A recent decision from the First Circuit in Astro-Med,Inc. v. Nihon Kohden America, Inc., No. 08-2334-25, applying Rhode Island lawhighlights that the "acquisition" of trade secrets (not just"use") can constitute misappropriation and subject the acquirer toliability for actual loss and unjust enrichment under the Uniform Trade SecretsAct (UTSA). The First Circuit cited the plain text of the UTSA to reach thisconclusion. It also reasoned that plaintiff's direct competitor hiredplaintiff's employee "to obtain access to his intimate knowledge ofAstro-Med's business." From there, according to the court, "it is alogical inference that a competitor who hires away a rival's valued employeewith access to inside information has done so in order to use that insideinformation to compete with the rival, and it is an equally logical inferencethat once [the employee] became [the competitor's employee], he sought tojustify its hiring decision by revealing and using the information [thecompetitor] had bargained for." In the case, defendants were liable forfor actual loss and unjust enrichment caused by the misappropriation.

Astro-Med, Inc. v. Nihon.pdf (170.20 kb)

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Categories: Product Liability

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Many employers require that new hires sign a non-competition or non-solicitation agreement as a condition of hire. Companies expect that these agreements will be valid and enforceable when the employee leaves, even if the employee and his or her job evolve over time. In Massachusetts in 2004, this basic assumption was called into question as a result of three successive decisions by Massachusetts Superior Court judges which held that a noncompete signed at an employee’s hire may later become unenforceable due to changed circumstances in the employee’s job. The most generous reading of these cases suggested that any time an employee's job changed in a "material" way -- for example, a promotion involving significant greater responsibility or a transfer across departmental or divisional lines -- an employer would need to require the employee to sign a new noncompete, a practice quite uncommon in most companies. Unfortunately, in the last five years, little guidance has come from the Massachusetts appellate courts on this important issue.

This is why a recent decision by a federal appellate court -- the First Circuit Court of Appeals -- is interesting. In Astro-Med, Inc. v. Nihon Kohden America, Inc., the First Circuit was considering an appeal of a jury verdict in favor of a former employer (Astro-Med) that sued a departed employee and his new employer for breach of a noncompete, tortious interference with contract and misappropriation of trade secrets. On appeal, the defendants argued (among many other things) that after Astro-Med hired the defendant employee (Mr. Plant), it made "material changes" in his employment, including a change from product specialist in Rhode Island to salesperson in Florida and, later, a substantial reduction in his sales territory. They argued that that these changes voided the noncompete Plant had signed at hire and therefore there was no contract that could be breached.

Interestingly, even though the First Circuit generally was applying Rhode Island law to the dispute, the parties and the court cited Massachusetts law on the subject of "material change." The court, citing one of the three 2004 Superior Court decisions mentioned above -- Lycos v. Jackson -- wrote the following:

“It is apparently correct that under Massachusetts law, "[e]ach time an employee's employment relationship with the employer changes materially such that they have entered into a new employment relationship a new restrictive covenant must be signed."

However, the court was not willing to take this concept to the extreme that some had suggested in the past (and the defendants were suggesting in Astro-Med). Looking at the origins of the "material change" rule, the court emphasized that the appropriate question is not simply whether the job changed materially but whether the conduct of the parties clearly showed that they had abandoned and rescinded by mutual consent the earlier employment agreement containing the pertinent noncompete provision and had entered into a new employment relationship that included no such non-compete provision. Significant evidence of such a change would be that the employer requested a new noncompete and the employee refused to sign. In Astro-Med, the court held that the original noncompete still governed, as there was no evidence that the former employee's job change was a mutual abandonment of the agreement or that the employer had sought and been refused a new noncompete.

Under this approach to the material change rule, an employer need not seek a new noncompete from an employee every time the employee's job changes in a significant way (although that approach may be appropriate in certain circumstances). Indeed, employers should refrain from constantly seeking new noncompetes -- if the employee refuses to sign, the employer will be forced either to end the employment relationship or leave itself exposed to the argument that it abandoned the old noncompete when it asked the employee to sign a new one.

Astro-Med, Inc. v. Nihon.pdf (170.20 kb)

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Categories: Employment/Labor Law

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The U.S. International Trade Commission (ITC) is an attractive forum for patent holders.  Although the ITC cannot award monetary damages for infringement, it is relatively speedy compared to federal district courts, its judges have specialized knowledge regarding patent infringement, and it can exclude goods from importation into the United States.  An exclusion order, which is akin to an injunction, does not require a showing of actual harm to the patent holder.  This standard for obtaining an exclusion order is in contrast to a patent holder’s other U.S. forum – federal district courts.  The Supreme Court’s 2006 opinion in eBay v. MercExchange L.L.C., 547 U.S. 388 (2006), has made it more difficult for companies that do not practice their own patents to obtain injunctions in federal court.  In eBay, the Supreme Court reversed the Federal Circuit’s holding that patent holders may obtain injunctions merely by showing that a patent is valid and infringed.  Rather, the Court explained, a plaintiff seeking an injunction in a patent case must satisfy the traditional four-factor test for the issuance of a permanent injunction, including showing that it has been irreparably harmed.  While the Court suggested that patent holders who exploit their patents via licensees rather than directly should still qualify for injunctions, it may be difficult for some patent holding companies to show irreparable harm, particularly if their licensees have yet to exploit their patents, or if they have yet to acquire any licensees.

Last month the ITC voted to investigate a complaint filed in December by Saxon Innovations LLC alleging that electronic products imported by six companies—including Nokia and Panasonic—infringe its patents.  (The complaint is available at http://edisweb.usitc.gov/edismirror/337-667/Violation/316153/405944/11d9/a6b219.pdf.)  This case could take the ITC one step further toward becoming the forum of choice for patent holding companies (also known as non-practicing entities and, less charitably, as patent trolls) seeking to use litigation to bring alleged infringers to the table.

Saxon’s complaint alleges that it “focuses its business on acquiring, licensing, and enforcing patented technology in the consumer electronics and communications industry.” The patents involved in its ITC complaint are three among 180 Saxon acquired in 2007; since that time, Saxon alleges that it has invested heavily in exploring licensing opportunities and litigating to enforce its patent rights, with four of its five employees dedicated to developing this licensing business.

The ITC has authority to enforce Section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337, which aims to protect domestic industries by prohibiting the importation of, among other things, products that infringe U.S. patents.  However, an infringing product violates § 1337 only if “an industry in the United States, relating to the articles protected by the patent . . . exists or is in the process of being established.” § 1337(a)(2).

The Tariff Act sets the criteria for when a domestic industry exists or “is in the process of being established.”  It provides:

For purposes of [the domestic industry requirement], an industry in the United States shall be considered to exist if there is in the United States, with respect to articles protected by the patent . . . concerned:

(A) significant investment in plant and equipment;
(B) significant employment of labor or capital; or
(C) substantial investment in its exploitation, including engineering, research and development, or licensing.”

(19 U.S.C. § 1337(a)(3) ( emphasis added).

In the 1997 case In re Certain Digital Satellite System Receivers, No. 337-TA-392 (Int’l Trade Comm. Oct. 20, 1997) (Initial Determination), aff’d in part (Int’l Trade Comm. Dec. 4, 1997) (Final Determination), the Commission interpreted § 1337(a)(3)(C), to be satisfied “if [a] complainant has invested a substantial amount of money in a licensing program.”  There the complainant had five employees, six patents, and four licenses. 

Saxon’s complaint, and the ITC’s decision to investigate it, have caught the attention of the patent bar because the complaint does not allege that Saxon has actually concluded any licenses.  Saxon is thus attempting to open the door fully to non-practicing entities.  If the ITC finds that a non-practicing entity can constitute a domestic industry, it may be inviting a flood of similar complaints from patent holding companies seeking import bans.  As important, it may result in a shift of such cases from U.S. District Court to the ITC when goods are imported.  The ITC’s traditionally speedy docket could suffer from its growing popularity, an outcome that could ultimately harm all companies in need of protection from unfair import trade.  The ITC would do well to keep its broader mission in mind before it throws its substantial enforcement weight into protecting companies that have yet to contribute significantly to the domestic economy.  Otherwise, it might join the Eastern District of Texas in being a victim of its own success.

Order initiating an investigation:  http://www.usitc.gov/secretary/fed_reg_notices/337/337-TA-667..1232050447.pdf

Vickie L. Henry
Foley Hoag LLP
vhenry@foleyhoag.com

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Categories: Intellectual Property

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