So This Prototype Cell Phone Walks Into a Bar…

It reads like the kind of not-quite-best-selling fiction that you might imagine only stranded travelers would resort to reading: a prototype cell phone goes missing and photos of it in a disassembled state show up on a technology news web site weeks later, apparently having changed hands for thousands of dollars along the way. It’s hardly Harry Potter. It is, however, an article in the L.A. Times; a secret prototype of Apple’s next iPhone has been photographed and posted on Gizmodo.com, and Gizmodo admits to having paid $5,000 for the privilege.

The bulk of the article recounts how exactly the phone came to be in the possession of Gizmodo, and eventually points out that the phone may have been stolen. The story reported that Gizmodo may be in the clear, because journalists generally don’t face penalties for being in receipt of stolen documents.  However, depending on what some very specific facts turn out to be, Gizmodo may actually be in serious trouble.

There are two basic legal theories at work: misappropriation of trade secrets, and receiving stolen property.

Misappropriation of Trade Secrets

The prototype iPhone is almost certainly protected by a trade secret: a kind of intellectual property that is protected not on the basis of being a novel idea (like patents) or an original work of authorship (like copyrights), but essentially by being (1) valuable and (2) secret. California has passed a version of the Uniform Trade Secrets Act (UTSA), which protects “. . .a device . . . that derives independent economic value from not being generally known to . . . other persons, and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

The prototype is obviously a “device” for the purposes of the UTSA. Its “value” lies in being secret at this time: that it will be for sale later doesn’t keep information about it from being a trade secret. As for the prototype being the subject of “reasonable efforts” to maintain its secrecy, Apple’s efforts have fallen short of maintaining perfect secrecy, but reasonable efforts include measures like restriction of information on a “need to know” basis, requiring employees to sign confidentiality agreements, and keeping the secrets under physical lock. Apple is notoriously secretive about its future products, so their efforts were probably at least reasonable under the circumstances.

If the prototype is a trade secret, Apple can sue Gizmodo for indirect trade secret misappropriation. Gizmodo wouldn’t be liable for direct trade secret misappropriation since (at least according to Gizmodo) they didn’t employ or hire the person who sold the prototype. However, Apple could win an indirect trade secret infringement action, provided it can prove three things.

First, that Gizmodo acquired the trade secret from someone other than Apple and knew (or had reason to know) that the information was a trade secret that the disclosing party (the source) acquired through improper means. It seems highly improbable that anyone buying a prototype of one of the most anticipated gadgets of 2010 would think this was a completely legitimate transaction.

Second, Apple must prove that Gizmodo disclosed the trade secret without Apple’s authorization. Gizmodo’s publication of photos of the prototype, assembled and disassembled, is a pretty straightforward disclosure, one we can assume was not authorized (conspiracy theories aside).  And lastly, Apple must show that either it suffered harm or Gizmodo benefitted from the disclosure of the trade secret. As Gizmodo has seen a 300% increase in readership (and presumably an increase in ad revenue), this showing should also be fairly straightforward.

Receiving Stolen Property

In California, anyone who “buys or receives any property that has been stolen or that has been obtained in any manner constituting theft or extortion, knowing the property to be so stolen or obtained” is guilty of receiving stolen property.

Gizmodo definitely bought the phone, so the question remains whether it was truly stolen. The phone had been “obtained in any manner constituting theft” — Gizmodo  admits its source told it that the phone was left in a bar, and that he helped himself to it. California’s definition of criminal theft includes “carrying away the property of another,” which requires a person to (1) achieve physical possession of the item, and (2) take it someplace else.  Gizmodo’s source did at least this much.

By way of analogy, leaving your jacket behind at a restaurant doesn’t give the guy at the next table a right to sell it on Craig’s List. If this opportunist tells a potential buyer how he got the jacket, the buyer has knowledge that the goods are not the rightful property of the seller. In California, you have three years to reclaim your jacket before being barred from legal action by §338 of the Code of Civil Procedure. You haven’t abandoned your jacket, you just have no legal recourse if you wait too long before trying to get it back.

Even if Gizmodo only intended to take photos and then return the phone to Apple, receipt of stolen property doesn’t require an intent to deprive the rightful owner of possession permanently.  Gizmodo has signaled its plans to return the phone to Apple, but the receipt of stolen property has already happened.  To make matters even worse, in California, §496(c) provides that the rightful owner of the property may sue the buyer (Gizmodo, in this case) for three times the actual damages sustained by the rightful owner.

Of course, it remains to be seen whether this situation will even move beyond the sort of public relations posturing that makes for entertaining banter around the water cooler.


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