Technically Legal

Technology and the law. Done right.

Hallmark Cards, PowerPoint, and Trade Secrets

The Eighth Circuit affirmed a strong win for Hallmark in an appeal of a trade secret case.

In 2001, Hallmark contracted with Monitor, a consulting group, to do research on the greeting card industry. The research was to be kept strictly confidential. Monitor delivered a series of PowerPoint presentations with their findings. Hallmark then presented a few general conclusions from the presentations at a conference.

Monitor was closely affiliated with Clipper, a private equity firm that leveraged its relationship with Monitor to invest in companies. After Monitor began its relationship with Hallmark, Clipper became interested in another greeting card company that was up for auction Recycled Paper Greetings (RPG).

Clipper asked Monitor for, and received, at least five PowerPoint presentations that Monitor had confidentially prepared for Hallmark. Clipper went on to win the auction, and used the confidential information in running RPG.

Upon hearing of this acquisition, Hallmark asked Monitor and Clipper to retain all documents relating to the acquisition of RPG and to investigate whether Hallmark’s data was used in the acquisition. Monitor and Clipper denied any wrongdoing, but proceeded to destroy communications between the two companies, and erase hard drives.

Hallmark entered mediation with Monitor and settled for $16.6 million, but Hallmark pursued litigation against Clipper.

Clipper argued that the PowerPoint presentations were not trade secrets under Missouri law, that Hallmark already recovered for the injury from Monitor, and that the $10 million in punitive damages awarded by the jury, on top of a $21.3 million judgment, were excessive and violated the due process clause.

Trade secret law is peculiar in that it varies from state to state. While is there a Uniform Trade Secrets Act, it has not been adopted by all states, and case law does not always agree across jurisdictions.

In this case, the Eighth Circuit affirmed the lower court’s findings on all accounts. That the PowerPoint presentations were a few years old at the time Clipper acquired them did not render them valueless, as Clipper argued. Similarly, Hallmark’s presentation of a few conclusions from those papers did not mean that the more detailed PowerPoint presentations were not the “subject of efforts that are reasonable under the circumstances to maintain [their] secrecy.”

The court also rejected Clipper’s argument that Hallmark was recovering twice. Rather, as the jury instructions required, Hallmark had recovered for the disclosure of the trade secrets from Monitor, and recovered for the subsequent use of those secrets from Clipper.

Finally, the court agreed that punitive damages, less than 50% of compensatory damages, were appropriate here given the extreme lengths that Clipper went through in order to cover-up any wrongdoing, including destruction of evidence after being informed to retain those documents.

Comment on this post Posted in: Analysis on July 15, 2014

Tenth Circuit Gives a Lesson in Writing Copyright Infringement Reports

The Tenth Circuit Court of Appeals released an opinion strongly chastising a special master for deficiencies in his report analyzing whether certain software infringed a copyright.

As discussed here recently, when determining whether software infringes copyright the proper analysis is whether the accused code copies original and protecable aspects of the original software product.

This appeal arose out of a dispute between relatives over a payroll company. An uncle went into business with a niece and nephew. After relations soured, the uncle started his own business and allegedly copied the software he developed at his previous company. The nephew registered the copyright on the original code and sued for copyright infringement. Pursuant to a consent decree, the parties agreed to the use of a special master to determine whether there was infringement, and whether an injunction should issue.

After the special master submitted his report, both parties agreed that the report was deficient and should be redone. However, after cajoling from the trial court judge, the plaintiff supported the report that the court then adopted.

On appeal, the defendant argued that the report failed to apply a the “abstraction-filtration-comparison” test and was too narrowly focused on actual copying. The appeals court agreed.

At the core of the court’s opinion was the test mentioned above. The steps of that test are:

[a]t the abstraction step, we separate the ideas (and basic utilitarian functions), which are not protectable, from the particular expression of the work. Then, we filter out the nonprotectable components of the product from the original expression. Finally, we compare the remaining protected elements to the allegedly copied work to determine if the two works are substantially similar.

The court held that there was little evidence that the special master applied the abstraction test at its most basic, or its most-indepth levels. When abstracting code, the Court suggests that one proceed by looking at, “(i) the main purpose, (ii) the program structure or architecture, (iii) modules, (iv) algorithms and data structures, (v) source code, and (vi) object code.” Rather than taking these steps, the special master wrote that “[b]ecause of the extensive literal copying, it is not necessary [to] spend much time on abstracting the nonliteral elements.” That view misses the point. Without abstraction, it is impossible to determine whether that extensive copying was impermissible. Again – only copying original and protectable code is prohibited.

The special master’s preoccupation with the literal copying continued. In the next step, filtration, he filtered only the menus as unprotectable. But in a program such as payroll handling, much more of the code would have to be unprotectable beyond just the menus.

Finally, the special master spent much effort explaining the steps defendant allegedly took to obfuscate the literal copying of the software. However, the infringement analysis does not begin and end with literal copying.

In a perhaps tongue-in-cheek conclusion, the court writes:

In fairness, it could be the case that Román applied the complete abstraction-filtration-comparison test during his work prior to drafting his report. Perhaps Román did an exemplary job, and perhaps his conclusions are unassailable. But with only the meager support included in his report, we cannot know for sure. Therefore, we vacate the district court’s order and remand.

This case provides a good, though partially incomplete, rubric for applying and reporting on the abstraction-filtration-comparison test that has been widely adopted in the US. More importantly, it really emphasizes the universal importance of experts both following the relevant case law, and documenting how they followed and applied that case law in writing their reports. Here, both parties initially asked for the special master to revisit the report. The district court judge would have been wise to follow that advice.

Comment on this post Posted in: Analysis, Commentary on July 11, 2014

Put This In Your Hookah and Smoke It

The Ninth Circuit, appealing to my unending love of utility defense to copyright and trademark suits, held that the shape of a hookah is not protected by copyright law.

The opinion, first published in early June but recently revised, follows a dispute between two companies selling hookahs in the United States. The plaintiff, Inhale, Inc., obtained a copyright registration on a hookah with a skull and crossbones printed on the glass. After obtaining the registration, they filed suit against Starbuzz Tobacco, Inc., alleging that Starbuzz’s hookah, which did not feature the skull and crossbones, infringed their copyright. Inhale rested its case on the shape of the hookah.

There was no dispute that the hookah itself was a useful article: that is something that had a function, as opposed to solely artistic value – like a painting or work of writing.

Because copyright only protects expressions of ideas, and not the design of a functional object, the court had to inquire as to whether the design of the hookah was separable from its function. Quoting from the Copyright Office’s manual, the court held that, “[a]lthough Inhale’s water container, like a piece of modern sculpture, has a distinctive shape, “[t]he shape of the alleged ‘artistic features’ and of the useful article are one and the same.” Thus, the shape itself was not protectable.

The court went on to uphold an award of over $110,000 in attorneys fees to Starbuzz, the prevailing party below, and further awarded Starbuzz attorneys fees for defending the appeal, to be calculated by the lower court.

Comments Off Posted in: Analysis on July 9, 2014

Raise or Waive – The Federal Circuit on Appellate Strategy

The Federal Circuit sent a strong message regarding what relief you ask for in your appellate briefs: in short, if you don’t raise the argument, you waive it, even if it seems unfair.

Becton was involved in a patent dispute with plaintiff Retractable Technologies. After a jury trial, Becton was found to infringe a patent with regard to its 1 ml and 3 ml syringes. The jury returned a verdict in favor of Retractable for $5 million, but did not apportion damages across the two infringing devices.

On appeal, Becton argued that the court should order a new trial on infringement and validity of the patent, but did not raise the issue of damages. The Federal Circuit reversed the lower court with regard to infringement of the 3 ml syringes, but affirmed with regard to the 1 ml syringes and validity of the patent. Due to the relief requested and outcome, the court did not remand the case to the lower court for further proceedings.

After achieving a win, Becton went back to the lower court seeking for a reduction in damages and modification of an injunction against Becton selling the 3 ml syringes. Retractable agreed to modify the injunction, but did not agree to a reduction in damages. The lower court found that it could not modify the judgment, and Becton appealed again.

On appeal, Becton raised a series of arguments regarding why the lower court had the ability to modify the damages order under Verizon Servs. Corp. v. Vonage Holdings Corp., 503 F.3d 1295, 1310 (Fed. Cir. 2007). In that case, and others cited by Becton, the Federal Circuit specifically remanded the issue of damages back to the lower court. Here, because Becton did not request relief with respect to damages there was no remand.

Becton raised other, more tenuous, arguments for the court to reduce the damages award. The Federal Circuit rejected those arguments as well.

The case serves a strong reminder that in seeking to craft a narrowly tailored strategic appeal, it is easy to overlook (or strategically omit) some important and fundamental issues. The Federal Circuit and Becton agree that this could have been resolved by adding a single sentence, or sentence fragment to their first appeal brief, asking for a remand and damages issues. However, because Becton failed to raise that issue, it is waived.

In the end, Becton is likely happy that they can once again sell their 3 ml syringes, and the long-term revenue from that win will likely off-set any limited losses from not reducing the damages award.

Comments Off Posted in: Analysis on July 8, 2014

NY High Court Strikes Down Cyberbullying Law

On July 1, 2014, the New York Court of Appeals, New York’s highest state court, struck down a local law that banned cyberbullying, on the grounds that the law was overbroad.

In 2010, the Legislature of Albany County outlawed cyberbulling, which they defined as:

any act of communicating or causing a communication to be sent by mechanical or electronic means, including posting statements on the internet or through a computer or email network, disseminating embarrassing or sexually explicit photographs; disseminating private, personal, false or sexual information, or sending hate mail, with no legitimate private, personal, or public purpose, with the intent to harass, annoy, threaten, abuse, taunt, intimidate, torment, humiliate, or otherwise inflict significant emotional harm on another person.

The law, while publicly aimed at protecting children, actually protected “any person” where a “person” could include a natural person, corporation, partnership, or business.

Shortly after the law was enacted, the defendant, a student a Cohes High School, started a Facebook page where the defendant harassed other students. After a police investigation, the defendant admitted involvement with the page, and was charged.

The Court of Appeals agreed that the state has a compelling interest in protecting children from harmful publications or materials. However, this law was not narrowly tailored to advance that compelling interest. Among other things, the law prohibited, “any act of communicating . . . by mechanical or electronic means . . . with no legitimate . . . personal . . . purpose, with the intent to harass [or] annoy. . . another person.” The law, while purporting to criminalize cyberbullying, also criminalized prank phone calls (which annoy) or even a taunting telegram.

The court declined to interpret the statute more narrowly, or to excise the overboard sections.

While the attempt to protect children from cyberbulling is laudable, this statute was fatally flawed, and criminalized a lot of protected speech under the First Amendment.

Comments Off Posted in: Analysis on July 2, 2014

The Slippery World of Software Disputes

On June 25, 2014, the Sixth Circuit Court of Appeals released an intriguing opinion that tracked a thirteen year story of software development and potential copyright infringement. The case serves as a cautionary tale about the difficulty of litigating disputes related to alleged copying of software.

The story begins in 2001. Automated Solutions Corporation (ASC) and Paragon Data Systems, Inc. (Paragon) contracted to develop and support a a newspaper delivery and subscription program for the Chicago Tribune. In 2003, the relationship between the parties soured due to billing disputes and Paragon terminated the contract. Shortly thereafter, ASC went to Ohio state court, seeking a declaration that it was the sole owner of the software in question, called Single Copy Distribution System (SCDS). The state court found for ASC.

During the pendency of the state court case, Paragon continued to provide support of SCDS. Paragon purchased a Sun Microsystems server to attempt to run the server-side software, but encountered issues getting it to work properly. By 2004 the handheld devices that were to interact with the server were obsolete. After the court found for ASC, Paragon abandoned SCDS and destroyed their server.

In mid-2004, Paragon contracted with the Cleveland Plain Dealer to create similar software. This program, called DRACI did not use a server and Paragon allegedly wrote the program “from scratch,” without using any of ASC’s code. DRACI was written in, where as SCDS was written in C++.

In 2005, ASC registered a copyright on SCDS and sued Paragon. During litigation, ASC sought to obtain record from the development of DRACI, alleging that ASC code was used during that development. However, due to poor backup procedures and faulty tapes, Paragon’s records from 2003 to 2006 were incomplete, and much of the information sought had been destroyed.

Following a series of discovery disputes, a magistrate judge ruled that Paragon had not intentionally destroyed any evidence, and that other destroyed or lost documents and hardware may have been relevant, but that its loss could be cured by a jury instruction allowing for adverse inferences against Paragon.

On appeal, the court held that the district court did not abuse its discretion in declining to impose more severe sanctions on Paragon for their negligent conduct.

In order to prove copyright infringement, ASC would have to show that (1) it owned a valid copyright, and (2) that Paragon copied original elements of that work. Paragon challenged the second element: stated another way, whether there were protectable elements of SCDS that were substantially similar to code in DRACI. However, certain aspects of fixed works are unprotectable by copyright – such as abstract ideas and elements common across programs.

“In the computer-software context, . . . the elements of a program dictated by practical realities—e.g., by hardware standards and mechanical specifications, software standards and compatibility requirements, computer manufacturer design standards, target industry practices, and standard computer programming practices—may not obtain protection.”

Here, ASC put all its eggs in the basket that Paragon had access to the SCDS code, and produced similar software. But ASC did not show which protectable parts of SCDS (the actual implementation) were substantially similar to DRACI. In a report written by ASC’s expert witness, the expert stated that he identified the protectable portions of the SCDS code, but failed to actually identify those elements. The court continues:

The most detail that [the expert]’s declaration provides is in reference to data structures used in a Paragon “” file. [the expert] states that the “field names, field types, field lengths, and the order of the fields within the data structures” within the file are similar to the SCDS code/software. Again, it is not at all clear from [the expert]’s declaration that these elements are subject to copyright protection, how they are similar to the SCDS, or why they “go well beyond what could be attributable to common usage, software/hardware requirements, or best practices.”

Because the expert declaration did not explain the how or why, there was not enough evidence to create an issue of fact for a jury to try, and summary judgment in favor of Paragon was affirmed.

This case presents an interesting view of a copyright litigation. ASC’s case was certainly hampered by Paragon’s negligent destruction of potentially relevant evidence. But, it was ASC’s failure to prove that there were protectable elements that were substantially similar was its downfall.

For example, there are only so many ways to represent a “subscriber” class in code. There are bound to be similarities between implementations, even if there was no access or direct copying involved. Without the expert having gone into more detail about the similarities between SCDS and DRACI, the court could not make a determination that there was actual copying of protected elements.

Comments Off Posted in: Analysis on June 27, 2014

Massachusetts High Court Orders Defendant to Decrypt Computer

Weighing in on an issue that has split federal courts, the Massachusetts Supreme Judicial Court has ruled that a defendant can be ordered to decrypt a computer.

Interestingly, this is typically viewed as a question that falls under the Fifth Amendment. While a defendant cannot be made to testify against him or herself, courts can order that defendants submit to certain actions that could provide incriminating evidence: actions such as genetic testing, fingerprinting, giving blood samples, or performing breathalyzer tests.

The court recognized that by entering a decryption key the defendant would essentially be testifying as to the ownership of the computer. But, the court noted, here it was a “foregone conclusion” that the defendant was the owner, thus his providing the key “adds little or nothing to the sum total of the Government’s information.” Thus, the court reasoned, the defendant’s Fifth Amendment rights were not violated.

In this case the defendant had

explained that his communications with this company, which purportedly was owned by Russian individuals, were highly encrypted because, according to the defendant, ‘[that] is how Russians do business.’ The defendant informed Trooper Johnson that he had more than one computer at his home, that the program for communicating with Baylor Holdings was installed on a laptop, and that ‘[e]verything is encrypted and no one is going to get to it.’ The defendant acknowledged that he was able to perform decryption. Further, and most significantly, the defendant said that because of encryption, the police were ‘not going to get to any of [his] computers,’ thereby implying that all of them were encrypted.

A case can easily be envisioned where the defendant made no such statements, and the target computer was one of several in common areas of a house. Potentially making this case a much closer one.

The court performed this analysis primarily under the Fifth Amendment, but also made a determination that forcing the defendant to provide the encryption key was lawful under the Massachusetts Constitution, which is typically interpreted to be more protective of individuals than the Federal Constitution.

Justices Lenk and Duffly joined in a dissent, where they agreed that the act of decryption is testimonial, but disagreed that any such act would be a “foregone conclusion” due to the lack of evidence presented by the Commonwealth that the documents sought actually existed.

Comments Off Posted in: Analysis, Commentary on June 26, 2014

Fourth Circuit Takes Another Look at TrafFix

On June 25, 2014, the Fourth Circuit Court of Appeals released an opinion that provided an interesting follow-on to the 2001 Supreme Court TrafFix case.

In TrafFix, the plaintiff held patents on signs with two springs: one at each side of the display. This allowed the signs to bend in the wind, and spring back. TrafFix, the defendant, was sued for trade dress infringement. The Court held that it was the burden of the plaintiff to show that the design was non-functional, and that the presence of a utility patent was strong evidence of functionality. If a design is functional it cannot be protected by trade dress or trademark.

In this case, McAirlaids made absorbent pads with a specific “pixel” design on them. Defendant Kimberly-Clark also made absorbent pads with the same design. Kimberly-Clark argued that because McAirlaids had a utility patent on the process of making these pads, that there was strong evidence that the pads were not protected by trade dress law. The district court agreed and granted summary judgment to Kimbely-Clark.

On appeal, the Fourth Circuit vacated the case and remanded. The court noted that the patent was on the process of making the pads without the use of glue, but the precise pixel design was not part of the patent. Further weighing in McAirlaid’s favor was that McAirlaid had obtained registered trade dress on the pixel design. Once to registration is obtained, there was a presumption that the design was non-functional.

It is worth noting that the stance of this case was on appeal of a motion for summary judgment. The facts were all construed in favor of McAirlaid, and a jury may still find the design functional. The Fourth Circuit has provided some intriguing clarification into the interaction between utility patents and registered trade dress.

Comments Off Posted in: Analysis on June 26, 2014

Supreme Court Holds Warrantless Cell Phone Search Unconstitutional

The Supreme Court handed down an opinion in two related cases relating to searching cell phones. Both cases involved defendants who were searched incident to arrest. Those defendants had cellphones on their person, and, without first obtaining a warrant, the police officers searched the cellphones for evidence of unrelated crimes.

When someone is arrested, police may conduct a limited search of that person and the immediate surroundings for the safety of the police officer. This often includes emptying pockets, or searching the inside area of a car where the person was sitting. This kind of search is also justified due to a risk of defendants destroying evidence on their person.

The Court held that neither of these justifications come into play with a cellphone. The device is not dangerous, and there is no reason to think that, when seized by the police, there is any risk of destruction of evidence. While data on phones may be encrypted or remotely wiped, neither justifies a warrantless search of the phone. The concern about destroying evidence is typically about evidence in the possession of the defendant: that he would flush drugs down a toilet, or shred papers. The concern is not that a third party would find out about his arrest and instigate a remote wipe.

Like all cases involving the Fourth Amendment, the Court was careful to state that there may be exceptions to this rule. If, for instance, the police had specific information that data on the phone implicated public safety, or there was another pressing need (based on reliable information), the warrant requirement could be waived.

Importantly, the Court put a lot of weight on cellphones containing a large amount of personal information — information that would not otherwise be readily available to police officers. This strikes me as a solid win for digital privacy.

I leave you all with this quote from the Chief Justice’s opinion:

In 1926, Learned Hand observed . . . that it is “a totally different thing to search a man’s pockets and use against him what they contain, from ransacking his house for everything which may incriminate him.” United States v. Kirschenblatt, 16 F. 2d 202, 203 (CA2). If his pockets contain a cell phone, however, that is no longer true. Indeed, a cell phone search would typically expose to the government far more than the most exhaustive search of a house: A phone not only contains in digital form many sensitive records previously found in the home; it also contains a broad array of private information never found in a home in any form—unless the phone is.

1 Comment Posted in: Analysis, Commentary on June 25, 2014

Second Circuit Limits Scope of Data Retention

On June 17, 2014, the Second Circuit Court of Appeals addressed the question of:

whether the Fourth Amendment permits officials executing a warrant for the seizure of particular data on a computer to seize and indefinitely retain every file on that computer for use in future criminal investigations.

The Second Circuit held that the Fourth Amendment does not permit that conduct. The court relied on underlying principles of the Fourth Amendment in finding that the government may not seize and retain all documents, regardless of whether they were responsive to a warrant.

The Fourth Amendment requires that a warrant specify the documents and things to be seized. While modern technology allows for police officers to easily copy the entire contents of a hard drive, that does not permit them to retain those documents indefinitely, or search documents that were not covered by the warrant through which they obtained the hard drive.

In this case, the government obtained a narrow warrant in 2003. That warrant did not include certain personal records. Despite separating the personal records from the business records, the government retained the personal records until 2006. The government then obtained a second warrant, and searched those personal records, which led to the charges from which this case arose.

Because the government had no basis for retaining those personal records for so long, that they obtained a warrant several years later did not cure the underlying problem: that they still had the documents long after they should have been destroyed.

This is certainly a win for the public, albeit a limited one. We’ll continue to closely watch the development of case law surrounding the Fourth Amendment with relation to technology.

Comments Off Posted in: Analysis, Commentary on June 18, 2014

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