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Attorneys

Patent Filings and the Potential Discovery of Trade Secret Misappropriation

April 22 2014

By James Kachmar

Under California law, a plaintiff must bring a claim for trade secret misappropriation within three years of discovering the misappropriation or, by the exercise of reasonable diligence, should have discovered the alleged misappropriation.  Often times, discovery of alleged trade secret misappropriation is rather straightforward, i.e., a company discovers that its former employee has downloaded information from a computer and has started soliciting customers to do business with a competitor.  However, there are times when discovery is less straightforward, especially in product development where it can take years for a product to hit the market.  One potential source of information that may give rise to the discovery of trade secret misappropriation that employers must be aware of are patent filings.  The U.S. District Court in the Northern District of California recently used evidence of a patent filing to grant summary judgment in favor of a defendant accused of trade secret misappropriation in the case: Wang v. Palo Alto Networks, Inc. (Case No. 12-05579).

Mr. Wang was a design engineer specializing in the field of network security.  He spent approximately a decade trying to commercialize his firewall technology that included  “fast signature scan” technology.  In 2004, he filed a patent application on his technology.  His patent eventually issued in November 2008.

For years prior to the issuance of his patent, he tried to interest venture capitalists in his product.  In 2005, Mr. Wang met defendant Fengmin Gong at a seminar.  Mr. Gong was a chief scientist at McAfee, Inc. at the time.  Mr. Wang gave Mr. Gong a brief overview of the technology he was developing and later had Mr. Gong sign a nondisclosure agreement.   Over the next year, Mr. Wang discussed his alleged trade secrets with Mr. Gong and even gave him a copy of his patent application that contained trade secret information.  Mr. Gong was supposedly the only person to whom Mr. Wang disclosed his trade secret information.

The nondisclosure agreement was for a period of three years and required Mr. Gong to return all trade secret information back to Mr. Wang at the end.  When the agreement expired by its terms, however, Mr. Wang never demanded that Mr. Gong return the information to him nor did Mr. Gong return the information.

In June 2005, defendant Nir Zuk formed Palo Alto Networks, Inc., which intended to develop its own next generation firewalls.  Shortly thereafter, Mr. Wang and Mr. Gong met with Mr. Zuk to discuss a possible joint development of their firewall products.  Mr. Wang understood Mr. Zuk to state during that meeting that he did not care whether or not he infringed on any patents.  Later that year, Mr. Gong joined Palo Alto Networks as its chief scientist and was introduced as one of its “founders”.  Mr. Wang learned at that time that Mr. Gong joined Palo Alto Networks.

During the following year, there were discussions about possibly licensing Mr. Wang’s technology by Palo Alto Networks.  However, these discussions were not fruitful and Palo Alto Networks decided not to bring Mr. Wang on board.

During that same time, Mr. Wang sought other investors to develop his product.  In preparing his summary for potential investors, Mr. Wang identified Palo Alto Networks as a potential competitor.  In June 2006, Zuk, Gong and two others filed a patent application for their firewall technology.  One year later Palo Alto Networks announced on its website the sale of its first commercial product, a next generation firewall.  Mr. Gong left Palo Alto Networks shortly thereafter.

In December 2007, the patent application submitted by defendants was published.  The patent was in the same field as Mr. Wang’s, i.e., firewall technology and would later form the basis of Mr. Wang’s claim that his trade secrets had been misappropriated by defendants and used in the filing of their patent application.

After defendants’ patent application was published, there were numerous press releases and articles over the next couple of years describing Palo Alto Networks’ technology.  In December 2011, Juniper Networks, Mr. Zuk’s former employer, filed a patent-infringement lawsuit against Palo Alto Networks.  Eight months later, in August 2012, Mr. Wang read a brief from that case and “allegedly learned about the [defendants] patent.”  During that same summer, Palo Alto Networks held a successful initial public offering at which time Mr. Wang claimed that he became aware for the first time that Palo Alto Networks was not a “conventional” firewall company.  In October 2012, Mr. Wang filed a lawsuit against defendants claiming patent infringement and trade secret misappropriation.

Defendants moved for summary judgment as to Mr. Wang’s trade secret misappropriation claim on the ground that it was not filed within three years of Mr. Wang discovering or should have discovered the alleged acts of misappropriation.  The Court noted that a plaintiff in a trade secret misappropriation case is “required to conduct a reasonable investigation after becoming aware of an injury and [is] charged with knowledge of the information that would have been revealed by such an investigation.”  Thus, the statute of limitations on a claim for trade secret misappropriation will begin to run when there is “actual or constructive notice of a claim.”  The U.S. Supreme Court had previously held that the issuance of a patent and its recording with the patent trade office constitutes “notice to the world of their existence.”

The Court examined the facts and concluded that the defendants had filed their patent application in June 2006 containing the alleged trade secrets and that it was published 18 months later in December 2007.  Shortly thereafter in April 2008, the nondisclosure agreement between Mr. Gong and Mr. Wang was technically violated because Mr. Gong had not returned the documents disclosing Mr. Wang’s alleged trade secrets.  Despite this, Mr. Wang did not file this action until more than four years later in October 2012.

In granting summary judgment, the Court held that “an inventor actively practicing in the field and prosecuting his own patent application must be deemed to be on constructive notice of published patent applications in the same field.”  Because Mr. Wang was prosecuting his own patent, the Court concluded that he either knew, or should have known, of the existence of defendants’ patent since it was in the same field.  In fact, Mr. Wang testified that at some point he had reviewed Palo Alto Networks’ patent application and saw that “pretty much everything in the patent application is already covered by my trading [sic] secret.”

The Court found it further significant that Mr. Wang did not take any action upon Mr. Gong’s breach of the nondisclosure agreement by failing to return the documents in April 2008.  This issue was compounded by the fact that Mr. Wang knew that Mr. Gong had gone to work with Palo Alto Networks, which was engaged in the same product field.

When there is evidence that a plaintiff knew or should have known that an alleged misappropriation has taken place, the law shifts the burden to the plaintiff to establish facts as to why he or she did not or could not have discovered the alleged misappropriation and/or filed the lawsuit sooner.  Essentially, the burden is on the plaintiff to show why the statute of limitations period should be “tolled” as to his or her claim. The Court found it significant that Mr. Wang could not offer any credible evidence suggesting that the statute of limitations period should have been tolled.

Mr. Wang’s trade secret misappropriation claim was dismissed because he did not diligently prosecute it after he learned of, or should have learned of, the facts constituting the alleged misappropriation.  The Wang case is a reminder that product developers should examine patent filings in their field to determine whether or not a competitor is misappropriating their trade secret information.  Failure to do so, or if having done so, failing to diligently prosecute such trade secret misappropriation claims, could result in a developer losing the right to sue for trade secret misappropriation.