Tuesday, December 22, 2015

Anatomy of a Trade Secret Case

                We recently prosecuted a case on behalf of a firm client in the building materials business that resulted in a settlement with a value in cash and other considerations to the client of over $1.43 million. 

The client, CHRYSO, Inc. is based in Dallas, Texas, and manufactures and sells specialty chemical additives that improve the performance properties of plastic and hardened concrete, such as workability, set time control and strength gain, among other things.  Our client is the U.S. subsidiary of a French corporation.  They divide the U.S. into three regions for business purposes, and on January 12, 2015, the head of the eastern region abruptly emailed the President at 11:46 p.m. resigning, effective at midnight.  In the following days it emerged that he and other employees were going into business in direct competition with the client, and were going to be selling the admixtures of a direct competitor.   

                The sales manager had an employment agreement that included a noncompete, nonsolicitation, nondisclosure, and other terms.  The other side vehemently disputed the enforceability of the restrictive covenants.  It is important to note, however, that trade secret and computer fraud claims generally do not depend on the enforceability of a noncompete. Moreoever, the other employees that went with him, including an independent sales representative, did not have contracts and therefore had no restrictions.  Moreover, the manager was in possession of a company laptop and smart phone that he was refusing to return unless unspecified expenses were paid.  Immediately, several customers informed company management that they were “going with” the manager to the competition.  Obviously, this appeared to be a well-planned exit. 

We were retained and immediately wrote demand letters for the return of all information, that they cease competing and using company confidential information, and added “litigation hold” language to preserve all evidence.  Ultimately, a lawsuit was filed in federal court alleging 14 counts, including violation of the Computer Fraud and Abuse Act and the North Carolina Trade Secrets Act, seeking an injunction, actual and punitive damages, treble damages under the North Carolina Unfair Trade Practices Act, and attorneys’ fees.  Also, a Motion for Expedited Discovery was filed and argued, which the judge ultimately partially granted.  With our suggestion, the client retained top tier local counsel in North Carolina to assist with the case.

Before returning the laptop, the former manager deleted numerous files.  Immediately, forensic experts were hired to closely examine the activity on the laptop, what was missing, and what had been copied from the laptop.  We ascertained that much of the data had been removed to a hard drive and demanded the return of the hard drive.  While much of the data on the laptop was not recoverable, we were able to see the file names and what files had been copied to the hard drive.  Just prior to the hearing on the motion for expedited discovery, a copy of the hard drive image was produced, and a trove of evidence became available.  An expedited and intensive search using discovery and document management software revealed key information about the timing and sequence of the events, and what had happened.  We contended that this constituted “smoking gun” evidence of misappropriation, and although the Defendants denied it and denied liability, a mediation was discussed and scheduled. 
               Within a few months of filing suit, the parties mediated the case.  Before the mediation, with the client’s assistance, we prepare an extensive analysis of damages.  It was clear that the Defendants would not cease their activities and the evidence appeared to show that the departure had been in the works for nearly a year.  We made it clear that we had significant damages and that monetary value would be the key to a resolution before the mediation took place.  Fortunately, the Defendants were ably represented by counsel to advise them, apparently, of the lengthy and expensive process such a major lawsuit would entail and the risks associated with the case.  Moreover, the competitor appeared eager to resolve the dispute and avoid lengthy litigation. 

Ultimately, the parties were able to resolve the case by creating a combination of cash and other equivalents that had a cash value of $1.43 million for the Plaintiff.  Moreover, certain protections for remaining customers were put in place to add more value.  CHRYSO was willing to invest in an aggressive pursuit of its rights and thorough forensic work by an expert, to sift for key evidence and learn everything about what happened and how it had happened.  The clients dedication to aggressive investigation and litigation ended up saving them time and money.  Thanks to the quick settlement the client was able to recover far more than was spent on the litigation and move forward. 

Thursday, June 11, 2015

Eleventh Circuit Confirms Low Floor for Copyright in Laminate Flooring Case

       The Eleventh Circuit recently reversed a district court ruling that a design for    
laminated  flooring was not original enough to be copyrighted in Home Legend, LLC v. Mannington Mills, Inc., 784 F.3d 1404 (11th. Cir. 2015).
     The district court had granted summary judgment in favor of Home Legend, the accused infringer.  Both companies design laminate wood flooring which consists of wood fiber board with a decorative layer of paper glued on top. Mannington Mills copyrighted a design called "Glazed Maple" which consisted of a digital photograph of fifteen stained and supposedly worn wood planks.  The evidence showed that the design is actually raw wood modified to appear worn over 20-30 years to create a rustic look, using hand tools to gouge the wood and stain applied unevenly to show "wear and tear."  Then the planks were arranged and photographed.  After registering the copyright Mannington discovered that Home Legend was selling flooring it contends is "virtually identical" to the Glazed Maple design. 

      Home Legend argued that the copyright should be thrown out because it covered subject matter that was not eligible for copyright.  First, it argued that the design lacked the requisite originality to be considered an original work of authorship under Section 102(a) of the Copyright Act.  The Eleventh Circuit held that the floor design was original enough for copyright, noting that for purposes of copyright law originality only requires "independent creation" by the author "plus a modicum of creativity."  The district court found that the design merely depicted elements found in nature.  However, the Eleventh Circuit noted that the photographs were not merely of the raw wood grain, which would not be original, but consisted of raw wood that had been worked to resemble what the designers thought aged wood "might" look like.  Thus, the creative element necessary was present in the design.  Moreover, the court noted that the designers had specifically chosen certain planks and arranged them in a way they deemed most aesthetically worthy of an old rustic hardwood floor.  Thus, enough creative effort had been exerted to satisfy the originality requirement. 

      Home Legend also argued that the decorative paper image of maple was inseparable from a useful article, the wood flooring fiberboard to which it was attached.  Section 101 of the Copyright Act states that the design of a useful article is only copyrightable as a pictorial, graphic or sculptural work if the design incorporates features that can be identified separately from and are capable of existing independently of the utilitarian aspects of the article.  The court below had reasoned that neither the flooring nor the design layer would be marketable without the other, and thus it is inseparable.  The district court reasoned that a photo of a wood floor could only be sold attached to floorboard.  However, the court noted that separability means that the design is either physically severable from the utilitarian article or conceptually severable.  Here, clearly the paper designs glued onto the flooring are interchangeable with others, and therefore obviously physically severable.  It was also conceptually severable, according to the court, because the design could conceivably attached to something besides flooring, such as wallpaper.   

     The court concluded by noting that the copyright for the design is not that strong, because the features of each individual plank in the photo are not copyrightable because this merely shows the features of the underlying wood (although this seems at odds with the court's description of the creative work that went into working on each plank).  Therefore the design is a derivative work (the strongest protection is for a creative work, second is for a derivative work, and third is for a compilation).  Therefore only identical or near-identical copies infringe the trademark.  It would not be infringing to use similar efforts to create and aged maple design. 

     This finding however, provides cold comfort for Home Legend, because it apparently copied the design and infringed the copyright.