California Court of Appeals, First District, Fifth Division
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Superior Court of San Mateo County, No. CIV467662, Marie S. Weiner, Judge.
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Morrison & Foerster, Miriam A. Vogel, Bryan J. Wilson, Roman A. Swoopes and Daniel Wan for Defendant and Appellant.
Millstone Peterson & Watts, Glenn W. Peterson; Costello Law Corporation and John P. Costello for Plaintiff and Respondent.
Trade secret protection “ ‘promotes the sharing of knowledge, and the efficient operation of industry, ’ ” by “ ‘permit[ting] the individual inventor to reap the rewards of his labor by contracting with a company large enough to develop and exploit it.’ [Citation.]” (DVD Copy Control Assn., Inc. v. Bunner (2003) 31 Cal.4th 864, 878 [4 Cal.Rptr.3d 69, 75 P.3d 1] (DVD Copy Control).) Trade secret law allows the inventor to disclose an idea in confidential commercial negotiations certain that the other side will not appropriate it without compensation. “[T]he holder of the secret, [may] disclose information he would otherwise have been unwilling to share, and [this] permits business negotiations that can lead to commercialization of the invention or sale of the idea, serving both the disclosure and incentive functions of [intellectual property] law.” (Lemley, The Surprising Virtues of Treating Trade Secrets as IP Rights (2008) 61 Stan. L.Rev. 311, 336-337, fns. omitted.)
Appellant and defendant Konica Minolta Systems Laboratory, Inc. (KMSL) is a research and development subsidiary of a multinational corporation that, among other things, manufactures multifunction printers (also known as multifunction peripherals) (MFP’s) and other devices with printing, scanning, and copying functionalities. Respondent and plaintiff Altavion, Inc. (Altavion), is a small company that invented a process for creating self-authenticating documents through the use of barcodes that contain encrypted data about the contents of the original documents. The trial court concluded that KMSL misappropriated trade secrets disclosed by Altavion during negotiations aimed at exploiting Altavion’s technology. The negotiations were subject to a nondisclosure agreement and centered around the possibility of embedding Altavion’s invention in one of KMSL’s MFP’s. During the negotiations, the invention was described as Altavion’s “digital stamping technology” (DST). After the negotiations failed, Altavion discovered KMSL had filed for patents encompassing Altavion’s DST. Altavion brought suit and, following a bench trial, the trial court found KMSL misappropriated Altavion’s trade secrets—both Altavion’s DST concept as a whole and specific DST design concepts. The court awarded Altavion damages, prejudgment interest, and attorney fees.
On appeal, KMSL contends it was improper for the trial court to base its ruling on misappropriation of Altavion’s DST concept as a whole, and any other trade secrets the court found misappropriated were not adequately identified in the court’s decision. KMSL further contends Altavion’s DST was not protectable as a trade secret, either as a combination secret or as particular design concepts, because ideas and design concepts are not protectable trade secrets. Moreover, KMSL contends Altavion did not show the ideas
were kept secret or had independent economic value. KMSL also challenges the trial court’s award of damages, prejudgment interest, and attorney fees. We reject KMSL’s contentions and affirm the trial court’s judgment.
From the voluminous record in the present case we set forth only those facts relevant to resolution of the issues on appeal. We recite the facts in the manner most favorable to the judgment and resolve all conflicts and draw all inferences in favor of respondent Altavion. (SCI California Funeral Services, Inc. v. Five Bridges Foundation (2012) 203 Cal.App.4th 549, 552-553 [137 Cal.Rptr.3d 693]; see also Pool v. City of Oakland (1986) 42 Cal.3d 1051, 1056, fn. 1 [232 Cal.Rptr. 528, 728 P.2d 1163].) Conflicts in the evidence are noted only where pertinent to the issues on appeal. (Pool, at p. 1056, fn. 1; SCI California Funeral Services, Inc., at p. 553.)
Dr. Ali Moussa is the President and founder of Altavion. He founded Altavion in 2000 with the goal of developing DST to enable the self-authentication of digital and paper documents.
Altavion’s DST was designed to encode the content of an original document into a small (maximum 1" x 1") barcode (also called a “stamp”) printed on the document. In order to create the barcode, a scanned
version of the original document would be divided into cells and the pixel-level data about each cell would be represented in the barcode in a highly compressed form. By comparing the data encrypted in the barcode with a subsequent version of the document, Altavion’s DST would show whether and where the document had been altered by searching for alterations at the pixel-level. Because the barcode would permit the document to be authenticated without involvement of a third party, Altavion claimed its DST would create “self-authenticating” documents. Altavion’s DST was implemented by software programmed to execute the algorithms necessary to perform the various barcode creation and authentication functions.
Altavion’s barcode, and especially its color barcode, could contain far more data in a small space than existing barcodes. Grayscale or color barcodes, as compared to black and white barcodes, represent data with higher density, enabling more data to be represented in a given area. However, the development of a color barcode presented a distinct technical challenge because over time the colors on a printed barcode are subject to degradation, which can inhibit read back of the data contained in the barcode. Altavion resolved this problem by using “color reference cells” to aid in reconstruction of the encoded data. The company’s implementation of the approach was unique, in that Altavion’s barcode employed multiple reference cells for each color, and by an averaging process a range of values could be determined to represent each color.
Altavion’s Relationship With KMSL
KMSL is a research and development company that develops technologies for its parent company, Konica Minolta Business Technologies, Inc., which, among other things, manufactures products including MFP’s that can copy,
scan, and print documents. Some of the KMSL personnel involved in the events underlying this case include KMSL’s president, Hiroshi Tomita, former consultant Paul Cattrone, computer scientist Dr. Wei Ming, and software engineer Vivek Pathak. Tomita handled the business negotiations with Altavion; Cattrone was hired in February 2004 to manage the digital stamping project; Ming helped evaluate Altavion’s DST; and Pathak was hired in September 2004 to help develop KMSL’s own DST.
Altavion was introduced to KMSL through William Zivic, a salesman employed at the time by Minolta Business Solutions. Although the terms of the agreement are unclear, in July 2003 Altavion and KMSL entered into a nondisclosure agreement (NDA), in which the companies agreed that any confidential information disclosed during their subsequent negotiations would be kept confidential. Prior to discussions with Altavion, KMSL had no digital stamping projects in progress or products in development. Indeed, Tomita admitted “the first consideration [he] had ever given to [DST] was brought about by [his] discussions with Altavion.”
KMSL’s interest in Altavion’s DST was in developing technology for authenticating printed documents, rather than for documents that remain only in a digital environment. For a variety of reasons, it is more difficult to authenticate printed documents than electronic documents (an issue known as the “closed loop problem”). For example, an expert for KMSL at trial explained that problems can arise in the printing, storage, and scanning processes that make it more difficult to authenticate a paper document with a stamp.
In a December 15, 2003 letter to Moussa, Tomita wrote, “At [KMSL] we are studying using your unique technology for digital stamping for possible use in multiple applications in current and future products and for jointly developing it further for even better utilization.” The parties sought to
negotiate terms by which Altavion’s DST could be embedded in a KMSL MFP. Altavion and KMSL discussed the possibility of a pay-per-stamp revenue model.
KMSL consultant Cattrone assesssed evaluation software provided by Altavion and authored a report entitled “Altavion Digital Stamping Software Evaluation.” The report concluded, “Altavion is the first available solution for creating a machine readable authentication barcode which can be later used to not only authenticate the document, but on false authenticity locate the areas within the document where tampering or alteration has occurred.” In reporting the testing results, the report stated, “In all cases, the verification software was able to successfully authenticate unaltered digital documents. For most cases, when a document was found to be altered and not authentic, the software was able to successfully identify the areas within the document—graphic or text—which had been tampered with.” The report also identified further areas for evaluation and stated that Altavion’s technology “does contain a number of problems and functional anomalies in its current implementation in both the stamp creation and integrity checking software components.”
A February 27, 2004 KMSL project development planning report (February 2004 planning report) articulated KMSL’s project development strategy employing Altavion’s DST. It stated, “This project will develop a Digital Stamping solution for use as a Konica-Minolta document authentication security technology. The solution will be built as two SDKs—Digital Stamp Creation SDK and Digital Stamp Authentication & Integrity Check SDK. Both SDKs will be built around a digital stamping core functionality component. Altavion will provide the core functionality component as they have a patent pending digital stamping technology which can create and verify authentic documents as well as discover tamper locations in unauthentic documents. With Altavion technology a small amount of essential data extracted from the image is required and can be encoded into a digital stamp as small as ½" x ½". [KMSL] will drive the development of Altavion’s core technology to provide Konica[-]Minolta with a solution that satisfies the basic requirements for creation and verification of a digitally stamped document.” It also stated, “By developing [an] SDK around Altavion’s digital stamping
core technology, Konica-Minolta will develop competing patentable technologies and marketable products which work to close the Printer/Scanner Loop to provide document authenticity and integrity validation regardless of digital or print form.”
The February 2004 planning report distinguished Altavion’s digital stamping process from a process patented by a competitor, Canon Inc., stating “The amount of data required to authenticate and verify integrity with the Altavion method is their key differentiating technology. Where as the Canon patent reduces the original document size in its approach to embed 2D barcodes, the Altavion solution does not apply any transformation to the original document as the stamp can be generated as small as ½" x ½".” The February 2004 planning report also included a “[p]atent application plan, ” indicating that “a patent could be filed which describes an Altavion technology based method for creating self-authentic[ating] with embedded integrity data documents which can be authenticated from digital or print form.”
In an April 1, 2004 e-mail, KMSL proposed to pay Altavion a fee for development of an SDK for a KMSL machine and further development of Altavion’s grayscale and color barcodes. In e-mail communications on April 21 and 22, KMSL and Altavion discussed the possibility of a $400, 000 fee, although it was contingent on an evaluation of Altavion’s software. On April 27 and May 11, KMSL paid a total of $50, 000 to Altavion for new evaluation software. The new software addressed some of the issues raised and enhancements requested in Cattrone’s evaluation of the previous version of the software.
On August 31, 2004, KMSL and Altavion executed a memorandum of understanding (MOU), which stated that KMSL “will continue to recognize that Altavion’s unique implementation of [DST] is Altavion’s own intellectual property and will continue to protect [it].” Unbeknownst to Altavion, even before execution of the MOU, KMSL had already begun filing a series of patent applications encompassing Altavion’s DST. Specifically, on June 28 and August 9, 2004, KMSL filed patent applications for color barcode producing methods, with KMSL’s Ming listed as the inventor on the June application and Ming and Tomita listed as inventors on the August application. Both applications described a method “to keep the integrity or authenticity of the color barcode” through the use of color reference cells in the barcode. KMSL ultimately filed 24 United States DST patent applications,
and eight United States patents were issued. The patents and applications identified varying combinations of Tomita, Ming, Cattrone, and Pathak as inventors.
The trial court ultimately found that KMSL “had no idea, interest or information about DST... or use of bar codes prior to their dealings with” Altavion. Among other things, the trial court rejected as unreliable the meager evidence that Tomita and Ming independently developed the DST concepts reflected in KMSL’s patents. KMSL does not dispute those findings on appeal.
In September 2004, shortly after execution of the MOU, KMSL hired software engineer Pathak to work on the digital stamping project and, specifically, to develop “closed loop technologies.” Pathak had access to the evaluation software provided by Altavion. In a September 17 e-mail to Tomita, Cattrone said he had “asked [Pathak] to analyze the Altavion software and think about ways in which we can achieve similar results with the focus on a closed loop digital stamp.” He also wrote, “[Pathak] understands and knows well that there are many ways to achieve similar Altavion’esque results within the digital domain.” The e-mail also asserted there were problems in the relationship with Altavion. For example, Cattrone opined, “It is unlikely that we will get a digital stamping SDK from Altavion in the near future—our signing of the MOU meant nothing to [Moussa].”
KMSL and Altavion reached an impasse in their negotiations in the fall of 2004. The parties were unable to agree on the terms for KMSL’s payment of a development fee to Altavion, or the scope of an SDK to be provided to KMSL.
The Present Lawsuit
In October 2006, Moussa learned about KMSL’s patent filings. In November 2007, Altavion filed the present lawsuit. In the second amended and operative complaint (Complaint), Altavion sued KMSL, Cattrone, and four other Konica Minolta entities (see fn. 4, ante). Altavion alleged causes of action for trade secret misappropriation, breach of the NDA, and a variety of other torts. KMSL filed a cross-complaint alleging (among other things) fraud based on Moussa’s false statements that he had applied for patents.
By the time of trial, the only remaining Altavion causes of action were for breach of the NDA and for misappropriation of Altavion’s trade secrets. The trial court issued a tentative statement of decision in July 2011 and a final statement of decision (FSOD) in November. The court ruled in favor of
KMSL on Altavion’s claim for breach of the NDA and in favor of Altavion on KMSL’s fraud claim. Neither of those two claims is at issue on appeal.
The court found in favor of Altavion and against KMSL (but not against the other Konica Minolta defendants) on Altavion’s misappropriation claim. The trial court awarded damages of $1 million and prejudgment interest of $513, 400, for a total of $1, 513, 400. After further proceedings, the trial court awarded attorney fees to Altavion in the amount of $3, 297, 102.50, as well as amounts for expert fees and costs. The court also awarded costs to three of the Konica Minolta companies that had not been found liable for misappropriation.
I. Summary of Trade Secret Law
In 1984, the Legislature “adopted without significant change” the Uniform Trade Secrets Act (UTSA) (Civ. Code, § 3426 et seq.). (DVD Copy Control, supra, 31 Cal.4th at p. 874; Cadence Design Systems, Inc. v. Avant! Corp. (2002) 29 Cal.4th 215, 221 [127 Cal.Rptr.2d 169, 57 P.3d 647]; Trade Secrets Practice in Cal. (Cont.Ed.Bar 2d. ed. 2013) § 1.2, p. 1-2.) Nearly all states have adopted the UTSA; although there are some variations, case law applying UTSA enactments in other states is generally relevant in applying California’s UTSA. (K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc. (2009) 171 Cal.App.4th 939, 955 [90 Cal.Rptr.3d 247]; Trade Secrets Practice in Cal., supra, § 1.2, p. 1-2.)
The UTSA “creates a statutory cause of action for the misappropriation of a trade secret.” (Brescia v. Angelin (2009) 172 Cal.App.4th 133, 143 [90 Cal.Rptr.3d 842].) The statute defines a trade secret as “information, including a formula, pattern, compilation, program, device, method, technique, or process, that: [¶] (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and [¶] (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” ...