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

[email protected]

SV: (650) 858-6580

LA: (213) 615-1780

John Keville Houston Office Managing Partner

[email protected]

(713) 651-2659

Sheryl Falk Of Counsel

Houston

[email protected]

713-651-2615

mailto:[email protected]




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

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Trade Secret Protection: The Basics

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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

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$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

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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

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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?

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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

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Trade Secret Protection

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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?

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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

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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

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• 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?

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• 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

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• 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

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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

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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

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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

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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

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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

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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

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Deleted emails showed the defendants had stolen confidential company information by emailing it to personal email accounts

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Case Study 1: Home Computers Proved Spoliation Fragments in unallocated space showed why their work computers had no operating system

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© 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

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Case Studies Take Aways

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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

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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

[email protected]

SV: (650) 858-6580

LA: (213) 615-1780

John Keville Houston Office Managing Partner

[email protected]

(713) 651-2659

Sheryl Falk Of Counsel

Houston

[email protected]

713-651-2615


