By Jason C. Schwartz, Alexander H. Southwell, and Molly T. Senger
Gibson, Dunn & Crutcher, Washington, D.C. and New York

INTRODUCTION

Information security has become one of the top priorities for corporate executives and board members in 2012, according to a November 2011 survey from the Corporate Executive Board Co. See Emily Chasen, Information Security Jumps to Top Priority for Audit Committees (Nov. 28, 2011), available at blogs.wsj.com.

And with good reason.

A recent report by the U.S. Office of the National Counterintelligence Executive found that “FIS [Foreign Intelligence Services], corporations, and private individuals increased their efforts in 2009-2011 to steal proprietary technologies, which cost millions of dollars to develop and represented tens or hundreds of millions in potential profits.” See U.S. Office of the National Counterintelligence Executive, Foreign Spies Stealing U.S. Economic Secrets in Cyberspace: Report to Congress on Foreign Economic Collection and Industrial Espionage, 2009–2011 (Oct. 2011), available at dni.gov.

Indeed, a survey published in USA Today in November found that as many as 17 percent of persons polled admitted that they would disclose their company’s secrets for money, while another 8 percent confessed that they had already done so. See USA TODAY Snapshots® (Nov. 20, 2011) (citing Monster.com survey), available at scoop.it.

The growing need for U.S. companies to protect their trade secrets and other confidential, proprietary information is illustrated by the increasing number and significance of trade secret and related litigation over the past year. 2011 saw several high-stakes jury trials resulting in substantial damages awards to victims of trade secret misappropriation, such as the $920 million award to DuPont in its suit against Kolon Industries over Kevlar-related technologies, and the $310 million award to MGA Entertainment in its long-standing dispute with Mattel over the successful line of Bratz dolls.

The Department of Justice also brought a number of significant criminal prosecutions for trade secret theft and economic espionage in 2011, many involving defendants allegedly acting on behalf of foreign state-owned entities. In addition, 2011 bore witness to several significant judicial decisions impacting trade secret law, including a noteworthy ruling from the U.S. Court of Appeals for the Ninth Circuit regarding the scope of the Computer Fraud and Abuse Act— which is currently being reconsidered by the Ninth Circuit en banc—and a December 2011 decision from the Eighth Circuit, which may serve to expand what constitutes a protectable trade secret under the Uniform Trade Secrets Act.

We highlight these and other significant 2011 developments below, first addressing civil developments and then criminal developments…

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By Alexei Alexis

Online privacy is expected to remain a hot topic in 2012, but it is unlikely that Congress will enact any major reforms in such a complex and unsettled area during an election year, observers tell Bloomberg BNA.

Privacy is expected to be an ongoing focus of congressional hearings with the Senate Commerce, Science, and Transportation Committee and the House Energy and Commerce Committee in particular weighing the need to protect consumers’ online personal data. While privacy bills are pending before both panels, and the Obama administration is finalizing its own proposal, key Republicans remain concerned about the potential impact on the business community.

“Short of a cataclysmic privacy event, I don’t see a comprehensive bill passing in 2012,” Lisa Sotto, head of the privacy and information management practice at Hunton & Williams, told Bloomberg BNA. “I do think we will see continued discussions that will build momentum toward passage of such legislation in a few years.”

For now, Sotto said, companies can expect the Federal Trade Commission to remain active on enforcement: “There’s no question that the FTC will continue to be active and probably step up formal enforcement activities.”

Behavioral Ad Legislation Momentum Waning?

Top committee Democrats have called for legislative action to address key privacy concerns, such as tracking of consumers’ web-surfing habits for behavioral advertising.

Dan Jaffe, executive vice president of government relations at the Association of National Advertisers, said industry has made progress toward convincing lawmakers that self-regulation can effectively address privacy concerns over behavioral advertising. “We’re hopeful that self-regulation, not regulation, will continue to be the focus in 2012,” he said.

Zaneis said that “with industry self-regulation beginning to succeed, there’s less pressure to move legislation. I don’t see any part of this dynamic changing in 2012.”

Early in 2011, the Senate Commerce Committee launched a series of oversight hearings on privacy. In May 2011, Sen. John D. Rockefeller IV (D-W.Va.), the panel’s chairman, introduced a “do-not-track” bill (S. 913) that would make it easier for consumers to avoid having their online activities followed by companies. Since then, however, he has not announced any specific markup plans.

Asked about Rockefeller’s position going into 2012, a committee spokesman said: “Consumers are still without sufficient safeguards to protect their privacy online. They need easy-to-use mechanisms, such as an opt-out option, when surfing their favorite websites. Ultimately, the Chairman believes that consumer privacy is a right, not a luxury, and that legislation is needed to empower consumers to protect their personal information from companies surreptitiously collecting and using that personal information for profit.”

However, the spokesman said it was too early to discuss specific committee plans for the new year.

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By Thomas Hanusik and Rebecca Baden, Crowell & Moring

The Supreme Court’s 2005 decision in Dura Pharmaceuticals, Inc. v. Broudo is the seminal authority on the appropriate measure of loss caused by a defendant’s fraudulent conduct in a civil securities fraud action. Under the Dura standard, a plaintiff must provide actual evidence that the defendant’s conduct proximately caused the plaintiff’s losses. The Dura standard thus requires “loss causation.” Less clear is whether this same standard should drive a federal sentencing court’s determination of actual losses when calculating a defendant’s sentence under the federal guidelines. The Fifth and Second Circuits have held that Dura’s “loss causation” standard applies to federal sentencing for securities fraud cases, but the Ninth Circuit has refused to adopt this same approach and a circuit split has developed as a result.

Loss Causation under Dura Pharmaceuticals

In 2005, a unanimous Supreme Court decided Dura Pharmaceuticals, Inc. v. Broudo, an important decision with significant ramifications for “fraud-on-the-market” private securities litigations.  The Dura Court held that a private plaintiff claiming to be the victim of a “fraud-on-the-market” scheme must both plead and prove that the defendant’s fraud proximately caused her to suffer economic loss.  In so holding, the Dura Court overruled the Ninth Circuit, which had found that a stock’s inflated purchase price sufficiently proved the plaintiff’s economic loss.  In rejecting the Ninth Circuit’s analysis, the Dura Court emphasized that any plaintiff alleging securities fraud must establish traditional notions of proximate causation, and that an inflated purchase price alone is not enough to make that showing.

The Dura Court identified three distinct rationales for rejecting the notion that an inflated purchase price alone could establish the requisite proximate loss causation. First, the Court relied on what it referred to as “pure logic.”  Second, the Court considered the similarities between securities litigation and common law misrepresentation claims, and analogized their respective proximate cause analyses.  Third, the Court found that Congress’ intent in enacting the Private Securities Litigation Reform Act of 1995 militated against the Ninth Circuit’s interpretation of loss.

Second, according to the Dura Court, securities fraud actions have common law roots. And, at common law, a successful plaintiff in a misrepresentation action must prove that a defendant’s conduct caused her to suffer actual loss.  Because an inflated purchase price neither demonstrates that a plaintiff has suffered actual loss, nor that any potential loss was caused by the defendant’s conduct, it is insufficient to support an action for fraud.  To allow a “fraud-on-the-market” claim to proceed based on allegations that do nothing more than identify an inflated purchase price would violate this basic tenet of common law.

Third, the statute enabling plaintiffs to bring claims based on a “fraud-on-the-market” theory evidences Congress’ intent to provide for a recovery only where a plaintiff demonstrates that the defendant’s conduct proximately caused her to suffer an actual loss.  When enacting the Private Securities Litigation Reform Act of 1995, the Court found that Congress “expressly impose[d] on plaintiffs the burden of proving that the defendant’s misrepresentations caused the loss for which the plaintiff seeks to recover.”  “By way of contrast, the Ninth Circuit’s approach would allow recovery where a misrepresentation leads to an inflated purchase price but nonetheless does not proximately cause any economic loss.”  Having found that proximate cause was a requirement, the Court rejected the Ninth Circuit’s approach…

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By Nancy J. Moore

A federal grand jury in New York Jan. 3 indicted three Swiss men working as client advisers to a Swiss bank for helping U.S. taxpayers hide more than $1.2 billion in assets (United States v. Berlinka, S.D.N.Y., No. 12-CR-002,indictment 1/3/12).

Michael Berlinka, Urs Frei, and Roger Keller, along with others not named in the indictment, were charged with conspiracy to defraud the United States, impede the Internal Revenue Service, and evade income taxes.

The case was filed in the U.S. District Court for the Southern District of New York and assigned to Judge Jed Rakoff.

According to the pleadings, the three advisers worked for the Zurich branch of “Swiss Bank A,” which began actively recruiting U.S. customers in 2008 after another bank, UBS AG, lost U.S. accounts due to an IRS investigation and eventual litigation.

Swiss Bank A does not have an office in the United States, and the advisers represented that it would be able to keep account information private under Swiss banking law and would not be subject to the same actions as were taken against UBS, which has U.S. offices.

U.S. taxpayers are required to provide information on any foreign bank account with a value of more than $10,000. They are also required to report all income earned worldwide…

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By Ari Natter

WASHINGTON, D.C.—The Department of Energy Dec. 29 said it will waive “Buy American” requirements contained in the American Recovery and Reinvestment Act for several products after determining the goods were unavailable in satisfactory quantity in the United States.

In two separate notices of limited waivers published in the Federal Register, the Energy Department waived Buy American requirements.

By Andrew Childers

WASHINGTON, D.C.—The Environmental Protection Agency is proposing revisions to its methods for allocating consumption and production allowances for two hydrochlorofluorocarbons for 2012 through 2014 in response to a 2010 federal court decision.

The proposed rule, to be published in the Federal Register Jan. 4, would establish company-by-company baselines for HCFC-22 and HCFC-142b production and consumption.

It would also clarify the procedures for intercompany transfers of the ozone-depleting substances, EPA said. The revised system would account for transfers of the ozone-depleting substances between companies, something EPA had previously eliminated from its calculations.

Under the proposed rule, EPA would continue to allocate HCFC-22 and HCFC-142b allowances based on the projected needs for those compounds while encouraging companies to recycle and reclaim existing stores of the substances. That could result in fewer allocations for HCFC-22, EPA said.

As part of the Montreal Protocol on Substances That Deplete the Ozone Layer, the United States is required to eliminate the use of HCFCs, ozone-depleting gases that also contribute to global warming, by 2030. Hydrochlorofluorocarbons are commonly used as refrigerants…

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By Perry J. Saidman, SAIDMAN DesignLaw Group, Silver Spring, Md

It is no longer possible to remain silent while design patents are drowning in the wake of the Federal Circuit’s opinion in International Seaway Trading Corp. v. Walgreens Corp.

The court made the following statements in Seaway regarding anticipation and obviousness in the design patent context:

1. “[T]he ordinary observer test must logically be the sole test for anticipation.”

2. “For design patents, the role of one skilled in the art in the obviousness context lies only in determining whether to combine earlier references to arrive at a single piece of art for comparison with the potential design or to modify a single prior art reference. Once that piece of prior art has been constructed, obviousness, like anticipation, requires application of the ordinary observer test, not the view of one skilled in the art.”

Following is a discussion of the maelstrom created by these two issues…

By Brett Coburn and Wes R. McCart, Alston & Bird, Atlanta

Nov. 21, 2011 marked the two-year anniversary of the effective date of the Genetic Information Nondiscrimination Act (GINA), which imposes limitations and special requirements on an employer’s acquisition and use of the genetic information of its employees. This article assesses the impact that GINA has had on employers by examining regulatory and judicial developments regarding the statute over the past two years, as well as recent efforts by several states to implement similar requirements at the state law level.

Summary of GINA’s Statutory and Regulatory Requirements

President Bush signed GINA into law on May 21, 2008 (7 PVLR 778, 5/26/08), and it went into effect on Nov. 21, 2009. As a general matter, GINA (1) prohibits the use of genetic information in making decisions related to any terms, conditions, or privileges of employment; (2) prohibits retaliation against individuals who oppose unlawful practices under GINA or participate in any investigation or proceeding under GINA; (3) restricts employers and other covered entities from requesting, requiring, or purchasing genetic information, with limited exceptions; and (4) generally requires employers and other covered entities to keep confidential any genetic information they have obtained about applicants and employees. GINA incorporates the enforcement provisions of Title VII, including the requirement that an aggrieved person file a charge of discrimination with the Equal Employment Opportunity Commission (EEOC) or a similar state or local agency. GINA also provides the same remedies that are available under Title VII, including compensatory and punitive damages.

EEOC is responsible for enforcing GINA. EEOC’s final regulations implementing the requirements of GINA are codified at 29 C.F.R. Part 1635 and went into effect Nov. 9, 2010 (9 PVLR 1559, 11/15/10). Among other things, the regulations provide additional detail regarding the definitions of several key terms of the statute, such as “genetic information,” “family member,” and “family medical information.” They also explain how GINA prohibits the use of genetic information in employment decisions. The regulations also make clear that GINA’s prohibition against acquisition of genetic information by employers is to be broadly construed, and they provide guidance regarding the limited circumstances in which employers may legally acquire genetic information. Additionally, the regulations detail employers’ obligations to keep genetic information confidential, as well as the limited situations in which disclosure of such information is permissible under the statute. While the regulations are ultimately helpful in providing guidance to employers about ensuring compliance with the requirements of GINA, they contain a number of technical requirements that could prove to be costly pitfalls for unwary employers. Several tips for avoiding these pitfalls are discussed in the final section of this article…

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By Joe Lustig

Magyar Telekom, Hungary’s largest telecommunications provider, and majority owner Deutsche Telekom agreed to pay over $95 million to settle charges that they bribed government and political party officials in Macedonia and Montenegro, the Department of Justice and Securities and Exchange Commission announced Dec. 29 (United States v. Magyar Telekom, E.D. Va., No. 1:11-cr-00597-CMH, 12/29/11; SEC v. Straub, S.D.N.Y., 11 Civ. 9645, 12/29/11; SEC v. Magyar Telekom Plc,S.D.N.Y., 11 Civ. 9646, 12/29/11).

The DOJ filed its charges under the Foreign Corrupt Practices Act against Magyar and Deutsche Telekom, Magyar’s majority owner, in the U.S. District Court for the Eastern District of Virginia. In a release, prosecutors said that the companies agreed to pay nearly $64 million in combined criminal penalties as part of a nonprosecution agreement.

Separately, the SEC said that Magyar agreed to settle FCPA chargesagainst it in the U.S. District Court for the Southern District of New York by paying more than $31.2 million in disgorgement and prejudgment interest.

Deutshe Telekom also settled SEC charges of books and records and internal control violations under the FCPA, the commission announced. At the time of the alleged violations, the SEC’s complaint said, the companies’ securities were traded through American Depository Receipts listed on the New York Stock Exchange and registered with the commission under 1934 Securities Exchange Act Section 12(b).

Meanwhile, SEC charges are pending in the Southern District of New York against three former Magyar executives whom the commission accused of orchestrating, executing, and approving the bribery scheme. They are Elek Straub, former chairman and chief executive officer, and Andras Balogh and Tamas Morvai, two former senior executives in the company’s strategy department.

The agency said it is seeking disgorgement, penalties, and permanent injunctions against them…

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By R. Christian Bruce

The Federal Reserve Board Dec. 20 asked for comment by March 31 on a tougher set of regulatory standards for financial firms critical to the well-being of the financial system, leaving some specific items, such as a special risk-based surcharge, to be addressed in follow-up proposals.

The 173-page proposal, which implements Sections 165 and 166 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, mandates new capital, liquidity, stress testing, risk management, and other requirements for banking firms with $50 billion or more in assets.

It also sets the basic ground rules for a class of nonbank financial firms that the Financial Stability Oversight Council (FSOC) may later determine to be, in the words of the proposal, “a grave threat to financial stability.”

Broad Impact Certain

Experts said the importance of the Dec. 20 proposal is almost impossible to exaggerate. Joseph Engelhard, senior vice president of Capital Alpha Partners, a Washington, D.C., area firm that provides research and analysis for institutional investors, called Section 165 “the single most important section of Dodd-Frank” for banks.

Michael E. Bleier, a partner in the Pittsburgh offices of Reed Smith, Dec. 20 called the Fed’s rules the most significant since 1971, when the Fed reshaped bank holding company regulation with the release of Regulation Y.

“They will likely have a major impact on investors and how these companies’ share price is impacted, and what steps they must take to meet the higher capital requirements that will surely be an outcome of the rulemaking process,” Bleier told BNA…

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