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The misappropriation of a trade secret creates just one claim for infringement, though damages can increase with each new misuse, the California Supreme Court has ruled. The court’s Nov. 21 ruling in Cadence Design Systems Inc. v. Avant Corp. was more of a win for Avant than Cadence — though it no longer means much for the bitter Silicon Valley rivals. A week before the ruling, Cadence agreed to accept $265 million to settle its trade secrets theft case against Avant, which was acquired earlier in 2002 by Synopsys Inc. The two companies compete with each other in the field of integrated circuit design automation. The justices chose to go ahead and release their first interpretation of the state’s Uniform Trade Secrets Act anyway. Acknowledging that the court’s answer to the question posed to it by the Ninth Circuit U.S. Court of Appeals was a narrow one, Justice Carlos Moreno wrote, “All we decide is that the [Uniform Trade Secrets Act] views a continuing misappropriation of a trade secret of one party by another as a single claim.” Moreno concluded that neither Cadence’s nor Avant’s attorneys got it exactly right, but said Avant and the trial court came close in finding that a claim against a defendant arises just once. Cadence’s attorneys had argued that each misuse of a trade secret created a claim for misappropriation. Avant had argued that trade secrets theft is a breach of confidence that occurs once. “The central issue in the appeal was whether repeated use of a trade secret is part of a single claim. That was the basis on which [the trial judge] ruled in Avant’s favor and the Supreme Court agreed with him,” said Daniel Bookin, a partner at O’Melveny & Myers who represented Avant. Moreno focused on the section of the California trade secrets law that defines the statute of limitations as three years and said that was key in answering the Ninth Circuit’s question. Moreno rejected Cadence’s contention that trade secrets should be treated as property, just like patents, writing that the legal protection is “fundamentally different” because trade-secret owners are only protected against the appropriation of the secret by improper means and the subsequent use or disclosure. “This is a very important decision,” said Bookin. “The court ruled for the first time in California that the legal protection accorded trade secrets is fundamentally different from that given to patents.” Jeffrey Chanin, a partner at Keker & Van Nest who represented Cadence, said the decision would have left a lot of questions for the Ninth Circuit had the case not settled prior to the state Supreme Court ruling. “The only conclusion I can draw is that the UTSA views a continuing misappropriation of a trade secret of one party by another as a single claim for all purposes under the act,” said Chanin. “But just what is a continuing use? That’s something parties will continue to litigate. I am delighted Cadence settled that case without having to continue to litigate that question.” He added that the opinion creates a “trap for the unwary” and will require more due diligence in the preparation of settlement releases. “Looking backwards, the agreement you see in this case is a very common form of agreement that has been used by a lot of companies,” he said. “A lot of people are going to be surprised it means something different than they thought.” Bernard Burk, who argued on behalf of 3Com Corp., Oracle Corp. and Xilinx Inc., which participated in the case as amici, said the ruling casts doubt on general releases commonly used in Silicon Valley. “If you don’t bring up every use that has been made or will be made and get them taken care of, you lose your right to remedy them forever,” said Burk, a partner at Howard, Rice, Nemerovski, Canady, Falk & Rabkin. But attorneys outside of the case said the Supreme Court decision would not substantially alter the trade secrets terrain. While it may limit claims, it doesn’t prevent damages from adding up, they said. “Is this the death knell for trade secrets plaintiffs? Not at all,” said Gary Weiss, a partner at Orrick, Herrington & Sutcliffe. “The court was saying this doesn’t cover damages and that’s a major issue. As long as that remains intact, companies in Silicon Valley need not worry.” The dispute began in 1995 when Cadence filed suit in federal court accusing Avant of trade secrets theft and copyright infringement. In the suit, Cadence alleged that key employees stole its trade secrets when they left to form Avant in 1991. U.S. District Judge Ronald Whyte dismissed the trade secrets claims, ruling that Cadence was barred from pursuing them by a general release signed in 1994 when Gerald Hsu left his position as Cadence’s vice president to become Avant’s CEO. Last year, Avant, Hsu and a handful of other officers pleaded no contest to a criminal indictment for trade secrets theft and securities fraud and were ordered to pay $195 million in restitution. The settlement in the civil case ended a long and ugly two-front battle for Avant. R.L. Smith McKeithen, Cadence’s general counsel, originally put the company’s damages at upwards of $1 billion. But he also said the amount recovered through the settlement and restitution was unprecedented in an intellectual property dispute. “We don’t know of a larger restitution, and we don’t know many larger IP settlements than the one that we recovered,” he said. McKeithen said Cadence wanted to put an end to the long-running matter, adding that “if we had waited for the Supreme Court, it would have gone back to the Ninth Circuit and back to the trial court. We get to trial in 2004 at the earliest.” Steven Shevick, general counsel of Synopsys, which finalized its purchase of Avant in June, said the pending release of the Supreme Court opinion provided a “compelling” reason to settle the case.

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