u.s. strategies for the protection of trade secrets in...

U.S. Strategies for the Protection of

Trade Secrets in a Global Economy

AIPPI Workshop VIII

2013 Helsinki AIPPI

R. Mark Halligan, Partner, Intellectual Property and Trade

Secrets Litigation, Nixon Peabody LLP

300 S. Riverside Plaza, 16th

Floor, Chicago, IL, USA

312-425-3970 • rmhalligan@nixonpeabody.com

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Three Important Trends

1. Intangible assets are now paramount in the new

information-based economy

2. Employee mobility and open multi-party innovation

3. Increasing availability of tools capable of hijacking

information assets residing in an electronic environment

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US Litigation & Enforcement

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Broad Protection Available in US

• Both technical and non-technical information are

protectable as trade secrets

• Negative know-how ("what doesn’t work") is protectable

as a trade secret

• Actual or potential economic advantage derived from

secrecy

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US Laws Protecting Proprietary Information

• Uniform Trade Secrets Act (UTSA)

• Restatement (Third) Unfair Competition

• Economic Espionage Act of 1996 18 USC Section 1831 et

seq. (EEA)

• Computer Fraud and Abuse Act 18 USC Section 1030 et

seq. (CFAA)

• State Laws Enforcing Confidential Information and Trade

Secret Agreements With Employees

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International Trade Commission (ITC)

TianRui Group Co. Ltd. v. US International Trade

Commission, 661 F.2d 1322 (Fed. Cir. 2011)

• Under Section 337 of the Tariff Act of 1930, the ITC is

authorized to exclude imports when it finds “[u]nfair

methods of competition and unfair acts in the importation

of [those] articles.”

• Now US corporations can seek expedited relief from the

ITC without having to bring suit in a foreign jurisdiction.

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US Federal Legislation & White House

Developments

• Obama administration strategy on mitigating the theft of

trade secrets: “Prosecuting Trade Secret Theft is a Top

Priority”

• Theft of Trade Secrets Clarification Act of 2012

• Foreign and Economic Espionage Penalty Enhancement

Act of 2012

• Amendments to Sentencing Guidelines for Trade Secrets

Theft

• S. 3389: Protecting American Trade Secrets and

Innovation Act of 2012 (112th Congress, Second Session)

• HR. 2466: Private Right of Action Against Trade Secrets

Theft (113th Congress, First Session, January 20, 2013)

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EONA Proofs for Litigation

Existence: What is “it”?

Ownership: Does Plaintiff have ownership rights in “it”?

Notice: Did Defendant have actual, implied or constructive

notice of the trade secret status of “it”?

Access: Did Defendant have access to “it”?

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Uniform Trade Secrets Act (UTSA)

• “‘Trade secret’ means 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, and not being readily

ascertainable by proper means by, other persons who can

obtain economic value from its disclosure or use, and

› Is the subject of efforts that are reasonable under the

circumstances to maintain its secrecy.”

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Proving the Existence of a Trade Secret

• Learning Curve Toys, Inc. v. PlayWood Toys, Inc., 342

F.3d 714 (7th Cir. 2003):

› “Trade Secret is one of the most elusive and difficult concepts

in the law to define.”

• Experienced counsel skilled in the litigation of trade secret

cases often determines success or failure because "trade

secrets" are created and/or lost in trade secrets litigation

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Six-Factor Analysis:

The Litmus Test for Trade Secrets

• Factor 1: The extent to which the information is known

outside the company

• Factor 2: The extent to which the information is known by

employees and others inside the company

• Factor 3: The extent of measures taken by the company

to protect the secrecy of the information

• Factor 4: The value of the information to the company

and its competitors

• Factor 5: The amount of time, effort and money expended

by the company in developing the information

• Factor 6: The ease or difficulty with which the information

could be properly acquired or duplicated by others

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Novelty & Combination Trade Secrets

• Novelty is not required for trade secret protection

• Penalty Kick Mgmt. Ltd. v. Coca-Cola Co., 318 F.3d 1284

(11th Cir. 2003):

› “It is well established that a trade secret can exist in a

combination of known characteristics and components which,

in unique combination, affords a competitive advantage.”

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Reasonable Measures

• A trade secret need not be locked in a safe

• Absolute secrecy not required; “relative secrecy”—efforts

that are reasonable under the circumstances to

maintain secrecy or confidentiality

• No contract is required

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Proving Misappropriation

• Must prove the existence of a “trade secret” first

• Liability for:

› Unauthorized acquisition

› Unauthorized disclosure

› Unauthorized use

• Notice: Actual, constructive, or implied

• Access: Direct, indirect, or circumstantial

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Memorization Is Not a Defense

• Stampede Tool Warehouse, Inc. v May, 272 Ill. App.2d

580 (1st Dist. 1995):

› “Using memorization to rebuild a trade secret does not

transform the trade secret from confidential information into

non-confidential information. Memorization is one method of

misappropriation.”

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Third-Party Liability

• Improper means used to acquire—“knew or had reason

to know”

• Acquired under circumstances giving rise to duty to

maintain its secrecy or limit its use

• Duty of inquiry

• Application of respondeat superior doctrine

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US Civil Remedies

• Primary remedy is injunctive relief

› To prevent actual misappropriation

› To prevent the threatened misappropriation of trade secrets

(the “inevitable disclosure” doctrine)

• PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995):

› “A plaintiff may prove a claim of trade secret misappropriation

by demonstrating ‘that defendant's new employment will

inevitably lead him to rely on the plaintiff's trade secrets.’”

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US Civil Remedies (cont’d)

• Damages:

› Actual loss to Plaintiff or

› Unjust enrichment caused by misappropriation or

› Reasonable royalty damages

• If willful and malicious misappropriation:

› Attorneys fees and costs

› Exemplary damages

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Trade Secret Misappropriate: Recent

Damage Verdicts

• St. Jude Medical (2011): $2.3 billion (reduced to $947

million

• Dupont/Kolon Industries (2011): $919 million (on appeal)

• Lexar Media (2005): $465.4 million (settled $288 million)

• Sven Peter Mannsfeld (2008): $192 million (settled for

$40 million)

• USA Power LLC (May 2012): $134 million

• Bancorp Services (2002): $118 million

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Litigation SWAT Team

• Time is of the essence:

› FMC Corp. v. Taiwan Tainan Giant Indus. Co., Ltd., 730 F.2d

61 (2d Cir. 1984):

– “A trade secret, once lost, is, of course, lost forever.”

• Rapid response protocols:

› Advance development

› Quick deployment to “stop the bleeding”

• Know your jurisdiction:

› Each jurisdiction requires different strategies for the

protection of trade secrets

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Economic Espionage Act of 1996,

18 USC Section 1831 et seq. (EEA)

• The theft of trade secrets is a federal criminal offense

• “‘Trade secret’ means all forms and types of financial,

business, scientific, technical, economic, or engineering

information, including patterns, plans, compilations,

program devices, formulas, designs, prototypes, methods,

techniques, processes, procedures, programs, or codes,

whether tangible or intangible, and whether or how stored,

compiled, or memorialized physically, electronically,

graphically, photographically, or in writing if—

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Economic Espionage Act of 1996,

18 USC Section 1831 et seq. (EEA)

› (A) the owner thereof has taken reasonable measures to keep

such information secret; and

› (B) the information derives independent economic value,

actual or potential, from not being generally known to, and not

being readily ascertainable through proper means by, the

public.”

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Economic Espionage Act of 1996,

18 USC Section 1831 et seq. (EEA)

• Liability for any person who:

› “steals, or without authorization appropriates, takes, carries

away, or conceals, or by fraud, artifice, or deception obtains

such information”

› “without authorization copies, duplicates, sketches, draws,

photographs, downloads, uploads, alters, destroys,

photocopies, replicates, transmits, delivers, sends, mails,

communicates, or conveys such information”

› “receives, buys, or possesses such information, knowing the

same to have been stolen or appropriated, obtained, or

converted without authorization”

› “attempts to commit any offense described” above

› “conspires with one or more other persons to commit any

offense described” above

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Economic Espionage Act of 1996,

18 USC Section 1831 et seq. (EEA)

• Extraterritorial jurisdiction: Applies to conduct occurring

outside the United States if–

1. The offender is a natural person who is a citizen or

permanent resident alien of the United States, or an

organization organized under the laws of the United States

or a State or political subdivision thereof, or

2. An act in furtherance of the offense was committed in the

United States

• Forfeiture and restitution

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Computer Fraud & Abuse Act,

18 USC Section 1030 et seq. (CFAA)

• Criminal or civil penalties

• Protects any computer “used in interstate or foreign

commerce or communication”

• Pacific Aerospace & Electronics, Inc. v. Taylor:

› “Employers…are increasingly taking advantage of the CFAA's

civil remedies to sue former employees and their new

companies who seek a competitive edge through wrongful

use of information from the former employer's computer

system.” 295 F.Supp.2d 1188, 1196 (E.D. Wash. 2003)

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Computer Fraud & Abuse Act,

18 USC Section 1030 et seq. (CFAA)

• Two bases of liability for computer access:

› “Without authorization” or

› “Exceeding authorized access”

• International Airport Centers v. Citrin, 7th Circuit:

› “Citrin’s breach of his duty of loyalty terminated his agency

relationship…and with it his authority to access the laptop.”

440 F.3d 418 (7th Cir. 2006)

› (J. Posner)

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Computer Fraud & Abuse Act,

18 USC Section 1030 et seq. (CFAA)

• Provides federal subject matter jurisdiction

• Extraterritorial jurisdiction:

› Applies to any “protected computer,” whether that computer is

located within the United States or outside the United States

• Civil penalties:

› Injunctive relief

› Damages

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State Laws and Employee Agreements

• Most states will enforce confidential and proprietary

information agreements employees execute in favor of

employers.

• These agreements offer the advantage of protecting

broader types of information that must be kept

confidential, including information that may not qualify as

statutory “trade secrets.”

• Agreements are often part of or signed in connection with

separate non-competition agreements that offer further

protection against disclosure or use of confidential

information.

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Trade Secret Misappropriation:

The “Threat”

• Foreign Economic Espionage: “The greatest transfer of

wealth in history”

• Advanced Persistent Threat (APT)

• “What’s Yours is Mine:” Symantec Study

› 3,317 individuals in 6 countries across industries:

– United States: 788

– UK: 530

– France: 491

– Brazil: 565

– China: 440

– Korea: 503

• “The majority of employees transfer work documents

outside and don’t understand that it’s wrong to engage in

such conduct.”

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Social Media

• B.Y.O.D. (Bring Your Own Device) versus

C.O.P.E. (Company Owned Personally

Enabled)

• Forfeiture of trade secret asset protection

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Symantec Study: Recommendations

• Employee education

› Employees must know that taking confidential information is

“wrong”

› Periodic "security awareness" training should be required

• Enforce NDAs

› Review and strengthen employment agreements

› Use "trade secret" exit interviews

› Enforce agreements by taking appropriate legal action

• Monitoring technology: DLP (Data Leak Protection)

› Critical to monitor BOTH "trade secrets in motion" and "trade

secrets at rest“

› Flag for inappropriate "access" and inappropriate "use" of

confidential company information

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Corporate Protection Strategies

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Protection Strategies

• Success in litigation often depends on the strategies in

place before any misappropriation occurs

• Protocols for suspected employees

• Protocols for internet leaks

• Protocols for “trade secrets at rest” and “trade secrets in

motion”

• Protocols for foreign actors and actions

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Contracts, Contracts, Contracts…

• Contracts are critical for proprietary information

protection in a global economy

• New contractual provisions for trade secret protection:

› Establish CFAA liability in employment agreements

– Employee is not authorized to use the computer for his own

personal benefit or for purposes contrary to the company’s

business interests

› Explicitly define and limit use in non-disclosure agreements

– Limited use licenses: Use of proprietary information is

solely for the “limited purpose” of…

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Employee Exit Interviews

• Foundation for civil liability

› EONA proofs

• Foundation for criminal liability

› Mark J. Krotoski, U.S. Department of Justice, speaking at the

InfoSec World Conference on March 11, 2008:

– “Exit Interviews often provide the evidence that we need to

pursue Economic Espionage Act violations.”

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Global Strategies:

Legal and Practical Approaches

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Realities of Globalization

• Third parties outside the US now have greater access to

US firms and sensitive technologies

• Digitization—trade secrets are transferred over networks

and are vulnerable to cyber-espionage

• Information security today—greater emphasis on

protecting “what is leaving” the enterprise instead of “what

is entering” the enterprise

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Global Strategies:

Legal and Practical Approaches

• National systems differ widely and each requires a tailored

approach based on the law and type of legal system

› Common law systems based on the English legal system

tend to have well-developed and predictable protections for

trade secrets

› Civil law systems, such as the EU, provide swift and effective

remedies upon the requisite factual showing, but discovery is

virtually nonexistent

› Asian legal systems have not historically recognized

intellectual property rights; contracts still the basis for

enforcement

› Developing nations must balance the value of protecting the

secret with the political value of building domestic industries

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Global Strategies:

Legal and Practical Approaches

• Enforcement issues also need to be addressed

› Civil remedies?

› Administrative remedies?

› Criminal remedies?

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Global Strategies:

Legal and Practical Approaches

• Contracts can be used to build an adjudication

mechanism into the private contract including:

› Definition of “trade secrets”

› Definition of what constitutes “misappropriation”

› The right to interim (injunctive) relief

› Procedures for international arbitration and adjudication of

disputes

› Liquidated damages and remedies for violations

› Right to discovery, inspections of equipment, etc.

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Global Strategies:

Legal and Practical Approaches

• “Carrots & Sticks”

› Incentives can be as effective as penalties, especially with

individual employees and small businesses, particularly in

developing nations

› Penalty clauses in contracts should be specific, with high U.S.

dollar amounts

• Be cautious of licensees

› Regularly monitor compliance with confidentiality agreements

and security measures

› Consider multiple licensees in multiple countries in a region,

each having access to only a specific piece, to reduce risk

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Two Cardinal Rules

of Trade Secret Protection

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Two Cardinal Rules

of Trade Secret Protection

• Restricted access

› Permit access to trade secrets only “on a need to know basis”

› Be careful of multiple security levels: Courts have held that

information available at lower security levels was not

protected by “reasonable measures” in light of more secure

environments available

• Compartmentalization

› Break up the pieces of the puzzle

› Individuals only have access to their piece of the puzzle

Nixon Peabody’s Approach

to Trade Secrets

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Our Trade Secret Team

• Nixon Peabody’s Trade Secret Team is made up of

seasoned professionals that have extensive experience

in dealing with all aspects of trade secret identification

and protection.

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Our Trade Secret Team

• Our Team is composed of top-flight practitioners from

across the firm who practice in a range of areas --- all

important to protecting these valuable assets.

› Intellectual Property/Patents

› Intellectual Property/Brands & Creations

› Labor & Employment

› Business Litigation

› Financial Services Litigation

› Government Investigations/White Collar

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A 360° Approach to Trade Secrets

Unlike some other firms, that view Trade Secrets as an “IP

issue” or as an “employment matter,” we understand that to

effectively manage and protect an organization’s trade

secrets, we need to pull all of the pieces together in a

robust and comprehensive effort. We take a complete 360

degree approach. We understand the content that is a risk

and we know how to protect it effectively --- through proper

technology applications, procedures, training,

communications, and, if necessary, litigation or other

dispute resolution.

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A 360° Approach to Trade Secrets

Employment Practices

Intellectual Property

Investigations Litigation

Financial Expertise

Technology

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Presenter Bio – R. Mark Halligan Esq.

• Partner, Nixon Peabody, LLP, Chicago Office

• Practice Areas: Intellectual Property, Intellectual Property Litigation, Litigation & Dispute Resolution, Technology

• Accomplished trial lawyer focused in intellectual property litigation and complex commercial litigation in federal and state courts

• Experienced patent litigator focused on protection and enforcement of trade secrets

• Frequent author and lecturer on intellectual property issues; Adjunct Faculty of The John Marshall Law School in Chicago where he teaches trade secrets law.

• Northwestern University, J.D.; University of Cincinnati, B.A. summa cum laude

•Chambers USA: America’s

Leading Lawyers for Business for

Intellectual Property

•“Top-flight IP strategist” in IAM

250: A Guide to the World’s

Leading IP Strategists, 2011 and in

IAM 300: A Guide to the World’s

Leading IP Strategists, 2012

•Illinois “Super Lawyer”

consecutive years since 2005

•Legal 500 Leading Lawyer in

Trade Secrets Litigation

•Best Lawyers 2013 for Intellectual

Property

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Questions

THANK YOU.

R. Mark Halligan, Nixon Peabody LLP

300 S. Riverside Plaza, 16th Floor, Chicago, Illinois 60606 USA

(312) 425-3970 ▪ rmhalligan@nixonpeabody.com