Strategies to Maintain and Enforce your Trade Secrets

Strategies to Maintain and Enforce your Trade Secrets
David Enzminger, Sheryl Falk & John Keville

© 2014 Winston & Strawn LLP
Today’s eLunch Presenters
David Enzminger Silicon Valley Managing Partner denzminger@winston.com SV: (650) 858-6580 LA: (213) 615-1780
John Keville
Houston Office Managing Partner
jkeville@winston.com
(713) 651-2659
Sheryl Falk
Of Counsel Houston
sfalk@winston.com
713-651-2615

Presentation Agenda
•
Trade Secret Basics and Risk
•
What Protections are Available?
•
Kicking Off the Internal investigation
•
Making the Case: What Evidence Do You Need?
•
Taking Steps to Protect your Trade Secrets
3

Trade Secret Protection: The Basics
4
A trade secret is:
•
a formula, pattern, physical device, idea, process, or compilation of information
•
not generally known or reasonably ascertainable
•
which can give a business an economic advantage over competitors
Examples of Potential Trade Secrets
•
A formula or chemical composition
•
Survey methods used by professional pollsters
•
a new invention for which a patent application has not been filed
•
marketing strategies
•
computer algorithms

Trade Secret Theft By the Numbers
5

$300 Billion economic loss from trade secret theft

59% of trade secret litigations are related to employees or former employees

65% of insiders had accepted positions with a competitor

50% steal data within a month of leaving

54% used a network-email, a remote network access channel, or network file transfer

Federal Cases
1950-2007
2008
Formulas
4% (12)
9% (11)
Technical information and know-how
46% (126)
35% (42)
Software or computer programs
11% (29)
10% (12)
Customer Lists
32% (86)
31% (38)
Internal business information
31% (84)
35% (42)
External business information
2% (5)
1% (1)
"Combination" trade secrets
2% (5)
1% (1)
"Negative" trade secrets
1% (2)
0
Other or unknown
5% (14)
9% (11)
State Cases
1995-2009
Formulas
5% (16)
Technical information and know-how
27% (98)
Software or computer programs
6% (23)
Customer lists
52% (187)
Internal business information
42% (150)
External business information
3% (10)
“Combination” trade secrets
0% (0)
“Negative” trade secrets
0% (0)
Other or unknown
6% (23)
Source: David S. Almeling et al., A Statistical Analysis of Trade Secret Litigation in State Courts, 47 GONZ. L. REV. 57 (2011)
Trade Secret Theft By the Numbers

What Protections Are Available?

Key Differences Between Patents and Trade Secrets
8
Patent
Trade Secrets
Applicable Law
Federal Statute
State Law
Requirements
Invention and application to the USPTO
Information is created, kept secret, and has independent economic value due to being secret
Exclusivity
Yes
No
Reverse Engineering
Not Permitted
Complete defense if properly acquired
Official Grant from Government
Yes
No
Novelty
Required
Cannot be generally known or readily ascertainable
Obviousness
Must be nonobvious
Cannot be generally known or readily ascertainable
Duration
Generally 20 years from application filing
No express limitation

Uniform Trade Secret Act Varies By State

Generally Provides a Uniform Law for the Protection of Trade Secrets
•
The UTSA “shall be applied and construed to effect its general purpose to make uniform the law with respect to the subject of [the UTSA] among the states enacting it.”

UTSA Is Not Identical In All States

Which State Law Governs Can be Important
•
Choice of Law Provisions in Nondisclosure Agreements and Covenants Not to Compete
9


UTSA Definition § 1(4)
Information, including a formula, pattern, compilation, program, device, method, technique, or process that:
(i)
derives independent economic value, actual or potential from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use, and
(ii)
is the subject of efforts that are reasonable under the circumstances to maintain its secrecy
Three Requirements:
(1)Secret Information
(2)Independent Economic Value
(3)Reasonable Efforts to Maintain Secrecy
What is a Trade Secret?
10


Individual States Provide the Law for the Civil Enforcement and Protection of Trade Secrets

47 States and the District of Columbia Have Adopted Broadly the Uniform Trade Secret Act (UTSA)

Not adopted in NY, NC, or MA
Basis for Civil Protection of Trade Secret Law
11

Trade Secret Protection
12

To bring Trade Secret Litigation, you must:

Establish a Trade Secret
(1)
secrecy
(2)
independent economic value
(3)
reasonable efforts to maintain secrecy

Prove Misappropriation

Allege damages and/or right to Injunctive Relief


The key part of a trade secret is secrecy

Information that is generally known or readily available by independent investigation is not “secret”

However, secrecy need not be absolute

Only “a substantial element of secrecy must exist, so that except by the use of improper means, there would be difficulty in acquiring the information.”
−
For example, there is no surrender of secrecy where information disclosed with an expectation that information remain secret
−
NDAs, fiduciary relationships, employment agreements, confidentiality notices, etc.
Requirement of Secrecy: How Secret?
13


Under Examined Aspect of the UTSA

Courts and Plaintiffs Often Ignore

But it is a Requirement!

Not Any Value – But Economic Value “Due to its Secrecy”

UTSA Requirements Greater Than Traditionally Required at Common Law

If Defendant, Do NOT Ignore!
Requirement of Economic Value
14

Requirement of “Reasonable Efforts”

“LAW”
−
Must be Reasonable “Under the Circumstances”
−
Failure to do Anything Precludes Protection

Practical Realities
−
The Worse Defendant’s Conduct, the Less the Requirement
−
Closer the Relationship, the Less the Requirement
−
Efforts Do Not Always Match the Risk
15

•
UTSA Definition §1(2)
Misappropriation means: (i) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (ii) disclosure or use of a trade secret of another without express or implied consent by a person who (A) used improper means to acquire knowledge of the trade secret; or (B) at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was (I) derived from or through a person who had utilized improper means to acquire it; (II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or (III) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or (C) before a material change of his [or her] position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.
Includes Actual or Threatened Misappropriation
1.
Wrongful Acquisition,
2.
Wrongful Disclosure, or
3.
Wrongful Use
What is Misappropriation?
16

•
UTSA § 3. Damages
(a) Except to the extent that a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation renders a monetary recovery inequitable, a complainant is entitled to recover damages for misappropriation. Damages can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss. In lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty for a misappropriator’s unauthorized disclosure or use of a trade secret. (b) If willful and malicious misappropriation exists, the court may award exemplary damages in the amount not exceeding twice any award made under subsection (a).
Monetary Damages
1.
Damages
2.
Disgorgement of Unjust Gains
3.
In Some Cases, a Reasonable Royalty
4.
Potential Punitive Damages
Remedies: Damages Under The UTSA
17

•
UTSA § 2. Injunctive Relief
(a) Actual or threatened misappropriation may be enjoined. Upon application to the court an injunction shall be terminated when the trade secret has ceased to exist, but the injunction may be continued for an additional reasonable period of time in order to eliminate commercial advantage that otherwise would be derived from the misappropriation. (b) In exceptional circumstances, an injunction may condition future use upon payment of a reasonable royalty for no longer than the period of time for which use could have been prohibited. Exceptional circumstances include, but are not limited to, a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable. (c) In appropriate circumstances, affirmative acts to protect a trade secret may be compelled by court order.
Generally: Injunctive Relief to Prevent Future Misappropriation and to Remove “Lead Time Advantage”
Remedies: Injunctive Relief Under The UTSA
18

Inevitable Disclosure
Majority Rule:
•
A limited duration injunction in many jurisdictions where an employee with significant trade secret knowledge departs for a competitor to perform the same or substantially similar job.
•
- PepsiCo v. Redmond, 54 F.3d 1262 (7th Cir. 1995)
Minority (California):
•
Inevitable disclosure doctrine expressly rejected in California, which instead requires more evidence of actual or threatened misappropriation than a reliance on the knowledge of the employee and the scope of the employees next job.
•
- Whyte v. Schlage Lock, Co. 101 Cal. App. 4th 1443 (2002)

•
UTSA § 4. Attorney’s Fees
If (i) a claim of misappropriation is made in bad faith, (ii) a motion to terminate an injunction is made or resisted in bad faith, or (iii) willful and malicious misappropriation exists, the court may award reasonable attorney’s fees to the prevailing party.
Summary: Attorney’s Fees Potentially Available to Prevailing Plaintiff or Defendant (Bad Faith Conduct)
Remedies: Attorney’s Fees Under The UTSA
20

Future Developments in Trade Secret Law

Pending Legislation for Federal Trade Secret Law

S.2267 (introduced April 29, 2014)

H.R. 5233 (introduced July 29, 2014)

Amends Economic Espionage Act to provide for civil cause of action:

Based on Uniform Trade Secrets Act

Concurrent Jurisdiction State/Federal

Provide ex parte seizure provisions not found in UTSA adopted by 47 states

Five year statute of limitation

Necessary?

State laws are remarkably uniform

Federal jurisdiction is frequently invoked with diversity jurisdiction or pendent jurisdiction (Computer Fraud and Abuse Act)

Future Developments in Trade Secret Law

Continued Federal Prosecution
•
“The Department of Justice has made investigation and prosecution of corporate and state sponsored trade secret theft a top priority.”
Administration Strategy on Mitigating the Theft of U.S. Trade Secrets, February 2014

Kicking Off the Internal Investigation

Investigation Triggers
25

Suspicious Departures

Multiple resignations within a group

Employee leaving to work for competitor

Employee not willing to divulge next employer

Employee leaving for start-up company in same field

Exposure to highly sensitive information

Refusal to account for all company assets

Frequent use of external USB devices

Forwarding documents to external email address

Copying documents to unapproved cloud storage services

Use of external VPN services to hide activities

New company with former employees announces competing product in suspiciously short time

Improper customer contacts

The Internal Investigation –Preserving Evidence
Secure and Forensically Preserve Evidence

Obtain Forensic Copy of Relevant Evidence
−
Hard Drives, Email Archives, Server data, On-line storage

Suspend Process Driven Deletions for Custodians

Chain of Custody to document 26
What are the Dangers of “do it yourself” collections?

Inferior Tools, Training or Methods

Attorney Mistakes

If not correctly done, can erase evidence

Spoliation and Tampering Claims

What Evidence Can You Get Through Forensic Analysis?
•
Manner and extent of a user’s theft of proprietary data
•
USB connections
•
Email
•
On-Line storage uploads
•
Communications with Competitor/Co- Conspirators
•
Calendar appointments/Contacts
•
Internet usage and online research
•
Timing and extent of file deletion or anti- forensics (wiping software)

Key questions to Answer = Key Dates
28
During Employment
•When was resignation given
•What devices were returned on departure
•What was last day of employment
After departure
•Start date at new employer
•What systems did they have access during this time
On litigation filed
•When was preservation letter sent
•When was first notice given
•What was suit served on defendant
Spoliation
Benefit to employer
Intent and scope of theft

Case Lessons: What Evidence Do You Need?

Case Study 1
30
Investigation Triggers:
•Two high level employees leave at same time
•Exit interviews – no current plans
•IT finds the returned computers have nothing – not even an operating system
•Investigation starts
•Their product looks like our product

Case Study 1: Compelled Production of Home Computers
31
Deleted emails showed the defendants had stolen confidential company information by emailing it to personal email accounts

© 2014 Winston & Strawn LLP 32
Case Study 1: Home Computers Proved Spoliation
Fragments in unallocated space showed why their work computers had no operating system

© 2014 Winston & Strawn LLP 33
Case Study 1: Home Computers Proved Spoliation
Disk logs showed that defendants tried to destroy evidence on home computers and USB devices
The Court was convinced there was spoliation, and instructed the jury accordingly.
2010-01-24 11:59:58 -0600: Disk Utility started. 2010-01-24 12:00:24 -0600: Preparing to zero disk : Secret Backup 2010-01-24 12:00:24 -0600: Passes : 0 2010-01-24 12:02:18 -0600: Preparing to erase : Secret Backup 2010-01-24 12:02:18 -0600: Partition Scheme: GUID Partition Table 2010-01-24 12:02:18 -0600: 1 volume will be erased 2010-01-24 12:02:18 -0600: Name : Secret Backup 2010-01-24 12:02:18 -0600: Size : 639.79 GB 2010-01-24 12:02:18 -0600: Filesystem : Mac OS Extended (Journaled) 2010-01-24 12:02:18 -0600: Unmounting disk 2010-01-24 12:02:18 -0600: Erasing 2010-01-24 12:02:58 -0600: Initialized /dev/rdisk1s2 as a 596 GB HFS Plus volume with a 49152k journal 2010-01-24 12:02:58 -0600: Mounting disk 2010-01-24 12:02:59 -0600: Could not mount disk1s2 with name Secret Backup after erase 2010-01-24 12:02:59 -0600: Erase complete.

Employee interviews with Competitor
My Passport #1 Copies data and later returns to Company
2/2
Employee signs Competitor offer letter
2/11-12
Copies >15,000 files to My Passport #2
3/11
3 Devices last attached
to Company Computer
3/15
My Passport #2 attached to iMac
3/22
My Passport
#2
Copied data using missing computer
3/30
__/__
Seagate
5/13
Accessed data from Seagate on Competitor computer
6/10
TRO Entered
Placed majority of documents in recycle bin in Company
computer
Runs Ccleaner 9 times on Company computer
Ran Ccleaner on Competitor Computer
Seagate
1/10
1/21
2/15
3/9-11
5/30
Installs Ccleaner on Competitor computer
Competitor’s Computer
Case Study 2: Build the case with forensics

Case Study 3: Not all evidence is forensic
35

Case Studies Take Aways
36
1.
Act quickly to investigate suspicious activity or resignations
2.
Build the case before filing
•
Don’t count on discovery without a hook
•
If they stole your trade secrets, they will likely lie and destroy evidence
3.
Pursue aggressive discovery based upon pre-filing foundation

Can I get my opponent’s hard drive?
Your chances are stronger if you establish need.
•
Show non-compliance with discovery
•
Show evidence of missing USB devices
•
Show destruction of other evidence
•
Show no alternate method to obtain data
•
Possibly suggest a neutral expert
•
Argue truth and justice (especially in trade secret cases)
Case Studies Take Aways

Taking Steps to Protect Your Trade Secrets

Tips to Protect Trade Secrets
•
Understand Portfolio of Confidential Data
•
Restrict Access to Trade Secret Information/Databases
•
Use Confidentiality Labels
•
Require Every Employee to Sign Confidentiality Agreements
•
Limit information provided to Outsiders
•
Use Exit Interviews for departing employees
•
Consider Pro-active investigation for employees who meet investigation triggers
39

Tips for Securing your data from External Threats
1.
Protect your most sensitive data
•
Encrypt your sensitive data
•
Tokenization
•
Data loss prevention systems
2.
Use Effective Password Management
3.
Consider multi-factor authentication
4.
Enforce lock out policies
5.
Keep good logs
6.
Look for suspicious activity
7.
Have a plan to respond quickly

Questions?

Thank You.
David Enzminger Silicon Valley Managing Partner denzminger@winston.com SV: (650) 858-6580 LA: (213) 615-1780
John Keville Houston Office Managing Partner jkeville@winston.com (713) 651-2659
Sheryl Falk Of Counsel Houston sfalk@winston.com 713-651-2615

Strategies to Maintain and Enforce your Trade Secrets

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