disgorgement Archives

disgorgement

When Is a Trade Secret Accessible? As Soon as It Can Be Reverse Engineered

by Jodi Benassi | Apr 10, 2025 | Trade Secrets

Although the US Court of Appeals for the Federal Circuit upheld a damages award for trade secret misappropriation and breach of a confidentiality agreement, it found that the district court erred in its determination of when the trade secret became publicly accessible for the purpose of applying a reverse engineering defense. The Federal Circuit also vacated and remanded the prejudgment interest award, finding that interest should not accrue on future sales. ams-OSRAM USA Inc. v. Renesas Elect. America, Inc., Case No. 22-2185 (Fed. Cir. Apr. 4, 2025) (Taranto, Schall, Chen, JJ.)

In 2008 ams sued Renesas for patent infringement, trade secret misappropriation, and breach of contract for using information that ams revealed in confidence. In 2015 a jury found for ams, and the district court entered judgment for trade secret misappropriation damages, but not for breach of contract. The district court determined that the breach award was duplicative of the misappropriation award. On appeal, in 2018 the Federal Circuit affirmed Renesas’ liability for misappropriation on a more limited basis than had been presented to the jury. The Court vacated the misappropriation award and remanded, instructing that disgorgement of profits damages should be decided by the judge, not the jury.

On remand, ams argued that it was entitled to “re-elect its remedy” and narrowed to the misappropriation and contract claims, which required the case to be retried. The new jury also found in favor of ams. The district judge then determined the monetary award for trade secret misappropriation, consisting of disgorgement of profits for one product and exemplary damages of double that sum. On ams’s breach of contract claim, the jury awarded a reasonable royalty on sales of products, other than the one subject to disgorgement damages. ams was also awarded prejudgment interest on both its misappropriation and contract claims, and attorneys’ fees on its breach of contract claim. Both parties appealed.

Trade Secret Accessibility and Reverse Engineering

The district court ruled that ams’s trade secrets became accessible in January 2006 when Renesas successfully reverse engineered the trade secret embodied in ams’s product. The district court determined that the relevant inquiry for accessibility is what the misappropriator actually did rather than what the misappropriator or other parties could have done. Renesas argued that the trade secret first became accessible when it could have reverse engineered the trade secret in February 2005.

The Federal Circuit agreed with Renesas, explaining that the district court’s ruling was inconsistent with Texas law. Under Texas law, information that is generally known or readily available by independent investigation does not qualify as a trade secret. Citing Fifth Circuit precedent, the Federal Circuit emphasized that the public is free to discover and exploit trade secrets through reverse engineering of products in the public domain. The Court found that Renesas could have accessed ams’s trade secrets through proper and straightforward means by February 2005. While acknowledging that the trade secret may not have been immediately apparent through casual inspection, the Court pointed out that reverse engineering is a common [...]

Continue Reading

David-Versus-Goliath Trademark Victory Isn’t Necessarily “Exceptional”

by Karen Gover | Jul 25, 2024 | Trademarks

The US Court of Appeals for the Third Circuit vacated an award of attorneys’ fees for reanalysis, explaining that the district court’s finding that the case was “exceptional” under the Lanham Act was based on policy considerations rather than the totality of the circumstances. Lontex Corp. v. Nike, Inc., Case Nos. 22-1417; -1418 (3rd Cir. July 10, 2024) (Hardiman, Matey, Phipps, JJ.)

Lontex Corporation is a small Pennsylvania business that manufactures and sells compression apparel to professional athletes and the public. Since 2008 it has held a registered trademark for the mark COOL COMPRESSION, which it used in conjunction with its sale of apparel. In 2015, Nike rebranded an athletic clothing line that included a category of “Cool” products designed to reduce body temperature, as well as various fits, including “Compression.” It also began using the words “Cool” and “Compression” together in the names of Nike clothing products sold online and in Nike catalogues. Nike used “Cool Compression” as a product name on tech sheets, which are internal documents used to explain Nike products to employees and third-party retailers.

The following year, upon discovering Nike’s use of the phrase “Cool Compression,” Lontex sent Nike a cease-and-desist letter. Nike’s lawyers directed the company to stop using the phrase “as soon as possible.” Nike took steps to remove the phrase from its website and catalogs but not its tech sheets. Two years later, Nike reached out to its third-party retailers and asked them to stop using “Compression” in product names.

Lontex sued Nike for trademark infringement of its COOL COMPRESSION mark, for contributory infringement based on its supply of “Cool Compression” products to retailers, and for counterfeiting. The district court dismissed the counterfeiting claim, and a jury trial was held on the infringement actions. The jury returned a verdict for Lontex, finding Nike liable for willful and contributory infringement. The jury awarded Lontex $142,000 in compensatory damages and $365,000 in punitive damages but declined to award Lontex disgorgement of Nike’s profits.

Post-trial, Nike renewed motions for judgment as a matter of law on fair use, trademark infringement, contributory infringement, willfulness and punitive damages. Lontex moved for disgorgement of profits and trebling of the damages awarded by the jury. The district court granted Lontex’s request for treble damages, increased the compensatory award to $426,000, and separately awarded Lontex almost $5 million in attorneys’ fees after finding that the case was “exceptional” under the Lanham Act. Both parties appealed.

As to the willfulness finding, Nike argued that the jury should not have been permitted to infer willfulness solely from its continued use of the mark after it received its cease-and-desist letter. The Third Circuit disagreed, pointing out that not only did Nike adopt the “Cool Compression” phrase without doing a trademark search, it also continued to use the phrase after receiving Lontex’s cease-and-desist letter and being advised by its own legal team to stop using it as soon as possible. The Court concluded that a jury could reasonably infer willful infringement. For similar reasons, [...]

Continue Reading

Self-Dealing Lawyer Held Jointly and Severally Liable in Trade Secret Misappropriation

by Paul Devinsky | Mar 17, 2022 | Trade Secrets

The US Court of Appeals for the Fifth Circuit affirmed a judgment holding a lawyer jointly and severally liable for trade secret misappropriation and fraudulent transfer and enjoining any further use of the trade secrets until a money judgment against the lawyer-purchased client business was satisfied. Thomas v. Hughes, Case No. 20-50671 (5th Cir. Mar. 3, 2022) (Wilson, J.)

James Pearcy founded Performance Products, Inc., (PPI) to develop and sell probiotics for livestock. In 2006, Pearcy sold PPI to his lawyer, Lou Ann Hughes. Hughes paid cash for PPI’s stock and agreed that PPI would pay Pearcy a 14% licensing royalty for use of his proprietary formulations, up to $1.35 million over five years, at the end of which PPI would have the option to purchase Pearcy’s formulations for $100,000. When PPI did not fully pay the royalties, Pearcy brought a Texas state court action against Hughes and PPI for breach of contract, misappropriation of trade secrets and breach of fiduciary duty. The jury found for Pearcy, and the Texas court entered judgment against PPI in the amount of $1 million. Hughes and PPI appealed the Texas judgment and posted a supersedeas bond, but the appeal was unsuccessful. Pearcy received the supersedeas bond, but PPI never paid the balance of the judgment. Pearcy sought post-judgment discovery and set a hearing on a motion to compel. The day before the hearing, PPI filed for bankruptcy.

Earlier, in 2006, Hughes had formed a second entity called Performance Products International, LLC. At the time of the Texas judgment, the LLC had no assets. During pendency of the Texas appeal, Hughes changed the second entity’s name to Performance Probiotics, LLC, and obtained a license to sell and distribute commercial livestock feed. In January 2012, Hughes ceased selling products through PPI and began selling them through the LLC. Hughes also formed a third entity called Advance Probiotics International, LLC (API).

Shortly after PPI declared bankruptcy, Pearcy’s widow (also Pearcy) and PPI’s bankruptcy trustee (Thomas) sued Hughes, Performance Probiotics and API in federal court for misappropriation of trade secrets and fraudulent transfer of PPI’s assets in violation of the Texas Uniform Fraudulent Transfer Act (TUFTA). The plaintiffs sought to pierce the corporate veil of both Performance Probiotics and API, alleging that Hughes had used them to commit fraud. Thomas further alleged that Hughes had breached her fiduciary duty to PPI. At trial, the jury found for Pearcy and Thomas, awarding about $1.4 million plus interest in actual damages, which was derived from the amount then due under the Texas judgment. The jury further awarded $1.2 million in exemplary damages., The district court entered final judgment, further ordering Hughes to disgorge $860,000 in compensation from Performance Probiotics. The district court enjoined Hughes and Performance Probiotics from using Pearcy’s trade secrets until the judgment was fully satisfied and held Hughes and Performance Probiotics jointly and severally liable for “all relief granted” and “all amounts due” under the Texas judgment. The district court retained jurisdiction over API in case [...]

Continue Reading

Third Circuit Orders Second Look at Delays and Disgorgement of Profits

by Sarah Bro | Aug 26, 2021 | Trademarks

In a long-running trademark dispute between two charitable organizations, the US Court of Appeals for the Third Circuit found that the appellee did not preserve its challenge to the district court’s denial of summary judgment on its trademark cancelation claims, the appellant waived any challenge to the validity of the defendant’s mark and the district court did not abuse its discretion by declining to award enhanced monetary relief or prejudgment interest. Kars 4 Kids Inc. v America Can!, Case Nos. 20-2813; -2900 (3rd Cir., August 10, 2021) (Shwartz, J.) The Court also vacated-in-part and remanded for the district court to reexamine its laches and disgorgement conclusions under applicable law.

As charitable organizations that sell donated vehicles to fund children’s programs, both America Can (as CARS FOR KIDS) and Kars 4 Kids have used similar trademarks since their respective starts in the early- to mid-1990s. In 2003 and 2013, America Can sent cease and desist letters to Kars 4 Kids after seeing its advertisements in the state of Texas. In 2014, Kars 4 Kids sued America Can for federal and state trademark infringement, unfair competition and trademark dilution claims. Less than one year later, America Can filed its own suit—alleging the same claims—plus a petition to cancel a Kars 4 Kids trademark registration and seeking a nationwide injunction and financial compensation.

Both parties appeal from a denial of their respective summary judgment motions as well as (1) the jury finding that Kars 4 Kids willfully infringed America Can’s trademark rights in Texas, (2) the rejection of America Can’s petition for cancellation of a KARS FOR KIDS trademark registration finding that the registration was not knowingly procured by fraudulent means, (3) the conclusion that laches did not apply against America Can’s claims, (4) disgorgement of Kars 4 Kids profits in Texas totaling about $10.6 million, (5) rejection of enhanced monetary relief and (6) an injunction against Kars 4 Kids with respect to use of its trademark in Texas and from using the carsforkids.com domain name. On appeal, Kars 4 Kids also renewed its motion for judgment as a matter of law, including an argument that America Can’s trademark is invalid.

The Third Circuit rejected Kars 4 Kids’ effort to overturn the jury’s liability verdict, concluding that Kars 4 Kids failed to preserve its challenge to the validity of the CARS FOR KIDS trademark when it left that issue out of its Rule 50(a) motion. Instead, evidence of America Can’s continuous use of the CARS FOR KIDS mark well prior to 2003 predated Kars 4 Kids’ first use of its trademark in Texas in 2003 and established America Can’s ownership of the CARS FOR KIDS trademark in Texas.

However, after examining the laches claim, the Third Circuit explained that it considered (1) the plaintiff’s inexcusable delay in bringing suit and (2) prejudice to the defendant as a result of the delay. With no statute of limitations under the Lanham Act, the parties agreed that their claims are properly analogized to New Jersey’s six-year [...]

Continue Reading