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Genuine Issues of Material Fact Preclude SJ on Breach of Nondisclosure Agreement Due to Misuse of Confidential Information

September 24, 2009

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Last Month at the Federal Circuit - October 2009

Judges: Schall, Plager, Moore (author)

[Appealed from: C.D. Cal., Judge Marshall]

In Kara Technology Inc. v., Inc., Nos. 09-1027, -1028 (Fed. Cir. Sept. 24, 2009), the Federal Circuit vacated-in-part, reversed-in-part, and remanded the district court’s decision that, Inc. (“Stamps”) did not infringe various claims of U.S. Patent Nos. 6,505,179 (“the ’179 patent”) and 6,735,575 (“the ’575 patent”), owned by Kara Technology Incorporated (“Kara”), with its Pre-Version 5 (“Pre-V5”) or Versions 5 and later (“V5”) products, and that Stamps did not breach its nondisclosure agreement (“NDA”) with Kara.

Kara owns the ’179 and ’575 patents relating to apparatuses and methods of creating and verifying the authenticity of documents, such as postage. The patents concern technology that allows a customer to print a secured document (such as a stamp or an airline ticket) at home using preprinted label sheets. Stamps approached Kara to collaborate on Kara’s PC-based stamp technology, and in May 2000, they signed an NDA requiring Stamps to “keep secret and not disclose . . . and not use for its own use in any capacity whatsoever any Confidential Information for any purpose other than for the purpose for which such information was disclosed.” Slip op. at 3-4 (alteration in original) (citing NDA, ¶¶ 1, 3). Further, the NDA specifically provided that Stamps was not permitted to “make written, electronic, or photostatic copies or excerpts of or summaries of Confidential Information” without prior written consent from Kara. Id. at 4 (citing NDA, ¶ 5).

In July 2000, Stamps indicated it was no longer interested in pursuing a business relationship with Kara. In October 2001, Stamps announced that the U.S. Postal Service had approved beta testing of its PC-based postage product. The Pre-V5 product was launched commercially in July 2002 and the V5 line was launched in June 2005. In 2004, Kara brought suit against Stamps, alleging infringement and breach of contract.

Following a jury trial, the jury found that neither the Pre-V5 nor the V5 line of products infringed the asserted claims. The district court then entered judgment, holding that Stamps was the prevailing party. Kara subsequently filed a renewed JMOL motion that Stamps’ Pre-V5 product infringed claim 42 of the ’575 patent and claims 36, 38, and 42 of the ’179 patent, a motion for a new trial, a motion to strike the part of the July 16 judgment stating that Stamps was the prevailing party, and a motion to dismiss Stamps’ invalidity and unenforceability counterclaims. In September 2008, the district court denied the motions for a new trial and renewed JMOL, but granted the motion to strike the reference to Stamps as a prevailing party, entered judgment for Kara on the counterclaim of unenforceability, and dismissed the invalidity counterclaims without prejudice.

On appeal, the Federal Circuit vacated the judgment of noninfringement, concluding that the district court erred in construing the claims. The Court held that “[t]he central dispute concerns the meaning of the underlined language describing the creation and validation of the security indicia,” and “whether the security indicia must be created and validated under control of a key contained in the preestablished data.” Id. at 7. The Federal Court further added, “The disputed terms and phrases require that the information or data contained in the preestablished data be used to create and validate the security indicia, but contrary to the district court’s determination and’s arguments, they do not require a key or cryptographic key in the preestablished data.” Id. at 10. The Court then remanded the proceedings to the district court for further proceedings because “we do not . . . believe it would be appropriate to rule as a matter of law on the issue of the Pre-V5 infringement in the first instance in light of alternative arguments of noninfringement that presented to the jury.” Id. at 11-12.

The Court next analyzed whether the district court erred by granting the SJ motion, finding that the statute of limitations for the contract claim had run because the claim was barred by the four-year statute of limitations under the applicable state law (Texas state law), or, in the alternative, that the NDA did not protect Kara’s trade secrets. The Court stated that, assuming arguendo that the statute of limitations had not run, all alleged “confidential” information was in the public domain. Thus, Stamps could not have breached the NDA by copying and retaining the information learned through its business dealings with Kara.

Kara alleged two separate breaches of the NDA. The first was based on Stamps’ admitted note-taking during a May 2000 business meeting, in violation of paragraph 5 of the NDA. The second was based on Stamps’ alleged use of Kara’s confidential information to develop Stamps’ PC-based postage products, in violation of paragraph 3 of the NDA. In agreeing with the district court that the note-taking breach is barred by the statute of limitations, the Federal Circuit stated, “There is no real dispute that Kara knew or should have known of this breach at the time it occurred, as the meeting was attended by several of Kara’s employees, including its President and Chief Operating Officer. Kara did not file its complaint until October 22, 2004, and therefore any claim based on this breach is barred by Texas’s four-year statute of limitations.” Id. at 13.

Finally, the Federal Circuit reversed the district court’s grant of SJ on the breach of contract claim and remanded for further proceedings because “there are material issues of fact in dispute regarding breach of the NDA due to misuse of the confidential information.” Id. at 15. The Federal Circuit further added that material factual disputes existed concerning what was disclosed at a presentation by Kara employees and what one skilled in the art would have understood from Kara’s exhibit at a stamp expo. Id. The Federal Court further stated, “Because we conclude that the district court erred when construing the claims, we vacate the judgment of noninfringement and remand. Because the district court erred by granting [SJ] on the breach of contract claim when there exist disputes of material fact on’s alleged misuse of information,we reverse and remand.” Id. at 16.

Summary authored by Ceyda Azakli Maisami, student associate at Finnegan.