Arizona Supreme Court Limits Preemptive Sweep of Arizona’s Trade Secrets Act

The Arizona Supreme Court decided yesterday in Orca Communications Unlimited v. Noder that Arizona’s version of the Uniform Trade Secrets Act, A.R.S. § 44-401 et seq., does not preempt common law tort claims for misappropriation of confidential information that does not rise to the level of a statutory “trade secret.”

The majority of jurisdictions deciding the preemption issue have held that the uniform act preempts such claims.  See, e.g., Mortgage Specialists, Inc. v. Davey, 904 A.2d 652, 664 (N.H. 2006) (interpreting New Hampshire Uniform Trade Secrets Act).

But the Arizona Supreme Court observed that the Legislature had not adopted the uniform act’s uniformity clause, and that “[e]ven when the legislature has adopted a uniformity clause, we have not felt compelled to follow other courts’ decisions.”  Arizona thus joins the minority of jurisdictions that have held there is no preemption.  See, e.g., Burbank Grease Servs., LLC v. Sokolowski, 717 N.W.2d 781, 789 (Wis. 2006) (interpreting Wisconsin Uniform Trade Secrets Act).

After Orca, one can expect Arizonans allegedly victimized by theft of confidential business information to argue that they have an unfair competition claim even if the stolen information does not satisfy the Act’s rather rigorous requirements to qualify the information as a “trade secret.”  Broadly speaking, these requirements include that the information derive economic value from not being generally known or ascertainable, and that the information have been subjected to reasonable efforts to maintain its secrecy.

Yet, to hold that the Act does not preempt such a common law unfair competition claim is not exactly the same as holding that theft of non-secret or unprotected, let alone valueless, business information gives rise to such a claim.  Indeed, the court took care to note that it had not even decided “whether Arizona common law recognizes a claim for unfair competition.”

At a minimum, Orca likely opens the doors to more claims based on theft of business information.  How those claims will fare is another matter.


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Patent Assertion Entity Settles FTC Charges

Patent Assertion Entities (PAEs) acquire patent rights and attempt to generate revenue by licensing or litigating the patents.  In September 2013, the FTC announced its decision to collect empirical data to study the effects of PAE activities.

Recently, on November 6, 2014, the FTC agreed to settle charges against MPHJ Technology Investments, LLC, a PAE that sent patent enforcement letters to thousands of small businesses and demanded licensing fees.  The FTC charged MPHJ and its law firm with using “deceptive sales claims and phony legal threats” to enforce MPHJ’s patents. This is the first time the FTC has responded to PAE activities using its consumer protection authority.  The public may comment on the proposed consent order through December 8, 2014.

The proposed consent order prevents MPHJ from making any deceptive representation (1) that many small businesses have licensed the patents at a particular price or within particular price ranges, or (2) that MPHJ will initiate a lawsuit if MPHJ does not receive a response within a certain period of time.  In addition, MPHJ must preserve any patent assertion related communication for inspection and copying for five years.

Jessica L. Rich, director of the FTC’s Bureau of Consumer Protection, said, “Small business and other consumers have the right to expect truthful communications from those who market patent rights.”  Whether or not the FTC study spurred this action against MPHJ, the FTC’s prosecution adds a new dimension to the discussion about PAEs.

Posted in Patent Litigation Tagged ,

Ninth Circuit: Unincorporated Groups Can Own and Enforce Trademarks

On August 11, 2014, the Ninth Circuit Court of Appeals held that unincorporated associations have the capacity to own their own trademarks and to sue to enforce them.  In Southern California Darts Ass’n v. Zaffina, No. 13-55780, the Court affirmed the United States District Court for the Central District of California’s entry of summary judgment and issuance of a permanent injunction against a former member of “SoCal”—a forty-year-old unincorporated association—who incorporated a same-named, competing corporation.

Even though SoCal is unincorporated, the Court affirmed summary judgment, holding that SoCal owns its marks.  Unincorporated associations must be evaluated on a case-by-case basis, but “[t]here is no reason . . . why such questions in specific circumstances should preclude the universe of unincorporated associations from owning trademarks. . . .  An entity of this character may engage in commercial activities, and may use names and marks in connection with those activities.”

Under California law, SoCal lacks the capacity to sue as a corporation because its corporate powers were suspended by the State of California in 1977.  See United States v. 2.61 Acres of Land, 791 F.2d 666, 668 (9th Cir. 1985) (applying California law).  But Rule 17(b)(3)(A), Federal Rules of Civil Procedure, permits an “unincorporated association” to “sue or be sued in its common name to enforce a substantive right existing under the United States Constitution or laws.”  So the Court held SoCal was permitted to bring suit in federal court as an unincorporated association for the purpose of enforcing its trademark rights.

Posted in Trademark Litigation Tagged

Supreme Court: Mere Computer Implementation Does Not Make an Abstract Idea Patentable

Today, the Supreme Court in Alice Corp. v. CLS Bank unanimously held that all of Alice’s asserted claims were drawn to patent-ineligible abstract ideas.  The Court reaffirmed the framework established in Mayo v. Prometheus for determining whether a claim contains one of the implicit exceptions to patent-eligible subject matter:  laws of nature, natural phenomena, and abstract ideas.

Under Mayo, the Court must first “determine whether the claims at issue are directed to one of those patent-ineligible concepts.”  If the claim contains a patent-ineligible concept, then the court must determine whether the additional elements “transform the nature of the claim” into a patent-eligible application, through an “inventive concept,” which is an element or combination of elements “sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the ineligible concept itself.”  The Court held, “merely requiring generic computer implementation fails to transform [ineligible matter] into a patent-eligible invention.”

The Court held Alice’s claims were drawn to the abstract idea of intermediated settlement: mitigating the “risk that only one party to an agreed-upon financial exchange will satisfy his obligation.”  It is an abstract idea because it is a “fundamental economic practice long prevalent in our system of commerce,” similar to the concept of “risk hedging” found to be an abstract idea in Bilski v. Kappos.  Then the Court held that each claim does no more than require a generic computer to perform generic computer functions, and the recited hardware in the claims fails to “[offer] a meaningful limitation beyond generally linking the use of the methods to a particular technological environment.”  The Court distinguished its prior decision in Diehr, noting that the claims there were patent-eligible not because of a computer, but “because they improved an existing technological process.”

Section 101 of the Patent Act does not explicitly proscribe laws of nature, natural phenomena, or abstract ideas.  But the Court has now “interpreted § 101 and its predecessors in light of [these implicit] exceptions for more than 150 years.”  Unless Congress acts, determining patent-eligible subject matter will continue to involve a complex analysis of those 150 years of precedent.

Posted in Patent Litigation Tagged ,

Changes in the Law Governing Patent Infringement Are on the Horizon

Much has been written about what the Supreme Court decided in Limelight Networks, Inc. v. Akamai Technologies, Inc. However, the case is more important for what the Court did not decide, than for what was actually decided.  On June 2, the Supreme Court reversed a Federal Circuit decision concerning what constitutes indirect infringement of a patent. In doing so, the Court’s decision signals a significant possibility of future changes in the law concerning what constitutes direct infringement of a patent.

In 2008, the Federal Circuit decided in the Muniauction case that in a patent claiming a method or a process as the invention, direct infringement required a single entity to perform all of the steps of the claimed method.  During oral argument of the Limelight Networks case before the Supreme Court, Chief Justice Roberts suggested that the Federal Circuit law governing direct infringement “makes it pretty easy . . . to get around patent protection.”  The Chief Justice said, “All you’ve got to do is find one step in the process and essentially outsource it . . . or make it attractive for someone else to perform that particular step and you’ve essentially invalidated the patent.”

In Limelight Networks, the Supreme Court noted that a natural consequence of the Federal Circuit’s Muniauction decision was that it permitted “a would-be infringer to evade liability by dividing performance of a method patent’s steps with another whom the defendant neither directs nor controls.”  Some commentators have suggested that this is a problem in patents directed to software inventions involving the Internet, because a patented method for such software can involve method steps that are performed by a user or customer who is not controlled or directed by the would-be infringer.

In Limelight Networks v. Akamai Technologies, the Federal Circuit attempted to close this loophole by changing the law governing indirect infringement, or more specifically, the law governing inducement of infringement. The approach taken by the Federal Circuit was to allow liability for inducement of infringement even if there was no single entity that performed all of the steps of the patented method, (in which case there would be no direct infringement under the Muniauction rule).

In the Limelight Networks decision, the Supreme Court refused to allow the Federal Circuit to make this change in the law governing inducement of infringement. The Court held that there can be no inducement liability unless there is direct infringement. The Court acknowledged the concerns that the Federal Circuit attempted to address.  But the Court stated, “the possibility that the Federal Circuit erred by too narrowly circumscribing the scope of [direct infringement] is no reason for this Court to err a second time by misconstruing [the patent statute] to impose liability for inducing infringement where no [direct] infringement has occurred.” The Court also said, “[a] desire to avoid Muniauction’s natural consequences does not justify fundamentally altering the rules of inducement liability.

The Muniauction rule was not before the Supreme Court in this case. However, the Limelight Networks opinion concluded with a suggestion that the Federal Circuit “will have the opportunity to revisit the [direct infringement] question if it so chooses.” Thus, future changes in the Federal Circuit’s Muniauction rule governing direct infringement of a patent appear likely.

Posted in Patent Litigation Tagged ,