Analysis: Murky trade secret law at heart of Gundlach trial

LOS ANGELES Fri Sep 9, 2011 2:30pm EDT

The Trust Company of the West building is seen in downtown Los Angeles August 10, 2011. REUTERS/Fred Prouser

The Trust Company of the West building is seen in downtown Los Angeles August 10, 2011.

Credit: Reuters/Fred Prouser

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LOS ANGELES (Reuters) - In the trade-secrets trial pitting star bond fund manager Jeffrey Gundlach against his former firm, lawyers and the judge frequently have joked about the clear-cut example of Colonel Sanders' famously guarded fried chicken recipe.

At financial firms, however, trade secrets are typically more abstract concepts than they are in restaurant kitchens. The outcome of this case, a high-stakes fight between Gundlach and asset manager Trust Company of the West, may hinge on how the jury interprets the meaning of "proprietary information" involving client lists, interfaces and sprawling databases.

TCW contends that Gundlach and his inner circle stole trade secrets that they used to set up a rival company, allegations that Gundlach and his associates deny. TCW lawyer John Quinn told jurors that a printed list of all the secrets Gundlach took with him would measure 2-1/2 times the height of the Empire State Building.

Over the past six weeks, witnesses at the California state court trial have told of a flash drive with company backups being lost in the mail, and of large amounts of data being downloaded by Gundlach's associates. Closing arguments in the trial are set for this Tuesday.

Court cases dealing with murky trade secrets law often boil down to whether defendants conspired to steal confidential information for a new enterprise. Trade secrets also are not registered with the government like patents or trademarks, so the definition of what is a trade secret can be subjective.

"In the financial services industry, trade secrets relate to some underlying valuation model or algorithm," said Eric Talley, director of the University of California Berkeley Center for Law, Business, and the Economy. "That's sometimes quite difficult to prove. These are specifics that are often very confusing even to professional business people and accountants."

For TCW to prevail on a trade-secrets theft claim, jurors likely will need to hear a compelling narrative of inappropriate behavior by Gundlach and his team, said Neel Chatterjee, a partner at law firm Orrick. He represents Facebook in an unrelated trade secrets case.

"If there are inflammatory facts, those can be helpful" to TCW's case, he said.

Such facts could include the story of a hard drive containing client contacts and holdings information being secreted away from the TCW office in an employee's bra, as described to the jury by one witness.

For Gundlach's defense, "the core of the case will be narrowing and focusing the case to try to get the jury to question, one, whether something was done wrong and, if so, two, whether it actually really hurt anyone," Chatterjee said.

DUELING ALLEGATIONS

Los Angeles-based TCW, a unit of France's Societe Generale, fired Gundlach in December 2009 and sued him a month later, accusing him of plotting to form a new company, DoubleLine Capital, using TCW proprietary information, and gutting TCW of its mortgage-backed securities team.

TCW has demanded about $89 million in damages on theft of trade secrets, in addition to other damages claims.

Gundlach, in a counter-lawsuit, argues TCW owes him hundreds of millions of dollars in compensation and secretly plotted to fire him while he was still its investment chief.

In court, the judge and lawyers have debated whether investment data can be compared to one of the best-known examples of a trade secret: KFC's formula of 11 herbs and spices.

Judge Carl West at one point summarized TCW's position by saying, "Your suggestion at the outset of this trial, in your opening statement, was that they took the Colonel Sanders recipe. And with that recipe, they were able to duplicate and do exactly the same thing."

But Gundlach attorney Mark Helm said his client's new DoubleLine funds were not the same as TCW's investments. He suggested that if Gundlach had used the same algorithms, the performance of both companies' funds would be identical.

"If you go to one Colonel Sanders, and you go to the other one, it's going to taste the same if the recipe is the same," Helm said.

WHAT'S THE HARM?

DoubleLine insists that the trade-secret theft accusations are unfair, pointing out that, under California law, the plaintiff must identify a trade secret, show that it was taken, that it was used, and that harm resulted.

"TCW has been unable to identify a single trade secret that was taken and used by DoubleLine or any of the defendants," said DoubleLine spokesperson Tony Knight.

While a TCW expert witness, Andrew Smith, told jurors that Gundlach's team downloaded secrets, he admitted to some ambiguity in what could be considered a trade secret.

"I think you're talking about gradations here between what's confidential, what's proprietary analytic, and what ultimately transpires to be a trade secret," Smith, executive managing director at Broadstreet Capital Partners, testified. "And there's a lot of gray, in terms of borderline between these various elements."

The jury has looked bored when lawyers and witnesses dive into technical subjects such as source code. Even the public relations teams and legal aides in the audience tend to scroll through their mobile phones when the talk turns technical.

Juries, though, can make decisions on complicated subjects such as semiconductor design and software technology, as in the recent Oracle Corp vs. SAP copyright infringement case. SAP was initially ordered to pay Oracle $1.3 billion in damages, although the judge overseeing the case last week slashed that award.

Some trade-secrets cases can be criminal prosecutions. A former Goldman Sachs computer programer is serving an 8-year prison sentence after being convicted in December 2010 of stealing part of the bank's high-frequency trading code.

The key in the TCW/Gundlach trial may be which side creates a more compelling human story. The outcome could depend on whether jurors believe Gundlach created a new business from scratch through honest work, or if he cut corners by stealing from his former employer.

"A lot of these trade-secret cases do not make it into the courtroom," said Talley, of UC Berkeley, although "it is not that uncommon, actually, when someone leaves a financial services firm" for trade-secret litigation to result.

(Reporting by Mary Slosson; Editing by Martha Graybow and Richard Chang)

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