Trade Secret Misappropriation

As originally discussed on this blog back in February, a lawsuit brought by Advanced Micro Devices (AMD) against former employees accused of taking AMD trade secrets with them to competitor Nvidia has been ongoing and a recent opinion in the case highlights the uncertainty surrounding the Computer Fraud and Abuse Act (CFAA).

A recent opinion issued by Judge Timothy S. Hillman narrowly interpreted the CFAA in this case. Judge Hillman declined a broad interpretation of the CFAA and held that AMD’s allegations in its complaint are insufficient to sustain a CFAA claim.

The relevant portion of the CFAA provides that it is a violation of the CFAA to:

Knowingly and with intent to defraud, [access] a protected computer without authorization or [exceed] authorized access, and by means of such conduct [further]the intended fraud and [obtain] anything of value, unless the object of the fraud and the thing obtained consists only of the use of the computer and the value of such use is not more than $5,000 in any 1-year period.

There exists a circuit split on the interpretation of this clause. As Judge Hillman noted, the 1st Circuit has not clearly articulated its position on the issue. The broad interpretation defines access in terms of agency or use. That is, whenever an employee breaches a duty of loyalty or a contractual obligation and acquires an interest adverse to their employer, then all subsequent access exceeds the scope of authorized access. Proponents of the narrower interpretation argue that the intent of the CFAA was to deter computer hacking and not to supplement common law trade secret misappropriation remedies and therefore fraudulent means must be used to obtain the information initially.

 Judge Hillman utilized a narrow interpretation of the CFAA and held that AMD had not pleaded sufficient facts to maintain a cause of action under the CFAA. AMD had pleaded that the defendants used their authorized access to computer systems to download and retain confidential AMD information which they retained when they left to go work at Nvida. The complaint, while alleging the defendants had the intent to defraud AMD, provided no facts which support the allegation that the defendants obtained the information through fraudulent or deceptive methods.

Judge Hillman did not outright dismiss the claim given the truncated evidentiary record and has allowed AMD the opportunity to plead specific details indicating that some or all of the defendants used fraudulent or deceptive means to obtain the confidential information and that they intentionally defeated or circumvented technologically implemented restrictions to obtain the confidential information. If other judges in the 1st Circuit follow Judge Hillman’s approach, plaintiffs will need to ensure that they plead with sufficient detail that the defendants obtained the information through a fraudulent or deceptive method as opposed to simply obtaining the information through permissible access. 

A scientific or technological advantage is something to be protected. A case in the Business Litigation Session of Suffolk Superior Court demonstrates how cutthroat competition can be in the medical device industry and how the law deals with companies that disregard fair trade practices to gain an unfair advantage.

In 2007, Lightlab Imaging, a company that provides OCT medical imaging for human coronary arteries, had developed the most powerful laser in the industry. Lightlab had a cooperative relationship with Axsun to convert Axsun’s basic laser into one that could be used by Lightlab. Volcano, a competitor of Lightlab, desired a foothold in OCT technology and was well behind in the research and development of a laser with similar capabilities.

 In 2008, Volcano acquired Axsun and viewed the acquisition as a means to both advance its entry into the OCT market and impede the growth of Lightlab. However, the contract between Lightlab and Axsun contained a confidentiality and exclusivity provision which prevented Axsun from selling high performance lasers to Volcano. In connection with Volcano’s indemnification of Axsun as part of the acquisition, Axsun breached its duty of confidentiality and provided Volcano with the specifications for the high performance laser.

In 2009, Lightlab filed suit in Suffolk Superior Court and its application for a preliminary injunction was granted. A subsequent jury trial on liability returned a verdict in favor of Lightlab finding that Axsun had violated the confidentiality provision of the contract with Lightlab. The jury also found that Volcano had misappropriated Lightlab’s trade secrets and interfered with Lightlab’s contract with Axsun.

Instead of trial on damages, the parties stipulated to damages of $200,000. Subsequently, after two jury waived trials, the Court granted Defendant’s summary judgment motion finding that Lightlab had not shown “use” of the trade secrets by Axsun and Volcano other than the due diligence use evidenced during the jury trial and therefore Lightlab had not proven misappropriation of those trade secrets.

On the 93A count, the court found that Lightlab was entitled to $200,000 in damages and because the defendant’s conduct was found to be knowing and willful, Lightlab received another $200,000 in punitive damages plus attorney fees which totaled $4,500,000.

The Supreme Judicial Court recently granted direct appellate review on whether the trial judge correctly excluded expert testimony on future lost profits on the grounds that the methodology used by the expert failed Daubert and was speculative and whether the trial judge correctly ruled that permanent injunctions may protect only specific trade secrets a defendant has already used.  The SJC is soliciting amicus briefs with argument scheduled for Fall of 2013.