As discussed in my prior blog post, Google, Apple, Intel and Adobe stand accused of conspiring not to poach one another’s employees in order to keep wages down. 

Attorneys representing the class-action employees agreed to settle the case for $324 million, but one of the employees objected that the settlement was too low, essentially accusing the plaintiff attorneys of selling out the class. The judge agreed and rejected the settlement.

Defendants have now increased the settlement offer to $451 million, but they will need to wait and see if any of the plaintiffs object or if the Court determines the offer is still insufficient. After all, plaintiffs claim defendants’ anti-poaching scheme cost the 64,000 class members a total of $3 billion in reduced wages, and a jury could treble that amount to $9 billion. The evidence, damning email and memos describing the anti-poaching conspiracy and a need to cover up the conspiracy, dictate that defendants must settle. The only question is how much they must pay for the court to determine the settlement is fair.

It’s a monster movie cliché – near the end, when the monster is “dead,” the dust is settling and the heroes are patting each other on the back, the monster rises from the dead and goes on one more rampage before it expires.

Monster Cable, originator of the Beats headphones, has risen from the dead and filed a lawsuit for hundreds of millions of dollars against its former “partner,” Beats Electronics, its principals and the company that acquired Beats Electronics. Monster alleges that the defendants created a $300 million sham transaction to steal Monster’s intellectual property and disenfranchise Monster before Apple purchased the company for $3.2 billion. (Monster’s Complaint)

BACKGROUND

As I discussed more fully in a prior post, Monster and Beats entered into a License Agreement in 2008. In 2011, Beats arranged to sell a controlling interest in the company to defendant HTC. As a result of the sale, Beats was able to transfer Monster’s intellectual property and ownership rights to HTC, and Beats was also able to terminate the License Agreement with Monster. In 2012, Beats repurchased the controlling interest of the company from HTC, along with the intellectual property. And in 2014, Beats sold the company to Apple for $3.2 billion. When the sale was announced, Monster’s reaction to missing the big payday was anything but monstrous. Monster’s CEO , Noel Lee said: “We’re very happy they received such a high valuation. And I’m thinking of what that means for Monster’s valuation.” But like the movie cliché, Monster has now risen from the dead and is on the rampage, suing Beats, its principals and HTC.

MONSTER ALLEGATIONS

The primary focus of Monster’s eight causes of action are that Beats and HTC conspired to create a sham sale of the company to HTC, which effectively stripped Monster of its intellectual property and ownership rights. Later, when Beats had terminated its relationship with Monster, Beats bought the company back from HTC. Monster’s complaint alleges:

The timing of the Beats/HTC transaction that triggered the “Change of Control” provision is significant: it occurred months before the Amended License Agreement was set to expire. If Beats had not exercised the “Change of Control” provision in the Amended License Agreement, the Amended License Agreement would have expired on its own terms and Beats would have lost its ability to assume complete manufacturing, promotion, distribution, and sales of the “Beats By Dr. Dre” product line. (Complaint ¶ 31.)

Monster also alleges that Beats tricked Monster’s CEO into reducing his 5% share of Beats by lying to him about the pending Apple acquisition, which deprived him of more than $100 million.

Monster’s complaint draws a colorful but unflattering picture of two of Beat’s principals:

Dre’s primary contribution was to bless Monster’s headphones when he exclaimed: “That’s the shit!”

[James] Iovine is a respected but ruthless music mogul….

Monster’s complaint does not calculate its damages, but it does allege Lee’s shares were worth more than $100 million and Apple’s purchase for $3.2 billion draws a large target. Monster also seeks punitive damages, which could potentially treble any award.

CLASH OF THE TITANS

Monster has alleged that the HTC transaction was a sham, and Monster’s various claims for fraud, breach of trust, breach of fiduciary duty, etc. all focus on the suspect timing of the controlling interest shell game. Defendants will likely respond that Monster read and signed the License Agreement, and “the deal is the deal.” Under the License Agreement’s terms, Beats was allowed to sell shares, terminate Monster and then buy back shares. This “lawful but awful” defense has a better chance before a judge than a jury, especially a jury in San Mateo, California, Monster’s home town.

As the defendants are reviewing Monster’s complaint, I’m sure they are collecting and pouring through hundreds of thousands of emails among and between Beats and HTC, praying that nobody was stupid enough to create a smoking gun. Any document created during the negotiations leading up to HTC’s purchase of the shares, that discussed Beat’s potential repurchase of the shares, could confirm Monster’s legal theory that, from the start, the HTC purchase was designed as a revolving door scam with the sole purpose of seizing Monster’s technology. As the WikiLeaks, Snowden, and most recently Sony leaks have taught us, anything you write that is incriminating or embarrassing can and will be held against you.

When you think of a monopoly you probably think of Rich Uncle Pennybags or oil tycoon John D. Rockefeller, but maybe you should think of Princess Elsa from Frozen or the iPhone 6 instead.  The largest Hollywood animation studios and leading Silicon Valley giants stand accused of wage-fixing in violation of the Sherman Antitrust Act. While nobody has proven he was the primary architect of these schemes, Steve Jobs of Pixar/Apple appears to be the common denominator between these two industries.

The Sherman Antitrust Act prohibits business activities that are deemed anti-competitive, including agreements that unreasonably restrain competition affecting interstate commerce. The prototypical case involves price fixing, where various competitors conspire not to compete so they can keep their prices high. In a 2012 case where LCD screen manufacturers conspired to fix prices world-wide, Hitachi, Sharp, Samsung, Toshiba, LG and AU Optronics collectively agreed to pay more than $1.1 billion to settle antitrust claims.

Unlike the typical restraint of trade cases, these Hollywood and Silicon Valley cases involve wage-fixing, not price-fixing. These two industries stand accused of colluding with their competitors not to hire each other’s employees, thereby driving down wages.

The Hollywood class action lawsuit, amended last week, alleges that most of the major animation studios entered secret agreements not to hire one another’s employees. The lawsuit alleges that Pixar, Lucasfilm, DreamWorks Animation, The Walt Disney Company, Sony Pictures, Blue Sky Studios [maker of Rio and Ice Age films], and ImageMovers, LLC, entered into agreements, some of which date back to the 1980’s, “not to actively recruit employees from each other…” While allegations in a complaint should generally be taken with a grain of salt, the studios’ own written documents may prove impossible to explain away. For example in 2005, Pixar’s VP of Human Resources wrote: “With regards to ILM, Sony, Blue Sky, etc., …we have a gentlemen’s agreement not to directly solicit/poach from their employee pool.” In 2007, after Disney acquired Pixar, a Pixar executive wrote a memo to his Disney colleague about “a serious problem brewing” in that Robert Zemeckis [director and creator of Back to the Future and Polar Express] “has hired several people away from Dreamworks at a substantial salary increase” and that the Northern California studios has “avoided wars” by “conscientiously avoiding raiding each other.” Steve Jobs owned the majority share of Pixar prior to the merger.

Meanwhile, in Silicon Valley there are two class actions alleging that Apple, Google, Dell, IBM, eBay, Microsoft, Comcast, Clear Channel, DreamWorks, Oracle, Sun Microsystems and others conspired not to recruit each other’s employees to keep wages down. Similar to the Hollywood case, defendants may find it difficult to overcome their own damning documents. In a Google memo titled “Special Agreement Hiring Policy,” the Google executive listed four Google competitors and explains that they will not “pursue manager level and above candidates for Product, Sales or G&A [General and Administrative] roles –even if they have applied to Google.” Steve Jobs was running Apple during the wage-fixing scheme. The parties in the larger Silicon Valley case reached a settlement of $324 million, but one of the plaintiffs objected that the amount was too low, given that the estimated lost wages was $3 billion and if defendants lose, those damages could be trebled to $9 billion. The Federal District judge agreed and rejected the settlement. The defendants asked the Ninth Circuit to reverse the judge’s decision and have her removed from the case. The parties have filed their initial briefs with the Ninth Circuit

The laws are clear: 1) you cannot conspire with a competitor to fix prices; 2) you cannot conspire with a competitor to fix wages, and 3) you cannot conspire with a competitor not to solicit/hire each other’s workers. These are obvious restraints of trade. But the shocking thing is how arrogant or just plain dumb the defendants were in memorializing their conspiracy in writing. With all the smoking guns, it’s clear the defendants failed to heed Google’s Eric Schmidt’s request that “I would prefer that [Google] do it verbally since I don’t want to create a paper trail over which we can be sued later?” These sophisticated companies committed the same sort of rookie mistake as the Billionaire Boys Club members, who mistakenly left a detailed “to do” list for committing the murder (“tape mouth, handcuff …kill dog”) at the murder site. That smoking gun helped secure their convictions. Similarly, in the wage-fixing class actions, the defendants’ smoking guns are likely to prove insurmountable. Having been caught red handed, the only likely remaining question is how much money the defendants will ultimately have to pay to their employees and the employees’ attorneys. Unfortunately for defendants, it won’t be Monopoly money.

When there’s a huge pile of money staring you in the face, it’s easy to overlook some of the potential pitfalls. But a recent $3 billion monster deal provides a cautionary tale for businesses negotiating make/break the company contracts.

Back in the 80’s, Monster Inc. was known for producing high priced (quality?) stereo cables, but as the public began shifting from stereo systems to headphones, Monster sought to expand into the new market. In 2007, Monster signed a deal with Dr. Dre’s company, Beats Electronics, which lead to the “Beats,” the ubiquitous, colorful headphones and ear buds that are today’s cool credential, like wearing Air Jordans back in the day. (I bought the hype and a shiny pair of red Beats, quick review, meh. Here’s what Consumer Reports had to say about them.

But while Monster’s owners might be audio geniuses, they deserve an F in negotiation and contract comprehension. Without a lawyer, they entered a contract whereby Monster transferred all ownership of the trademarks and technology behind the products to Beats Electronics. Monster also shouldered the obligation to manufacture and distribute the products, an expensive proposition.

INSULT-In 2011, HTC, a Taiwanese company purchased a majority stake in Beats Electronics for more than $300 million, but Monster only got a small payout and according to BusinessWeek.com, in 2012 Beats declined to renew the contract with Monster.

INJURY-Beats bought back a majority share from HTC, and in spring of this year, Apple purchased Beats for $3 billion, mostly in cash, and Monster’s share was zero.

FATAL ERROR 1: Recognize your leverage. Monster had the technology. They could have negotiated a non-exclusive license or an exclusive license with an end date, or they could have sold the technology outright at a higher price. Instead, Monster got the worst of both worlds, losing its technology without adequate compensation.

FATAL ERROR 2: Hire a professional. When you’re sick, see a doctor. When your dishwasher starts spewing water, call a plumber. When you’re negotiating the future of your company, call a business lawyer. Even when you’re “negotiating” with an 800 pound gorilla (i.e. Microsoft, Coca Cola) and you have no leverage, at least have a lawyer look at the contract and identify the potential pitfalls. Whether you’re selling your key technology, disclosing your trade secrets, or indemnifying another party, you need to do so with your eyes open.

FATAL ERROR 3: Understand your relationship. The PR regarding the Monster/Beats deal described it as a partnership, but because Beats owned the technology, Monster ended up as a service provider that merely obtained a cut of the profits. When Beats decided not to renew the contract and sold the company, Monster ended up with virtually nothing, even though it developed the key technology behind the Beats products and considered itself a partner.

Conventional wisdom holds that software algorithms and source code can be protected as trade secrets, but broader technology “design concepts” can only be safeguarded by registering for patent protection.  But that conventional wisdom is bending as more and more courts grapple with the boundaries between trade secret and patent law.  In one of the more interesting California trade secret cases from the second quarter of 2014 — Altavion, Inc. v. Konica Minolta Systems Laboratory Inc. — the court of appeal confirmed that technology design concepts can be trade secrets.

Altavion’s Digital Stamping Technology (DST)

The plaintiff, Altavion, was a small company that invented a process for self-authenticating documents through the use of barcodes containing encrypted data about the contents of the original documents, otherwise known as digital stamping technology or DST.  Altavion alleged that several aspects of its DST process constituted trade secrets and that the defendant, Konica, stole those trade secrets.  Altavion and Konica had entered negotiations, subject to a nondisclosure agreement, aimed at embedding Altavion’s DST in Konica’s multifunction printers.  After those negotiations failed, Altavion discovered that Konica had secretly filed for patents encompassing Altavion’s DST process.

The trial court found that Altavion’s DST concepts were trade secrets, that Konica gained all of its knowledge of DST through the confidential negotiations with Altavion, and that Konica misappropriated Altavion’s DST trade secrets.  The court of appeal affirmed.

Can a patentable idea also be a trade secret?

On appeal, Konica argued that “[g]eneralized ideas and inventions are protectable by patents and thus cannot be trade secrets.”  The court of appeal disagreed, holding that “it is clear that if a patentable idea is kept secret, the idea itself can constitute information protectable by trade secret law.”  The court noted the different aims of patent law (shielding a publicly disclosed idea from infringement) and trade secret law (the right to control the dissemination of secret information), and observed that due to concerns regarding patent validity many businesses now choose to protect commercially valuable information through trade secret protection.

The court distinguished between the various components of Altavion’s DST technology.  At one end of the spectrum was Altavion’s “general idea” for a barcode allowing for self-authentication of documents, which was not a trade secret because it had been disclosed to several companies without a nondisclosure agreement.  At the other end of the spectrum was Altavion’s “algorithms and source code,” which was the most specific and secret level of information, and unquestionably a trade secret.  In the middle of this spectrum, and the focus of the lawsuit, were the “design concepts” underlying Altavion’s DST concepts.

Design concepts are protectable as trade secrets

The court held that Altavion’s design concepts were protectable trade secrets because they had independent economic value, were created through Altavion’s substantial investment of time and effort, were not readily ascertainable by competitors, and had not been previously disclosed.  The last part — “not previously disclosed” — was key to the court’s decision.  The court recognized that some earlier decisions had ruled that software design concepts were not trade secrets where those concepts were already “disclosed and evident to the end user.”  According to those prior cases, “plans, flows, inputs, outputs, rules of operation, priorities of operation, and the like are not trade secrets to the extent they are manifest in the way a program works.”

But here, the court ruled that Altavion’s design concepts maintained trade secret protection because they had not yet been disclosed in any finished product.  Altavion and Konica merely anticipated that the concepts would be disclosed later if and when the finished product containing the concepts was placed on sale.  The parties never reached that point, however, because negotiations ended and Konica pursued its secret patent applications covering Altavion’s concepts.

Takeaway

Trade secrets are not just for formulas, algorithms, and customer information.  An idea or design concept that might otherwise be patentable can also constitute a trade secret if it has independent economic value, is not readily ascertainable, and the owner diligently keeps it confidential.  Given recent concerns over heightened standards for patent validity and the high stakes of disclosing inventions in patent applications that might be rejected, expect more companies to rely on trade secret protection for their design ideas.

In another installment of “Google does WHAT?!?,” the Supreme Court on June 30 rejected the Silicon Valley giant’s bid to stop a lawsuit accusing the search company of wiretapping. You read that right. Wiretapping.

You know those cool Google Street View cars that drive around taking pictures that allow you to look at your house on Google Maps? Well, it turns out that those Street View cars weren’t only looking at your house, they were also looking into your house, or, more specifically, the information available over your home Wi-Fi network. Google’s argument that it was simply listening to your home radio station fell flat in the Ninth Circuit, and the Supreme Court has now refused to grant certiorari to review the appeals court’s decision.

How Street View Collected Data

The Google wiretapping suit focuses on the Street View cars’ previous practice of collecting information from unprotected Wi-Fi networks as they drove by snapping photographs for Google Maps. As they were rolling through a neighborhood, the cars would record the GPS coordinates of wireless routers and save data transmitted over any network it detected that was not password-protected. The connections only lasted for a split-second each, but that is enough time to download around 25 or more emails and/or other data, including passwords, images, and other personal information. Moreover, if you happened to be transmitting data from a password-protected site as the Street View-mobile drove by, the information from that site, too, would potentially be recorded, unless the site was encrypted. In sum, if you needed another reason to password protect your home Wi-Fi network, here it is.

For Google’s part, it claims that the Street View data mining described above was the result of a rogue programmer (though this assertion has been challenged by regulators in the U.S. and abroad) and that the company never put the information obtained to commercial use.

Google’s Legal Argument:  It’s Just a Radio!

When consumers first filed their class action suit against Google, the company moved to dismiss the lawsuit, claiming that its conduct did not constitute wiretapping. Citing a statute applicable to radio communications, Google claimed that the Wi-Fi communications that it recorded were “electronic communications” that were “readily accessible to the general public.” District Court Judge James Ware, Chief Judge of the Northern District of California, denied Google’s motion in June of 2011.

Last September, the Ninth Circuit Court of Appeals unanimously affirmed Judge Ware’s decision in a strongly-worded opinion. Discussing the term “radio communication,” the Court stated that “Google’s proposed definition is in tension with how Congress — and virtually everyone else — uses the phrase.” A “radio communication,” said the court, does not include “sending an e-mail or viewing a bank statement while connected to a Wi-Fi network.”

Following the Ninth Circuit’s ruling, Google petitioned the Supreme Court for a writ of certiorari. On Monday, the Court denied Google’s petition without comment (as is the Court’s usual practice in denying such petitions).

Data Privacy in the Supreme Court

Despite the absence of any comment from the Supreme Court, its decision to leave the Ninth Circuit’s ruling undisturbed is significant, particularly in light of the Court’s unanimous decision last week Riley v. California, which held that the police must obtain warrants before searching the cell phones of individuals whom they arrest. The Riley decision reveals a surprising sensitivity from the Court regarding the data privacy concerns raised by modern technology.

In Riley, the Court rejected the government’s analogizing the search of a cell phone’s contents to the warrantless search of the contents of a cigarette pack found on an arrestee’s person, which the Court condoned in United States v. Robinson. The Court reasoned that “Cell phones differ in both a quantitative and a qualitative sense from other objects that might be kept on an arrestee’s person. . . Before cell phones, a search of a person was limited by physical realities and tended as a general matter to constitute only a narrow intrusion on privacy. . . But the possible intrusion on privacy is not physically limited in the same way when it comes to cell phones.” Both the aggregation of different types of media and the sheer storage capacity of modern cell phones set the devices apart from a privacy perspective. “The sum of an individual’s private life can be reconstructed through a thousand photographs labeled with dates, locations, and descriptions; the same cannot be said of a photograph or two of loved ones tucked into a wallet.” An individual’s interests, medical condition, and travel history, among other things, can be traced through a search of their phone’s contents, said the Court.

Given the Court’s refusal in Riley to fall back on arcane pre-digital conceptions of Fourth Amendment privacy rights, its decision to allow the Google wiretapping case to proceed is unsurprising. Lending any credence whatsoever to the argument that mining data from private home Wi-Fi networks is akin to listening to “radio communications” would be entirely discordant from a Court that acknowledges that “the sum of an individual’s private life” can be contained in a single application on your cell phone.

The Supreme Court’s recent decision in Octane Fitness v. ICON has been hailed by patent reform advocates and some commentators as a death blow to so-called “patent trolls,” patent owners who enforce patent rights despite not actually using or licensing the patents in question.  In Octane Fitness, the Court relaxed the standard for awarding attorney’s fees in patent cases.  Many believe that patent trolls, as bad actors, will now run for the hills in fear of paying successful defendants’ fees.  The reality, however, is far more nuanced.  Indeed, patent trolls’ prevalence in United States courts could actually prevent any bright line application of the Octane Fitness rule to patent trolls.

The Octane Fitness Case

At issue in Octane Fitness was the application of a federal statute allowing district courts to award “reasonable attorney fees to the prevailing party” in “exceptional cases.”  The Federal Circuit Court of Appeals had previously interpreted the provision to require findings of “material inappropriate conduct” or that the losing party’s case was both “objectively baseless” and “brought in subjective bad faith.”  Justice Sotomayor, writing for a unanimous Court, found that test too narrow, noting that the attorney’s fees statute “imposes one and only one constraint on district courts’ discretion to award attorney’s fees in patent litigation: The power is reserved for ‘exceptional’ cases.’”  The Court held the statute applied more broadly:

“an ‘exceptional’ case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated. District courts may determine whether a case is ‘exceptional’ in the case-by-case exercise of their discretion, considering the totality of the circumstances.”

The Court also overturned the high “clear and convincing evidence” threshold, which the Federal Circuit had previously required litigants to satisfy to recover fees, finding that fees should be awarded if a party proves by a preponderance of the evidence that the case is “exceptional.”

Octane Fitness’ Impact

So, how severe a blow is this holding to the average patent troll?  The likelihood is:  Not as fatal as advertised.  Although a defendant that prevails in litigation against a patent troll will now have an easier time establishing that its case is “exceptional,” nothing in the decision suggests that cases brought by patent trolls, (patent owners who don’t use their patents) will automatically be more susceptible to a fee award than any other patent infringement litigant.  To the contrary, Octane Fitness, expressly states that “there is no precise rule or formula for making these determinations.”  Neither party in the Octane Fitness case was a patent troll, nor does the case discuss patent trolls even once.

Patent Trolls Are Not Automatically “Exceptional”

Those suggesting that Octane Fitness will dramatically alter the landscape of patent troll lawsuits, therefore, appear to be assuming that patent trolls, en masse, will fear the prospect of paying the defendants’ legal fees and opt against filing infringement suits.  But Octane Fitness provides patent trolls with plenty of room to maneuver.  The Court notes that “exceptional” means “uncommon, rare, or not ordinary.”  Patent trolls and their counsel, however, can point to substantial data refuting the proposition that their infringement suits are particularly “exceptional.”  A 2013 White House report states that 62% of all infringement suits are brought by patent trolls, who threatened more than 100,000 companies in the year prior to that report.  If such suits make up more than half of the patent suits in the federal courts, can they be said to be, by definition “uncommon, rare, or not ordinary”?

Some Patent Trolls May Be “Exceptional”

This is not to say that patent trolls will be immune from the attorney’s fees provision in question.  Far from it.  The point is simply that the strength of their cases, and the legitimacy of their litigation conduct will more likely be judged on a case-by-case basis.  The same White House report referenced above finds that many patent trolls engage in conduct that most district courts may find exceptional, including:  “focus[ing] on aggressive litigation, using such tactics as: threatening to sue thousands of companies at once, without specific evidence of infringement against any of them; creating shell companies that make it difficult for defendants to know who is suing them; and asserting that their patents cover inventions not imagined at the time they were granted.”

Nonetheless, couldn’t such conduct easily be described as “materially inappropriate” and the cases in question “objectively baseless” and “brought in subjective bad faith”?  If so, do patent trolls truly face an increased risk of paying defendants’ attorney’s fees?  Arguably not, and the prior standard clearly did little to dissuade patent troll infringement suits.

Additionally, defendants, and not only patent trolls, face a less exacting standard for having fees awarded against them.  If the troll has a valid patent and a strong case of infringement, therefore, Octane Fitness could make it twice as expensive for a defendant to fight, as the court could force the defendant to pay the troll’s fees.

In sum, the impact that Octane Fitness will have on patent troll lawsuits is far from clear.  Despite the public policy implications of such suits, they have become so ubiquitous that courts may not be able to deem them per se “exceptional.”  To the extent that the decision in Octane Fitness does result in fewer suits by patent trolls, arguably, the relaxed burden of proof (from clear and convincing to preponderance of the evidence) will have been  more significant than the Court’s revised definition of “exceptional.”  In any event, it is likely that infringement suits brought by patent trolls will continue to be decided on the merits of the particular case and the deftness of the attorneys on either side.