On March 25, 2015, a federal jury in the Northern District of California rejected claims that a supplier of Memory Channel Storage (MCS) owed its customer $6.5 million for selling products manufactured using stolen technology.

Netlist Inc. signed a Development and Supply Agreement with Diablo Technologies Inc. in 2008 under which Diablo would manufacture chips for the Netlist HyperCloud product. This contract included an agreement to keep the Netlist technology secret.

Diablo then filed a patent application, which Netlist alleged was based on the Netlist technology.

Netlist contended that the theft of its trade secrets saved Diablo 22 months of research and development work, allowing Diablo to beat Netlist to market with its own product. Netlist contended that it was unable to negotiate deals with Samsung and other companies as a result.

The Lawsuit

Netlist sued Diablo for breach of contract and theft of trade secrets, and also tried to have the inventorship on the Diablo patent “corrected.”

In January, a federal judge granted Netlist a preliminary injunction prohibiting sales of the Diablo chips. This apparently cut off Diablo’s only source of revenue.

In addition to its other causes of action, Netlist claimed that Diablo had infringed its trademark and engaged in false advertising by using the term HyperCloud on his website. However, Netlist only sought one dollar in damages for each claim.

Diablo contended that Netlist never actually disclosed any trade secrets that Diablo allegedly stole. Diablo claimed that it knew about the technology at issue before it entered into the agreement with Netlist because other companies were already using it.

The Verdict

The jury concluded that Diablo did not breach either the nondisclosure agreement between the parties nor the Development and Supply Agreement.

The jury concluded that the eight trade “secrets” allegedly stolen by Diablo were not actually secret.

The jury also declined to add Netlist engineers to the list of inventors on the Diablo patent.

Netlist’s stock fell 59.3% in the wake of the verdict, after soaring 41.8% when the injunction was granted.

Significance of the Ruling

The outcome is a reminder of the challenge of establishing the viability of trade secrets in the fluid environment of Silicon Valley.