Patent Forum August 9, 2012

Trade Secrets Dallas Regional Chamber Patent Issues Forum

Keith Davis, Jones Day (kbdavis@jonesday.com) August 9, 2012

Trade Secrets In The News

Paul Shin Devine, Apple global supply manager from 2005 to 2010, sent drawings, pricing information, and projected sales figures on various Apple devices to suppliers in China, South Korea, Taiwan, and Singapore. Suppliers paid kickbacks, which Apple said totaled more than $1 million. Xiang Dong Mike Yu, product engineer, copied 4,000 documents, including design specs, before leaving Ford, where he worked from 1997 to 2007. Later worked for Beijing Automotive. Specs turned up on his Beijing Automotive laptop when confiscated at OHare International at his 2009 arrest . Clark Alan Roberts and Sean Edward Howley, both U.S. citizens and engineers at a Goodyear supplier, convicted of entering Goodyear plant in Kansas under false pretenses, photographing device used to wrap cable for tires inner thread, and transmitting photos for eventual use by Wyko contractor in China to build tiremaking equipment. Yuan Li, research scientist at company 2006-2011, charged with stealing trade secrets and making them available to rival in which she was partner, Abby PharmaTech, a U.S. subsidiary of Chinese chemical company, and making compounds available for sale on Abbys website.

http://www.businessweek.com/articles/2012-03-14/the-great-brain-robbery

Trade Secrets In The News

What if the FBI came knocking on your door saying that your employer had accused you of stealing US $1 billion from the company? Thats exactly what happened to Biswamohan Pani, a former Intel engineer who was indicted earlier this month for stealing trade secrets from the chip maker. Pani allegedly downloaded more than 100 pages of data containing details about future Intel chip designs and 19 drawings detailing the chips layouts. [B]y the time Pani resigned his position at Intel near the end of May, he had already been hired by Intel rival Advanced Micro Devices (AMD) to work at one of its R&D labs. For nine days after he reported for duty at AMD on 2 June, he was technically still a full-fledged Intel employee, with all the rights and privileges thereof. One of those privileges was access to an encrypted server containing a cache of Intels trade secrets. Intel says it has proof that he raided the server. His supposed intent: to advance his career by strategically using the information to make himself indispensable to his new employer. Lessons From the $1 Billion Intel Trade-Secret Theft, IEEE Spectrum, Nov. 24, 2008

Trade Secrets In The News

Although there are no pending criminal or civil actions against AMD, there are some steps Intel needs to take to ensure that its rival is not sandbaggingin other words, biding its time before coming out with chip designs based on the information. Among them is aggressively demanding that AMD cooperate in an internal investigation in which witnesses would be interviewed and computers would be reviewed forensically to see if any of the information allegedly taken was transferred to or copied on any of AMDs systems. A big open question is why Intel didnt cut off Panis systems access the moment he tendered his resignation. Pani lied about where he was going after leaving Intel, concocting a suspicion-diverting story about going to work for a hedge fund. One of two things was going on There either wasnt a procedure in place, or the procedure wasnt followed to deal with that resignation in terms of data security. In other words, did somebody have a checklist? Did HR get notified? Did IT get notified? Did someone say, This person has given notice. What do we do now? Lessons From the $1 Billion Intel Trade-Secret Theft, IEEE Spectrum, Nov. 24, 2008

Lock the Barn Door ...

Vigilance in the area of trade secrets is required, particularly because once a trade secret is made public all ownership is lost.
- Computer Assocs. Intl, Inc. v. Altai, Inc., 918 S.W.2d 453, 457 (Tex. 1996) (emphasis added)

 Before the Horse Gets Out

It is self-evident that the subject matter of a trade secret must be kept secret.
- Luccous v. J.C. Kinley Co., 376 S.W.2d 336, 338 (Tex. 1964)

Before information can be termed a trade secret, there must be a substantial element of secrecy.
- Astoria Indus. of Iowa, Inc. v. SNF, Inc., 223 S.W.3d 616, 634 (Tex. App.Fort Worth 2007, pet. denied)

A trade secret must be a secret.

- Ineos Group Ltd. v. Chevron Phillips Chem. Co., LP, 312 S.W.3d 843, 852 (Tex. App.Houston [1st Dist.] 2009, no pet.) (emphasis in original).

Statistics and Surveys

Scott Adams

Statistics and Surveys

InfoBrief, NCSES, National Science Foundation (NSF 12-307, Feb. 2012)

Statistics and Surveys

InfoBrief, NCSES, National Science Foundation (NSF 12-307, Feb. 2012)

Statistics and Surveys

InfoBrief, NCSES, National Science Foundation (NSF 12-307, Feb. 2012)

Statistics and Surveys

Ponemon Institute LLC. (2009). Data Loss Risks During Downsizing: As Employees Exit so Does Data.

Statistics and Surveys

Ponemon Institute LLC. (2009). Data Loss Risks During Downsizing: As Employees Exit so Does Data.

Statistics and Surveys

Ponemon Institute LLC. (2009). Data Loss Risks During Downsizing: As Employees Exit so Does Data.

Statistics and Surveys

Some other statistics:

Top 5 states with trade secret case filings: California, Illinois, Michigan, New York, Texas 7-9 years: How often trade secret litigation has doubled in the United States 85%: How often the alleged misappropriator was known to the TS owner Employee, former employee, or business partner Half of information misappropriated is business information; the other half is technical information and know-how 42%: How often the TS owner prevailed on all TS claims in litigation 5%: How often TS owner prevailed on some TSs but not others
Almeling et al., A Statistical Analysis of Trade Secret Litigation in Federal Court, 45 Gonzaga L.R. 291 (2009) See also Almeling et al., A Statistical Analysis of Trade Secret Litigation in State Courts, 46 Gonzaga L.R. 291 (2010)

The Law

If at first you don't succeed [at protecting your trade secrets], you're not Chuck Norris.

Texas
Trade secret: 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.
Computer Assoc. Intl, Inc. v. Altai, Inc., 918 S.W.2d
453, 455 (Tex. 1996); Hyde Corp. v. Huffines, 158 Tex. 566, 314 S.W.2d 763, 777 (Tex.), cert. denied, 358 U.S. 898 (1958).

Texas
Trade secret: Factors to be considered include: (a) the extent to which the information is known outside of the business of the party claiming the information is a trade secret (b) the extent to which the information is known by employees and others involved in the partys business (c) the extent of the measures taken by the party to guard the secrecy of the information (d) the value of the information to the party and to his or her competitors (e) the amount of effort or money expended by the party in developing the information (f) the ease or difficulty with which the information could be properly acquired or duplicated by others
- In re Bass, 113 S.W.3d 735 (Tex. 2003).

Texas
Misappropriation: Use or disclosure of a trade secret that was acquired through a relationship of trust or through fraud or other improper means, including breach of: Fiduciary relationship Employment relationship Express or implied contract Other confidential relationship Hyde Corp. v. Huffines, 158 Tex. 566, 314 S.W.2d
763,770 (Tex.), cert. denied, 358 U.S. 898 (1958)

Texas
The mere fact that knowledge of a product might be acquired through lawful means such as inspection, experimentation, and analysis does not preclude protection from those who would secure that knowledge by unfair means. Although information generally known and readily ascertainable is not protectable, the fact that information is discoverable by lawful means does not deprive its owner of protection from one acquiring it by unfair means.

IAC, Ltd. v. Bell Helicopter Textron, Inc., 160 S.W.3d

191, 198-99 (Tex. Ct. App.Fort Worth 2005) (citing In re Bass, 113 S.W.3d 735, 739 (Tex. 2003))

California
Trade secret: Information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Cal. Civ. Code 3426.1(d) (adopting UTSA)

California
Misappropriation: (1) 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 (2) 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 or her 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. Cal. Civ. Code 3426.1(b) (adopting UTSA)

Examples of Trade Secret Information

Advertising & marketing strategies Contract and payment terms Cost information Customer lists Engineering drawings and software Formulas for product designs Manufacturing processes

Marketing & competitor research Pricing, revenue, and sales information Profit margins Software Strategic plans

How to Protect Your Trade Secrets

Pretty Good Advice From the FBI

How to Protect Your Business from Espionage: Six Steps 1. 2. 3. 4. 5. 6. Recognize there is an insider and outsider threat to your company. Identify and valuate trade secrets. Implement a proactive plan for safeguarding trade secrets. Secure physical and electronic versions of your trade secrets. Confine intellectual knowledge on a "need-to-know" basis. Provide training to employees about your company's intellectual property plan and security.

http://www.fbi.gov/about-us/investigate/counterintelligence/economic-espionage/

Step 1: Recognize the Threat

Who might take confidential information? Officers & directors Scientists, engineers & programmers Marketers & salesmen Vendors & consultants Trade secret theft is deliberate: Former employees NOT an accident! Joint venture partners Supply chain members OEMs & distributors International companies & citizens Computer hackers & IT personnel Criminals & felons

Step 2: Identify Trade Secret Information

Prioritize & identify confidential information What type of information (strategy, sales, technical, etc.)? How is the information generated ? How critical is the information to the business? Where is it located (within United States/outside United States)? How is it stored (server, database, locally, hard copy, cloud)? How is it accessed (network, Internet, laptop, tablet, PDA)? Who has access (within company and outside of company)? How am I able to track access and copies? Understand technology related to all of the above!

Step 3: Implement a Protection Plan

Create a written, definitive, enforceable protection policy covering:

Identity of confidential information Access to confidential information Investigation & screening of persons prior to access Maintaining confidentiality of information Including disclosure process, public and otherwise Use of technology to limit access & preserve confidentiality Legal obligations related to confidential information Access, maintenance, copies & storage Nondisclosure & noncompete agreements Audit & reporting requirements Misappropriation plan Document trade secret development & use Document trade secret value (sales, royalties, licenses) Educating employees

Step 4: Secure Trade Secrets

Generally

Mark confidential information as such Police access to information Limit & track access, copies & downloads; password protect Be aware of access by and storage on mobile devices Including ability to remotely wipe or block access Non-disclosure agreements & audit rights Employment agreements & non-competes Jurisdictional limitations (especially outside the United States) Ownership rights & joint confidential information (joint ventures)

Technology:

Legal:

Step 5: Need-to-Know Access

Investigate recipients of confidential information

Background checks of new employees Investigate vendors, OEMs & partners Conflicts & competition E.g., joint venture or M&A due diligence

Provide public information if possible Technology Legal

Contractual provisions limiting access to information Audit provisions Reporting provisions

Step 6: Training (and ENFORCEMENT)

Back to the Factors

(a) the extent to which the information is known outside of the business of the party claiming the information is a trade secret - Cannot be public information; think prior art (b) the extent to which the information is known by employees and others involved in the partys business - Limited disclosure and distribution (c) the extent of the measures taken by the party to guard the secrecy of the information - Technology; NDAs & contractual terms; audit rights; background investigations; monitoring copying and distribution (d) the value of the information to the party and to his or her competitors - Nexus to success & sales; efforts taken to preserve secrecy (e) the amount of effort or money expended by the party in developing the information - Document development costs and relative importance (f) the ease or difficulty with which the information could be properly acquired or duplicated by others

Other Considerations

Occupy Wall Street effect

Big companies dealing with small inventors Small inventors dealing with big companies Discovery rule may toll statute but dont count on it

Statute of limitations: 3 years in Texas

Equitable defenses laches Inevitable disclosure (Un)enforceability of noncompete agreements
Noncompete restrictions must be reasonable

Noncompete Agreements
Texas Covenants Not to Compete Act (Tex. Bus. Com. Code 15.50-15.52) An enforceable non-compete must: Be ancillary to or part of otherwise enforceable agreement at the time the agreement is made; Protect a legitimate business interest; Contain reasonable limitations as to the scope of activity to be restrained; Contain reasonable geographical limitations; and Contain reasonable durational limitations
- Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011)

Extraterritorial Misappropriation and Federal Statutes

Some problems with extraterritorial misappropriation

Personal jurisdiction Choice of law Discovery Enforceability Remedies and injunction

Federal Statutes: Economic Espionage Act, 18 U.S.C. 1831 et seq. (1996)

- Includes criminal and civil actions by the Federal Government, including over extraterritorial misappropriations, but no private causes of action

See Robert Kantner, Protecting Trade Secrets Internationally Through a Comprehensive Trade Secret Policy (available through Jones Day) See also http://tradesecretshomepage.com/indict.html#_Toc9924962 (describing convictions under the Economic Espionage Act)

Receiving Confidential Information (Beware Greeks Bearing Gifts)

Receiving Confidential Information

If you receive confidential information, you could be inviting a lawsuit! Competitors?
Same products? Same customers? Former employee? Recipients commercial success = his or her trade secret!

Small businesses or sole inventors?

Potential acquisitions & deals; due diligence

Sales & marketing leads Technical leads & information Industry knowledge Conflicts cause problems!

Receiving Confidential Information

Before you receive confidential information, ask:

Do you need the information?

Public information a sufficient substitute? Sales information? Technical information How are you going to ensure its confidentiality?

Is the information, in fact, confidential?

Who is going to receive the information?

The point: You need to have a policy for receiving confidential information too!

Receiving Confidential Information

When receiving confidential information

Be specific identify the confidential information?

Require information to be clearly identified marked No generic NDAs (confidential information) Memorialize what is public and what is not Memorialize dealings and communications between parties Beware oral communications (he said, she said)

If you disagree that information is confidential, say so Need to know still applies
Use public information if possible (no thank you) Take only what needed (not a buffet) Take only when needed (due diligence)

Receiving Confidential Information

Preserve the confidentiality of any received information

Limit & enforce disclosure If competitors, or you have similar information

Maintain clean room environment Consider disclosing conflicts of interests Do not take confidential information at face value (e.g., financial or marketing information)

Be careful what you say especially internally!

Return & destroy

Parting Thought: Avoid the Flu

 Dont Get Pneumonia!

- Use hand soap - Get a flu shot - Get regular checkups - Watch for flu symptoms - Get a prescription - Take your medicine

Dont end up in the emergency room!

Additional Articles & Resources

CREATE.org, Trade Secret Theft: Managing the Growing Threat in Supply Chains (available at http://www.create.org/views/trade-secret-theft-managinggrowing-threat-supply-chains ) Nicola Searle, The Criminalization of the Theft of Trade Secrets: An Analysis of the Economic Espionage Act, IP Theory: Vol. 2: Iss 2, Article 2 (2012) (available at http://www.repository.law.indiana.edu/ipt/vol2/iss2/2) J. Benjamin Bai and Guoping Da, Strategies for Trade Secrets Protection in China, 9 Nw. J. Tech. & Intell. Prop. 351 (2011) (available at http://scholarlycommons.law.northwestern.edu/njtip/vol9/iss7/1) State Bar of Texas Unfair Competition and Trade Secrets Committee website: http://texasbariplaw.org/committees/committee/trade-secrets/