Court Dismisses Complaint Charging Misappropriation of Intellectual Property on Summary Judgment

• Posted on: Dec 31 2018

As new technologies are developed, and the exchange of ideas proliferate, the risk that a company’s trade secrets and ideas will be misappropriated has become a part of doing business. As discussed by this Blog in a prior post (here), businesses can find protection from the misappropriation of trade secrets in the Uniform Trade Secrets Act (adopted in some form by every state other than New York) and/or the common law. [On Aug. 10, 2018, Massachusetts adopted the UTSA. As a result, New York is the only state that has not adopted the UTSA, although there are two bills to adopt a version of the UTSA pending in the state legislature.]

In New York, when a plaintiff claims misappropriation of a trade secret, it must prove that: (1) it possessed a trade secret; and (2) the defendant used the trade secret “in breach of an agreement, confidence, or duty, or as a result of discovery by improper means.” Integrated Cash Management Services, Inc. v. Digital Transactions, Inc., 920 F .2d 171, 173 (2d Cir. 1990) (citation omitted); Smartix Intern. Corp. v. Mastercard Intern. LLC, 2010 N.Y. Slip. Op. 33786 (U) (Sup. Ct. New York County 2010), aff’d, 90 A.D.3d 469 (1st Dept. 2011).

To determine whether a plaintiff possesses a trade secret, the courts consider several factors: “(1) the extent to which the information is known outside of [the] business; (2) the extent to which it is known by employees and others involved in [the] business; (3) the extent of measures taken by [the business] to guard the secrecy of the information; ( 4) the value of the information to [the business] and [its] competitors; ( 5) the amount of effort or money expended by [the business] in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.” Ashland Mgmt. Inc. v. Janien, 82 N.Y.2d 395, 407 (1993) (quoting Restatement of Torts § 757, comment b). Moreover, a plaintiff that claims to have a trade secret must describe the alleged trade secret “with sufficient particularity, both at the time of disclosure and throughout the litigation.” Big Vision Private Ltd. v. E.I DuPont De Nemours & Co., 1 F. Supp. 3d 224, 257 (S.D.N.Y. 2014); Next Communs, Inc.v. Viber Media, Inc., 2016 U.S. Dist. Lexis 43525, at *9 (S.D.N.Y. 2016).

“An essential prerequisite to legal protection against the misappropriation of a trade secret is the element of secrecy.” Atmospherics, Ltd. v. Hansen, 269 A.D.2d 343, 343 (2d Dept. 2000). Information that is “readily ascertainable” is not afforded trade secret protection. Id.; see also Big Vision, 1 F. Supp. 3d at 270 (internal quotation marks and citation omitted) (“It is … well-established that information that is public knowledge or that is generally known in an industry cannot be a trade secret, including information that is available in publications”).

In addition to trade secrets, New York courts recognize a cause of action for the misappropriation of ideas. To prove a claim for misappropriation of ideas, a plaintiff must establish: (1) a legal relationship between the parties in the form of a fiduciary relationship, an express contract, implied contract, or quasi contract; and (2) that it possessed an idea that was novel and concrete. See Schroeder v. Pinterest Inc., 133 A.D.3d 12, 23 (1st Dept. 2015). “Novelty requires a showing of true innovation, not merely that a particular idea has not been used before.” Brown v. Johnson & Johnson Consumer Prods., Inc., 1994 WL 361444, at *3 (S.D.N.Y. 1994) (internal citation omitted), aff’d, 60 F.3d 811 (2d Cir. 1995). Thus, to be novel, an idea cannot be “a variation on a basic theme” already in the public domain. Paul v. Haley, 183 A.D.2d 44, 53 (2d Dept. 1992) (internal quotation marks and citations omitted) (“an idea which is a variation on a basic theme will not support a finding of novelty … [as] the mixture of known ingredients in somewhat different proportions – all the variations on a basic theme – partake more of the nature of elaboration and renovation than of innovation”); see also Ferber v. Sterndent Corp., 51 N.Y.2d 782, 784 (1980).

The plaintiff has the burden to establish “proof of novelty” and courts apply a “stringent test” in determining whether an idea qualifies as novel. See Paul, 183 A.D.2d at 53. A “[l]ack of novelty in an idea is fatal to any cause of action for its unlawful use.” Id. at 52 (internal quotation marks and citation omitted).

On December 5, 2018, Justice Saliann Scarpulla of the Supreme Court, New York County, Commercial Division issued a decision in Hyperlync Technologies, Inc. v. Verizon Sourcing LLC, 2018 N.Y. Slip Op. 33123(U) (here), dismissing claims, on summary judgment, for misappropriation of trade secrets and ideas.

Hyperlync Technologies, Inc. v. Verizon Sourcing LLC

Background

In 2013, Hyperlync developed a peer-to-peer phone provisioning app named the Phone Cloner (“Phone Cloner”). In March of that year, Hyperlync presented the Phone Cloner concept to Verizon. Thereafter, Joseph Berger (“Berger”), an employee of Verizon, told Hyperlync that Verizon was interested in the Phone Cloner. In response, Hyperlync gave a PowerPoint presentation and conducted additional meetings with Verizon at which Hyperlync gave functioning versions of the app as well as technical information for testing. Hyperlync alleged that it disclosed the Phone Cloner secret phone-to-phone transfer process to Verizon pursuant to a non-disclosure agreement (“NDA”) the parties signed on October 12, 2012.

In August 2013, a Verizon employee, Vishal Grover (“Grover”), gave a demonstration of the Phone Cloner at a Verizon “innovation fair” in Walnut Creek, California (the “Walnut Creek Meeting”). Prior to the Walnut Creek Meeting, Grover was trained by Hyperlync on the operation of the Phone Cloner. At the meeting, Grover displayed a poster containing screen shots of the Phone Cloner’s interface.

The Walnut Creek Meeting was attended by Verizon employees and an outside guest, Sanjeev Bhalla (“Bhalla”), the owner of Strumsoft, a Verizon vendor at the time.

Following the Walnut Creek Meeting, Bhalla sent an email to two employees of defendant Synchronoss Technologies, Inc. (“Synchronoss”), a competitor of Hyperlync, informing them that a “content transfer” app was demonstrated at the meeting. The email did not reference Hyperlync or the Phone Cloner. Synchronoss ultimately acquired Strumsoft and Bhalla became the former’s employee. Bhalla testified that he neither received materials/information from Verizon regarding Phone Cloner or any peer-to-peer provisioning technology nor worked on any phone provisioning app while at Synchronoss.

Hyperlync claimed that, in September 2013, Grover told a Hyperlync employee, Stephen Morrow (“Morrow”), that Verizon gave Hyperlync’s confidential Phone Cloner information to Synchronoss and instructed it to copy the product. According to the Court, Hyperlync’s witnesses were unable to identify the specific information that was allegedly passed to Synchronoss.

Hyperlync also claimed that Grover allegedly informed Hyperlync that Verizon planned to give any peer-to-peer provisioning contract to Synchronoss instead of Hyperlync. In October 2013, Verizon declined Hyperlync’s terms for continued development of the Phone Cloner.

Hyperlync contended that after Verizon disclosed Hyperlync’s trade secret information to Synchronoss in breach of the NDA, Synchronoss then released its own phone provisioning app, named MCT, based on the misappropriated Hyperlync information. Hyperlync maintained that the MCT app had the same functionality, look and feel as the Phone Cloner.

Verizon moved to dismiss Hyperlync’s claims and in a decision dated February 17, 2016 (the “February 2016 Decision”), the Court granted the motion as to the claims for intentional interference with a contract, civil conspiracy, conversion and fraudulent concealment. In the February 2016 Decision, the Court also denied Verizon’s motion to dismiss as to Hyperlync’s claims for misappropriation of trade secrets, breach of contract, and misappropriation of ideas.

Verizon moved, pursuant to CPLR 3212, for summary judgment on the remaining three claims alleged against it.  The Court granted the motion.

The Court’s Decision

The Court held that Hyperlync failed to identify a trade secret that had been misappropriated. The Court noted that notwithstanding the “voluminous papers and exhibits,” Hyperlync “failed to describe its trade secret with the requisite particularity.” Instead, Hyperlync merely described a “general interface, speed, and platform[-]to[-]platform transfer without [the] use of the cloud.” Without a specific description indicating “why or how these facets of its model are unique, proprietary, and secret,” the Court concluded that Hyperlync’s “explanation of its trade secret [was] nebulous at best….”

The Court also held that Hyperlync failed to demonstrate a misappropriation as a consequence of Verizon’s alleged violation of the NDA. The Court found that Hyperlync failed to submit “any documents or testimony to raise an issue of fact” demonstrating that “the ‘how to’ of the Phone Cloner app was passed to Verizon.” This finding was underscored by Hyperlync’s admission that Morrow could not clearly state “what information he gave to Verizon about the Phone Cloner,” and Morrow’s testimony “that Hyperlync did not disseminate any source code associated with Phone Cloner.”

Finally, the Court held that Hyperlync failed to demonstrate that “the Phone Cloner’s bundle of functionality was unlike other products on the market.” “In fact,” the Court noted, deposition testimony “confirmed that the idea for data transfer between two phones via Wi-Fi was already in the public domain at the time of the Phone Cloner app,” and documentary “evidence” presented by Verizon showed that there were a number of “applications for Wi-Fi data transfer” that “pre-dated Phone Cloner.…”

In holding that Hyperlync failed to demonstrate the misappropriation of ideas, Justice Scarpulla declined to follow Nadel v. Play-By-Play Toys & Novelties, Inc., 208 F.3d 368 (2d Cir. 2000), in which the Second Circuit held that the standard for determining novelty should be judged by the buyer, because no New York State court had adopted that standard. According to the Court, only one state court (Lapine v. Seinfeld, 918 N.Y.S.2d 313, 321 (Sup. Ct. N.Y. County 2011)) addressed Nadel and concluded that it incorrectly interpreted Apfel v. Prudential-Bache Secs. Inc., 81 N.Y.2d 470 (1993), decided by the New York Court of Appeals.  Thus, “[i]n the absence of any state court decisions supporting the “novelty to the buyer” standard, [the Court] decline[d] to follow Nadel.”

Takeaway

Trade secrets and ideas, because they’re intangible, are prone to misappropriation. New York courts will protect them if the plaintiff can satisfy its burden of demonstrating secrecy and novelty. As Hyperlync demonstrates, meeting this burden is not easy.

Tagged with: Business Litigation, Commercial Litigation, Misappropriation Of Ideas, Misappropriation Of Trade Secrets, Trade Secrets, Uniform Trade Secrets Act