not show that the InteliClear System was a trade secret or that ETC had access to InteliClear’s source code. The district court granted ETC’s motion and denied InteliClear’s motion to defer ruling until after completion of discovery under Rule 56(d). InteliClear appealed.

The Ninth Circuit analyzed the federal and state trade secret misappropriation claims together because the elements were substantially similar. The Court noted that to succeed on a claim for misappropriation, a plaintiff must prove (1) that the plaintiff possessed trade secrets, (2) that the defendant misappropriated the trade secrets, and (3) that the misappropriation caused or threatened damage to the plaintiff. To prove the first element, “a plaintiff must identify the trade secrets and carry the burden of showing they exist.” The Court pointed out that it is important to identify trade secrets with sufficient particularity because [...]

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Not Your Grandfather’s Internet Royalties? DMCA Favorable Rates Might Apply to Internet Offerings

by Christopher M. Bruno | Sep 3, 2020 | Copyrights

Reversing the Copyright Royalty Board’s determination that a favorable grandfathered royalty rate did not apply to internet streaming audio transmissions, the US Court of Appeals for the District of Columbia Circuit concluded that internet transmissions are not categorically excluded from the definition of “service” in the Digital Millennium Copyright Act of 1998 (DMCA). Music Choice v. Copyright Royalty Bd., Case No. 19-1011 (DC Cir. Aug. 18, 2020) (Rao, J.).

In the late 1990s, Music Choice, a company best known for its cable television genre-specific music channels, also offered some digital audio transmissions over the internet. These audio transmissions—and their alleged continuation through today—are the subject of this case.

Seeking to establish a new regime governing royalties for digital music services, Congress required in the DMCA that service providers pay copyright holders a market-based rate for playing digital music, but set a generally lower “reasonable rate” for certain preexisting subscription services. A preexisting subscription service—i.e., a service offering digital audio subscriptions for a fee before July 31, 1998—was entitled to the lower rate for its subscription transmissions “made in the same transmission medium used by such service on July 31, 1998.” The question here was whether those transmissions could be made over the internet.

In 2016, the Royalty Board held proceedings to set the preexisting royalty rates for 2018 to 2022, during which it referred the legal question of whether Music Choice’s internet transmissions qualified for the grandfathered rates to the Copyright Register. The Register concluded that, based on the DMCA’s legislative history, the grandfathered rates were intended to apply only to cable and satellite offerings. Accordingly, when the Royalty Board set rates for Music Choice’s offerings, it excluded its internet transmissions from the more favorable grandfathered rate.

Music Choice appealed, and the DC Circuit reversed the Royalty Board. The Court found nothing in the DMCA that required that the definition of “service” categorically exclude internet transmissions. As long as the entity existed as of July 31, 1998 (as Music Choice undisputedly did), internet transmissions could be eligible for the grandfathered rate so long as such transmissions were in the medium in existence on that date. The Court found that nothing in the clear and broad statutory definition of “transmission medium” excluded internet transmissions. The Court also concluded that the structure of the DMCA supported such a conclusion, because in other places it distinguished between particular types of transmissions, whereas in the grandfathered copyright rate at issue, the statute used language capturing all types of transmissions available before the key date.

Having concluded that the Royalty Board wrongly excluded internet transmissions per se, the DC Circuit remanded to the Board to consider “the extent to which Music Choice’s current internet offerings can be fairly characterized as included in the service offering Music Choice provided on July 31, 1998.”

Practice Note: It remains to be seen how narrowly the Royalty Board will define the service offered by Music Choice as of July 31, 1998. Regardless of what the Board finds, this case [...]

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Use of Infringing Product, Misappropriated Trade Secrets May Continue—for a Licensing Fee

by Paul Devinsky | Sep 3, 2020 | Copyrights

The US Court of Appeals for the Sixth Circuit affirmed a district court’s stay of a permanent injunction against copyright infringement and trade secret misappropriation, permitting the infringer to continue use of an infringing product and misappropriated trade secrets but requiring the infringer to pay a licensing fee. ECIMOS, LLC v. Carrier Corp., Case Nos. 19-5436, -5519 (6th Cir. Aug. 21, 2020) (Boggs, J.).

Carrier sold HVAC systems. ECIMOS designed and sold a quality-control-testing system that assessed each HVAC unit at the end of Carrier’s assembly line. ECIMOS’s system consisted of a software program, associated hardware and a database that stored results of runtests performed by the system. Carrier paid ECIMOS to maintain and periodically upgrade its software system. ECIMOS licensed Carrier to use the system but prohibited unauthorized copying, distributing or creating derivative works based in whole or in part on the software.

Years into the relationship, ECIMOS upgraded its software to run on a new operating system. ECIMOS expected Carrier to agree to the proposed upgrade just as it had done previously. Unbeknownst to ECIMOS and without its consent, Carrier had already installed ECIMOS’s software directly onto the new operating system. Carrier started a venture with a third party, Amtec, to develop a new quality-control software and storage database to replace the ECIMOS system.

ECIMOS sued Carrier for violating the copyright on the ECIMOS system’s database, breaching the parties’ software-licensing agreement and misappropriating ECIMOS’s trade secrets. At trial, ECIMOS alleged that Carrier improperly shared ECIMOS’s copyrights and trade secrets with Amtec, allowing Amtec to develop a competing system. The jury agreed, finding that the competing system incorporated ECIMOS’s trade secrets. The jury determined that Carrier infringed the copyright on ECIMOS’s runtest database script source code, that ECIMOS held a trade secret in its software source code and its assembled hardware drawings and wiring diagrams, and that Carrier misappropriated those trade secrets by sharing them with Amtec. The jury awarded ECIMOS copyright and contract damages.

The district court also imposed a permanent injunction against Carrier’s use of the infringing Amtec database, but stayed the injunction until Carrier developed a noninfringing database. The court also enjoined Carrier from further disclosure of ECIMOS’s trade secrets, but did not enjoin Carrier from using those trade secrets. To the contrary, the district court appointed a special master to supervise the redesign and permitted Carrier to continue using the infringing database that incorporated ECIMOS’s trade secrets until the redesigned system was complete. The district court further required Carrier to pay ECIMOS the licensing fees that ECIMOS would have charged in the course of an ongoing, mutually agreeable licensing relationship. ECIMOS objected to the stay and appealed.

ECIMOS argued that the stay was an abuse of discretion, that the injunction should have prohibited Carrier from using (not just disclosing) ECIMOS’s trade secrets, and that the injunction should have prohibited Carrier’s disclosure and use of ECIMOS’s assembled hardware, not just the hardware drawings and wiring diagrams. The Sixth Circuit disagreed, affirming in full the district court’s [...]

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Bugs in Space? Star Trek Plotline Does Not Infringe Tardigrade Video Game

by Paul Devinsky | Aug 27, 2020 | Copyrights

The US Court of Appeals for the Second Circuit affirmed a district court’s pleadings-stage determination that certain Star Trek: Discovery characters and plotlines did not infringe copyrighted elements of a video game because there was not substantial similarity between protectible elements of the video game and the Discovery episodes. Abdin v. CBS Broad. Inc., Case No. 19-3160 (Fed. Cir. Aug. 17, 2020) (Chin, J.).

Between 2014 and 2017, Plaintiff Abdin posted videos and draft designs online for his sci-fi video game, Tardigrade, a puzzle-based game in which the human protagonist can travel through outer space in the warm embrace of a gigantic blue tardigrade. Tardigrades, also known as water bears, are microscopic animals capable of withstanding extreme climates—including the harsh vacuum and radiation of space. After a 2007 research study confirmed tardigrades’ spacefaring abilities, they became somewhat of a pop culture phenomenon, being featured in numerous literary works and television shows. In June 2018, Abdin registered a copyright for a distillation of his video game concept.

In the latest installment of the Star Trek series, the 2017 season of Discovery features a three-episode storyline involving a creature called Ripper that resembles a giant tardigrade. The crew of the USS Enterprise realizes that Ripper is able to act as a type of supercomputer to improve the performance of their space traveling equipment (the DASH Drive).

Abdin filed suit for copyright infringement against CBS in August 2018, alleging that the Discovery creators copied aspects of his video game, including space-traveling tardigrades. CBS filed a motion to dismiss, which was granted by the district court. The district court concluded that Abdin’s video game was not substantially similar to Discovery. Abdin appealed.

The Second Circuit reviewed the lower court’s dismissal de novo and affirmed the district court’s dismissal, finding that Abdin failed to plausibly allege substantial similarity between protectible elements of his video game and the Discovery episodes. The Court first looked to the two elements of a copyright infringement claim: (1) ownership of a valid copyright, and (2) copying of constituent elements of the work that are original. The Court explained that to satisfy the second element, Abdin must demonstrate that CBS actually copied Abdin’s work, and that a substantial similarity exists between CBS’s work and the “protectible” elements of Abdin’s work.

The Second Circuit identified three elements of Abdin’s video game that were not protectible under copyright law: facts and ideas, scènes à faire and generic character traits. First, the Court found that the scientific facts relating to tardigrades’ survivability are not copyrightable, and that Abdin’s idea of tardigrades moving through space was also unprotectible. While noting the distinction between an idea and its expression is elusive, the Court explained that Abdin’s space-traveling tardigrade was merely a generalized expression of a scientific fact. Second, the Court looked to whether any of Abdin’s otherwise protectible expressions were unprotected scènes à faire—indispensable “stock themes” in a given genre. The Court explained that space travel, supernatural forces and alien encounters are all generic themes that [...]

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Fifth Circuit Drills Down to Details in Drilling Database Disagreement

by Paul Devinsky | Jul 15, 2020 | Copyrights

In a wide ranging opinion, the US Court of Appeals for the Fifth Circuit held that copying unimportant database schema from a proprietary database did not constitute infringement. The Court also held that where the technological measure that the defendant allegedly circumvented did not effectively control access to the work, there was no Digital Millennium Copyright Act (DMCA) violation. Moreover, the Court found error in not treating the defendant as the sole prevailing party on the copyright and DMCA claims for purposes of attorneys’ fees, notwithstanding plaintiff’s success on other claims. Digital Drilling Data Systems, LLC v. Petrolink Services, Inc., Case No. 19-20116 (5th Cir. July 2, 2020) (Duncan, J.).

Digital Drilling Data Systems (Digidrill) provides software used in oil drilling operations. Digidrill’s software collects data from underground sensors in order to help above-ground operators steer the drill. Digidrill’s systems compile the data into a database that is accessible through a variety of programs, including Digidrill’s DataLogger software. DataLogger includes a security feature that allows access only if a certain USB key is inserted in the computer running the software.

One of Digidrill’s competitors was Petrolink Services. Concerned about losing a large customer to Digidrill, Petrolink obtained a laptop running DataLogger along with the USB key. It soon realized that the database storing the data used by DataLogger was accessible without the USB key. Because Digidrill had not changed certain default settings, all that was required to gain access was a commonly known default administrator username and password. Petrolink then designed a program to copy data from the Digidrill database, including relevant portions of the database schema.

Digidrill sued Petrolink for copyright infringement, DMCA violation and unjust enrichment. The district court entered summary judgment against Digidrill on its copyright infringement and DMCA claims. The district court allowed the unjust enrichment claim to go to trial, where the jury awarded damages to Digidrill. Petrolink then sought fees and costs as a prevailing party under the Copyright Act and DMCA, which the district court denied because both parties had prevailed on some claims. Both parties appealed.

The Fifth Circuit affirmed the summary judgment against Digidrill on its copyright and DMCA claims. As for the copyright claim, the Court cited its own precedent and noted that “[T]o prove copyright infringement, a plaintiff must establish (1) ownership of a valid copyright; (2) factual copying; and (3) substantial similarity.” The only element at issue here was the third prong, substantial similarity.

Digidrill contended that even though Petrolink copied only 5% of DataLogger’s copyrighted schema, a reasonable trier of fact might nevertheless have found substantial similarity due to the “qualitative importance” of that small copied portion. The Fifth Circuit rejected Digidrill’s qualitative importance argument, concluding that there was no record evidence establishing the importance of the copied schema to the DataLogger program as a whole. Thus, “[W]hile the question of substantial similarity typically should be left to the factfinder, summary judgment may be appropriate if the court can conclude . . . that no reasonable juror [...]

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More Than a Feeling: No Fees for Frivolous Claim Where “Perceived Wrongs Were Deeply Felt”

by Thomas DaMario | Jul 1, 2020 | Copyrights, Trademarks

Addressing the appropriateness of the district court’s decision to deny attorneys’ fees relating to a copyright claim it labeled “frivolous,” the US Court of Appeals for the Seventh Circuit affirmed the denial, despite the strong presumption in favor of awarding fees. Timothy B. O’Brien LLC v. Knott, Case No. 19-2138 (7th Cir. June 17, 2020) (Flaum, J).
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Advertising Falls within Commercial Activity Exception to Sovereign Immunity

by Paul Devinsky | Jun 18, 2020 | Copyrights

The US Court of Appeals for the Second Circuit affirmed a district court’s denial of a motion to dismiss a copyright infringement suit on the ground of sovereign immunity, holding that advertising activity in the United States on behalf of a sovereign government falls within the commercial activity exception to sovereign immunity. Pablo Star Ltd. v. Welsh Gov’t, Case No. 19-1262 (2d Cir. June 8, 2020) (Lynch, J.).

Pablo Star is a company registered under the laws of Ireland and the United Kingdom. The Welsh government is a political subdivision of the United Kingdom. Pablo Star sued the Welsh government, along with multiple New-York-based media companies working with the Welsh government, for copyright infringement. Pablo Star alleged infringement of its copyrights in photographs that the Welsh government used in online and printed materials advertising Welsh-themed events in New York and promoting tourism to Wales. The Welsh government moved to dismiss, asserting sovereign immunity under the Foreign Sovereign Immunities Act (FSIA), which provides for presumptive immunity of a foreign state in federal court. The district court denied the motion to dismiss, holding that the commercial activity exception to the FSIA applied because the acts of the Welsh government that resulted in Pablo Star’s claims constituted commercial activity, and the activity had substantial contact with the United States. The Welsh government sought an interlocutory appeal.

The Second Circuit affirmed, finding that the Welsh government abrogated its sovereign immunity by engaging in commercial activity that had substantial contact with the United States. On the commercial activity prong, the Court rejected the argument that the Welsh government’s conduct was governmental, rather than commercial, because it promoted tourism to Wales. The Court explained that an activity is deemed commercial based on its nature rather than its purpose. Activity is commercial if a foreign state performs the types of actions typical of a private party engaging in commerce. A state’s motives, including motives without profit or to fulfill sovereign objectives, are irrelevant. The Welsh government’s assertion that it acted as a sovereign government to promote Welsh culture and tourism conflated the act with its purpose. The broader characterization of promoting tourism also did not distinguish the activity from functions regularly undertaken by private entities because the profit motive was irrelevant. Because the publication of advertising materials is an activity regularly performed by private-sector businesses, the court affirmed the district court’s conclusion that the Welsh government engaged in commercial activity.

The Second Circuit also distinguished Pablo Star’s claims from those in cases where sovereign immunity applied. Claims dismissed on the ground of sovereign immunity lacked a sufficient nexus between a party’s injury and the governmental entity’s commercial activity. They instead stemmed from functions unique to government, such as detention and punishment or the employment of civil service personnel. Pablo Star’s copyright infringement claim, by contrast, directly resulted from the Welsh government’s commercial conduct, including its unauthorized use of photographs in advertising materials promoting Welsh culture and tourism.

On the substantial contact prong, the Second Circuit agreed that the [...]

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Trademark Claim for Profit Damages Means No Jury Trial

by Jodi Benassi | Jun 11, 2020 | Food, Beverage & Agribusiness, Trademarks

The US Court of Appeals for the Ninth Circuit affirmed a denial of a jury trial demand in a trademark infringement lawsuit where only a claim of disgorgement of profits was at issue. JL Beverage Company, LLC v. Jim Beam Brands Co., Beam Inc., Case No. 18-16597 (9th Cir. May 27, 2020) (Wallace, J.) (Friedland, J., concurring).

JL sued Jim Beam for trademark infringement. JL manufactured and sold vodka in bottles featuring stylized depictions of lips. Jim Beam also sells vodka in bottles featuring stylized depictions of lips. JL alleged that consumers would confuse its “Johnny Love Vodka” lip mark with Jim Beam’s Pucker line of flavored vodka products.

After JL failed to provide a computation of actual damages during discovery, Jim Beam sought to limit the damages JL could seek at trial. The district court found that JL’s failure prevented Jim Beam from preparing a responsive case and granted Jim Beam’s motion to exclude JL’s claims for actual damages. Jim Beam further argued that JL may not recover a royalty because 1) it is not appropriate in situations, like this one, where the parties did not have a previous royalty agreement and 2) as with actual damages, JL never identified a means of calculating a reasonable royalty or produced evidence upon which a fact finder could determine such a royalty. Again, the court agreed, and limited JL’s damage claims to equitable disgorgement of Jim Beam’s profits, as provided under the Lanham Act.

Without claims for actual damages or royalties, Jim Beam moved to strike JL’s demand for a jury trial. Since the Lanham Act does not afford the right to a jury trial, the district court considered whether the Seventh Amendment affords such a right in a trademark dispute. The Seventh Amendment provides that “[i]n Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved.” The district court found controlling law in Ninth Circuit precedent Fifty-Six Hope Road Music, which held that that the Seventh Amendment does not afford the right to a jury calculation of profits for two reasons: disgorgement is an equitable remedy, and the specific issue of profit determination cannot be said to be traditionally tried by a jury. The district court denied JL’s demand for a jury trial, held a two-day bench trial and ultimately determined that Jim Beam did not infringe JL’s marks. JL appealed the district court’s order granting Jim Beam’s motion to strike its jury trial demand and the district court’s judgment.

The Ninth Circuit affirmed the district court’s order and judgment, finding no error in the court’s likelihood of confusion analysis on any of the factors, nor in its denial of the jury trial.

In a concurring opinion, Judge Friedland wrote separately to address the tension between the Court’s holdings in Fifty-Six Hope Road Music (a trademark case) and Sid & Marty Krofft (a copyright case). In Krofft, the Ninth Circuit found a right to a jury trial in a copyright case where there was only a claim [...]

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Chalk One Up to the Knock-Off

by Jodi Benassi | May 27, 2020 | Copyrights, Patents

Addressing issues of design patent infringement, copyright infringement, trade dress infringement and unfair competition, the US Court of Appeals for the Federal Circuit affirmed a district court’s grant of summary judgment on all claims. Lanard Toys Limited v. Dolgencorp LLC, Ja-Ru, Inc., Toys “R” Us-Delaware, Inc., Case No. 2019-1781 (Fed. Cir. May 14, 2020) (Lourie, J.).

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Thank You to Our Readers

by McDermott Will & Emery | May 4, 2020 | Trademarks

We greatly appreciate our readers over the past year and are pleased to share that we were recently recognized for our intellectual property thought leadership in the 2020 JD Supra Readers’ Choice Awards, which acknowledge top authors and firms for their thought leadership in key topics during all of last year.

Eleanor Atkins, a regular contributor to IP Update, was recognized as “Top Author” for trademarks. She focuses her practice on trademark, copyright, sweepstakes and promotions, and false advertising matters.

Through our various blogs and thought leadership pieces, we are dedicated to maintaining our position as a leading firm for intellectual property work and keeping clients abreast of significant and relevant topics in the industry.

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