Roses Are Red, Violets Are Blue, Giving Someone Trade Secrets Injures the Owner, and Using Them Does Too

by Orrick - Trade Secrets Group
Contact

http://blogs.orrick.com/trade-secrets-watch/files/2014/08/loveyou200x150-200x150.jpgHow do two companies end up liable for nearly $50 million in damages relating to confidential, trade secret materials?  Like many romances gone awry, this tale arose from actions taken under cover of secrecy that did not look as good in the clear light of day.

The sordid affair involved the greeting card company Hallmark, the consulting company Monitor Company Group, L.P. (“Monitor”), and a related private equity firm called Monitor Clipper Equity Partners (“Clipper”).  Monitor performed consulting work for Hallmark, with the parties’ relationship governed by non-disclosure agreements.  Monitor and Clipper had close ties, sharing founders, an office building, and consultants.  Clipper publicly touted its close relationship with Monitor as a selling point with its investors.  Clipper claimed that it had a “substantial number of potential investments through Monitor’s business relationships and through initiatives and target industries where Monitor has significant knowledge and expertise.”

The real trouble began when Clipper was presented with the opportunity to purchase greeting card maker, and Hallmark competitor, Recycled Paper Greetings, Inc.  To differentiate itself from competitors in bidding on Recycled, Clipper told potential investors that it would “derive growth and produce high cash flows from [Recycled Paper Greetings] that others cannot” because of “[Monitor’s] unparalleled experience in the greeting card industry including the work they have done with Hallmark . . . .”  What Clipper failed to tell investors was that Monitor had provided Clipper with confidential information that Monitor had acquired and developed in connection with its consulting relationship with Hallmark and was specifically covered by non-disclosure agreements.

Clipper ultimately won the bidding for Recycled, raising Hallmark’s suspicions.  Hallmark demanded that Monitor and Clipper preserve documents relating to the Recycled acquisition.  Despite receiving this demand, Monitor and Clipper began to systematically destroy documents showing that Monitor had shared Hallmark’s information with Clipper.  At the same time, they told Hallmark that no Hallmark information had been misused.

Hallmark ultimately filed an arbitration case against Monitor, alleging breach of the parties’ NDAs as well as trade secrets theft under the Minnesota Uniform Trade Secrets Act (“MUTSA”).  Based on the scant evidence that Hallmark was able to muster, the arbitrator ruled against Hallmark on the MUTSA claim, but ruled in favor of Hallmark on the contract claim.  The arbitrator found that Monitor had widely disseminated Hallmark’s information internally, including to people who were not on the Hallmark consulting team.  The arbitrator awarded Hallmark $4.1 million in contract damages and ordered that a forensic accountant be hired to search for any confidential Hallmark information remaining on Monitor’s system.

The forensic accountant then uncovered emails showing that Monitor had shared Hallmark presentations with Clipper, which led to the arbitration award being reopened.  Monitor subsequently settled with Hallmark for a total of $16.6 million, with the settlement specifically providing that it was only “attributable to damages related to the breach of contract claims . . . as well as interest, expenses and attorney’s fees,” but not the MUTSA claim.

Hallmark then sued Clipper in federal court, asserting trade secret misappropriation in connection with the Recycled acquisition.  A jury ultimately ruled in Hallmark’s favor, awarding Hallmark $31.3 million in damages, including $10 million in punitive damages, a verdict that was affirmed by the trial court following post-trial motions.

Clipper appealed the verdict to the Eighth Circuit, raising two arguments: (1) there was insufficient evidence to support a finding that the Hallmark presentations were trade secrets; and (2) Hallmark was being allowed a double recovery under MUTSA, in light of its settlement with Monitor.

As to first argument, Clipper argued that the Hallmark presentations had no value since they were over four years old.  The Eighth Circuit rejected that argument, acknowledging that the passage of time could erode the value of trade secrets, but noting that the greeting card industry had little publicly available market information and therefore, “the presentations still provided a valuable source of knowledge about the greetings cards market.”  The Eighth Circuit also rejected Clipper’s argument that the trade secrets had been publicly disclosed, finding that the public statements by Hallmark that Clipper pointed to only disclosed generalized conclusions and not the in-depth information contained in the confidential presentations, which could still have value to competitors.

With respect to the second argument, Clipper pointed to the $16.6 million settlement between Hallmark and Monitor as providing at least partial compensation for any trade secrets theft.  Clipper relied on prior Eighth Circuit precedent that held that transmission of trade secrets between two parties was a single injury and precluded double recovery.  The Eighth Circuit rejected this argument, holding that Hallmark suffered two separate injuries:  (1) Monitor’s transmission of Hallmark’s trade secrets to Clipper; and (2) Clipper’s use of Hallmark’s trade secrets to acquire Recycled.  The Court reached this conclusion after studying the Monitor-Hallmark NDA, which was the basis of the Monitor-Hallmark settlement and expressly prohibited the recovery of consequential damages.  The Eighth Circuit reasoned that Clipper’s subsequent misuse of Hallmark’s trade secrets were the type of “consequential damages” precluded by the NDA and thus not part of the Monitor settlement.  Second, the Eighth Circuit looked to the jury instructions in the Clipper-Hallmark trial.  The instructions explicitly described a theory of trade secrets misappropriation through improper use, not just improper acquisition, a different theory of misappropriation under MUTSA.  In addition, the Hallmark damages calculations depended on Clipper’s actual use of Hallmark’s information.

There are two important takeaways from these cases:

  1. The setup and discovery plan in a trade secrets case are often more than half of the battle.  Here, Hallmark’s pre-emptive retention demands followed by a request for appointment of an independent forensic investigator unearthed the spoliated, smoking-gun evidence that eventually turned this case in Hallmark’s favor.
  2. The Eighth Circuit’s holding regarding double recovery may have significant long-term implications.  The Monitor/Clipper activities at issue in these cases were reasonably separable, and the Monitor settlement was careful to state it only related to Hallmark’s claim under its NDA.  One wonders, however, how the Eighth Circuit’s double recovery holding will play out in situations where the activities at issue represent more of a continuum of activity or where the claims between multiple parties are more closely overlapping.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Orrick - Trade Secrets Group | Attorney Advertising

Written by:

Orrick - Trade Secrets Group
Contact
more
less

Orrick - Trade Secrets Group on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.