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Tenth Circuit Affirms Permanent Injunction Barring Use of Trade Secrets in Software Case

Tuesday, July 26, 2011

ClearOne Communications, Inc. v. Bowers, No. 09-04092, 2011 BL 169413 (10th Cir. June 27, 2011) The U.S. Court of Appeals for the Tenth Circuit affirmed a district court judgment that plaintiff's former misappropriated trade secrets relating to computer software used to cancel echoes in telephone conferencing systems. The Tenth Circuit specifically affirmed the district court's grant of a permanent injunction preventing the defendants from using the trade secrets "forever," and an award of punitive damages in an amount equal to two times the actual damages.

ClearOne's Trade Secrets

ClearOne Communications, Inc. ("ClearOne"), formerly known as Gentner Communications Corp., is a Utah corporation that manufactures teleconferencing equipment. In 2000, ClearOne was seeking to acquire echo-cancelling computer software technology and approached a Massachusetts company called ClearOne, Inc. ("Old ClearOne"), which had developed a tabletop teleconferencing system using an echo-suppression program called "Honeybee." Ultimately, ClearOne purchased Old ClearOne for $3.7 million and assumed its name. Jun Yang and Andrew Chaing, then Old ClearOne employees, continued to work for ClearOne in Massachusetts to develop teleconferencing products. Later, Yang, Chaing and a third person, Donald Bowers, attempted to license echo-cancelling software to other audio equipment manufacturers. They initially used a "fictitious" company, Echonology, LLP, then formed an actual company, WideBand Solutions, Inc. ("WideBand"), and approached at least one audio equipment company, Biamp Systems, to offer a license to acoustic echo cancellation ("AEC") software. WideBand later introduced an AEC product in 2004. In the course of discussions with Biamp, Bowers stated that the algorithm in WideBand's AEC product had been functioning successfully in the market since before 2000. ClearOne eventually discovered WideBand's product and, following an investigation, it filed suit against WideBand, Bowers, Yang and Chaing in the U.S. District Court for the District of Utah, alleging misappropriation of trade secrets, breach of fiduciary duty, and related claims. A jury ruled in favor of ClearOne and awarded damages against Yang, Chaing, Bowers and their corporations in the amount to $956,000. The district court awarded punitive damages based on the trade secret misappropriation claim in the amount of two times compensatory damages. The court also entered a permanent injunction enjoining the defendants from disclosing, using, or transferring ClearOne's trade secrets. ClearOne later commenced contempt proceedings against WideBand and the individual defendants, alleging that they had transferred WideBand's assets to another sham corporation that was marketing the accused AEC products. The district court subsequently found the defendants in contempt, and the defendants appealed to the Tenth Circuit.

Tenth Circuit Affirms Injunction Scope and Punitive Damage Award

The Tenth Circuit affirmed the district court on each of the 14 issues raised in 12 consolidated appeals. In addition to affirming the judgment of liability for misappropriation of trade secrets and the contempt ruling, the court affirmed the scope of the permanent injunction granted by the lower court and its award of punitive damages. The court affirmed the award of injunctive relief permanently barring the Wideband defendants from using or disclosing ClearOne's trade secrets. The defendants argued that the injunction essentially prohibited them forever from entering the echo-cancellation marketplace. They further argued that the ClearOne trade secrets could be reproduced by anyone "reasonably versed in audio/echo cancellation software" in between three months to one year, and thus an injunction was not necessary to prevent the defendants from benefitting from any "head start" attributable to misappropriation. ClearOne at 31. The Tenth Circuit rejected the defendants' challenge to the perpetual permanent injunction. First, the court noted that the record and jury verdict did not support the assertion that the ClearOne software could be reproduced in three months to one year. In fact, ClearOne's witnesses testified at trial that any reproduction of the software would be "exceptionally difficult." Id. Second, the court rejected the suggestion that a person versed in the disputed technology would reproduce the exact same algorithm as that embodied ClearOne's software:
[R]egardless of how long it takes to develop a new AEC algorithm, the evidence presented at trial refutes the Appellants' suggestion that they, or anyone for that matter, could develop AEC software identical to the Honeybee Code. As ClearOne's witnesses explained at trial, there are a host of algorithmic and programming choices that can be made in developing competing AEC software, making it difficult, if not impossible, for two individuals working independently to produce the same algorithm.
Id. at 15. Noting that the Utah Uniform Trade Secrets Act authorizes the entry of injunctive relief for the "life of the trade secret at issue," the court noted that a perpetual injunction was appropriate based on the defendant's contemptuous conduct. Finally, the court rejected the defendants' argument that the injunction permanently blocked them from the echo-cancellation market, observing that, "nothing in the permanent injunction prohibits, or remotely purports to prohibit, Yang from creating, from scratch (or from publicly available materials), his own new and unique [noise cancelling] algorithms[.]" Id. at 34 The Tenth Circuit also rejected the defendants' argument that an injunction was inappropriate because money damages could remedy any injury to ClearOne caused by use or disclosure of the trade secrets. The court noted that the injunction was imposed to prevent likely future harm to ClearOne's competitive market position and goodwill, and since ClearOne would have difficulty collecting damages from the defendants, the injunction may constitute the most meaningful of the two forms of relief granted by the district court.

Tenth Circuit Affirms Award of Punitive Damages

The Tenth Circuit also affirmed the district court's award of punitive damages in an amount equal to two times the actual damages awarded for trade secret misappropriation. The court noted that the Utah Uniform Trade Secrets Act provides that a court may award "exemplary damages" in an amount up to two times actual damages if "willful and malicious misappropriation" exists. Utah Code Ann. § 13-24-4(1). The district court evaluated whether punitive damages were appropriate by weighing the factors used to determine enhanced remedies under the Patent Act for willful patent infringement. See Read Corp. v. Portec, Inc., 970 F.2d 1571, 1576 (Fed. Cir. 1992). The Tenth Circuit ruled that the district court appropriately considered these factors in deciding to award the maximum available punitive damages. Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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