You have a brainstorm: there is a market for dumpster rentals, and what better place to make the rentals than The Home Depot? You go to Home Depot and have it sign a non-disclosure agreement before you disclose this idea to it. You disclose the dumpster idea to Home Depot executives, but after much discussion and a great deal of back and forth over several years with many Home Depot employees, Home Depot turns you down. The next thing you know, Home Depot is renting dumpsters, using a business model not too different from the one you proposed.
You cry foul. You sue Home Depot in Massachusetts state court for misappropriation of trade secrets. Home Depot removes the case to Massachusetts federal district court where it grinds through a couple of years of discovery. During that process you claim that the damages you’ve suffered are between $19 and $60 million.
Home Depot files a motion for summary judgment. U.S. District Court Judge Douglas Woodlock grants summary judgment. Judge Woodlock observes that the idea of renting dumpsters through Home Depot is not a trade secret.
(1) the idea of Home Depot renting and (2) the idea of renting dumpsters [was not a trade secret] . . . anyone even vaguely familiar with the home improvement industry could have put these two concepts together easily based upon information in the public domain.
Essentially, the court relied on the hoary Massachusetts trade secret doctrine which state that a confidentiality agreement cannot make secret that which is not secret. Case dismissed.
By the way, most large companies will not sign an NDA in advance of receiving business ideas for this very reason – if they reject the idea and adopt it later, they are vulnerable to suit. They then have to show that either the idea is not a “secret” (as Home Depot did here) or that it was already under consideration somewhere within their company prior to disclosure. Most companies conclude that rather than take that risk, it’s better to just refuse to sign NDAs. Without the NDA, this case would never have been filed or, it would have been dismissed much earlier. Home Depot learned that lesson the hard way.
While I shy away from posting PowerPoint outlines on this blog, the materials from two talks that my partner Sean Gilligan recently gave to attorneys in our firm are sufficiently comprehensive as to be an exception. Both outlines are on scribd.com, and are embedded below:
In the late 1970s and early 1980s, the American economy was in crisis after years of stagflation. Mortgage rates were 17%, business loans carried 20% interest rates and productivity had collapsed. On April 21, 1980, Time magazine ran a cover story that asked the question: “Is Capitalism Working?” Today, the crisis that the American economic system faces is greater than that during the darkest days of stagflation. In this opinion piece, George M. Taber, former business editor of Time magazine and author of the 1980 cover story, asks and answers the same question — 29 years later. [Continue reading at Knowledge@Wharton]
Taber still agrees with the final sentence of his 1980 article in Time:
For all its obvious blemishes and needed reforms, capitalism alone holds out the most creative and dynamic force that any civilization has ever discovered: the power of the free, ambitious individual.
And, he warns that despite the pain inflicted by the boom and bust business cycle that is the downside of unfettered capitalism — pain that we are suffering from now –
well-intentioned, but unwise, changes in the nature of American capitalism could do damage that will be felt for decades . . . The American brand of capitalism rests on creative destruction, innovation and, ultimately, entrepreneurs. It is impossible to rebuild the superstructure of U.S. prosperity by destroying its foundation.
It would be nice if lawyers didn’t have to call their clients and tell them that their company had been sued for patent infringement in the Eastern District of Texas (EdTX). “Where? Where’s that?” “What, you’ve never heard of Marshall, Texas?” you reply. “Never been to Tyler, Beaumont or Lufkin? Kind of quiet evenings after the sidewalks are rolled up, but your choice of BBQ rib joints is almost endless, and traffic isn’t a problem.”
As I’ve written before EdTX has evolved into a hotbed of patent litigation, although it has cooled a bit as of late. When you’re talking to a lawyer in Boston and you learn that he or she is heading to Texas, it’s a good bet that the destination is somewhere in the Eastern District. The EdTX has assembled some frightening statistics regarding number of patent cases (large) and the success rate of plaintiffs (high).
The lawyers in that part of the country joke that they used to do PI law (personal injury), and now they do IP law (intellectual property). But, everyone has known for a while that this couldn’t last forever, and that EdTX might lose its hold on patent litigation once W left office.
Indeed, the patent reform litigation just filed in the House and Senate has the EdTX in its crosshairs. The Senate bill states (excerpted):
A party shall not manufacture venue by assignment, incorporation, or otherwise to invoke the venue of a specific district court. Venue is only proper were (a) defendant is incorporated; (b) defendant has its principle place of business; (c) where the defendant is permanently located and has committed substantial acts of infringement; or (d) where the plaintiff resides if the plaintiff is a nonprofit or individual inventor. The court should transfer venue to avoid evidentiary burdens when transfer can be accomplished without causing undue hardship to the plaintiff.
If passed, a provision like this would cut into the patent litigation industry in EdTX, and the lawyers there might have to return to PI once the cases in their pipeline run out. That may make them sad, but it will make lawyers and companies in the rest of the U.S. quite happy.
The terms “unjust enrichment,” “restitution,” “quasi-contract” and “constructive trust” cause the average lawyer to recoil with apprehension (although she doesn’t show it, of course). We were forced to grapple with some of these ancient legal concepts in law school, but we quickly migrated to more modern legal principles, and although we may have remembered the terms (any lawyer worth his salt can throw around the terms unjust enrichment and restitution), the depth of knowledge of most lawyers on these topics is shallow at best. We were relieved when we could move on to things like the Uniform Commercial Code, which dates back only to the early 1950’s.
In fact, it’s easy to trace “unjust enrichment” and related terms back as far as the 1600s, and earlier. A search on Google Book Search reveals a volume titled “Unjust Enrichment in England before 1600.” References to Roman Law are also not difficult to find. When you start dealing with legal principles forged during the Middle Ages or Roman times, you know it’s going to be difficult.
Imagine, then, how QLT, Inc., a Canadian-based biopharmaceutical company, felt when it learned that it had been sued in federal court in Massachusetts and that the outcome of the case hinged on the application of these ancient legal doctrines? That was the situation that QLT faced. Even worse, QLT found itself in the courtroom of U.S. District Judge William Young, one of those rare judges who never backs down from a challenge, and probably mastered Latin so he could read the ancient legal texts in the original.
In early January the U.S. Court of Appeals for the First Circuit issued a decision, affirming a $100 million-plus judgment against QLT. The facts of the case are complex, but the First Circuit summarized them nicely in the opening paragraph of its 64 page decision:
These appeals require us to grapple with the metes and bounds of Massachusetts unjust enrichment and restitution law. Like many such cases, the present case involves one party’s conferral of a valuable benefit during ongoing contract negotiations, followed by an irreparable breach in the bargaining process. What makes this case unusual is that its subject matter — the development of a blockbuster pharmaceutical — poses challenges in valuing the benefit conferred, . . . . Defendant QLT Phototherapeutics, Inc. (“QLT”) appeals a jury finding that it was unjustly enriched because plaintiff Massachusetts Eye and Ear Infirmary (“MEEI”) conferred on QLT several benefits during the course of the development of Visudyne, a successful (and highly profitable) treatment for age-related macular degeneration (“AMD”), a leading cause of adult blindness.
The Court of Appeals decision is a tour de force on the law of unjust enrichment in Massachusetts, and although not binding on the Massachusetts state courts, is likely to be the guiding case in this area until something more authoritative comes along from the Massachusetts state courts. After a recitation of the well-known legal standard for unjust enrichment (see the three-part standard at bottom**), where the case got interesting was when the court held that:
the “benefit conferred” under this doctrine did not require proof of a “trade secret.” The First Circuit affirmed Judge Young’s decision to allow the jury to to proceed to an unjust enrichment verdict based on the plaintiff’s ownership of merely “confidential information.” “Confidential information” and “trade secrets” are two different things, with confidential information generally being things such as pricing or marketing plans – information of some value, but usually ephemeral in nature. Trade secrets tend to be proprietary formulas, algorithms, things that are of lasting value and importance. However, the First Circuit held that mere “confidential information” could be used to support a claim of unjust enrichment. This holding is noteworthy, and it opens to door to a category of claims that would have been precluded had the court held otherwise. Unjust enrichment may not stand where the benefit is publicly available information, but almost anything short of that can be deemed confidential, and will support a claim.
The First Circuit held that while a plaintiff may not recover its lost profits under a theory of unjust enrichment, it could force the defendant to disgorge its profits. Although Massachusetts courts have not spoken on the issue of profit disgorgement in the context of quasi-contracts, the First Circuit held that it was “likely” it would rule as described. Thus, the court clarified the measure of damages in unjust enrichment cases, again to the benefit of plaintiffs.
(** The elements of unjust enrichment are: (1) a benefit conferred upon the defendant by the plaintiff; (2) an appreciation or knowledge by the defendant of the benefit; and (3) acceptance or retention by the defendant of the benefit under the circumstances that would be inequitable without payment for its value.)
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