General Patent Corporation v. Wi-Lan Inc. et al

Filing 42

OPINION & ORDER, For the reasons stated above, the application for apreliminary injunction is denied. A status conference is scheduled for January 10, 2012 at 11:00 a.m. (Signed by Judge John F. Keenan on 11/22/2011) (cd)

Case 1:09-md-02013-PAC Document 57

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
---------------------------------- X
UNITED STATES DISTRICT COURT
GENERAL PATENT CORPORATION,
:
SOUTHERN DISTRICT OF NEW YORK
:
-----------------------------------------------------------x
Plaintiff,
:
In re FANNIE MAE 2008 SECURITIES
:
:
LITIGATION
:
-against:
:
:
:
WI-LAN INC., GLADIOS IP INC., and :
-----------------------------------------------------------x
PAUL J. LERNER, ESQ.,
:

Filed 09/30/10 Page 1 of 45
USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: Nov. 22, 2011

08 11 Civ. 6585 (JFK)
No.Civ. 7831 (PAC)
09 MD 2013 (PAC)
OPINION & ORDER
OPINION & ORDER

Defendants.
:
---------------------------------- X
HONORABLE PAUL A. CROTTY, United States District Judge:
APPEARANCES

BACKGROUND1
FOR PLAINTIFF GENERAL PATENT CORPORATION:
The Y. years of
Levi earlySilver this decade saw a boom in home financing which was fueled, among
Silver & Silver APC
other things, by low interest rates and lax credit conditions. New lending instruments, such as
FOR DEFENDANTS WI-LAN INC, GLADIOS IP INC.:
subprime mortgages (high credit risk loans) and Alt-A mortgages (low-documentation loans)
Jamie M. Brickell
Pryor Cashman
kept the boom going. Borrowers played a role too; they took on unmanageable risks on the
FOR DEFENDANT PAUL J. LERNER, ESQ.:
assumption that the Forman
Robert W. market would continue to rise and that refinancing options would always be
Shapiro Forman Allen & Sava LLP
available in the future. Lending discipline was lacking in the system. Mortgage originators did

John hold these high-risk mortgage loans. Rather than carry the rising risk on their books, the
not F. Keenan, United States District Judge:
Before their loans into the secondary mortgage market, often securitized packages
originators soldthe Court is Plaintiff General PatentasCorporation’s
(GPC) application for a preliminary MBS markets grew almost exponentially.
known as mortgage-backed securities (“MBSs”). injunction against Wi-Lan,
Inc. (“Wi-Lan”), Gladios IP, Inc. (“Gladios”), and Paul J. abruptly
But then the housing bubble burst. In 2006, the demand for housing dropped
Lerner, Esq. (“Lerner” In light of the changing housing market, banks modified their
and home prices began to fall. and collectively, “Defendants”). The
Court held an and became unwilling to refinance home mortgages8-10, 2011. On
lending practices evidentiary hearing from November without refinancing.
November 14, 2011, the Court vacated the Temporary Restraining
1
Order and denied Plaintiff’s application“Complaint” preliminary Complaint,
Unless otherwise indicated, all references cited as “(¶ _)” or to the for a are to the Amended

dated June 22, 2009. For purposes of this Motion, all allegations in the Amended Complaint are taken as true.

injunction, for the reasons stated below.

1

I. Background
A. The Parties
The following allegations are drawn from the Plaintiff’s
Complaint, unless otherwise noted.1

GPC is a patent licensing

and enforcement firm headquartered in New York.

It partners

with inventors, universities, and small patent owners to license
and enforce patents.

In addition, GPC manages and finances

patent licensing campaigns in return for a share of the
licensing revenues or an ownership interest in the patents.
According to GPC, this business model differs from that of many
other patent enforcement companies:

while other patent

enforcement companies purchase patents from patent holders, GPC
partners with patent holders.

Further, GPC’s Chief Executive

Officer Alexander Poltorak (“Poltorak”), states that GPC holds
“carefully honed and confidential business strategies” that are
vigorously safeguarded.

To that end, GPC requires its employees

to execute confidentiality and non-compete agreements.
(Poltorak Decl. ¶ 18).
Wi-Lan is a publicly traded Canadian corporation that
develops, protects, and licenses patents through the acquisition

1

As of the filing of this Opinion, only the first day’s Hearing
transcript is available. Because of the time-sensitive nature of this
action, however, I write this Opinion and Order based upon the
parties’ briefs and exhibits, as well as my recollection of the
testimony from the second and third days. To the extent any facts
must be clarified or corrected when the full transcript is made
available, I will file a supplemental opinion.

2

of those patents.

Gladios was formed in November 2010 as a

subsidiary of Wi-Lan.

Its business approach is similar to that

of GPC, in that Gladios protects patents by partnering with
patent owners, instead of acquiring the patents.
Lerner joined GPC in 1999 as General Counsel and has also
served as Senior Vice President.

From 2000, Lerner was a member

of the GPC Board of Directors and Executive Committee.

In 2004,

Lerner signed a non-competition agreement with GPC, which
stipulated that he would be precluded from working for any of
GPC’s competitors for one year after the termination of his
employment, should Lerner be terminated for cause. (Forman Aff.
Exh. 5).

In February 2010, Poltorak and Lerner discussed his

departure from GPC; nevertheless, Lerner continued to work at
GPC through August 31, 2011.

After leaving GPC, he joined Wi-

Lan, announced in a press release issued by Wi-Lan on September
11, 2011.
B. Negotiations Between GPC and Wi-Lan
In April 2010, GPC retained investment banking firm
Houlihan Lokey Capital, Inc. (“Houlihan”) to seek strategic
partners to invest in or acquire GPC.

Houlihan approached Wi-

Lan, among other firms, about this potential acquisition.

Wi-

Lan expressed interest in the investment, noting that GPC’s
unique business model would help the newly created Gladios excel
in the industry.
3

In the subsequent months, Wi-Lan evaluated the possible
acquisition of GPC, and GPC furnished detailed information about
its business model.

GPC and Wi-Lan executed a Confidentiality

and Non-Solicitation Agreement on November 16, 2010.

The

Agreement provided that (1) the information Wi-Lan obtained from
GPC would be used only to evaluate the proposed transaction, and
(2) Wi-Lan would not solicit GPC’s employees for a two-year
period from the date of the agreement. (Silver Decl. Exh. J).
On April 8, 2011, Wi-Lan made an offer to acquire GPC.

A

non-binding Term Sheet, executed on April 29, 2011, permitted
Wi-Lan access to more of GPC’s records so that Wi-Lan could
conduct due diligence. (Poltorak Decl. ¶ 42).

Wi-Lan executives

spent three days in GPC’s offices, evaluating records and
earnings forecasts.
On June 16, 2011, one week prior to the scheduled closing,
Wi-Lan informed GPC that it would not be proceeding with the
acquisition.

The proposed transaction was officially cancelled

on June 19, 2011. (Id. ¶¶ 46-50).
C. Lerner’s Employment and Termination
Before Lerner’s final departure from GPC on August 31,
2011, Poltorak and Lerner drafted a Separation Agreement.
During the drafting process, Lerner emailed Poltorak a series of
recitals, which included that his “employment with GPC was
terminated on March 2, 2010” and that “it is agreed that
4

Lerner’s termination was for the convenience of GPC and without
cause.” (Silver Decl. Exh. N).

In response to these recitals,

Poltorak wrote in an email to Lerner that the statements
“captured the essence of it all.” (Forman Decl. Exh. 10).

The

final Separation Agreement signed by both parties includes these
terms. (Id. Exh. 11).
In June, Lerner began discussing possible employment with
Wi-Lan.

Cory Houston, an executive at Wi-Lan, allegedly spoke

to Lerner on the phone and contacted him through the LinkedIn
professional network. (Silver Decl. Exh. L).

Wi-Lan published

an employment opportunity announcement in the Internet
newsletter IPLaw360, to which Lerner responded on June 28, 2011,
about twelve days after the GPC-Wi-Lan transaction was
cancelled. (Lerner Decl. ¶¶ 25-27).

Lerner states that prior to

joining Wi-Lan, he provided a copy of his Separation Agreement
with GPC, which demonstrated that he was no longer bound by the
non-compete.
D. Instant Action
On September 21, 2011, Judge Buchwald issued a temporary
restraining order against (1) Lerner from working with WiLan/Gladios on business development; (2) Wi-Lan from working
with Lerner, except on patents that were in its portfolio before
Lerner joined the company; (3) Gladios from working with Lerner;
and (4) Defendants from using or disclosing GPC’s trade secrets
5

and confidential information.

Following an expedited Discovery,

the Court held a Hearing on GPC’s application for a preliminary
injunction.
II. Discussion
A. Legal Standard
Preliminary injunctive relief is “one of the most drastic
tools in the arsenal of judicial remedies.” Hanson Trust PLC v.
SCM Corp., 774 F.2d 47, 60 (2d Cir. 1985).

Because it is such

an extraordinary remedy, it should be granted only “when the
intervention of a court of equity is essential to protect a
party’s property rights against injuries that would otherwise be
irremediable.” Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 68
(2d Cir. 1999).

Upon demonstration that legal remedies are

inadequate to make a party whole, a movant may obtain injunctive
relief upon the showing of:

“(1) irreparable harm or injury,

and (2) either (a) a likelihood of success on the merits or (b)
sufficiently serious questions going to the merits to make them
a fair ground for litigation and a balance of the hardships
tipping decidedly in favor of the movant.” Earth Web, Inv v.
Schlack, 71 F. Supp. 2d 299, 308 (S.D.N.Y. 1999).
Courts have long recognized that irreparable harm is an
absolute prerequisite to a preliminary injunction.
Demonstrating a mere possibility of harm is not sufficient to
warrant the drastic imposition of a preliminary injunction.
6

Rather, the movant must present sufficient proof to provide a
reasonable basis for believing that the injury is real and
imminent. See Time Warner Cable, Inc. v. DirecTV, Inc., 497 F.3d
144, 153 (2d Cir. 2007).
B. Injunction Against Lerner
Lerner was undoubtedly an employee of GPC from February
2010 through August 2011.

His dubious assertion that he worked

in a “consulting” capacity is belied by the fact that he
continued to report to the same office, receive tax forms, and
enjoy the same benefits as he did before his purported
“termination.”

At his own “farewell” party in August 2011, he

stood silently by while Poltorak told colleagues Lerner was
entering retirement.
Lerner’s disloyal – and perhaps deceitful – behavior
notwithstanding, the August 2011 Separation stipulated that
Lerner was terminated for “convenience,” not for cause.
such, the non-competition period was not triggered.

As

Therefore,

GPC cannot succeed in demonstrating that by starting to work for
Wi-Lan, Lerner violated the non-compete. Orbit One Commc’ns,
Inc. v. Numerex Corp., 692 F. Supp. 2d 373, 376-79 (S.D.N.Y.
2010) (finding that a non-competition covenant, which was
dependent upon an employee being terminated for cause, was not
triggered where the employer and employee agreed that the
employee’s departure was not for cause).
7

GPC has not met its burden for establishing that it is
entitled to a preliminary injunction against Lerner on the basis
of the non-compete, as it has presented no evidence that the
non-compete period was triggered.

Therefore, GPC has shown

neither that it has a likelihood of success on the merits of its
claim against Lerner, nor that there are sufficiently serious
questions going to the merits as to make them a fair ground for
litigation.

Moreover, GPC has not presented evidence that it

will be irreparably harmed by Lerner’s employment at Wi-Lan. See
Faiveley Transport Malmo AB v. Wabtec Corp., 559 F.3d 110, 119
(2d Cir. 2009) (holding that a party seeking an injunction must
provide “evidentiary support” that a former employee’s presence
at a competing firm causes ongoing damage to its operations,
reputation, or goodwill).
C. Injunction Against Wi-Lan
GPC has asserted two causes of action against Wi-Lan:
misappropriation of trade secrets and violation of the nonsolicitation agreement.

First, GPC has not demonstrated that it

will be successful on the merits in its misappropriation claim.
Next, although GPC has demonstrated that it is likely to prove
that Wi-Lan breached the non-solicitation agreement, it has not
satisfied the irreparable harm requirement.
preliminary injunction is inappropriate.

8

Therefore, a

To prevail in a claim for misappropriation of trade
secrets, a party must demonstrate “(1) that it possessed a trade
secret, and (2) that the defendants used that trade secret in
breach of an agreement, confidential relationship or duty, or as
a result of discovery by improper means.” R.F.M.A.S., Inc. v.
Mimi So, 619 F. Supp. 2d 39, 86 (S.D.N.Y. 2009).

While it is

undisputed that the parties were bound by a confidentiality
agreement, GPC has not adduced sufficient evidence that its
business model comprised trade secrets.
Factors for determining whether business information
constitutes a trade secret include:

(1) the extent to which the

information is known outside of the business; (2) the extent to
which it is known by employees and others involved in the
business; (3) the extent of measures taken by the business to
guard the secrecy of the information; (4) the value of the
information to the business and its competitors; (5) the amount
of effort or money expended by the business in developing the
information; and (6) the ease or difficulty with which the
information could be properly acquired or duplicated by others.
EarthWeb, Inc. v. Schlack, 71 F. Supp. 2d 299 (S.D.N.Y. 1999).
GPC has not submitted evidence to demonstrate that its
business model satisfies any of the six above-listed elements.
In his affidavit, Poltorak detailed eighteen “business
strategies,” including unique marketing campaigns, a
9

confidential business model, longstanding relationships in the
patent community, compensation plans, and unique litigation
strategies. (Poltorak Aff. ¶ 16).

Poltorak submits that these

eighteen points, taken together, are trade secrets that have
allowed GPC to outdo its competitors despite having fewer
employees and fewer resources. (Hearing Tr. at 20-21).

At the

hearing, however, Poltorak conceded that many of these
strategies are not novel; indeed, the strategies are widely
known in both the patent protection and marketing communities.
(Id. at 17 (“In and of itself, advertising and public relations
is not a trade secret.”)). See In re Parmalat Sec. Litig., 258
F.R.D. 236, 255 (S.D.N.Y. 2009) (holding that marketing
strategies are not trade secrets where the plaintiff “failed to
explain what particular information about the particular . . .
marketing techniques are not already public [and] are not
already commonly known in the industry”), Marietta Corp. v.
Fairhurst, 754 N.Y.S.2d 62, 67

(N.Y. App. Div. 2003)

(concluding that “pricing data and market strategies . . . would
not constitute trade secrets”); see also Silipos, Inc. v.
Bickel, No. 06 Civ. 2205, 2006 WL 2265055, at *4 (S.D.N.Y. Aug.
8, 2006) (“[T]rade-secret protection does not extend to
information regarding market strategies.” (internal quotation
marks omitted)).

10

Addressing each of Poltorak’s eighteen “confidential
business strategies” (Poltorak Decl. ¶ 16) in turn, none of them
rise to the level of trade secrets.

The first two points in

Paragraph 16 of Poltorak’s Declaration constitute traditional
marketing strategies known by many in the industry, as Poltorak
conceded at the Hearing. (Hearing Tr. at 17).

The third,

fourth, fifth, seventh, eleventh, and fourteenth points describe
GPC’s relationships with third parties such as patent lawyers,
lenders, and other patent professionals.

These business

contacts are not trade secrets; any patent enforcement firm may
meet with someone in the patent enforcement community and forge
a unique relationship, which Poltorak also admitted. (Id. at
116-17). See EarthWeb, 71 F. Supp. 2d at 316 (noting that the
existence of licensing agreements and lists of contacts are
generally not protected as trade secrets).

Moreover, Poltorak

stated that GPC did not keep detailed lists of these contacts
such that protected information would even be available.
(Hearing Tr. at 115-16).

The sixth point deals with GPC’s

“triage” system for selecting and analyzing clients, which
Poltorak submits is unique in the industry. (Id. at 24-25).

GPC

has not shown, however, that the system is either secret or
valuable to GPC.

Rather, Poltorak noted that GPC’s method of

client intake differs from that of other firms merely because
GPC carries out its evaluation in the “opposite order.” (Id. at
11

25).

The practice of undertaking the same general methods in a

different order is not a trade secret. See Editions Play Bac,
S.A. v. W. Pub Co., Inc., No. 92 Civ. 3652, 1993 WL 541219 at *5
(S.D.N.Y. Dec. 28, 1993) (“[M]ethods which are generally known
in the industry . . . cannot be trade secrets.”).

The eighth

point states that GPC’s business model is geared toward various
sorts of patent holders, yet the fact that GPC works with these
patent holders does not preclude other patent enforcement firms
from making their own contacts. See Synergy Advanced Pharms.,
Inc. v. CapeBio, No. 10 Civ. 1736, 2010 WL 2194809 at *5
(S.D.N.Y. June 1, 2010) (stating that the term “trade secrets”
is “a term of art which does not cover all confidential
information”).

Point nine addresses relationships with law

firms, which Poltorak admitted are not unique. (Hearing Tr. at
117).

Points sixteen and seventeen address licensing terms and

negotiation strategies, yet GPC adduced no evidence that these
strategies are novel, secret, or cannot be duplicated.

Point

eighteen is a catch-all and therefore need not be addressed.
Points ten, twelve, and thirteen address GPC’s business
plans, which GPC has publicized.

Poltorak, a self-proclaimed

“thought leader,” has published articles detailing the successes
of GPC and touting its business model. (Id. at 114 (indicating
that he and others in the patent protection community attend
conferences and discuss their strategies)).
12

For instance, point

thirteen, “elaborate and confidential litigation risk management
techniques, such as proprietary decision tree analysis
templates” appears in an October 2005 article in Law Journal
Newsletter, under the heading “Litigation Risk Analysis.”
(Brickell Aff. Exhs. 6-8).

Because Poltorak and GPC have not

exhibited an intent to this information secret, it does not
warrant trade secret protection. See WGJ Holdings, Inc. v.
Greenberg, No. 07 Civ. 2742, 2008 WL 80932 at *4 (S.D.N.Y. Jan.
8, 2008) (holding that Defendant cannot obtain trade secret
protection for its recipes because they were published in The
New York Times).
Point fifteen addresses a “proprietary set of documents,”
of which only two were identified at the Hearing:

Poltorak’s

marketing plan (Exh. 24) and the GPC “checklist” (Exh. 100).
These documents were not made available to Wi-Lan. (Hearing Tr.
at 107-08).

The marketing plan was not located on the company’s

server (Id. at 107-08), and Gladios President Steven Adam
testified that GPC never furnished its “checklist” to Wi-Lan.
Earthweb, Inc. v. Schlack, No. 99 Civ. 9302, 2000 WL 1093320, at
*2, (2d Cir. May 18, 2000) (finding plaintiff's showing
insufficient to warrant a preliminary injunction where it failed
to demonstrate that defendant had removed proprietary documents
or information or was about to violate his duties under the

13

agreement).

As a result, even if these items constitute trade

secrets, they have not been compromised.
GPC has also argued that during the acquisition talks, WiLan acknowledged that GPC held trade secrets through various
email statements exchanged between the companies during due
diligence.

GPC points to Wi-Lan executives’ email statement

that they wanted “to get a peek under the covers of a
competitor’s business structure.” (Levi Reply Aff. Exh. AA).
However, this evidence does not tend to show that Wi-Lan
believed GPC’s business plan involved trade secrets.

Rather, it

indicates nothing more than that Wi-Lan was planning to conduct
ordinary due diligence.
GPC has not presented sufficient evidence to demonstrate
the existence of trade secrets and therefore has not
established:

a) a likelihood of success on the merits of its

claim against Wi-Lan for misappropriation of trade secrets, or
b) serious questions as to the merits of its claim.

As a

result, it has not satisfied its burden for a preliminary
injunction.

In addition, even if GPC had raised serious

questions as to the merits of its case, its motion for a
preliminary injunction fails because it has not proffered
evidence that its business will be irreparably harmed.

14

Next, the Court will address the non-solicitation
agreement.

GPC and Wi-Lan agreed to the following non-

solicitation covenant:
[N]ot to solicit for employment any GPC employees to whom
[Wi-Lan] may be introduced or with whom [Wi-Lan] otherwise
has contact as a result of [Wi-Lan’s] consideration of a
Transaction for a period of two years after the date of
[the Confidentiality Agreement], provided that [Wi-Lan]
shall not be restricted in any general solicitation for
employees . . . not specifically directed at any such
persons, and provided further that [Wi-Lan] shall not be
restricted in hiring any such person who responded to any
such general solicitation.
This covenant is reasonable in scope and limited in duration and
therefore is prima facie enforceable. See Ticor, 173 F.3d at 70
(2d Cir. 1999).
Less than a week after dissolving the acquisition deal, WiLan began talking to Lerner about employment opportunities.
While Lerner contends that he sought employment at Wi-Lan after
reading an announcement on IPLaw360, the temporal proximity of
Lerner’s discussions with Wi-Lan to Wi-Lan’s cancellation of the
acquisition raises several questions as to the veracity of this
assertion.

Although not dispositive, it is also noteworthy that

15

executives of Wi-Lan requested to join Lerner’s “LinkedIn”
network.
Despite the fact that GPC might succeed on the merits of
its claim for breach of the nonsolicitation agreement, a
preliminary injunction is inappropriate here because it has not
been established that GPC will suffer irreparable harm.

While

the divulgence of trade secrets might warrant an equitable
solution, FMC Corp. v. Taiwan Tainan Giant Indus. Co., 730 F.2d
61, 63 (2d Cir. 1984), GPC has not demonstrated that it
possesses trade secrets.
While irreparable harm can be proven even in the absence of
trade secrets, GPC has failed to satisfy its burden:

GPC has

not suggested that Lerner’s employment with Wi-Lan will cause
GPC to lose clients or diminish its capacity to implement its
patent enforcement strategies.

An employee's mere “knowledge of

the intricacies of [a former employer's] business operation” is
not a protectable interest sufficient to justify enjoining the
employee “from utilizing his knowledge and talents in this
area.” Reed, Roberts Assocs., Inc. v. Strauman, 40 N.Y.2d 303
(1976); see Tradition Chile Agentes de Valores LTDS v. ICAP Sec.
USA LLC, No. 09 Civ. 10343, 2010 WL 185656 at *3 (S.D.N.Y. Jan.
12, 2010) (“A party seeking an injunction must provide
evidentiary support of ongoing damage to its operations,
reputation or goodwill.”)
16

Moreover, GPC has not proffered evidence to demonstrate
that Lerner was irreplaceable and, therefore, a unique employee.
International Creative Management, Inc. v. Abate, No. 07 Civ.
1979, 2007 WL 950092 at *6 (S.D.N.Y. Mar. 28, 2007) (noting that
the standard for uniqueness is “high” and that a unique
employee’s replacement is “impossible”).

GPC’s arguments have

amounted to mere speculation that Lerner’s employment at Wi-Lan
will cause irreparable harm.

See Tradition Chile, 2010 WL

185656 at *3 (“Mere speculation that the loss of a valuable
employee will result in [irreparable harm] is insufficient to
warrant an injunction.”).

Therefore, GPC has not established

that it will suffer irreparable harm.
Indeed, GPC will be positioned to pursue remedies at law if
it is ultimately determined that Wi-Lan violated the nonsolicitation agreement.

Any harm that befalls GPC would occur

during the two-year non-solicitation period, and would involve
only the areas of the business in which GPC was involved, i.e.,
not the actual enforcement of patents, but rather, the marketing
scheme.

If it is determined that Lerner held confidential

information that he used at Wi-Lan, the amount of money that is
owed to GPC would be readily calculable.

17

III. Conclusion

For the reasons stated above/ the application for a
preliminary injunction is denied.

A status conference is

scheduled for January 10[ 2012 at 11:00 a.m.

SO ORDERED.
Dated:

New York/ New York
November 22/ 2011
.

~ :;~"".----

John F. Keenan
United States District Judge

18