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Trade Secrets in the Workplace

Institute for Corporate CounselMarch 2003

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Basic IP Rights

• Patents

• Copyrights ©

• Trademarks ™

• Trade Secrets

Intellectual Property Overview

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1. What is a Trade Secret?

2. What is Misappropriation?

3. Penalties for Misappropriation

4. Steps to Protect Trade Secrets

5. Steps to Reduce Misappropriation Risk

6. Questions & Discussion

Trade Secret Overview

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What is a Trade Secret?

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• A Trade Secret is Information that:

– derives independent economic value, actual or potential, from not being generally known to the public or to others who could derive economic value from its disclosure or use; and

– is the subject of reasonable efforts under the circumstances to maintain its secrecy.

What is a Trade Secret?

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What is a Trade Secret?

– formulas– patterns– compilations– programs

– devices– methods– techniques– processes

“Information” Can Broadly Include:

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• Specific Examples of Information That May Constitute a Trade Secret:– customer and supplier lists– recipes/formulas– computer source code– manufacturing methods– business plans and marketing strategies– pricing and costs– “negative information”/avoiding blind alleys

What is a Trade Secret?

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• Specific Examples of Information that Does Not Constitute a Trade Secret

– “generally known”– lacking in actual or potential “independent

economic value”– “general knowledge, skills and experience”

acquired on the job– not subject of reasonable efforts to maintain

secrecy

What is Not a Trade Secret?

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• Observable or apparent product features

• Scientific principles and laws of nature

• Standard industry practices

• Textbook or open literature concepts

Information That Is “Generally Known”

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• Information of no real economic value or competitive significance

• Stale or historic information

Information Lacking “Independent Economic Value”

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• If a chef quits her job to start her own restaurant, what information is she entitled to use?– knowing to oil or butter the pan before

cooking?– suitable cooking temperature ranges for certain

foods?– specific recipes?

An Employee’s “General Knowledge, Skills & Experience”

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• A Trade Secret is Information that:

– derives independent economic value, actual or potential, from not being generally known to the public or to others who could derive economic value from its disclosure or use; and

– is the subject of reasonable efforts under the circumstances to maintain its secrecy.

What is a Trade Secret?

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• no hard and fast rules

• must be reasonable under the circumstances– a reasonable effort for a major manufacturer

may not be reasonable for a garage shop inventor

• stay tuned for some practical tips

What Are “Reasonable Efforts” to Maintain Secrecy?

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• Information disclosed in patents

• Information disclosed in SEC filings

• Information disclosed in data books, websites, etc.

• Information observable on plant tours

• Information disclosed in speeches and articles

Information Not Subject to Reasonable Secrecy Measures

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• What if an employee distributed the company’s trade secrets to outsiders without authorization?

Potential Loss of Trade Secret Protection

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• Patent vs. Trade Secret Protection– limitations on patentability– where overlap, concepts mutually exclusive– public disclosure vs. private information– scope of protection– length of protection

Comparison of Patent and Trade Secret Protection

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• Ability to sufficiently protect information from disclosure– ease of reverse engineering– risk of inadvertent public disclosure

• Need for disclosures to customers or others• Licensing considerations• Cycle Time/Duration of competitive

significance• Cost considerations

Choosing Patent vs. Trade Secret Protection

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What is Misappropriation?

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Misappropriation:

• Disclosed or used in violation of an obligation of confidentiality

• Disclosed or used by one who knows or ought to know it was derived from someone who violated an obligation of confidentiality

What is Misappropriation?

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Misappropriation:

• Acquired by improper means

• Disclosed or used by one who knows or ought to know it was acquired by someone through improper means

What is Misappropriation?

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Misappropriation:

• Disclosed or Used Under Circumstances Where One Knows or Has Reason to Know It was Acquired by Accident or Mistake

What is Misappropriation?

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Inducement

• Inducing misappropriation by others

• Inducing breach of confidentiality obligations

What is Misappropriation?

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Penalties for Trade Secret Misappropriation

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Penalties for Trade Secret Misappropriation

Civil Liability

Monetary Damages+Injunction: Pre/post-trial+“Double” Damages + Attorneys’ Fees

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Civil Liability

Overlapping Criminal Statutes

Monetary Damages+Injunction: Pre/post-trial+”Double” Damages+ Attorneys’ Fees

State Criminal StatutesFederal Criminal Statutes

Penalties for Trade Secret Misappropriation

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• Cal. Penal Code § 499c: Theft of Trade Secret

• Cal. Penal Code § 496: Receiving Stolen Property

• Cal. Penal Code § 502: Unauthorized Access to Computers, Computer Systems, and Computer Data

State Criminal Statutes

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• Economic Espionage Act of 199618 U.S.C. §§ 1831-1839

• Mail and Wire Fraud18 U.S.C. §§ 1341, 1343

• R.I.C.O.18 U.S.C. §§ 1961-1968

• National Stolen Property Act18 U.S.C. §§ 2311-2322

• Fraud and Related Activity18 U.S.C. § 1029

Federal Criminal Statutes

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BusinessConsiderations

Civil Liability

Overlapping Criminal Statutes

Monetary DamagesUnjust Enrichment+Injunction: Pre/post-trial+ “Double” Damages+ Attorneys’ Fees

State Criminal StatutesFederal Criminal Statutes

Harm to ReputationDisruption to Customer Relationships

Penalties for Trade Secret Misappropriation

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Steps to Protect One’s Trade Secrets

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“Just because you’re paranoid

Doesn’t mean they’re not after you.”

Nirvana, “Territorial Pissings” from Nevermind

Steps to Protect One’s Trade Secrets

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Evolving Reasonable Efforts

Workplace Controls

Steps to Protect One’s Trade Secrets

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• restricted distribution

• off-limits areas

• visitor access procedures

• disposal of sensitive materials

Workplace Controls

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EvolvingReasonable Efforts

Workplace Controls

Materials-Marking Practices

Steps to Protect One’s Trade Secrets

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• defined procedure

• employee training

• automatic e-mail headers

• guarding against overuse

Materials-Marking Practices

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EvolvingReasonable Efforts

Workplace Controls

Materials-Marking Practices

Electronic Security Measures

Steps to Protect One’s Trade Secrets

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• firewall

• access cards

• encryption of transmissions

• password protection

• digital watermarks

• “read-only” email

• preserving audit trails

Electronic Security Measures Today and Tomorrow

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Evolving Reasonable Efforts

Workplace Controls

Materials-Marking Practices

Electronic Security Measures

Vigilance

Steps to Protect One’s Trade Secrets

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• Assign a Gatekeeper– Attorney or Senior Business Person– Reviews Materials Before Publication or

Distribution

                   

Vigilance

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• Assign a Gatekeeper– Attorney or Senior Business Person– Reviews Materials Before Publication or

Distribution

Website

Patent Disclosures

                   

Articles

Trade ShowsTrade Shows

ToursTours

SpeechesSpeeches

Vigilance

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EvolvingReasonable Efforts

Workplace Controls

Materials-Marking Practices

Electronic Security Measures

Vigilance

Employment Practices

Steps to Protect One’s Trade Secrets

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• Confidentiality Agreements– protect company’s confidential information

(whether trade secrets or not)– protect third party’s confidential information

given to company– no improper use or disclosure of former

employer’s confidential information

Employment Practices

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• Intake Procedures

• Employee Handbook and Education

• Compliance Procedures

• Exit Interviews– return company documents– laptops, email accounts, server access

Employment Practices

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EvolvingReasonable Efforts

Workplace Controls

Materials-Marking Practices

Electronic Security Measures

Vigilance

Employee Practices

Non-Disclosure Agreements

Steps to Protect One’s Trade Secrets

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Typical Non-Disclosure Agreement Terms

• Applies to specific information disclosed and designated as “Confidential”

• Limits use of the Confidential information to specific purpose

• Prohibits disclosure of the Confidential information to third parties

• Requires precautions to avoid the inadvertent disclosure of the Confidential information

• Requires the return or destruction of Confidential information at a particular time or when the business need for it has passed.

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• Lots of bad forms out there. Beware!• Provisions to Pay Attention to:

– time limits– carve-outs for information “otherwise known”– carve-outs for information “independently

developed”

• Potential for contamination of important players.

• Recordkeeping.

Non-Disclosure Agreements

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Steps to Reduce Misappropriation Risk

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• As employees move, so do trade secrets.

• Employees are often required to make black and white distinctions in a gray world.

• There are no realistic safe harbors.

• The name of the game is minimizing and managing risk.

Setting the Stage

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• Do your own work.

• Be open and honest in describing your conduct.

• If you have a problem . . .– take appropriate prompt action– seek Legal Department advice– don’t ignore it or procrastinate

Step 1: “Do The Right Thing, and Act Like It.”

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• Hire based on your needs and the candidate’s skills

• Be straightforward and honest in approach

• Credibility and integrity count

• Do your homework

Step 2: Use Prudent Hiring Procedures

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• Implement policies requiring respect for others’ intellectual property rights.

• Discuss those policies openly, and make sure your employees know you’re serious.

• Respect your employee’s judgment on the limits of what he can and cannot do or discuss.

Step 3: Implement Prudent Employment Policies

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• Make and preserve your record.

• Consider taking a snapshot of work in progress.

• Consider hiring a respected, neutral expert.

Step 4: Document Independent Development

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• In litigation, everything you do may be scrutinized.

• Perfectly legitimate and ordinary business conduct may be distorted and twisted.

• Be cognizant of how things can be mischaracterized or cast in the worst possible light.

Step 5: Think Carefully!

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• Similarity of position and responsibilities• Degree of supervision and controls• Speed of R&D activities• Deviations from normal practice• Use of pre-existing company resources• Time and cost to market• Misrepresentations or concealment

Factors Juries Tend to Find Significant

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Mark A. Samuels

www.omm.com

Trade Secrets in the Workplace