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In September 1995, Internet Magic Inc. applied for a patent covering technology that allows the use of the Internet to fax documents. Two months later, Netfax Inc. applied for a patent covering the same type of technology. In some other nations, Internet Magic would have automatically had the right to the patent because it filed first. In the United States, however, the U.S. Patent Office notifies the parties that there are competing claims and schedules an interference proceeding. When the patent office notified Internet Magic and Netfax in July 1997 that they had competing claims, the companies began merger talks to avoid going through the lengthy and uncertain interference process. As part of their discussions, they entered into a disclosure agreement and began exchanging confidential information. But they hit a major bump in the road when, in February 1998, Internet Magic discovered that Netfax was using some of what it learned against Internet Magic. “We [had] identified three potential [lawsuits], and Netfax immediately contacted the three” parties to buy the claims, said plaintiff’s attorney Robert M. Steele, adding that Netfax’s principal shareholder, Victor Lombardi, bought one, then used it to sue Internet Magic. Although a jury rejected the claim, the suit scared off Internet Magic’s investors. In August 2000, Internet Magic sued Netfax and Lombardi for breach of the confidentiality agreement and misappropriation of trade secrets. The plaintiff’s courtroom strategy was to drive home the “despicableness” of Netfax’s using confidential information against a potential partner, Steele said. The defense countered that the information at issue wasn’t a trade secret under Massachusetts law, which was the governing law of the contract, and challenged the plaintiff on damages. On Feb. 1, a San Diego jury awarded Internet Magic $12.4 million on the breach claim and $1.6 million on the misappropriation of trade secrets claim. They also hit Netfax and Lombardi with $50 million each in punitive damages. Plaintiff’s attorney: Robert M. Steele of Meisenheimer Herron & Steele in San Diego. Defense attorneys: Michael McDonnell and John Romaker of McDonnell & Romaker in San Diego.

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