A Primer on Trade Secrets Law NYSBA CLE

A Primer on Trade Secrets Law NYSBA CLE November 20, 2014 BY ANDRE CASTAYBERT PLLC CO-CHAIR OF TRADE SECRETS SUBCOMMITTEE NYSBA IP SECTION

Trade secrets: In the news… §Department of Justice: Two individuals and Company found guilty of conspiracy to sell trade secrets to Chinese companies – March 5, 2014 §United States Senate: Senators Coons and Hatch introduce bill to combat theft of trade secrets – April 29, 2014 §The Washington Post: U. S. announces first charges against foreign country for cyberspying – May 19, 2014 §Global Post: EU agrees on new framework for trade secrets protection – May 26, 2014

Increase in legislative activity § On September 17, 2014 the House Judiciary Committee approved the Trade Secrets Protection Act of 2014. The legislation will now move to the full House of Representatives for consideration. § The Trade Secrets Protection Act of 2014 would create a federal private right of action for trade secret theft and would permit a seizure order on an ex parte basis for the preservation of evidence.

What is the economic impact of trade secret theft to U. S. companies? §Estimates of trade secret theft range from 1 -3% of the GDP of the United States and other advanced industrial economies* §U. S. Senators Coons and Hatch: Estimate $160 to $480 billion lost to trade secrets theft in U. S. each year *CREATe and PWC: “Economic Impact of Trade Secret Theft: A framework for companies to safegaurss trade secrets and mitigate potential threats

What is Trade Secrets Misappropriation Law? § Protects a firm’s interest in information that the firm has developed which is both confidential and commercially valuable. § Protects such “trade secrets” against unauthorized acquisition, use, or disclosure by others, i. e. , misappropriation, even though they are neither patented or copyrighted nor patentable or copyrightable.

The UTSA Definition of Trade Secret §The Uniform Trade Secret Act “UTSA, ” enacted by all states and the District of Columbia, except New York and Massachusetts, defines a trade secret as: ◦ information, including a formula, pattern, compilation, program, device, method, technique, or process; ◦ that derives independent economic value, actual or potential, from not being generally known to, or readily ascertainable through appropriate means, by other persons who might obtain economic value from its disclosure or use; and ◦ is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Trade secrets in New York §New York courts have adopted definition from Restatement of Torts Section 757 —“a trade secret consists of a formula, process, device or compilation which one uses in his business and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. ” § Unlike UTSA, New York courts have held that trade secrets must usually consist of ‘‘a process or device for continuous use in the operation of business. ’’ §Abstract ‘‘marketing concepts, ’’ ‘‘new product ideas, ’’ and ‘‘business possibilities or goals’’ may not qualify for trade secret protection.

Trade Secrets in New York follows § 757 Restatement of Torts (1939) factors: (a) the extent to which the information is known outside of [the] business; (b) the extent to which it is known by employees and others involved in [the] business; (c) the extent of measures taken to guard the secrecy of the information; (d) the value of the information to [the business] and its competitors; (e) the amount of effort or money expended in developing the information; (f) the ease or difficulty with which the information could be properly acquired or duplicated by others.

Examples of Trade Secrets § R&D information § Manufacturing processes § Design drawings § Cost/price/margin data § Production machinery § Business plans § Source code § Market plans /research /studies/analyses § IT system architecture § Customer lists § Blue prints § Customer information § Product designs § Customer support services

Economic Value § Economic value: actual or potential § Not generally knows by others who can obtain economic value for disclosure or use § Need not be novel

What constitutes misappropriation? 1. Wrongful acquisition, retention, or use 2. Wrongful disclosure of specifically identified information: § That has actual or potential economic value; § Is not generally known to the relevant public; § And that has been the subject of reasonable measures to maintain secrecy.

Wrongful acquisition? The trade secret owner must show that the alleged misappropriator : (a) acquired the trade secret knowing or having reason to know it was acquired by “improper means”; or (b) used or disclosed the trade secret without consent and used “improper means” to acquire the trade secret ; or (c) acquired the trade secret from a third person and knew of or should have known that the trade secret was either obtained by the third person by “improper means” or the third person was under a duty to keep it secret.

Defenses to Trade Secrets Misappropriation Generally § Competitor had previously used the matter in question in its business § Defendant had already been using the information § The information had been widely circulated or published before the alleged misappropriation § The information can be readily obtained from public sources

Reasonable Precautions §Fact intensive / case by case §Efforts to label §Efforts to secure and maintain security § Limited distribution: vaults, passwords, codes §Employee training and reminders §NDAs §Confidentiality agreements §Noncompetes

Improper Means §Theft or breaking and entering §Bribery §False identity or misrepresentation §Espionage §Computer fraud or hacking/ improper access §Wrongful taking §Removed from trash

The Computer Fraud and Abuse Act (CFAA) § Enacted in 1986 as an amendment to existing computer fraud to clarify and increase the scope of the previous version while limiting federal jurisdiction to cases "with a compelling federal interest-i. e. , where computers of the federal government or certain financial institutions are involved or where the crime itself is interstate in nature. " (see "Protected Computer", below). § CFAA also criminalized additional computer-related acts. Provisions addressed the distribution of malicious code and denial of service attacks. § Congress also included in the CFAA a provision criminalizing trafficking in passwords and similar items. §To have the best chance of seeking remedies under the CFAA, only give employees access to company networks on a need-to-know basis.

Acquisition by Memory Not a Defense § Employer does not lose protection when employee reconstitutes information from memory

Acquisition by Accident § Person receiving information knows or has reason to know that the information was a trade secret § Defeated if accident caused by failure of trade secret owner to employ reasonable efforts to maintain secrecy

Unauthorized Use §Breach of obligation not to use trade secret arising from agreement not to disclose §Confidential relationship ◦ ◦ ◦ Employer – employee Licensor – licensee Potential buyer Manufacturer or independent contractor Submitted bid

Proof of Acquisition and Use §Direct § Emails and voice mails §Circumstantial showing access and product has similar features or results § Timing § Shift in business strategy § Spoliation of evidence/ evidence of cover up

Preliminary and Permanent Injunctive Relief § The threat of misappropriation may be sufficient to obtain an injunction, even before use. § Need to meet the requirements for an injunction. § Likelihood of success on the merits § Irreparable harm § Balance of equities in favor of plaintiff / clean hands § The misappropriator cannot base a request to terminate the injunction based on improper publication of the trade secrets § Injunctive relief after trial to remove “lead time advantage”

Inevitable Disclosure §Pepsico vs. Redmond 7 th Circuit decision in 1995 enjoined a former employee of Pepsico from working with a competitor for six months, even though there was no evidence the former employee intended to use or disclose trade secrets to the new employer, and was not bound by a noncompete. §The doctrine is disfavored in New York, which as a matter of public policy construes noncompete obligations narrowly. §In such case, the pertinent factors in favor of the application of the doctrine include § § The involvement of direct competitors The employee would perform the identical job The trade secret is well established The trade secret is highly valuable to each of the competitors

Remedies: Monetary Damages §Monetary damages § Lost profits § Loss of revenue § Price erosion § Cost of efforts to minimize consequences of theft §Unjust enrichment: disgorgement of unjust gains §Reasonable royalty

Additional Remedies §Punitive damages and attorney’s fees to prevailing party potentially available under UTSA §Potential criminal remedies § 18 U. S. C. § 1832 Theft of Trade Secrets § Fined and/or imprisoned up to 10 years § Economic Espionage Act (1996) § Provides criminal penalties for misappropriation of trade secrets “related to or included in a product that is produced for or placed into interstate commerce” § Foreign and Economic Espionage Penalty Enhancement Act of 2012 § Greater penalties if misappropriation is to benefit foreign government § Maximum fine for individual perpetrator increased from $500, 000 to $5 million § Maximum fine for organizations is changed from $10 million to “the greater of $10 million or 3 times the value of the trade secret to the organization, including expenses for research and design and other costs of reproducing the trade secret that the organization has thereby avoided” §Under the Tariff Act, Section 337, prohibition on import of goods made through misappropriation

Criminal penalties § 18 U. S. C. § 1832 Theft of Trade Secrets § Fined and/or imprisoned up to 10 years § Economic Espionage Act (1996) § Provides criminal penalties for misappropriation of trade secrets “related to or included in a product that is produced for or placed into interstate commerce” § Foreign and Economic Espionage Penalty Enhancement Act of 2012 § Greater penalties if misappropriation is to benefit foreign government § Maximum fine for individual perpetrator increased from $500, 000 to $5 million § Maximum fine for organizations is changed from $10 million to “the greater of $10 million or 3 times the value of the trade secret to the organization, including expenses for research and design and other costs of reproducing the trade secret that the organization has thereby avoided”

How should a potential trade secrets plaintiff proceed before litigation? §While a trade secrets plaintiff can’t know everything at the start of suit, it must consider how to find out and investigate and re-evaluate the facts thoroughly at each step of the case §Document the objective reasons for suspicion §Work to rule out alternative explanations §See and carefully evaluate the results of appropriate discovery regarding wrongful acquisition, use, and/or disclosure

Defenses: Independent Development § Independent development is a complete defense. Best strategy is to show that defendant only used its own or public information. The key advantages of an independent-development defense are (1) it does not matter how the plaintiff defines its trade secrets, and (2) the defendant controls the evidence. If a company can show it never used any of the plaintiff’s information, then it does not matter how the plaintiff defines its secrets. § If defendant can show that it completed its development before the alleged misappropriation, then the defendant has an easier time showing it misappropriated nothing from plaintiff.

Defenses: Publicly Available Information §Because one cannot claim as its trade secret information that is already in the public domain, a defendant should look for public documents that show that the trade secrets the plaintiff identifies are actually not secret at all. §Although this defense depends on a trade-secret definition from plaintiff, a defendant does not have to rely on the plaintiff's documents for this defense. §This strategy especially effective if the court requires the plaintiff to define its trade secrets early in the case.

Defenses: Reverse Engineering § Information which is “readily ascertainable” through reverse engineering or inspection cannot meet the secrecy element. § Whether the information is “readily ascertainable” may depend on the extent of the effort required.

Defenses: Failure to Keep Information Secret §Another defense is to show that the plaintiff did not take proper efforts to keep the information secret. § For example, if the plaintiff gave the alleged secrets to someone who was not required to keep the information secret, or if the plaintiff allowed persons to get the information without restriction, it has not properly protected the information. §Companies have lost trade secret cases for any number of reasons: § By including the information in published patent applications. By failing to instruct their employees to keep the information secret, and allowing the employee to share it outside the company. § By sending the information to customers, suppliers, or co-developers without any NDA.

Protecting Trade Secrets § Limit access to trade secret materials on a need-to-know basis. A locked filing cabinet with limited key access is sufficient. § Create secure passwords for computer-stored trade secret information. § Consider shredding (rather than throwing away) documents containing trade secrets. § Obliterate or wipe clean (rather than merely deleting) any trade secret information contained on computer hard drives.

Protecting Trade Secrets §Require all employees with access to confidential company information to sign confidentiality agreements. §Have clear written policies that leave no doubt that any access and use of company information, for purposes other than company business is strictly prohibited and have employees acknowledge receiving copies. §Send out regular reminders of the policies and require acknowledgment of receipt. §Beware: Under many federal and state laws, employees have privacy rights in their personal information, even if it is stored on company computers.

Protecting Trade Secrets Companies should safeguard proprietary information by: ◦ conducting entrance and exit interviews with employees; ◦ educating managers and HR sources professionals regarding the company-owned items that employees must return upon departure; ◦ transparently communicating the company’s policies regarding the monitoring of employees’ electronic devices and communications to employees; ◦ disabling employees’ access to company and computer networks at the time of departure; ◦ creating a culture of compliance and confidentiality where employees recognize the value of protecting trade secrets; and ◦ sharing best practices within their industries to protect valuable business data.

Practical Measures BYOD Policies §In light of identified risks to trade secrets portfolio, implement BYOD policy or require employees to use company-issued devices? §Different policies for different levels of employees? §If adopt BYOD policy: § Specify which devices are permitted § Provide clear restrictions regarding use and transfer of company data § Explain when company gets access to device and data § Incorporate into exit interview process § Explain investigation, incident remote wiping procedures § Address personal data/privacy concerns consistent with applicable law

Practical Measures Exit Interviews § Identify the trade secret and confidential information the employee accessed/used. §Question the departing employee: § Ask employee why he is leaving § Ask employee what his new position will be §Check employee’s computer activities and work activities in advance of the meeting. §Ensure that all Company property, hardware, and devices have been returned, including e-mail and cloud data, and social media accounts.

Practical Measures Exit Interviews §Ensure that arrangements are made to have all company data removed from any personal devices. §Disable access to company computer networks. §Make sure to obtain user names and passwords for all company social media accounts. §Inform the employee of continuing obligation under agreements with the Company. §Consider letter to new employer and employee with reminder of continuing obligations. §Consider having departing employee’s emails preserved and electronic devices forensically images as appropriate. §Consider using an exit interview certification.

Practical Measures Post-Termination Investigation §Interview employee’s co-workers; gauge whether employees are hearing about employee in the marketplace. §Examine employee’s email activity. §Conduct a forensic investigation of employee’s computer activities. §Examine and analyze badge records and access logs. §Examine phone records. §Check employee’s social media accounts as appropriate.

Covenants Not to Compete

Noncompete §Prohibits employee from working for a competing company §Require all employees who have access to key trade secrets to sign a noncompete §To enforce the employer needs to show a protectable interest: § Access to a trade secret § Close relations with customers § Unique or extraordinary services

Reasonable Scope of Noncompete §Territory §Duration §Nature of activity §Overall reasonableness: blue pencil

Other Suggested Provisions §Anti-solicitation and no-hire §Choice of law and jurisdiction §Possibly arbitration §Cause of termination §Liquidated damages

Prepared by Andre Castaybert Esq. CASTAYBERT PLLC 830 Third Avenue, 5 th floor New York, N. Y. 10022 WWW. accounsel. com If you would like a copy of this presentation, please email Andre at: acastaybert@ac-counsel. com