Intellectual Property – Trade Secrets
InteliClear, LLC v. ETC Global Holdings, Inc., United States District Court of Appeals for the Ninth Circuit, Docket No.19-480, decided October 15, 2020
Topics: Trade Secrets, Securities Trading Software, Sufficient Particularity
This is an appeal from a district court decision to grant summary judgment against plaintiff InteliClear which claimed that ETC Global Holdings misused its securities transaction software. This case considered whether the plaintiff InteliClear identified its trade secrets with “sufficient particularity.”
Background
In the mid-2000s, InteliClear developed a electronic system to manage “stock brokerage firm accounting, securities clearance, and securities settlement services.” It used a structured query language (SQL) database which could handle millions of daily trades.
In early 2008, ETC’s predecessor company executed a Software License Agreement (SLA) for the InteliClear system. The license asserted InteliClear’s confidential, proprietary and copyright interest in the software. It also provided that ETC would have a duty to maintain confidentiality after the agreement’s expiration. In 2012, all rights, duties and obligations were delegated to ETC. Five years later, ETC notified InteliClear that it intended to terminate the license in February 2018 and confirmed, per the SLA that it would remove the database from its systems. It certified removal of the software and database from all computers and servers in March 2018. However, before the SLA termination, it started developing a competing product and deployed it. InteliClear’s General Manager and software developer, Martin Barretto noticed similarities between ETC’s new product and InteliClear’s, including a unique name table. InteliClear made its suspicions known to ETC and after negotiations, ETC agreed to allow a forensics expert to compare the two systems. The forensics expert found the similarities “striking” and submitted a report finding abundant evidence of identical elements.
InteliClear filed a lawsuit against ETC based on the forensics report in federal court on the claims of 1) misappropriation under the Defend Trade Secrets Act (DTSA); 2) misappropriation under the California Uniform Trade Secrets Act (CUTSA); and 3) unfair competition.
The district court dismissed unfair competition by saying that the CUTSA covered the same claims but denied ETC’s motion to dismiss the misappropriation claims. The ETC had claimed that InteliClear did not identify its trade secrets with “sufficient particularity.” A sealed response to ETC’s argument was given to the district court. The district court granted ETC’s motion to for summary judgment because InteliClear did not sufficiently identify which elements of its system qualified as a trade secret. It also denied InteliClear’s discovery request which InteliClear claimed would assist them in proving their case. InteliClear appealed.
Analysis
Because the CUTSA and DTSA are substantially similar, the court used the DTSA as the basis for analysis.
The DTSA’s definition of a trade secret is “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing” from which the owner of that trade secret derives economic value and is not generally known or ascertainable. There are three elements: 1) information, 2) that is valuable because it is unknown to others and 3) the owner has attempted to keep it a secret. To succeed on that claim, the owner must be able to prove that it had a trade secret, that the other party misappropriated the trade secret, and that there are or could be harm as a result. The seminal case Mai Sys. Corp. v. Peak Computer says that the plaintiff must describe the trade secret with sufficient particularity to separate it from matters of general knowledge.
Despite InteliClear’s disclosures regarding the alleged trade secrets, this court determined that there was a genuine issue of material fact as to whether Inteliclear did meet the sufficient particularity standard. However, the court did decide in Inteliclear’s favor that it took reasonable measures to keep the trade secret confidential and that the licensing agreement with confidentiality language was indicative of that.
Because there remained genuine issues of material fact, the district court abused its discretion in denying InteliClear’s request for discovery. The district court’s decision was reversed.
Comments: Trade secret protection has many advantages. Among them, trade secrets do not have to be disclosed to the public in order to protect the secret. As this case shows, if there has been misappropriation of a trade secret, it is difficult to reveal sufficient information proving that the claim is true without revealing the trade secret itself. Coca-Cola®’s trade secret protected formula is one of the best known and protected trade secret and is an example of how valuable trade secrets can be. Maintaining the confidential nature of a trade secret is a moving target as it becomes more difficult to meet a sufficient trade secret protection standard. If you are concerned about whether your employment agreements or licensing terms sufficiently protect your trade secrets or other business proprietary information, please contact Gayton Law.
Copyright and VARA
Castillo v. G&M Realty L.P., cert. denied, October 5, 2020 (5Pointz) – Gayton Law Opinion
Topics: Copyrights, Moral Rights, Visual Artists Rights Act of 1990
That the Supreme Court decided not to take this appeal shouldn’t indicate much – whether in favor of the lower court decision or in favor of the artists or even against G&M Realty. Indeed it may have thought that Congress was in the best position to make less vague how to determine whether a work is of “recognized stature”.
The question presented to the Supreme Court was:
Designed to create for visual artists a “moral right” of “integrity,” the Visual Artists Rights Act of 1990 (“VARA”) authorizes courts to impose statutory damages of up to $150,000 against the owner of a work of visual art if the owner intentionally destroys a work of “recognized stature”—a novel term, undefined in VARA, which fails to provide a person of ordinary intelligence fair notice of what is prohibited.
Did the Due Process Clause of the Fifth Amendment permit the district court to impose liability against a property owner under the “recognized stature” provision of VARA, and award enhanced statutory damages of $6.75 million, for destroying works of graffiti art affixed to his warehouses being demolished in connection with development of his property?
Legal History
In 2018, an Eastern District of New York judge found that developers G&M Realty destroyed 45 graffiti works of “recognized stature” as defined by The Visual Artists Rights Act of 1990, by “willfully” whitewashing the works in 2013. The judge ordered the payment of $6.75 million – the maximum amount representing $150k for each artist, plus attorneys’ fees. The developers appealed the decision to the Second Circuit which affirmed the Eastern District’s decision stating that although the graffiti works were temporary, they were entitled to the same protection as permanent visual works under the Act.
In response, the developers appealed to the Supreme Court under the Constitution’s due process clause. Because the Supreme Court denied certification and declined to hear the appeal, the Eastern District can hear the artists’ application for attorneys’ fees.
Copyright and Visual Artists Rights
The United States Copyright Act does not directly protect what are called “moral rights” to a work. The closest law visual artists have to moral rights in physical visual art is the Visual Artists Rights Act of 1990, an amendment to the Copyright Act of 1976, which grants art considered works of “recognized stature” certain protections, including the right to prevent the work from being destroyed. Its protection extends beyond the original creator and subsequent owner, but only applies for the life of the artist. It is a unique provision because it is contrary to the first-sale doctrine where if, for example, a non-VARA qualifying visual work was sold, the copyright owner would have no remaining interest in the physical object, even though the artist would retain copyright in the work – rights related to the art’s physical manifestation (tangible rights) are distinct from the copyright (intangible rights). Unless the copyright to the work is assigned in writing to the physical object holder, the creator still holds a copyright interest.
Background
Starting in 1993, graffiti artists were given permission by the owner, Gerald Wolkoff, to paint on the walls of an abandoned building. By 2013, the area became known as 5Pointz and was a tourist attraction. That year, Wolkoff decided he wanted to use the property for luxury condominiums, which would require the painted buildings to be demolished. The artists sought an injunction against the demolition under VARA. The U.S. District Court denied the injunction. Judge Block said that the artists knew that the buildings were going to come down and the works destroyed. He also said that Wolkoff gave permission to the artists to paint the buildings: “After all, Wolkoff gave his blessings to Cohen and the aerosol artists to decorate the buildings, and he did not choose to protect himself from liability by requiring VARA waivers. Moreover, while he was supportive of the artists and appreciated their work, he also stood to benefit economically from all the attention that had been drawn to the site as he planned to market the new buildings’ residences. … VARA protects even temporary works from destruction, defendants are exposed to potentially significant monetary damages if it is ultimately determined after trial that the plaintiffs’ works were of ‘recognized stature.’ “
Between the time of the injunction’s denial and the judge’s written opinion, Wolkoff painted over the art. Because there was no longer any object on which to assert an injunction, the only remaining claim was damages under VARA. Since there was testimony regarding the works’ importance as well as substantial photo evidence, the judge made the determination to grant full statutory damages amount for each artist.
Due Process
Wolkoff’s question to the Supreme Court regarding due process would have likely been responded to in the negative. Wolkoff claimed that the term “recognized stature” was vague and that no one of ordinary intelligence would have known what was prohibited, therefore the individual statutory damages amount of $150,000 and attorneys’ fees each denied him due process because of the phrase’s vagueness.
There are other avenues than the Supreme Court to challenge legislative vagueness. However, Wolkoff’s attorneys likely knew that he would fail on the question of whether the damages were punitive.
Historically, the Supreme Court does not take up cases regarding punitive damages which may be considered a violation of the 8th Amendment’s prohibition against excessive fines and cruel and unusual punishment. Judges are given discretion whether or not to allow a party to recover more damages than reasonable compensation for the injury if a right was violated for reasons such as fraud, malice or other despicable conduct. A damage award in the form of exemplary or punitive damages is analyzed by looking at the degree of reprehensibility on the part of the defendant, the difference between the actual or potential harm suffered and the punitive damages award, and the difference between civil penalties awarded in comparable cases and punitive damage award in instant case. Here, the statutory damage amount in full was awarded. It was contemplated by the statute to cap the award at this amount, as well as attorneys’ fees.
The facts indicated that the previously abandoned property increased in value several times over from 1993 to 2013 – so much so that he planned to build luxury condominiums. The attractiveness of the neighborhood was linked to the artists’ endeavors, and because of this met the “recognized stature” requirement. It became a well-known destination because of the art.
Comments: The Supreme Court correctly avoided taking up this case. There may be a better dispute in the future that sufficiently challenges the VARA, which may be considered too subjective and discriminatory with regard to what qualifies for “recognized stature” and is limited to visual art and no other creative form. This case may be referred to in other cases, but the facts here are unique enough that the likely result will be what Judge Block suggested – real property owners will require VARA waivers. The IP trend for the past several decades has been to coordinate protection with similar international IP rights. For example, the America Invents Act now applies the “first to file” patent standard instead of the uniquely United States’ standard of “first to invent,”and has extended patent rights to 20 years. For copyright protection, © is no longer required and is now in alignment with international norms. If you are contemplating a public or private public visual art project, and need some assistance, please contact Gayton Law.
Bulletins
Ransomware
The Department of Treasury – Office of Foreign Assets Control (OFAC) has issued an advisory regarding businesses that engage with victims of ransomware attacks. The October 1, 2020 announcement says that there are federal sanctions for businesses assisting with the facilitation of ransomware payments on behalf of cyber-crime victims. If you are the target of a ransomware attack, report it to OFAC. The alert and related guidance can be found here.
Social Media Scams on the Rise
According to the Federal Trade Commission (FTC) social media scams cost people almost $117 million in losses over the first 6 months of 2020. The most frequently reported social media scam spreaders are Facebook and Instagram. The largest scam categories are romance, free money and pyramid schemes. The FTC offers tips such as:
- Before you buy, type the company name in a search engine followed by the word “scam,”
- Don’t send money to a love interest you have not met irl.
- Before sending money for an opportunity, go to ftc.gov/mlm.
Report the scams you find. See here for more information.
Unlawful Debt Collection Business Shut-Down
In September 2020, an Atlanta-based company was shut down for threatening consumers with arrest and imprisonment for non-existent debt. Critical Resolution Mediation posed as attorneys, law enforcement or process servers. It was shut down for being in violation of the Fair Debt Collection Practices Act. See here for more information.
Publications and Education
Publications
Legal Aspects of Engineering, Design and Innovation 10th edition by Cynthia Gayton, February 2017.
This edition is available through the publisher, Kendall-Hunt publishers and on Amazon.com in paper and e-book form. This book is used in several engineering courses and is a useful reference for anyone interested in contracting, intellectual property, engineering practice, and other general legal issues. This new edition includes separate chapters for each intellectual property type, introduces and explanation of blockchain smart contracts, discusses trends in product liability, and has recent case law to highlight chapter topics. It also expands from a primarily engineering perspective to include design professionals and innovation-specific coverage.
Guide to Copyrights & Trademarks for CryptoCreatives by Cynthia Gayton, January 2019
This guide is available as an e-book on Amazon.com and is intended to introduce basic contract, copyright and trademark concepts for the benefit of creatives in the crypto and digital art communities. It covers the art and music market, provides an introduction to contracts and smart contracts, and briefly explains copyright and trademarks.
Education
Cynthia Gayton will participate in the 2020 Vancouver Bienniale, which begins on November 11, as a keynote speaker and moderator. Her Keynote is entitled “Voxel Bridge to Smart Cities and Public Art.” Learn more about it here: http://artproject.io/
Ms. Gayton taught a Business Entities Formation class for the Washington Area Lawyers for the Arts Creative Entrepreneurship Series on September 21, 2020. In addition, she made two digital, blockchain, art and copyright presentations since January 2020.The first was at the Rare Art Festival in May and the CADAF event in June.
Thank you for reading!
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