For employers, safeguarding trade secrets and requiring that employees sign non-disclosure agreements are now more crucial than ever. On April 23, the Federal Trade Commission issued a final rule that, if it survives challenges that have already been filed in the courts, will ban the noncompete restrictions many employers used to prevent departing employees from taking trade secrets to a competitor. While the final rule is being litigated, there are still alternative claims employers can bring against former employees who take trade secrets to a competitor. KPM Analytics N. Am. Corp. v. Blue Sun Sci., LLC, illustrates how state and federal trade secrets and unfair competition claims remain potent alternatives to protecting trade secrets and even allow employers to recover punitive damages.
To start, Defendant Irvin Lucas, while working for Plaintiff KPM, approached KPM’s competitor, Defendant Innovative Technologies Group (“ITG”), to form Blue Sun Scientific. Lucas and other employees stayed at KPM as they misappropriated KPM’s trade secrets for Blue Sun’s benefit. For example, Lucas and others used phony email addresses to hide their identities, misrepresented KPM’s business, diverted KPM customers to Blue Sun, and used KPM’s customer data to undercut KPM. The employees did this in violation of their KPM NDAs and noncompetes.
The Court found the noncompetes to be unenforceable, but KPM pursued claims under the Defend Trade Secrets Act (“DTSA”) and Massachusetts Uniform Trade Secrets Act (“MUTSA”) for trade secret misappropriation, the Massachusetts Consumer Protection Act (“MCPA”) for unfair or deceptive trade practices, and breach of the NDAs. A jury found that Blue Sun, Lucas, and the other employees misappropriated trade secrets under the DTSA and MUTSA, and that Lucas and the other employees breached their NDAs. The jury also found Blue Sun and ITG liable for unfair or deceptive trade practices under the MCPA. The jury awarded KPM actual damages of $1.8M from ITG, $1.5M from Blue Sun, $20K from Lucas, and a total of $27.5K from other individual employees. The Court assessed punitive damages of $1.8M against ITG, $1.5M against Blue Sun, $10K against Lucas, and $7.5K against another employee.
This case demonstrates the types of claims employers can bring against employees who misappropriate trade secrets. By bringing actions under state consumer protection laws alongside actions for federal and state trade secret laws, an employer may be able to recover compensatory and punitive damages. Issues of preemption must be considered, however. For example, claims under some state trade secret statutes may preempt claims under state unfair competition statutes where the unfair competition or deceptive act involved trade secret misappropriation. That said, to maintain these causes of action, employers should take appropriate measures to protect their valuable business information as trade secrets, such as requiring that employees sign NDAs, controlling and limiting access to trade secrets, and developing ways to monitor threats to their secrecy.
On April 12th, the 10th Circuit determined that I Dig Texas’ (“IDT”) use of the term “American-made” to promote its products and to discourage consumers from supporting its competitor, Creager, is inherently ambiguous. Thus, advertisements including that phrase for products assembled in the United States using components from other countries were not literally false under the Lanham Act. The 10th Circuit also affirmed no indirect copyright infringement damages were available to Creager for the use of its copyrighted images in IDT’s ads because Creager was unable to prove a nexus between IDT’s sales and its ads using the infringed photos. As such, the 10th Circuit granted summary judgment in favor of IDT on both Creager’s false advertising and copyright counterclaims and remanded the case to state court for a determination of the state law claims.
The Court considered whether IDT’s ads, bearing the words “Made in America,” and American flags, constituted false advertising. Under the Lanham Act, a claimant may show falsity in one of two ways: (1) when a statement is literally false, or (2) when a statement is literally true, but “likely to mislead or confuse customers.” The statement must be unambiguous to be literally false, meaning if a statement is susceptible to more than one reasonable interpretation it cannot be literally false. Creager only argued the ads were literally false and not that the ads were misleading. To determine whether IDT’s statement was “literally false,” the court asked, “what does it mean to make a product in the United States or in America?” The Court concluded that the term “make” was susceptible to more than one meaning. It could either refer to the origin of the components or the location of assembly of the product itself. Similarly, use of patriotic symbols is also ambiguous since the symbols may imply that the products are American-made, but this cannot be objectively verified as true or false.
The Court further affirmed summary judgment to IDT on Creager’s copyright counterclaims for the use of copyrighted images of Creager’s products next to a “Made in China” symbol, focusing on whether Creager could prove a nexus between IDT’s sales and use of the infringed images. The District Court granted summary judgment to IDT finding that IDT’s use of the images in comparative advertising was permissible fair use without reaching the nexus issue. The 10th Circuit did not address fair use and held there was no nexus because no evidence was presented that IDT sold any additional products due to its ads containing Creager’s copyrighted product photos.
This decision highlights the importance of pleading both “literal falsity” and “true, but likely to mislead” in false advertising cases, as well as the desirability of registering images prior to use in commerce for the availability of statutory damages in copyright infringement matters.
This presentation examines the essential role of intellectual property law in the success of inventors, entrepreneurs, and content creators. Additionally, this presentation addresses common questions and concerns within these industries, offering a platform to seek personalized legal advice for unique situations.
Patents are prohibited from claiming inventions that would have been obvious to a person having ordinary skill in the art (“POSITA”). This non-obviousness requirement is an application of the Constitution’s limitations on the scope and purpose of Congress’ authority to grant patents.
Congress’ power to award patent monopolies flows from Art. I, § 8, cl. 8 of the Constitution, which states: “Congress shall have Power … to promote the Progress of Science and Useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” “This clause is both a grant of power and a limitation” that “was written against the backdrop of the practices … of the Crown in granting monopolies to court favorites in goods or businesses which had long been enjoyed by the public.” Graham v. John Deere, 383 U.S. 1, 5 (1966). In other words, the Constitution forbids patents on obvious subject matter because they would not “promote the Progress of Science and the Useful Arts.”
As Graham made clear, Clause 8’s limiting language is no paper tiger:
Congress in the exercise of the patent power may not overreach the restraints imposed by the stated constitutional purpose. Nor may it enlarge the patent monopoly without regard to the innovation, advancement[,] or social benefit gained thereby. Moreover, Congress may not authorize the issuance of patents whose effects are to remove existent knowledge from the public domain, or to restrict free access to materials already available. Innovation, advancement, and things which add to the sum of useful knowledge are inherent requisites in a patent system which by constitutional command must ‘promote the Progress of * * * useful Arts.’ This is the standard expressed in the Constitution and it may not be ignored.
Id. (quoting U.S. Const., Art. I, § 8, cl. 8). Patent monopolies on obvious subject matter add no knowledge to the public domain, but rather remove existent knowledge, and undermine the Constitutional purpose of patents—promoting progress in the useful arts. KSR Intern. Co. v. Teleflex, 550 U.S. 398, 416 (2007).
While the first Patent Act, passed in 1790, did not contain any express requirement of non-obviousness, it did require that certain high-ranking government officials assess whether an invention was “sufficiently useful and important” to merit a patent. 1 Stat. 109-112, § 1 (Apr. 10, 1790). This examination criterion was intended to exclude frivolous and obvious patents. However, this requirement proved problematic because such officials lacked time to examine patents (resulting in a backlog). In 1791, Jefferson drafted a revised Patent Act dispensing with examination and the “sufficiently useful or important” criterion, substituting it with a provision for alleged infringers to challenge patents by proving them “so unimportant and obvious that it ought not to be the subject of an exclusive right.” The Writings of Thomas Jefferson, Vol. 5 at 279 (Feb. 7, 1791). However, Congress took no action on the draft bill that year, and upon resubmission the following year, the bill, after extensive revision, was passed as the Patent Act of 1793. This Act dispensed with examination1 and the requirement that inventions be “sufficiently useful and important,” as Jefferson had proposed, but did not incorporate the provision for invalidating obvious patents.
Following enactment of the Patent Act of 1793, some courts rejected the idea that there was any requirement for patentability beyond novelty and usefulness. See, e.g., Earle v. Sawyer, 8 F.Cas. 254, 255 (D. Mass. 1825) (rejecting any prohibition on obvious patents). However, in 1850, in Hotchkiss v. Greenwood, the Supreme Court recognized that patentability required more than what the ordinarily skilled artisan could envision. See 52 U.S. 248, 267 (emphasis added):
unless more ingenuity and skill … were required … than were possessed by an ordinary mechanic acquainted with the business, there was an absence of that degree of skill and ingenuity which constitute essential elements of every invention. In other words, the improvement is the work of the skillful mechanic, not that of the inventor.
The dissent asserted that the requirement lacked any basis in precedent2. Id. at 26869 (J. Woodbury, dissenting). However, Hotchkiss’ holding aligns with Clause 8’s requirements that patents promote the progress of the useful arts by requiring a patent to disclose something more than what was already within the knowledge or creativity of the field. Indeed, Hotchkiss’ reference to the ordinary mechanic’s “ingenuity,” makes clear that the Court was focusing on not only the ordinary mechanic’s knowledge and skills, but their creativity and what they could envision.
As the Supreme Court in Graham and KSR later found, the “premises [underlying Clause 8] led to the bar on patents claiming obvious subject matter established in Hotchkiss and codified in § 103.” KSR, 550 U.S. at 427. The non-obviousness requirement did not emerge from the judicial ether; it was contemplated from the start and needed to align the patent system with its Constitutional purpose.
This week, the United States District Court for the Central District of California (the “Court”) granted L’Oreal’s motion for terminating sanctions. The litigation centers around L’Oreal’s alleged misappropriation of Metricolor’s trade secret, which is a first-generation system for storing, formulating, and dispensing hair coloring agents and additives. The system comprises of a “plastic bottle, a standard [] orifice reducer, and a syringe.” In 2014, Metricolor and its president, Sal D’Amico, discussed a few of its products with L’Oreal. The discussions centered around Metricolor’s second-generation product, but Metricolor alleged that, during its pitch, it related details of its first-generation system to L’Oreal. The discussions proved unfruitful, but in September of 2016, L’Oreal launched a product similar to Metricolor’s first-generation system. Metricolor brought suit in January of 2018.
In 2021, L’Oreal began to suspect that Metricolor had produced edited documents. For example, Metricolor appeared to fabricate an email exchange indicating that Metricolor sent L’Oreal samples of its first-generation system. However, the recipient of those emails did not recall ever seeing the email nor receiving any samples. Later, in October 2021, Metricolor’s own expert, Kevin Cohen, created a forensic image of Sal D’Amico’s computer (“Cohen Image”), unbeknownst to L’Oreal or the Court. L’Oreal, unaware of the Cohen Image, filed an ex parte application to suspend deadlines pending investigation of documents. The Court denied the application, but ordered L’Oreal to take a forensic image (“L’Oreal Image”) in December 2021, of the same computer previously imaged by Cohen. L’Oreal noted that several sample documents contained deletions and insertions when compared to what Metricolor had produced in the litigation. L’Oreal unsuccessfully sought terminating sanctions. However, in March 2023, Mr. Cohen disclosed creation of the Cohen Image, which the Court compelled Metricolor to produce. When comparing the Cohen and L’Oreal Images, more than fifty thousand files were missing from the L’Oreal Image. L’Oreal’s renewed motion to terminate the case was successful.
The Court found that Metricolor’s actions were “troubling” and “easily support a finding of willfulness, bad faith, and fault.” First, the Court stated that it is entirely unclear whether Metricolor ever disclosed the trade secret that was subject to the litigation, because the “limited evidence suggesting the existence and conveyance of a trade secret was largely fabricated.” Second, the Court stated that such an ambiguity would be prejudicial because L’Oreal was deprived of important evidence. Finally, the Court found that lesser sanctions would not be appropriate here because monetary or adverse inference sanctions would be insufficient to remedy the impact or deter future misconduct if the case was allowed to proceed.
This case serves as yet another warning to counsel representing zealous clients. Although the Court directed most of its ire toward “particularly Sal D’Amico[,]” who fabricated and destroyed evidence, counsel’s behavior was also problematic because they improperly withheld responsive discovery after the Cohen Image was discovered. Even if a client believes their efforts are justified to get the truth out, it is the duty of counsel to trust-but-verify and ensure that all conduct is unquestionably above board. Else, parties risk losing over six years of litigation efforts.
As an initial disclaimer, Irwin IP LLP is privileged to be lead counsel for LKQ Corporation and Keystone Automotive Industries, Inc. (collectively, “LKQ”) in several design patent validity disputes, including this case against GM Global Technology Operations and by extension General Motors Co. (collectively, “GM”). LKQ neither requested nor paid for preparation of this article, however, and the views expressed herein are those of the authors alone.
Last month, the Court of Appeals for the Federal Circuit (“CAFC”), held an en banc oral argument for LKQ’s appeal of the Inter Partes review decision by the Patent Trial and Appeal Board (“PTAB”) which held that U.S. Design Patent No. D797,625 (“the ’625 Patent”) was not unpatentable as obvious. During the US Government’s argument, Judge Chen broached a central issue of the appeal when he asked whether it was “true that only about one to two percent of all design patent applications get a prior art rejection during examination?” The Government indicated that their rate is “a little higher,” but admitted that only “about 4%” of design patent applications receive a prior art rejection. This low rejection rate for design patents has received the attention of design patent scholars. See Sarah Burstein, Is Design Patent Obviousness Too Lax?, 33 BERKELEY TECH. L. J. at 608-610, 624 (2018) (positing that design patent validity precedent makes it nearly impossible for the United States Patent and Trademark Office (“USPTO”) to reject design patent claims); Dennis Crouch, A Trademark Justification for Design Patent Rights, 24 HARV. J. L. TECH. at 18-19 (2010) (citing the “vastly different” rejection rate between design and utility patents as evidence that the USPTO has abdicated its role in examination for design patents). For reference, by some estimates, the amount of total rejections for utility patents under prior art (35 U.S.C. §§ 102, 103) is as high as 68%.1 An important component of this explanation is that design patents have not received the flexible and expansive obviousness inquiry mandated by the US Supreme Court’s KSR decision.
In an effort to explain the low rejection rate, GM referred to an amicus brief submitted by Hyundai Motor Company and Kia Corporation (“Hyundai-Kia”), arguing that “often these, these design patents, because it’s a singular claim, you will see, for example, a shoe will be patented once and then you’ll see, you know, more patents off that similar initial concept. So, there’ll be a lot of patents that come out of the same invention because you can’t have, you know, 25 claims.” GM also argued that “the narrowness of design patents is another reason why we see a difference in the allowance rate as compared to utility.” Neither Hyundai-Kia nor GM cited any support for their theories. This article shows that neither argument adequately explains the alarmingly low rate at which design patents receive prior art rejections.
Regarding the argument that multiple design patents are filed on the same invention, there is no explanation as to why that would drive down the rejection rate. Logically, if there are groups of design patents for a particular invention (a “design patent family”) one would expect that prior art applicable to one patent in the family would be applicable to all of the patents in the family. And, one would expect that the number of design patent families that receive a prior art rejection as compared to the total number of design patent families would mirror the rate individual design patents receive a prior art rejection as compared to the total number of individual design patents. As such, the fact that there may be design patent families should not impact the overall rejection rate. Further, dissecting a whole design into many component elements (“design patents on fragments”) would likely seem to create a higher probability that any of these elements would have been known in the art to an ordinary designer. And, as such design patents on fragments would logically seem to drive up the rejection rate.
Regardless, it is appropriate to stress test the effect “duplicate design patents” could have in skewing the prior art rejection rate. By randomly selecting tranches of 50 sequential design patents granted between 2013 and 2023, we can create a statistically significant subset of design patents (that demonstrates the same 2-4% prior art rejection rate overall) to identify the percentage of design patents that were, as GM and Hyundai-Kia have argued, multiple, narrowed claims of the same invention. By removing these patents from the analysis altogether, we can determine an adjusted rejection rate for just individual design patents. For example, assuming no patent applications that received a prior art rejection were issued, if we were to hypothetically apply a 4% rejection rate to our sample of 500 patents, we can determine that about 21 patents were rejected to result in 500 allowed patents. If within those 500 patents, there are 50 duplicate design patents, that would leave 450 individual design patents. Dividing the rejected patents by just the individual design patents leads to an adjusted rejection rate. In our example, the adjusted rejection rate (21/450) is 4.67%. In performing our analysis, to be as generous as possible to GM and Hyundai-Kia’s argument, we also calculated an adjusted percentage by including similar designs issued to the same entity.
Applying this methodology, only 8.6% of design patents are duplicate patents in the way that GM and Hyundai-Kia argue. Removing these from the randomized subset, 91.4% of the design patents remain. Applying the Government’s 4% prior art rejection rate against the sample that excludes the duplicate patents, we arrive at an adjusted prior art rejection rate of 4.37% (still “about 4%”). If we expand the definition of duplicate design patents beyond GM and Hyundai-Kia’s definition in the above-mentioned manner, there are a total of 15.2% duplicate design patents. Once these are excluded and we are left with 84.8% of the randomized subset, applying the Government’s 4% prior art rejection rate results in an adjusted prior art rejection rate of 4.7%. At bottom, the exclusion of duplicate design patents in the way that is most generous to GM and Hyundai-Kia’s argument does not raise the prior art rejection rate of design patents by even one percentage point. The existence of duplicate design patents fails to explain the alarmingly low rate at which design patents receive prior art rejections.
Although not specifically argued by GM or Hyundai-Kia, the scholarly community should consider whether a claim-by-claim analysis of utility patents would result in a prior art rejection rate of about 4% for individual patent claims. That is beyond the scope of this article, but based on the readily available data we hypothesize that such a prior art rejection rate would still be “vastly different.”
Finally, GM’s appeal to design patent “narrowness” does not provide design patents with any kind of conceptual armor. The adage that “design patents have no scope” due to their visual claim style, has been practically rejected by modern precedent. See, e.g., Crocs, Inc. v. Int’l Trade Comm’n, 598 F.3d 1294, 1304-06 (Fed. Cir. 2010) (finding that several products with noticeable differences read on a single design patent, effectively expanding its scope beyond the literal claim depicted). Many courts have found that design patents have expansive scope in terms of infringement and damages.
The CAFC’s attention to the issue of the alarmingly low design patent prior art rejection rate at oral argument was well placed. As shown above, the disparity of this rate with that of utility has not been reconciled by any explanation or argument and is probably indicative of an inability or acquiescence to rigorous examination on the part of the USPTO.
- https://projectpq.ai/patent-rejections-103 ↩︎
A license agreement with broad terms might seem like a good idea, but it could turn into something that you later regret. On March 25, 2024, the Second Circuit (“the Court”) affirmed that a licensee did not violate a trademark license agreement for “beer” products by selling hard seltzer products under the same trademark.
Cervecería Modelo de México, S. de R.L. de C.V. and Trademarks Grupo Modelo, S. de R.L. de C.V. (collectively, “Modelo”) entered into a perpetual trademark license agreement with CB Brand Strategies, LLC, Crown Imports LLC, and Compañía Cervecera de Coahuila, S. de R.L. de C.V. (collectively, “Constellation”) for Constellation to use Modelo’s trademarks to make and sell “beer” inside the United States. The license agreement defined “beer” as “beer, ale, porter, stout, malt beverages, and any other versions or combinations of the foregoing, including non-alcoholic versions of any of the foregoing.” Recently, Constellation started to sell Corona Hard Seltzer and Modelo Ranch Water (collectively, “Corona Hard Seltzer”) using Modelo’s trademarks. Corona Hard Seltzer is a flavored carbonated drink that derives its alcohol content from fermented sugar. Modelo sued Constellation alleging that sales of Corona Hard Seltzer violated the trademark license agreement because Modelo believed a sugar-based hard seltzer did not constitute “beer” under the license agreement. The issue of what “beer” meant was sent to a jury who determined that Modelo failed to establish that hard seltzer was not beer as defined in the license agreement. Modelo appealed.
On appeal, Modelo argued that under the plain meaning and dictionary definitions of “beer” or “malt beverages” that Corona Hard Seltzer could not be a beer or malt beverage because the seltzer was not flavored with hops and contained no malt. The Court acknowledged that the plain and ordinary meanings of “beer” and “malt beverages” would exclude Corona Hard Seltzer, however, the definition of “beer” allowed for “versions” of beer and malt beverages. Modelo argued “versions” could only mean beverages sharing similar characteristics to beer or malt beverages. Constellation argued that the definition of “beer” also included “non-alcoholic versions” and that a beverage without the common elements of beer, such as malt or hops, would be covered under the agreement. The Court held both parties’ definitions of the term “versions” were plausible and that the definition of “beer” was ambiguous as to whether it included Corona Hard Seltzer. Therefore, the Court affirmed the jury’s determination that “beer,” at least as used in the license agreement, included hard seltzers as the jury was not limited to plain and ordinary meaning of the term and was allowed to consider the parties’ intent when the contract was negotiated.
IP owners need to be careful using license agreements with broad definitions, like “any other versions” used here, because those definitions may later include items the IP owner did not intend to include at the time of the agreement. If there is any uncertainty in the scope of an IP contract, the ambiguity may be used against the IP owner in the future.
Irwin IP is delighted to announce two ITC rulings in favor of our client, LKQ Corporation. These investigations were two of the largest cases in the ITC’s recent history, with LKQ prevailing on all 41 design patents asserted by Hyundai and Kia. In its rulings, the ITC agreed with Irwin IP’s position that neither Hyundai nor Kia could establish a domestic industry to be protected by the ITC. These wins are not only important to LKQ but also impact consumers who will continue to have the ability to purchase aftermarket automotive parts.
LKQ and Keystone Automotive Industries are represented by Barry F. Irwin, Michael Bregenzer, Jason Keener and Robyn Bowland
Read the full decisions here:
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Irwin IP specializes in mission-critical intellectual property and technology litigation, catering to a diverse client base, including Fortune 500 companies and innovative startups. Our expertise extends to enforcing and protecting intellectual property portfolios, ensuring our clients’ product lines, worth hundreds of millions annually, remain secure. Notably, we routinely, successfully litigate against the largest, most prestigious law firms representing the largest companies in the world on matters valued in the tens and hundreds of millions.
On March 8, 2024, the International Trade Commission (ITC) announced that the decisions for both investigations in the LKQ / Genera cases have been reversed finding no violations. These wins are not only important to LKQ but also impact consumers who will continue to have the ability to purchase aftermarket automotive parts.
To read the full article, visit: https://www.autobpa.com/2024/03/08/itc-reverses-prior-detrimental-decisions-against-lkq-and-tyc-genera/