April 04, 2005
Theft of Trade Secrets
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Jack Horgan - Contributing Editor

by Jack Horgan - Contributing Editor
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There have been two recent high profile cases of misappropriation of trade secrets in the EDA and Semiconductor industry, namely Lexar vs Toshiba and Synopsys vs Nassda. These individual cases are summarized below.

On March 23, 2005 Lexar Media, Inc., a marketer and manufacturer of high-performance digital media and accessories, today announced that after a six week trial, the jury found Toshiba Corporation and Toshiba America Electronic Components, Inc. liable of breach of fiduciary duty and theft of trade secrets and awarded Lexar over $380 million in damages. A day later the jury awarded Lexar an additional $84 million in punitive damages. The total amount is believed to be the largest intellectual-property verdict in California history and the third largest IP verdict in the United States.

Toshiba had invested in, held a board seat at and became a strategic partner of Lexar thereby gaining extensive access to Lexar confidential information. At the same time Toshiba was negotiating with and later entered into a joint venture with SanDisk, a Lexar competitor, to manufacture NAND flash memory.

Based on the jury's verdict and findings, Lexar intends to ask the Court for an injunction that bars the sale of Toshiba's products in the United States. Lexar will ask that the injunction include products that have been found to incorporate Lexar's trade secrets, including Toshiba's large and small block NAND flash chips, its CompactFlash, Secure Digital and xD Picture Card products.

Separately Lexar's case for patent infringement against Toshiba on more than ten of its patents remains pending in Federal Court.

Eric Whitaker, Lexar's EVP and general counsel, commented "This verdict validates Lexar's core intellectual property and contributions to the flash memory industry. It holds Toshiba accountable for its conduct - building Lexar's trust to acquire our technology and then betraying that trust to partner with our competitor and compete against us. It sends a clear message to Toshiba that this type of corporate conduct will not be tolerated - as a strategic partner and board member, Toshiba was required to act with the utmost good faith and fell far short of that standard."

The total award is 10 percent larger than Toshiba's estimated net profit of 45 billion yen ($423.2 million) for it fiscal year. On March 25, 2005 Toshiba issued a press release according to which:
“Toshiba believes that the verdict rendered by the jury was in error, and we plan to pursue all available legal avenues to correct it. Toshiba invented NAND flash memory technologies and has been a pioneer throughout its development. At this time, Toshiba does not plan to revise projections for fiscal 2004 business performance due to this matter.

Flash memory remains a strategic product for Toshiba, and one in which Toshiba owns the original technologies. Toshiba will continue to strongly promote its NAND flash business. “
In February 2000 Synopsys filed claims against Nassda in state and federal court based on the alleged facts and circumstances relating to the departure of the five founders of Nassda from their employment at Synopsys, the founding of their company and the development and sale of HSIM and other products. The claims included breach of contract, breach of fiduciary trust and misappropriation of trade secrets. In January 2003, the discovery referee issued orders creating rebuttable presumptions in favor of Synopsys on certain evidentiary issues to sanction defendants for erasure of certain computer files requested in discovery by Synopsys. In June 2004 the Discovery Referee issued new
orders that established as facts that: (i) the first 60,000 lines of source code of HSIM and all the ideas and concepts reflected therein, to the extent they were not publicly known, were copied or derived from Synopsys' source code or other Synopsys' materials while the individual defendants were employed by Synopsys and (ii) Nassda and the individual defendants acted in concert to intentionally alter, destroy, lose or misplace items requested in discovery and conceal evidence. Separately Synopsys had filed a complaint alleging HSIM software infringed their patent “Hierarchical Power Network Simulation and Analysis tool for reliability testing of Deep Submicron IC Designs”.

On November 30, 2004 Nassda and Synopsys entered into an agreement whereby Nassda will be acquired by Synopsys in an all cash transaction at $7.00 per share. The aggregate purchase price will be approximately $192 million, or approximately $92 million net of Nassda's estimated cash at closing. Upon closing, the Nassda officers, directors and employees who are defendants in the litigation between Synopsys and Nassda will make settlement payments to Synopsys in the aggregate amount of approximately $61.6 million and will not exercise options to purchase Nassda common stock valued at approximately $5.9 million. As a result of the litigation settlement, Nassda will record a one-time charge of
approximately $67.5 million in the quarter ended September 30, 2004.

On January 11, 2005 Synopsys Inc. and Nassda Corp. reported that the Federal Trade Commission had requested additional information and documentary material in connection with its review of the proposed acquisition of Nassda by Synopsys. As a result, the waiting period under the Hart-Scott-Rodino Act of will be extended. Nassda and Synopsys said they would respond promptly to the request.

Trade Secrets

Although the idea of patents was part of the US Constitution there was no federal statute that explicitly criminalized the theft of commercial trade secrets until 1996 when Congress passed and President Clinton signed the Economic Espionage Act of 1996 on October 11, 1996. Previously federal prosecutors were limited to using laws such as Interstate Transportation of Stolen Property Act, the Computer Fraud and Abuse Act and Mail and Wire Fraud statues to prosecute individuals for theft of trade secrets. In today's economy the value of a firm's intangible assets often far exceeds that of its tangible assets. At the same time the ability of someone using computers, high capacity portable
storage devices and the Internet to quickly and surreptitiously acquire and distribute this type of information is almost without limit.

The Economic Espionage Act of 1996 ("EEA") contains two separate provisions that criminalize the theft or misappropriation of trade secrets. The first provision is directed towards foreign economic espionage and requires that the theft of the trade secret be done to benefit a foreign government, instrumentality, or agent. The second provision makes criminal the commercial theft of trade secrets, carried out for purely economic or commercial advantage.

The commercial theft of trade secrets is described below (source: Department of Justice website)
a) Whoever, with intent to convert a trade secret, that is related to or included in a product that is produced for or placed in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will injure any owner of that trade secret, knowingly --
(1) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains such information;

(2) without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys such information;

(3) receives, buys, or possesses such information, knowing the same to have been stolen or appropriated, obtained, or converted without authorization;

(4) attempts to commit any offense described in paragraphs (1)through (3); or

(5) conspires with one or more other persons to commit any offense described in paragraphs (1) through (3), and one or more of such persons do any act to effect the object of the conspiracy,
shall, except as provided in subsection (b), be fined under this title or imprisoned not more than 10 years, or both.
A defendant convicted for commercial theft of trade secrets can be imprisoned for up to 10 years and fined $250,000 or both. Organizations found guilty under the EEA can be fined can be fined up to $5 million. The penalties for foreign economic espionage are considerably higher.

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-- Jack Horgan, EDACafe.com Contributing Editor.

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