United States: Don’t Touch! A Cautionary Tale In Which Court Awards Damages, Fees, And Injunction For Trade Secret Misappropriation By Ex-Employees

Last Updated: October 28 2014
Article by Diana Rutowski and Lillian J. Mao

Findings of Fact and Conclusions of Law, PQ Labs, Inc. et al. v. Yang Qi et al., Case No. 12-0450 (Judge Claudia Wilken)

It is not uncommon for Silicon Valley employees to switch companies, and the temptation of bringing along materials such as customer lists, pricing information and technical documents to jumpstart their new employment can be strong. It is also not uncommon for such employees to get their new companies in hot water when they act on such temptation and use the materials. Judge Wilken reminded us all that when an employee's switch in jobs includes misappropriation of his or her former employer's confidential intellectual property, the consequences can be severe.

This past spring, Judge Wilken held a bench trial on IP claims brought by PQ Labs, Inc. and its subsidiary Shanghai PinQi Digital Technology Co., Ltd. (collectively "PQ Labs") against Zaagtech, Inc. and individuals Yang Qi, Jinpeng Li, and others. In her written decision issued several months later, Judge Wilken awarded trade secret misappropriation damages, attorneys' fees, and a permanent injunction against further trade secret misappropriation, trademark infringement, or false advertising. In addition to the juicy facts that gave rise to Judge Wilken's ruling, her decision offers some lessons about proving liability and damages.

Background

PQ Labs designs, develops, manufactures, and sells hardware and software relating to multi-touch screen overlays, which turn regular monitors into touch-screen monitors. Defendants Yang Qi and Jinpeng Li formerly worked for PQ Labs, on the sales/marketing and technical sides, respectively. In 2010, Yang Qi was terminated and formed a competing multi-touch technology company called Zaagtech, where he was CEO. Jinpeng Li joined Zaagtech that same year and became its CTO. Also in 2010, Yang Qi and another defendant, Haipeng Li, formed a company called Multitouch Group to distribute PQ Labs' products, with the plan of diverting sales from PQ Labs to Multitouch Group. PQ Labs was not pleased with this turn of events, and sued for relief under several federal and state law theories, including misappropriation of trade secrets, copyright infringement, trademark infringement, and unfair competition.

Trade Secret Misappropriation

Judge Wilken first concluded that the defendants had collectively misappropriated PQ Labs' trade secrets. She found that PQ Labs' asserted trade secrets (both technological trade secrets and customer information) met the definition of "trade secret" under the California Uniform Trade Secrets Act. That is to say, PQ Labs derived independent economic value from the trade secrets and PQ Labs had taken reasonable efforts to maintain their secrecy.

The court further found that defendants had misappropriated PQ Labs' trade secrets for use in making and selling Zaagtech's products. Among other conduct, Yang Qi had emailed himself PQ Labs' customer lists and pricing spreadsheets just before he was terminated. He also obtained PQ Labs' hardware schematics from Jinpeng Li via email and chat. PQ Labs' expert testified that Zaagtech's products incorporated PQ Labs' technological trade secrets. While defendants asserted that many of the trade secrets could be reverse-engineered, they failed to show that they had actually obtained the trade secrets through reverse engineering. Thus, the court found that Zaagtech gained access to the trade secrets through Yang Qi and Jinpeng Li's misappropriation. In addition, the court found that Yang Qi and Jinpeng Li had willfully and maliciously misappropriated PQ Labs' trade secrets.

Other Claims

The court also ruled on a variety of additional IP, contract, and business tort claims reflecting the sprawling scope of the dispute between PQ Labs and defendants.

" Copyright: While PQ Labs owns a copyright in its software, it admitted it had presented limited evidence on the claim, so the court found no copyright infringement.
" Trademark Infringement and False Advertising: The court found that defendants had violated the Lanham Act and California's False Advertising Law by falsely stating in internet advertisements that Zaagtech was a manufacturer and distributor of PQ Labs' touchscreen products.
" Tortious Interference and Conversion: The court found that Yang Qi had diverted at least one sale from PQ Labs to Multitouch Group, which satisfied the elements of tortious interference. In addition, Yang Qi had taken the touchscreen monitor and sold it through Multitouch Group without PQ Labs' authorization, making him liable for conversion.
" Phishing Email Claims: PQ Labs brought claims under California Penal Code Section 502 as well as the Computer Fraud and Abuse Act based on phishing emails containing viruses and other harmful computer programs that the company had received in 2011. However, the court found the evidence insufficient to prove that defendants were responsible for those emails.
" Breach of Contract and Fiduciary Duty: The court found that Jinpeng Li breached the confidentiality provisions of his employment contract by sending hardware schematics to Yang Qi. The court also found that both Jinpeng Li and Yang Qi had owed fiduciary duties to PQ Labs, which they breached by misappropriating trade secrets. Further, Yang Qi was liable for fraudulent concealment because he had had a duty to disclose his creation of Multitouch Group while serving as PQ Labs' account manager.
" Unfair Competition: PQ Labs had brought claims under California's Unfair Competition Law based on the same allegations underlying the trademark, false advertising, phishing email, tortious interference, and fiduciary duty claims. Each succeeded or failed in parallel with the corresponding claim.

Damages

Despite the successful trade secret misappropriation claim, PQ Labs' case faced an initial setback on damages. The court noted evidence of significant price erosion (an 83% drop in the price of PQ Labs' products from Zaagtech's entry into the market in August 2010 until July 2013). However, the court found that PQ Labs' lost profits claims were not credible. Among the court's criticisms were the fact that PQ Labs' claim was not based on Zaagtech's sales figures but on PQ Labs' projected sales, which had been based on as little as three months' data. In addition, the court noted that there were other competitors in the market, who could have contributed to the price erosion. Thus, the only lost profits the court awarded was $650 for the sale diverted to Multitouch Group. The court also awarded $214,800 – the cost of developing the trade secrets, and thus the amount by which defendants had been unjustly enriched in misappropriating the trade secrets.

The court did not stop there, however. The court also awarded PQ Labs as exemplary damages the statutory maximum of twice actual damages for Yang Qi and Jinpeng Li's willful and malicious misappropriation. (Citing the Taiwan Semiconductor case, the court noted that Zaagtech was not liable for exemplary damages as only individuals could commit willful and malicious conduct.)

Attorneys' Fees

The court awarded attorneys' fees to PQ Labs on its trade secret misappropriation claim, as the CUTSA permitted reasonable attorneys' fees and costs for willful and malicious misappropriation. The court also awarded fees on the trademark and false advertising claims, finding that defendants' deliberate misrepresentations made this an "exceptional case." The court noted, however, that the attorneys' fees award did not extend to PQ Labs' unfair competition claims, even those based on the same conduct, as California's UCL does not provide for attorneys' fees.

Defendants also sought attorneys' fees, for the copyright claim, but the court denied the request, noting that such an award was discretionary and that defendants had given the court no reason to exercise that discretion other than the mere fact that they had prevailed on the claim.

Injunction

Citing the Lanham Act and California UCL, the court granted an injunction barring defendants from further misappropriation of PQ Labs' trade secrets, infringement of PQ Labs' trademarks, and engaging in false or deceptive advertising about PQ Labs and its products.

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