New York Times Says FBI Has Been Investigating St. Louis Cardinals for Stealing Trade Secrets of Houston Astros

Cardinals Rule . . . The New York Times is now reporting that FBI investigators “have uncovered evidence that St. Louis Cardinals officials broke into a network of the Houston Astros that housed special databases the team had built . . . .”  According to the report,  “[i]nternal discussions about trades, proprietary statistics and scouting reports were compromised.”  Also according to the report, the FBI believes that Cardinals officials gained access to the Astros’ database by using a list of passwords associated with Astros general manager Jeff Luhnow dating to his tenure with the Cardinals from 2003 until he left for Houston after the 2011 season.

The author of this blog has worked with FBI investigators in investigating corporate espionage matters.  Suffice it to say that the federal government has assembled a team of forensic sleuth types who are truly skilled and thorough.  These types of reports are not usually released before the FBI is about to conclude their work.  I would predict we’ll hear more about this in the next few weeks.  We’ll report back while keeping an eye on this one.

Former Goldman Sachs Programmer, and Alleged High-Frequency Code Thief, Sergey Aleynikov Convicted in New York State Court

The legal travails of code programmer Sergey Aleynikov are like none this student of trade secret litigation has ever seen.  This long, strange trip on Mr. Aleynikov’s existentialist legal nightmare began with his arrest at the Newark airport.  He was on his way to Chicago as part of the pre-hire process at Teza Technologies, a high-frequency trading firm.  It is undisputed that he had in his possession some of the computer source code for the high-frequency trading platform at Goldman Sachs.  He helped design the Goldman Sachs platform and his intended role at Teza was going to include building them a high-frequency platform.  He was making about $400,000 at Goldman Sachs; he was going to be making about $1.2 million at Teza Technologies.

After getting arrested in the Newark airport, he obviously lost the job with Teza.  Then he was prosecuted in federal court in Manhattan, charged with criminal violations of the federal Economic Espionage Act and the National Stolen Property Act.  He was convicted in December of 2010 of those two crimes and received an eight year prison sentence.  He spent over a year in federal prison while appealing the convictions and, on appeal, the federal appellate court in New York reversed his convictions.  He was set free, with the appellate court holding that his conduct didn’t violate the two federal statutes because the computer code he took wasn’t a tangible good that he could take “physical control over” and also because the code wasn’t intended to enter interstate commerce.  This was February of 2012.

BUT then the Manhattan District Attorney’s office got involved.  Using the exact same set of facts, they state charged Mr. Aleynikov with “making a tangible reproduction” of scientific material and duplication of computer data owned by Goldman Sachs.  Such acts are allegedly crimes in New York – but query whether “source code” satisfies the definition of “scientific material”?  Regardless, the state prosecutor pushed on.  Then, Mr. Aleynikov filed civil suits against Goldman Sachs regarding his right to an officer’s legal fee indemnity for millions of dollars in fees incurred.  Was Mr. Aleynikov an officer of Goldman Sachs?  That issue is apparently being litigated still.

The trial of Mr. Aleynikov on these state charges was a virtual gong-show, as well.  Apparently one of the twelve jurors accused another of the twelve jurors of attempting to poison her jury food and was significantly distraught that some avocado slices were missing from her jury-room sandwich.  Buh-bye to both of you (after determining the allegation was specious) says the trial judge.  But now Mr. Aleynikov has a decision to make – seek a mistrial because there are only 10 jurors left?  He decided to relent and agree to move forward with 10 jurors.  On Friday, May 1st, 10 person jury voted to convict Mr. Aleynikov on the count of “stealing scientific material” and they failed to reach a verdict on a virtually identical charge regarding code that Mr. Aleynikov copied on a different day.  Inconsistent?  Sounds that way.  We imagine that Judge Daniel Conviser of State Supreme Court in Manhattan will have a bunch of post-trial motions seeking a different judgment from him notwithstanding the verdict.

Oh – I forgot to mention another part of this crazy story.   Remember that the whole thing started with Mr. Aleynikov getting stopped at the Newark airport on his way to Chicago?  A state court judge granted a motion to exclude most of the evidence acquired from Mr. Aleynikov in that airport arrest.  The judge ruled that Mr. Aleynikov’s arrest and subsequent search of his home were “presumptively unreasonable” and the product of a “mistake of law” by the federal authorities.  But that same judge denied Mr. Aleynikov’s motion to have the state charges thrown out on “double jeopardy” grounds.

This is clearly not the last we’ve heard from Sergey Aleynikov.  His lawsuits against Goldman Sachs and the FBI agents continue.  We’ll report back once we know something more.

Iowa Appellate Court Sends Trade Secrets Case To Trial in Custom Machine Equipment Reverse-Engineering Case

Deimco is a Tampa-based company that designs and manufactures custom finishing equipment.  Pella Corporation makes and sells windows and doors.  Pella asked Deimco to build custom equipment for Pella.  Deimco did so but did not formally obtain an NDA contract from Pella.

Deimco’s quotation request form contained language that Deimco owned all custom modifications made to standard equipment.  Additionally, Deimco’s quotation and initial drawings included a legend that indicated the drawing was proprietary to Deimco and it required Pella to endorse that drawing and Pella did.  Deimco then built the equipment and sent it to Pella.

Pella later tried to change the original ownership language in the quotation request to read that Pella, not Deimco, owned the designs.  Deimco objected and Pella ultimately made a purchase order pursuant to the “Deimco owns the designs” language.  The relationship ended when Pella indicated that it had decided to design and produce its own finishing equipment.  Pella even asked Deimco to turn over some sub-assembly drawings to Pella so that Pella could properly maintain the Deimco designed machinery in its possession.  Deimco, probably smelling something fishy, declined.

Pella then disassembled and replicated the Deimco machine.  The alleged evidence apparently indicates some at Pella were concerned doing so would infringe on Deimco’s property interests in the machine.  But Pella went forward and successfully reverse-engineered the Deimco machine.  Deimco sued for trade secret misappropriation in Iowa state court as Pella is located in Iowa.  After discovery in the litigation concluded, Pella moved for summary judgment.  Pella convinced the trial court that Deimco had not made reasonable efforts under the circumstances to maintain the secrecy of the designs of the machine.  The trial court found it undisputed that Deimco had publicly disclosed the equipment at trade shows and through public sales and without confidentiality agreements in place or even seeking patent protection.  Summary judgment was granted to Pella.  Deimco appealed.

On appeal, the Court of Appeals of Iowa reversed.  The opinion was handed down April 8th.  The Court of Appeals noted that the reasonableness of Deimco’s efforts to preserve the secrecy of the designs of the machines was usually an issue of fact left to the fact-finder and it went on to note the substantial disputes in the evidence, including expert testimony, regarding the reasonableness of Deimco’s efforts to preserve the secrecy of the designs.  On the topics of trade shows and office tours where Deimco’s machines could be observed by the public and competitors and even Pella, the appellate court credited the testimony that indicated nothing specific as to the designs could be observed during these tours and shows.  As to drawings Deimco apparently published on its website, experts testified that even skilled designers could not take those drawings and derive the machine design in question.  As for the ease of reverse-engineering the machines, the appellate court noted Pella’s own evidence that it estimated it would take over 2300 hours to design and build a similar machine.

Lastly, and importantly for this discussion, the appeals court noted that the failure of Deimco to obtain an NDA from Pella was not, as Pella apparently argued, a per se unreasonable failure to preserve the secrecy of the designs.  The court noted the various legends and negotiated quote language as evidencing efforts by Deimco to preserve the secrecy of the designs.  It obviously didn’t help Pella that it had attempted to re-negotiate language that identified ownership and the proprietary nature of the drawings as belonging to Deimco.

This case is going back to trial.  This was a close one for Deimco.  The take-away from this opinion is that failure to obtain an NDA in a design scenario is not automatically fatal to the trade secrets claim  – but we suspect that Deimco is going to alter its behavior in the future in that regard.  It looks like the Court of Appeals of Iowa probably got this one right, too – failure to obtain an NDA is not automatically fatal to one disclosing a trade secret to another who values it in a commercial setting but there better be other efforts that are reasonable under the circumstances to preserve the secrecy of the information at issue.


This Fight Isn’t About Who Keeps the Billy Joel Albums: Maryland Divorce Firm Served With Trade Secret Misappropriation Suit Alleging $350 Million in Damages

90063Now THIIS is one we’ve never seen before at Sullivan’s Trade Secrets.  Law360 is reporting that a Maryland-based divorce firm has been sued in federal court in Maryland for allegedly stealing and copying a computer program designed and owned by a couple of companies owned and operated by Donald Bailey Sr. Who is Donald Bailey Sr.?!?  Apparently the soon-to-be-ex-husband of Mrs. Bailey and Mrs. Bailey is represented in the divorce action by Joseph, Greenwald and Laake’s Stephen Friedman.

What is Mr. Friedman allegedly doing with this computer program?  Well, according to Donald Bailey Sr., Mr. Friedman “allegedly uploaded and copied more than 800 pages of client information and copyrighted code that belonged to Bailey’s companies. Other government contractors will now be able to edge out his product in bidding because the security of his program was compromised when his wife stole it and handed it off to the divorce attorney.”

The computer program in question is owned by plaintiffs Zegato Solutions Inc. and Aldmyr Systems Inc., both Bailey’s companies, according to the complaint.  Bailey apparently alleges that the fact that Mr. Friedman and soon-to-be-ex Mrs. Bailey possess the program and won’t return it to Bailey’s companies depletes and depreciates the value of the program in his/their hands because the code’s security now has to be identified to all potential purchasers as compromised.  Bailey Sr. also apparently claims that Mr. Friedman and Mrs. Bailey are using their possession of the code as a “bargaining chip” and are trying to extract $1.5 million for its safe return.

Well – that’s a new twist in the world of trade secrets.  We’ll keep an eye on this one for you.


Scalia Argues SEC Rule 21F-17 Enforcement Action Imperil Corporate Trade Secrets

Eugene Scalia, a well-respected attorney at the esteemed Gibson, Dunn & Crutcher law firm, has penned an interesting and thought-provoking Op-Ed piece in Monday’s Wall Street Journal.  The piece, linked below and titled “Blowing the Whistle on the SEC’s Latest Power Move”, argues that the SEC’s interpretation of Dodd-Frank generated SEC Rule 21F-17 generates a slippery slope where corporate trade secrets could be transmitted to the government en masse by a self-proclaimed whistle-blower.  This, argues Mr. Scalia, represents an unacceptable risk to corporate secrets.

According to the SEC, KBR (the large Houston-based technology and engineering firm)  apparently required witnesses in certain internal investigations interviews to sign confidentiality statements with language warning that they could face discipline and even be fired if they discussed the matters with outside parties without the prior approval of KBR’s legal department.  Although Mr. Scalia’s piece didn’t particularize what the KBR agreement provided, this was the commitment KBR required of its employees involved in investigations:

“I understand that in order to protect the integrity of this review I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.”

While I would generally agree with Mr. Scalia that there is a risk of agency over-reach and clear abuse were the SEC just to treat whistle-blowers as corporate moles able to tap, without limitation, the proverbial corporate secrets database whenever tasked by their government master – that’s not what appears to have been going on at KBR nor was it implied in the SEC’s enforcement action against KBR.  No – the feature of the KBR confidentiality agreement that generated the SEC umbrage was that the employee needed prior approval of KBR’s legal department before discussing “the subject matter” with anyone outside the company.  And this, the SEC apparently reasoned, sent an impermissible in terrorem message to employees that they could not discuss the “subject matter” with the SEC or the DOJ or other investigative entities.  

The following language is how KBR solved its drafting problem with the SEC through amending and supplementing the above-referenced language that originally required “prior authorization of the Law Department”:

“Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.”

Anyone who has ever represented or advised a company being investigated by the government is sympathetic with the arguments made and implied by Mr. Scalia that government investigators are not as mindful of the “due” part of “due process” while investigating what is alleged to be a legal violation.   However, in this particular instance, I’ll admit that I don’t agree  the KBR situation and solution should leave corporations shaking in their proverbial boots.  If an investigation is underway and the company wants to keep a lid on its efforts and the matters discussed, it can generate agreements that require that as long as those same agreements are clear what employees are NOT prohibited from disclosing to the government.  My take on this is pretty simple – what was formerly implied in this scenario must now be expressed.

Does a Trade Secret Plaintiff in North Carolina Have to Be the Owner of The Trade Secrets to Have Standing to Sue for Misappropriation?

license_agreementAn interesting motion was made in case pending in the North Carolina Business Court that alleged the defendants had stolen trade secrets of the plaintiff.  During the discovery phase of the suit, the defendants learned that the plaintiff was not the “owner” of the purported trade secrets – plaintiff had an exclusive license to use them from the entity that DID own the technology that constituted the trade secrets.

North Carolina’s Trade Secret Protection Act provides that “the owner of a trade secret shall have remedy by civil action for the misappropriation of his trade secret.”  This is different language than that contained in the model for the TSPA – which is the Uniform Trade Secrets Act.  In the uniform act, the action may be brought by a “complainant.”  Did the North Carolina legislature, in adopting the UTSA but modifying this language regarding who could bring a claim, intend that only the “owner” of a trade secret could bring a claim for misappropriation – not a licensee or other legal holder?

Judge Gale, in this case captioned SCR-TECH, LLC v. EVONIK ENERGY SERVICES LLC et al. , denied the motion to dismiss SCR-TECH’s motion on technical grounds that the original judge assigned to the case had already denied this same argument that plaintiff did not have standing.   As such, this rendered Judge Gale powerless to overrule the original ruling and order a different result.   But this outcome puts into direct conflict two legal/jurisprudential principles that are both foundational: (a) one judge of the same court cannot overrule the earlier ruling of another judge based on the same motion; and (b) the subject matter jurisdiction of a court can be challenged at any time, including by the court itself.

The Business Court got this one correct but it seems that this issue should be submitted to the appellate court and the case stayed to determine how the appellate courts interpret the word “owner” in this context.  Should appeal suggest that the word “owner” means that what it says and there is obviously only one “owner” of a trade secret, I await the explanation regarding this language from the same NC TSPA: “The existence of a trade secret shall not be negated merely because the information comprising the trade secret has also been developed, used, or owned independently by more than one person, or licensed to other persons.”

We’ll keep an eye on this one for you.