CONFIDENTIAL© Copyright Baker Botts 2016. All Rights Reserved.

Perspectives from the General Counsel’s Office and Outside Counsel

Trade Secret Law Reboot

BAKER BOTTS

Speakers

Brian Campbell Vice President, Business & Legal Affairs and General Counsel, DHI Group, Inc. | New York

Mr. Campbell is responsible for managing DHI Group, Inc.'s legal affairs, including intellectual property,

mergers and acquisitions, strategic alliances, corporate securities, real estate, litigation and employment

law, as well as supervising outside counsel. Mr. Campbell also oversees DHI’s privacy initiatives.

Colm Dobbyn

Mr. Dobbyn has global responsibility for intellectual property (IP) and related technology legal matters for

MasterCard. He oversees a team of 15 professionals that handles MasterCard’s trademarks, patents,

copyrights, licensing and technology transfers on a worldwide basis. Prior to his employment with

MasterCard, Colm was previously Senior Counsel with PepsiCo, Inc., where he had responsibility for

trademark and related intellectual property matters for PepsiCo’s beverage divisions.

Dolly von Hollen

Ms. von Hollen oversees all trademark, patent, copyright, trade secret, and domain name issues for

Prudential Financial. Previously, she was an Assistant General Counsel with Nike, Inc. in Oregon, where she

was responsible for a variety of trademark, copyright, and domain matters. Dolly has practiced law in the

IP groups of several general practice and IP boutique firms in New York City.

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General Counsel, Intellectual Property, MasterCard | New York

Vice President, Corporate Counsel for Intellectual Property, Prudential Financial | New Jersey

Rich HarperPartner, Baker Botts L.L.P. | New York

Mr. Harper is a trial partner in the New York office of Baker Botts. He represents public and private

companies in a broad range of complex commercial litigation and on corporate governance matters. Rich

has obtained dismissals, summary judgments and verdicts for his clients in significant commercial

litigation matters across a variety of sectors, including energy, media, technology, and consumer

products.

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A "crash course" in trade secret law, including discussion of the recently-enacted

Defend Trade Secrets Act of 2016.

Best practices for managing trade secret issues in vendor relationships and

employment agreements.

Strategies for what to do when there are trade secrets in the data room.

Trade Secret Law Overview

Proactive Management of Trade Secret Issues

Trade Secret Issues in Mergers and Acquisitions

Early steps to identify, assess, protect and defend trade secret rights.

Litigating Trade Secrets

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PART

TRADE SECRET LAW OVERVIEW

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Overview

• Historically protected under state, not federal, law

• Sources of Trade Secret Law

Uniform Trade Secrets Act (UTSA) § 1.4:

o Any information, including a formula, pattern, compilation, program,

device, method, technique or process, that: (i) derives independent

economic value, either actual or potential, from not being generally

known or readily ascertainable, and (ii) is the subject of efforts that

are reasonable under the circumstances to maintain its secrecy.

Non-UTSA states (NY, MA) apply the Restatement of Torts § 757:

o Any formula, pattern, device or compilation of information which is

used in one's business, and which gives him an opportunity to

obtain an advantage over competitors who do not know or use it.

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Scope of Trade Secret Protection

• Broadly, trade secrets must be used in one's business,

provide some kind of commercial advantage, and of

course, be secret.

Secrecy is key: while there is no express originality or novelty

requirement, courts have required that a trade secret must meet

a certain level of novelty in order to be valid.

• A trade secret is a process or device for use in business

operations:

= Business Information = Formulas

= Compilations of Data = Computer Programs

= Devices = Methods, Techniques, Processes

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Secrecy and Duration of Trade Secret Protection

• Absolute secrecy is not required, but information must be

secret from those who would use it commercially

– Confidential disclosure to employees, customers, licensees, etc.

does not necessarily terminate a trade secret

• Secrecy can depend on:

– Internal conduct - company's efforts to keep information secret

– External factors - independent discovery and disclosure by a

competitor will end protection

• Multiple competitors in an industry can independently

have trade secret rights in the same information

– But, it must remain secret: if one competitor discloses their trade

secret (i.e., in a patent), the others will lose trade secret protection

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What Destroys Secrecy?

• Disclosure

– Revealing information publically, (trade shows, trade papers, etc.)

– Issuance of patent covering same information

– Advertisements or mass media

– Voluntary disclosures to the government, if statutes allow

government to reveal information

– Accidental disclosure

• Information readily available to those who would

commercially use it

– Theoretical availability not enough

– Easy and inexpensive means of discovery will end trade secret

protection

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Elements of Trade Secret Claim

• Plaintiff must prove, by a preponderance of the

evidence:

Possession: Plaintiff possesses a trade secret;

Acquisition: Trade secret information was received

by Defendant (whether under contract, as part of a

confidential relationship, or unlawfully taken); and

Use: Defendant has used or disclosed Plaintiff's trade

secret information, to Plaintiff's detriment.

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Possession of Trade Secrets

• Factors courts look to determine possession: Extent to which the information is known outside of the business;

Extent to which it is known by employees and others involved in the

business;

Extent of measures party takes to guard the secrecy of the information;

Value of the information to the party and its competitors;

Amount of effort and money spent in developing the information; and,

Ease/difficulty others could properly acquire/duplicate the information.

Hudson Hotels Corp. v. Choice Hotels Int’l., 995 F.2d 1173, 1175-76, n.1 (2d

Cir. 1993).

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Acquisition (Misappropriation) of Trade Secrets

Misappropriation defined (UTSA § 1.2):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.11

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Acquisition - "Proper" Means of Discovery

• Not all acquisition of claimed trade secret information is

improper.

• "Proper" means of discovery include:

Discovery by legitimate independent invention

Reverse engineering

Licensing arrangements

Published literature

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Use of Trade Secrets

• Defined broadly:

Restatement (Third) Unfair Competition § 40, comment c: "any exploitation of the trade secret that is likely to result in

injury to the trade secret owner or enrichment to the defendant"

• Under UTSA § 1.2(i), improper acquisition can constitute

wrongful use.

• Absent improper acquisition, Plaintiff must prove

Defendant's use or disclosure (or the threat thereof) of

the trade secret.

• Plaintiff must show that claimed use or disclosure has

harmed or will harm Plaintiff.

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Damages Remedies

• Damages may include

both:

– plaintiff's loss from

misappropriation

– defendant's unjust

enrichment, if not counted

in the plaintiff's loss

• UTSA allows plaintiff to

elect reasonable royalty

as an alternative measure

of damages

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Defend Trade Secrets Act (DTSA)

• Amends Economic Espionage Act of 1996

• Permits DTSA claims to be brought in federal court (but

does not preempt state laws governing trade secrets)

• Trade secret definition similar to UTSA

• Relief

Civil seizure procedure

Injunctions

Actual damages

Exemplary damages (2x actuals)

Attorneys' fees15

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Trade Secrets Versus Patents

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Trade Secrets Patents

Length of Protection Potentially forever -- until

disclosure

20 years

Subject Matter Any data/information that

provides an advantage

over others in the

marketplace

Specific narrow subject

matter

Extent of Protection Protection only against

misappropriation

Ability to exclude

Protecting Information Vigilance and

maintenance of secrecy

Disclosure to public

domain

PART

PROACTIVE MANAGEMENT OF TRADE

SECRET ISSUES

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Practical View from Inside the Company

• Exercise reasonable efforts to maintain secrecy

Preserve the information as substantially secret

Exercise reasonable precautions to ensure the information

remains secret

Restrict disclosure to those employees/contractors who actually

need to know the secret in order to perform their jobs/functions

Confidentiality agreements

Restrict access by others

Contractual provisions for employment or independent

contractor contracts, vendor agreements

• What do you do after the horse has left the barn?

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INTERNAL: TRADE SECRETS AND

EMPLOYEES

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The Issue: Departing Employees Pose Risks

• 85% of intellectual property thefts are committed by

employees or business partners.

• Half of employees admit to taking information from a

former employer and did not think it was wrong.

• Why?

Gain advantage for a competitor

Create a new business

Embarrass or retaliate

Simple ignorance

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Policies to Identify and Protect Trade Secrets

• Limit employee access to trade secret information,

especially from home.

• Physical precautions:

Guards, surveillance, ID badges, sign-in

Physically segregate confidential information

Use "confidential" stamps on documents

Password protect critical documents

and trade secret information

Limit, monitor or restrict copying

Destroy drafts and copies

• Consider creating a trade secret registry (but there are

pros and cons).

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Non-Disclosures in Employment Agreements

• Non-disclosures often “backstop” non-compete

agreements

• What information is “confidential” but not protected as a

“trade secret”

• Must be specific and narrowly tailored

• What is your company's secret formula?

• No disclosure or use

• Time period or until stale

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Address People, Process, and Technology

• People Training and awareness

Segregation of duties

Appropriate levels of access

• Process Confidentiality and nondisclosure agreements

Exit interview and checklist

Policies

Periodic risk assessments or security audits

Documented security procedures

• Technology Work with CIO/IT Directors on solutions and vendor selection

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Hiring New Employees

• Incoming employees can "contaminate" or "infect" a

business with trade secrets from a former employer

Require new hires to leave behind devices, documents, and other

information that their former employer considers confidential

Inform new hires of consequences of bringing in outside trade secret

information, up to and including dismissal

If a new hire will have access to trade secret information, have them sign

a non-disclosure agreement

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Employee Training & Agreements

• Educate employees about proprietary information and

the value of maintaining secrecy

• Training or regular education on handling trade secret

information, especially electronic information

• Have employees sign a non-disclosure agreement

Written agreements should clearly state what information is

trade secret and what is not

Gives employer option to bring claim for breach of contract in

addition to claim for misappropriation of trade secrets

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Departing Employees

• Exit interviews for departing employees

Remind them of continuing confidentiality obligations

Require them to return any trade secret materials, including

computers, phones, flash drives, documents, etc.

Ask them: "Do you have any company documents at home?

Have you returned all company devices? Did you store any files

on any personal flash drive/computer?"

If necessary, inspect and wipe phones or personal devices

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EXTERNAL: TRADE SECRETS AND

VENDORS

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Non-Disclosure Agreements

• Unlike covenants not to

compete, non-disclosure

agreements do not have

geographic limitations

• Courts may require non-

disclosure agreements be

reasonably limited in time and

subject matter

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General Tips for Drafting Confidentiality/NDA

Agreements

• The agreement should put the reader on notice of the types of

information to which it applies

Define confidential information and trade secrets and indicate that

information may fall into these categories even if not marked

confidential

Clearly identify WHO owns the trade secrets

• Tailor the agreement to the company's business to increase the

likelihood it will be enforced

• Recite employee vendor’s recognition that company regards trade

secrets as valuable business assets to which considerable resources

have been devoted

• Consider whether the agreement should be one-way or mutual

• Provide for duration (limited) and termination

• Consider noncompete/nonsolicitation provisions

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PART

TRADE SECRET ISSUES IN MERGERS

AND ACQUISITIONS

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Three Trade Secret Issues for Discussion in the

Context of a Corporate Merger or Acquisition

1. What is necessary to ensure that you obtain the rights to trade secrets?

2. How should the parties approach due diligence issues?

3. What can happen if the parties fail to complete the merger or acquisition?

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When Acquisition Negotiations Succeed: Drafting the

Acquisition Agreement to Obtain Trade Secret Rights

• The Setting Most target companies (especially smaller, private companies) do

not document their trade secrets

In practice, when identifying intellectual property rights in asset purchase agreements, most companies do not list them out by trade secret

The Acquirer naturally wants to obtain rights to all intellectual property (including trade secrets) with the ability to enforce those rights

• The Challenges Crafting the Asset Purchase Agreement language regarding

intellectual property rights

Addressing post-acquisition relationships with key employees who may have access to or knowledge of trade secrets

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BAKER BOTTS

Chemetall Litigation (7th Cir. 2003)

• Chemetall acquired the assets of Morton International. After the acquisition,

Joseph Fraval left the company and formed a competitor. Chemetall, as the

successor to Morton, sued Fraval for violating a non-disclosure

agreement/employment contract.

• Fraval argued, in part, that it was not the intent of the parties to the

acquisition to assign to Chemetall the right to enforce Fraval’s employment

contract.

• The district court allowed that issue to go to the jury. Even though the

employment agreement “inured” to the benefit of Morton successors, the

asset purchase agreement said that no Morton employee would become an

employee of Chemetall and did not list his employment contract as one of

the assets being sold.

• The appellate court affirmed, finding that the intent of the parties was an

appropriate issue for the jury (and that nothing Fraval argued would support

ruling on the issue as a matter of law).

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Due Diligence on a Target's Trade Secrets

• In order to gain access to a target's trade secrets as part of negotiations, the parties typically enter into a non-disclosure agreement: It protects the target's claim that it has taken adequate steps to protect its

claimed trade secrets

It protects the acquirer in helping to define what is not a trade secret

• Trade secret due diligence usually takes place under the larger umbrella of IP due diligence

• Due diligence check list items – try to obtain the following:

A schedule of all trade secrets

All trade secrets policies and procedures (Including security measures to protect)

Any valuation of trade secrets (often as part of a large IP valuation)

Agreements dealing with trade secrets, including licenses

Employee and vendor confidentiality and non-disclosure agreements

Correspondence regarding any trade secret disputes

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When Acquisition Negotiations Fail: the

Importance of the Non-Disclosure Agreement

• Acquirer -- Patriot Rail Corp: A large national railroad holding company that purchased/operated shortline and regional freight railroads in the US.

• Target: Sierra Railroad Co: Operator of shortline railroads in Northern California, including profitable relationship with McClellan Air Force Base.

• 2005-2007: Patriot-Sierra had acquisition discussions under an NDA. Patriot got access to Sierra's confidential information, but promised to use it only for "evaluating and negotiating" the acquisition. As part of acquisition discussions, Sierra introduced Patriot to McClellan.

• In 2008, McClellan terminated its contract with Sierra, opened up a bid process for moving forward, and Patriot got the new contract.

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The Sierra-Patriot Litigation

• Sierra's Claims included: Breach of Contract/NDA; Misappropriation of Trade Secrets; Tortious Interference with (Prospective) Contract; Unfair Competition

• What Happened?

Sierra won jury verdict for $20 million in damages

Sierra won punitive damages

Sierra then successfully obtained sanctions

• Lessons Learned:

What is our business strategy if the acquisition is not successful?

How much trade secret information do we need to see in order to value the company? In order to do the deal?

How long/under what circumstances can we agree to stay away form this area if the acquisition negotiations fail?

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PART

LITIGATING TRADE SECRETS

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Plaintiff: Immediate Issues to Consider

• What are the trade secrets in dispute?– Pleading requirements

– Competing interests: particularity versus secrecy

– Protective orders

• What (if any) records of the trade secrets exist in writing?– When were they reduced to writing? Before or after

contemplation of litigation?

• What record of efforts to keep trade secrets from being leaked to the public?

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Defendant: Immediate Issues to Consider

• Evidence that subject matter is not a trade secret– Research prior art or other evidence that the subject matter is in

the public domain or readily ascertainable

• Information showing that the plaintiff did not adequately maintain secrecy of the claimed subject matter– Public disclosure: review patents, press releases, website,

publicly-available materials

• Records of independent development– Issue hold memos to relevant personnel to preserve evidence of

independent development

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Maintaining Secrecy During Litigation

• Protective orders

• During discovery, who on the

litigation team gets access to trade

secret information?

– Outside counsel?

– In-house counsel?

– Client business people?

– Experts?

• Treatment of confidential information

during discovery and at trial

• Filing under seal

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Early Motion Practice

• Plaintiff– Motion for Preliminary Injunction

• Goal: Prevent defendant from disclosing the information claimed as a trade secret into the public domain or to a competitor

• Defendant – Motion to Dismiss or for More Definite Statement

• Plaintiff's obligation to identify claims (trade secrets) with particularity

– Motion to Stay Discovery Pending Identification of Trade Secrets• Goals: Protect company information; prevent plaintiff from

modifying its claimed trade secrets

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Should you hire a trade secret or damages

expert early in the litigation?

• Should the expert assist the plaintiff in "defining" its

trade secrets?

• What can a defendant's liability expert do to add

value early in the case?

• When can a damages expert be helpful in litigation?

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Injunctive Remedies—Inevitable Disclosure

• PepsiCo v. Redmond, 54 F.3d

1262 (7th Cir. 1995):

Court may enjoin an employee

from taking new employment

where employee will inevitably

rely on former employer's trade

secrets

Redmond knew Pepsi's

marketing strategy, and the

court concluded Redmond

would rely on that secret

information in making decisions

for new employer

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7th Cir. 1995

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Injunctive Remedies—Inevitable Disclosure

• Factors courts consider include:

Level of competition between old and new employers

Similarity of employment

Value of trade secrets

Nature of the industry

Efforts by new employer to prevent disclosure

Bad faith

• Some courts have applied inevitable disclosure doctrine even in

absence of non-compete agreement

• Other courts have rejected inevitable disclosure doctrine since it

turns non-disclosure agreement into non-compete agreement

Whyte v. Schlage Lock Co., 125 Cal. Rptr. 2d 277 (Cal. Ct. App. 2002)

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