June 16, 2004

ABA Project: Model Case Management Orders
for Patent Cases

Several years ago, I chaired a special committee of the American Bar Association's Section of Intellectual Property Law. We set out to develop some model orders for implementing "best practices" in managing patent litigation cases.

(Of course, many of the model orders could be used in non-patent litigation as well.)

We adopted many of the provisions in the model orders from local rules of various federal district courts. The model orders reflect many practices that are already somewhat routine among experienced patent litigators. They also include provisions to help reduce administrative and mechanical costs.

Last month I participated in a panel discussion on local court rules in patent cases. The panel took place at the spring continuing-legal-education meeting of the American Intellectual Property Law Association. Several people asked me where to get an electronic copy of the model orders. Here they are:

Download model_case_management_orders_1998.12.08.rtf

June 16, 2004 in Intellectual Property, Litigation | Permalink | Comments (3) | TrackBack

April 23, 2004

Public Allegation of Copyright Infringement
Leads to $300K Defamation Verdict

If you think a competitor is doing something illegal, like infringing your copyright, it's usually best not to complain to customers about it. If it turns out you're wrong about the alleged illegality, you could be liable for defamation. A Web site operator named Boats.com recently learned a $300,000 lesson on that subject in a Florida federal district court.

The "student," now $300K poorer -- plus legal expenses, of course -- is a company called Boats.com. It has a Web site, Yachtworld.com, where subscribing yacht brokers can post listings of yachts for sale. The "teacher" is another company, Nautical Solutions Marketing (NSM), which started a competing Web site, Yachtbroker.com.

NSM's competing Web site apparently was an "aggregator"; it used a "spider" program called Boat Rover to harvest factual data from other yacht-brokerage Web sites, including the Yachtworld Web site of Boats.com. NSM employees also copied and pasted other data from the Yachtworld Web site.

Boats.com didn't especially like having data copied from its Web site to a competing site. According to a report published by the Bureau of National Affairs in one of its printed weeklies (not available on-line), Boats.com sent out letters to yacht brokers and others, claiming that NSM's data-harvesting was illegal.

In response, NSM filed a lawsuit accusing Boats.com of defamation and asking the court to declare that its data-harvesting activities were legal. In November 2003, the jury awarded NSM $250,000 in damages for defamation, plus $50,000 in punitive damages. And then earlier this month, the judge issued findings of fact and conclusions of law that pretty much gave NSM the declaration it had asked for.

References: The Associated Press story was carried in USAToday. The district court's findings of fact and conclusions of law on the copyright issue are here.

April 23, 2004 in Intellectual Property, Litigation, Marketing, Sales | Permalink | Comments (1) | TrackBack

February 11, 2004

Compuware: Hit By Its Own Torpedoes

In my Navy days I was a carrier sailor, not a submariner. But I still heard the story about the valor of the submarine USS TANG, sunk in the middle of a furious battle in 1944 by one of its own faulty torpedos with the loss of all but nine of its crew. TANG's skipper, Richard O'Kane, was one of the most successful U.S. sub skippers of WW II; he was awarded the Medal of Honor after he and his surviving crew were released from Japanese captivity at the end of the war.

(In re-reading this essay before posting it, I wonder whether I'll be guilty of poor taste in using TANG's epic saga as a motif for a far less-heroic tale. But many of you will have never heard of either TANG or O'Kane, and you should, so here goes.)

Compuware, a mainframe computer software vendor, seems to have been hit by several of its own torpedoes. In 2002, it launched a copyright- and trade-secret lawsuit against IBM, its former alliance partner. Not long afterwards, CompuWare's own assertions were re-directed at them, as part of a class-action securities lawsuit. Last week, Compuware's motion to dismiss the class-action lawsuit was denied in part, leaving the unfortunate Compuware to the tender mercies of the securities plaintiffs' bar. See In re Compuware Securities Litigation, _ F. Supp.2d _, 2004 WL 231464 (E.D. Mich. Feb. 3, 2004) (link via Securities Litigation Watch.)



A Rocky Alliance

IBM was and is a major player in the market for mainframe computers. Compuware is a software vendor in the mainframe market. It was (formerly) a "tier one" alliance partner of IBM; as such, it enjoyed access to IBM source code and other proprietary information. One might think of them as sailing in IBM's wake.

IBM, however, allegedly became dissatisfied with the pricing of Compuware's software. So, beginning in 1999 and 2000, it developed its own competing software, much to Compuware's displeasure. In 2002, Compuware filed a copyright- and trade-secret lawsuit against IBM.

Unhappily, just a few weeks later, Compuware pre-announced what the class-action complaint delicately describes as "disappointing financial results." Its stock price dropped 25% in one day on heavy volume.

A securities class-action plaintiff seized on Compuware's allegations against IBM. The plaintiff claimed that Compuware had admitted that it knew for a long time that its relationship with IBM was deteriorating -- and that it had wrongfully failed to disclose that deterioration.

Torpedo 1 Away: A 1999 Press Release

The class-action plaintiff focused on several of Compuware's press releases, but one of them stands out. In a press release from 1999, Compuware's CEO was quoted as saying "I see no significant trends or impediments that would negatively affect our prospects." (Emphasis added.) No doubt that sentence was actually written by some marketing type, seized by the enthusiasm of the late 90s tech bubble. (Incidentally, Compuware's executive VP for corporate communications and investor relations was named as one of the individual defendants in the class-action suit.)

But according to the class-action plaintiff, the CEO either knew, or recklessly failed to know, that IBM was a'coming, and therefore his statement was deceptive. Judge Taylor concluded that the plaintiff had made out a plausible case in that regard, commenting that:

Plaintiffs have alleged and provided the most plausible inference that Defendant [and CEO] Karmanos knowingly stated that he saw "no significant trends or impediments" to Compuware's growth while being fully aware that a company [i.e., IBM] accounting for one-third of the company's business was becoming increasingly dissatisfied with Compuware's price structure and that an all-important relationship may well disintegrate at any time, absent correction.

Torpedo 2 Away: The IBM Litigation

Compuware's 2002 copyright- and trade-secret suit alleged that IBM had started its competing activities back in 1999 and 2000. When Compuware filed its complaint, it also issued a press release that said, among other things, that "We have been considering this distressing issue for quite some time . . . ."

The class-action plaintiff regarded these statements as admissions that Compuware knew about its problems with IBM and had failed to disclose them.

(Shameless Plug Department: For more information about copyrights and trade secrets in computer software -- as well as software patents, software licensing, export controls, and related topics -- see my one-volume treatise, The Law and Business of Computer Software, published by West Group. Last year I turned over the editing and updating responsibilities to the publisher, but I'm still sentimentally attached to the book.)

The Cautionary Language in
Compuware's SEC Filings Wasn't Enough

In its motion to dismiss, Compuware pointed out that it wasn't as if they hadn't included cautionary language about IBM in their SEC filings. Some of those filings had listed a number of significant competitors (not including IBM), then mentioned that IBM also made competitive products and there could be no assurance IBM would not offer significant competing products in the future.

Judge Taylor didn't buy it, at least for purposes of determining whether the plaintiff was entitled to keep working toward an eventual jury trial:

With regard to future events, uncertain figures, and other so-called soft information, a company may choose silence or speech elaborated by the factual basis as then known -- but it may not choose half-truths. [Citations and internal quotation marks omitted.] IBM's introduction of the Fault Analyzer and File Manager programs not only signaled the release of directly competing products, but were accompanied by a staunch refusal to share indispensable source code information. Clearly, a good relationship had ended.

In light of this, Defendants' choice to disclose anything about that relationship in its press releases and SEC filings mandated full disclosure concerning the benefits, as well as the impediments, to realizing the full potential of that relationship.

* * *

Defendants' statement that "there can be no assurance that IBM will not choose to offer significant competing products in the future," implied that IBM's development of competing software was a possibility as opposed to an actuality, and therefore, this statement does not qualify as meaningful cautionary language. The court finds that the 10-K filings did not satisfy Defendants' obligation to warn investors of risks and negatives as significant as those which were actually realized.

(Emphasis and paragraphing edited.)

Motion to Dismiss Denied

The judge denied Compuware's motion to dismiss the class-action lawsuit in most respects. The denial order said:

Contrary to the assumptions underlying Defendants' arguments, the relevant issue here is not what Plaintiffs can prove, but rather whether what they have alleged creates a plausible inference that Defendants acted or spoke with the requisite state of mind. . . . [I]n this instance, it is hard to imagine a complaint that could better withstand a motion to dismiss. The court finds that Plaintiffs have submitted a well-crafted, well-pled complaint, stating sufficient facts to create a plausible inference that Defendants knowingly misstated or omitted material information. Therefore, Defendants' Motion to dismiss must fail.

(Citations omitted.)

Possible Lessons

In the classic book The Right Stuff, Tom Wolfe recounts that whenever a test pilot crashed and burned, his surviving colleagues -- bathed as they were in the certainty of their own infallibility and immortality -- often reacted along the lines of: How could he have been so stupid?

We might be tempted to say the same about Compuware. But can we? What could Compuware have done differently? That's hard to say. Here are some thoughts:

Press releases: Obviously it would have been better if Compuware's press release hadn't had the CEO saying he saw no significant negative trends. That's an example of a categorical statement, which you're usually better off avoiding when possible. (All categorical statements are bad, including this one.) But at the time, Compuware's CEO may well have genuinely believed that he saw no negative trends.

SEC filings: Obviously, you have to do your best to make a full and fair disclosure of known material information in your SEC filings. But for all we know, at the time, Compuware's executives might have been genuinely optimistic that they could patch up their relationship with IBM. Moreover, they had to face the choice of just how much to disclose about their relationship with IBM. Conceivably, if they had disclosed more than they did, the mere act of disclosure might have damaged the relationship even further, possibly causing more harm than good to the company and its shareholders.

Plaintiffs' lawyers always have the benefit of hindsight. Executives, in contrast, have to make actual business-judgment calls, usually on the basis of limited information.

But even so, companies -- especially their marketing people -- would do well to keep Compuware's troubles in mind when they're drafting press releases and SEC filings.

February 11, 2004 in Intellectual Property, Litigation, Marketing, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

December 09, 2003

Bandwidth Management to Keep Copyright Police Away

It's said that a non-trivial portion of the Internet bandwidth consumed by businesses is taken up by illegal employee downloading of music and video files. This ComputerWorld column suggests that businesses can reduce their risks of being targeted by the record industry, video industry, etc. -- and reduce costs too -- by deploying bandwidth-management software:

"We started by doing bandwidth prioritization between the dorms and the main campus," Dodds says.

During business hours, campus connections have priority over dorm use, and Dodds can filter out certain IP addresses, block some peer-to-peer traffic and even segregate dorms by subnet. Using the graphic capabilities of the package, Dodds is able to see which protocols are using the most bandwidth and then allocate bandwidth as needed.

* * *

Prior to implementing the bandwidth management setup, Fairmont was considering purchasing additional bandwidth. That's now been shelved.

And as for pulling the plug on illegal music and video downloads, well, let's just say Britney can shop to her heart's content.

It's an interesting idea, but bandwidth-management software strikes me as a short-lived phenomenon. Bandwidth will get cheaper; music and videos will become available on-line at reasonable prices (it's already happening with music); and employees will gradually get the message that they can be fired for doing illegal downloading.

December 9, 2003 in IT Management, Intellectual Property | Permalink | Comments (0) | TrackBack

October 13, 2003

How Much Would Actual Subscriptions Have Cost?

MSNBC reported last week that money-management firm Legg Mason was hit with a $20 million jury verdict for copyright infringement, for internally distributing a stock-market newsletter when they had only paid for a single subscription. Thanks to TechLawAdvisor for the tip.

October 13, 2003 in Embarrassments / Bad Career Moves, IT Management, Intellectual Property | Permalink | Comments (0) | TrackBack

October 12, 2003

P---d Off

Natural Biologics LLC really knows how to p--s off a federal judge (bad pun intended). Earlier this month, the judge seriously hammered Natural Biologics for misappropriating trade secrets relating to the processing of horse urine. She hit Natural Biologics even harder than usual, essentially putting them out of the business – and for somewhat unusual reasons.

Concealing Evidence, Giving False Testimony

Natural Biologics was -- note the past tense -- in the business of making a generic version of Premarin, a hormone replacement therapy drug of Wyeth (formerly American Home Products Corporation). Both drugs are made using estrogens extracted from pregnant mare urine.

Federal Judge Joan Ericksen found that Natural Biologics knowingly misappropriated Wyeth's trade-secret information about its estrogen-extraction process by getting the information from a former Wyeth employee. She also found that the former Wyeth employee knew he had no right to provide the information to Natural Biologics.

As if that weren't enough, the judge found that the president of Natural Biologics destroyed documents, concealed other evidence, and gave false testimony in deposition and at trial (!). He did so, she said, in an effort to conceal the misappropriation.

The Hammer Drops

If you're found liable for misappropriation of a trade secret, normally you'll be enjoined from continuing to use the secret and ordered to pay damages. Even so, you'll usually be allowed to stay in business, as long as you don't use the secret in doing so.

But it's never a good idea to let a judge think that you've destroyed evidence or given false testimony. This principle was driven home for Natural Biologics when the judge concluded that:

Because Natural Biologics attempted to conceal its misappropriation of the Brandon Process by destroying evidence, giving false testimony, and improperly redacting evidence, the Court concludes that Natural Biologics cannot be trusted to avoid using the misappropriated process and cannot be trusted to obey an Order that permits them to exercise any discretion..

Consequently, the judge did not merely enjoin Natural Biologics from using the misappropriate trade secrets. She went even further – she ordered them, among other things:

  • to stop “producing, manufacturing, selling, offering for sale, distributing, importing or exporting any material or product consisting in whole or in part of estrogens from urine”;
  • to destroy all of its documents concerning its estrogen-extraction processes; and
  • to destroy "any material or product consisting in whole or in part of estrogens from urine resulting from any Natural Biologics Process."

In effect, the judge put Natural Biologics out of the generic-Premarin business entirely. And it sounds like conceivably the president of Natural Biologics may be facing still more legal troubles of his own. (Wyeth v. Natural Biologics, Inc., No. 98-2469 (D.Minn. 10/02/2003), available at CourtWeb)

Possible Lessons

1. Be careful in talking to a competitor's former employees. It won't look good if it even appears that you were trying to learn about the competitor's trade secrets.

2. In litigation, don't play hide the ball. If the judge or jury concludes that you were trying to conceal evidence, or that you otherwise can't be trusted, you're likely to be in big trouble. (This is a variation of the aphorism that the cover-up is often worse than the crime, a lesson that Arthur Andersen, Richard Nixon, and a host of others have learned the hard way.)

3. Never, ever, give false testimony in a court proceeding. If the judge or jury decide you're a liar, it may well be game over.

October 12, 2003 in Intellectual Property, Litigation, R&D; | Permalink | Comments (0) | TrackBack

October 01, 2003

Will Your PPT Slides' Footer Help Lose a Lawsuit Too?

Last week a court poured out * Storage Technology's corporate-raiding lawsuit against Cisco. One of the nails in the coffin was the way that Storage Tech had protected -- or more accurately, failed to protect -- the alleged trade secrets that Cisco had supposedly misappropriated. While that alone didn't lose the case for Storage Tech, it didn't help, and it likely has triggered some internal recriminations at Storage Tech.

* When a lawsuit is "poured out," it generally means the lawsuit was dismissed, in this case, by the granting of summary judgment.

Here's the story:

The Lawsuit

The parties to the lawsuit are well-known players in the tech sector. Storage Technology makes various disk- and tape storage devices, as well as equipment for storage networking and management. Cisco is "the worldwide leader in networking for the Internet," according to its Web site. In late 1999 and into 2000, several of Storage Tech's employees left to join NuSpeed, Inc., a start-up company that opened in January 2000. In September 2000, Cisco bought out NuSpeed for some $450 million in Cisco stock.

(Wait a minute -- in September 2000, long after the tech bubble had burst, the NuSpeed guys got $450 million in stock for their nine-month old company? Wow. Don't be too envious, though. As this chart shows, Cisco's stock price joined the plunge in the months following the acquisition. Depending on how long the lock-up was for -- I couldn't seem to find the acquisition agreement in Cisco's SEC filings -- the NuSpeed people probably didn't net nearly as much as they had hoped.)

Anyway, Storage Tech sued Cisco shortly after the acquisition closed. The gravamen of the lawsuit was that Cisco allegedly had interfered with the noncompete, nonsolicitation, and nondisclosure provisions in the employment contracts of the former Storage employees who had gone to NuSpeed. Three years later (viz., last week), the judge granted summary judgment for Cisco on all counts, largely because Storage Tech had failed to come forward with evidence of actual damages.

Storage Tech's Secrecy Problems

At one point, the judge zeroed in on Storage Tech's supposedly-cavalier treatment of what it was claiming to be trade-secret information:

As to the requirement of reasonable efforts to maintain the secrecy of the information, the [Minnesota Uniform Trade Secrets Act] requires neither the maintenance of absolute confidentiality nor the implementation of specific measures to maintain the secrecy of a trade secret. A plaintiff asserting a misappropriation claim must demonstrate that it undertook some effort to keep the information secret.

Here, Storage used general employee-confidentiality agreements, but such agreements are insufficient to satisfy the statutory requirement. [Editorial comment: That doesn't seem like a correct statement of the law, but maybe the judge was making a specific statement about these particular circumstances.]

Given its rejection early in the product development process, very little information about the SAN Appliance exists. What little information does exist was not the subject of reasonable efforts to maintain its secrecy. For example,

  • the author of the slide presentation did not mark it as confidential because he did not believe the design of the SAN Appliance was confidential, proprietary, or a trade secret. None of the limited documentation of the SAN Appliance was marked confidential.
  • Nor did Storage secure the documentation related to the SAN Appliance. Storage admits that it found the documentation on back-up disks left behind by departing employees. [Editorial comment: It's hard to see how this one example weighs against secrecy.]
  • Moreover, upon the resignation of the slide presentation's author, Storage did not inform him of the secrecy of the SAN Appliance. [Editorial comment: This doesn't sound right at all. It doesn't seem reasonable to expect that an employer, in every exit interview, must go through and list every trade secret that the departing employee is expected to keep secret. But again, maybe the judge was referring to the specific facts and circumstances of this case.]

In short, viewed in the light most favorable to Storage, the record reveals that Storage did not subject information about the SAN Appliance to reasonable efforts to maintain its secrecy.

(Emphasis, paragraphing, and bullets added, citations omitted.)

As you can tell from the editorial comments above, I think the judge probably goofed here. It could be that the judge didn't have sufficient evidence presented about Storage Tech's security system. From the discussion in the judge's opinion, it seems to me that if Storage Tech had the usual corporate security systems in place -- locks on the doors, passwords to access the network, etc. -- the judge should have let the secrecy claim go to the jury. But then I have yet to be appointed and confirmed as a federal judge, so my opinion counts for exactly zero.

The overall tone of the opinion suggests that the judge didn't think much of Storage Tech's trade-secret claim concerning a product proposal that it apparently had never even tried to develop. In all likelihood, he was going to pour out Storage Tech in any case.

Possible Lessons

There are several lessons to be had in this case, but here's a big one: Make an effort to label your confidential documents as "Confidential" or "Proprietary." If you don't, a judge might later use that as an excuse to deny your claim that the documents contain trade secrets -- if you didn't treat the documents like trade secrets, why should the court?

(On the other hand, don't go overboard with your confidentiality stamp -- the credibility of your secrecy assertions may well be diluted if you unthinkingly label the menu in the company cafeteria as confidential.)

October 1, 2003 in Embarrassments / Bad Career Moves, Intellectual Property, Marketing, R&D;, Record-keeping | Permalink | Comments (1) | TrackBack