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If You Buy a Product Made With Stolen Trade Secrets, Are You a Misappropriator?

The National Law Journal has reported on a fascinating issue that is cranking its way through the California appellate courts - are customers who buy products made with misappropriated trade secrets liable for being misappropriators themselves? The issue is usually an academic one - rarely would a victim of trade secret misappropriation sue customers of the misappropriator. But, as you'll see below, that's exactly what Silvaco Data Systems did - they sued the misappropriator's customers:

Eyebrows were raised by Silvaco Data Systems Inc.'s aggressive move when it sued the customers of a software maker, Circuit Semantics Inc., that it had beaten in a trade secrets case.
Last week, one of those customers, Cypress Semiconductor Corp., notched a win in the long running fight. Santa Clara County Superior Court Judge Kevin Murphy granted summary judgment to Cypress, ruling that Silvaco didn't have the evidence to show that Cypress acquired or knew about the stolen trade secrets when it bought software from Circuit Semantics.

"At most, Cypress obtained software that was created using the purported trade secrets," Murphy wrote.

Silvaco had sued 12 semiconductor companies in 2003 and 2004 that bought CSI software, which is used to test computer chips, alleging that they should've known that it contained the computer code that CSI took from Silvaco. Seven settled, but Intel, Agilent, Cirrus Logic, Hewlett-Packard and Cypress fought the allegations. Intel, Agilent and Cirrus eventually won on summary judgment, and now Cypress joins them.

"We're extremely pleased with the court's decision and are now looking forward to victory on appeal," said Arturo Gonzalez, the Morrison & Foerster partner who represented Cypress.
Chris Scott Graham, the Dechert lawyer who represents Silvaco, said that with the decision, the state appeal court can now decide the issue of whether the third parties can be held liable in this case for trade secret misappropriation.

Rodger Cole, the head of Fenwick & West's trade secret practice, said he's not surprised that Silvaco wasn't successful at the trial court. "Unless there's evidence that the customer really knows about the fact of misappropriation, it's going to be hard to nail the customer," said Cole, who is not involved in the litigation.

Murphy originally ruled against Cypress on the same summary judgment motion in 2007. While Cypress appealed a separate issue involving the statute of limitations, Murphy granted summary judgment to Intel, Agilent and Cirrus. So MoFo asked him to reconsider his earlier decision on Cypress, which he did. "The court is of the view that it erred in denying Cypress's motion for summary judgment," Murphy wrote.

The issue on appeal following the summary judgment rulings is whether the customers, even if they didn't actually get Silvaco's trade secret source code, are still liable for trade secret misappropriation. Silvaco's lawyer, Graham, said they knew they were getting tainted software.

"There's no dispute that they knew," he said. "The code they were getting from CSI had been alleged to contain Silvaco trade secrets."

MoFo's Gonzalez said if they didn't get the trade secret, there's no case. "In order to violate the trade secrets act, you must actually have the secret," he said. "In this case, the secret is the source code, and we never got the source code."

Full post as published by Womble Trade Secrets Blog on February 19, 2009 (boomark / email).