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Cypress Semiconductor Corp. Gets Appellate Win in a Closely Watched Trade Secrets Case California Court of Appeal rules that companies must sue third parties in a timely manner for unknowingly purchasing products that may contain trade secrets; Morrison & Foerster represents Cypress after seven other semiconductor firms agreed to settle claims by Silvaco Data Systems SAN JOSE, CA (June 2, 2008) – In a decision that should provide a boost to semiconductor and other electronics firms having to defend against certain types of trade theft lawsuits, the California Court of Appeal issued a groundbreaking ruling providing greater protection to unknowing purchasers of products that allegedly contain trade secrets. The highly anticipated ruling may derail pending suits against some of Silicon Valley’s largest semiconductor companies. In a series of actions filed in 2003 and 2004 in Santa Clara County Superior Court, Silvaco Data Systems of Santa Clara, CA, alleged that 12 semiconductor companies misappropriated its trade secrets. Silvaco did not claim that the semiconductor defendants directly stole its secrets, but that they purchased commercially available Electronic Design Automation (EDA) software containing its trade secrets from an alleged thief, Circuit Semantics, Inc. (CSI). EDA software is used in the design of semiconductor chips to power computers, cell phones, MP3 players, and many other electronic devices. Silvaco claimed that three of its former employees had stolen its source code and incorporated it into CSI’s EDA products. Seven of the defendants chose to settle with Silvaco. Five others, including San Jose, CA-based Cypress Semiconductor Corporation, chose to fight. Of the five outstanding actions, Cypress was the first case set for trial in September 2007. At trial, Cypress argued that it did not use any of Silvaco’s secrets and, moreover, that Silvaco’s lawsuit was barred by the statute of limitations. Cypress argued that Silvaco, upon learning that CSI had distributed its products to customers, had an obligation either to alert CSI’s customers that CSI’s software might contain Silvaco trade secrets, or to bring action against them. Silvaco did not do that. Instead, knowing that CSI had distributed the allegedly tainted software to innocent purchasers, Silvaco chose to wait and to allow those customers to use the product. Only years later did Silvaco tell those companies, including Cypress, that it believed the CSI software was tainted. At that point, Silvaco demanded the companies pay a royalty to Silvaco to continue to use the allegedly tainted software that each of them had already purchased in good faith from CSI. Silvaco argued at trial that it was not obligated to inform innocent purchasers that the CSI product contained its secrets. It also argued that it was not obligated to file suit until the innocent purchasers became aware that the CSI product contained Silvaco secrets. In other words, Silvaco submitted that it could wait and allow the innocent customers to unknowingly use a tainted product, then later sue them for trade secret misappropriation and seek substantial damages. On September 26, 2007, the trial judge agreed with Silvaco’s argument and rejected Cypress’s statute of limitations defense. Cypress immediately appealed. The appellate court agreed that the issue was important and stayed the trial pending its review. The second of the five trials, Silvaco’s suit against Cirrus Logic, was also stayed until the Court of Appeal could rule on this issue. After substantial briefing, including the filing of an amicus brief in support of Cypress by Intel Corporation, the appellate court heard oral argument on May 8, 2008. On Friday, the Court of Appeal issued its ruling. In the unanimous ruling, written by Justice Eugene M. Premo of the Sixth Appellate District in San Jose, the court agreed with Cypress and reversed the trial court’s decision. The appellate court ruled that trade secrets holders must timely file a lawsuit to seek return of the product containing its secrets. The appellate court agreed with Cypress that a trade secrets holder cannot lay in wait and allow an innocent purchaser to use the allegedly tainted product in its manufacturing process, and then sue years later seeking to recover the innocent purchaser’s profits. “The proper focus, for purposes of the running of the statute of limitations, is not upon the defendant’s actual state of mind but upon the plaintiff’s suspicions,” wrote Justice Premo. “A trade secret loses its protected status if the owner does not undertake reasonable efforts to keep it secret. . . . Thus, the failure of the trade secrets owner to take prompt action to protect its trade secrets or to alert good-faith acquirers to the existence of its trade secret claims can serve as a defense in the event the trade secret owner eventually decides to pursue a misappropriation claim against the third party.” Arturo J. González from Morrison & Foerster is Cypress’s lead trial counsel and argued the matter in the Court of Appeal. “This is a significant victory for Cypress and all other innocent purchasers of software and other products that allegedly contain trade secrets,” Mr. González said. “It means that companies cannot allow innocent purchasers to use their products, then seek to pounce on them years later, after the innocent purchasers have spent millions of dollars investing in a new product.” The Court of Appeal remanded the case back to the Superior Court for trial. “We look forward to trying this case with Arturo and his team,” stated Victoria Tidwell, Cypress’s Vice President, Legal Affairs. “We will demonstrate that this lawsuit was not filed in a timely manner, and that even if it was, the case has no merit,” Mr. González added.
