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American Intellectual Property Law Association

TRADE SECRET LAW IN THE U.S.

AIPPI JAPAN

April 10, 2013

John (Jack) J. Penny

Nutter, McClennen & Fish LLP

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Overview of Trade Secret ProtectionApplicable Law

• Statutory Basis

I. Uniform Trade Secrets Act (“UTSA”) enacted by 46 of the 50 states (all states except CA, NY, MA, TX) – sought to alleviate the differences between the states by creating a uniform trade secrete law

II. Economic Espionage Act of 1996

III. Theft of Trade Secret Clarification Act 2012

IV. Foreign and Economic Espionage Penalty Enhancement Act of 2012

• Common Law

State Common Law, e.g. CA, NY, MA

Uniform Federal Common Law in the ITC

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Overview of Trade Secret Protection

What Is A Trade Secret?

• Any information that:

is secret;

has commercial value derived from the fact that it is secret; and

is the subject of reasonable efforts to be kept secret. UTSA

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Definition Of Misappropriation (UTSA)

• Misappropriation means;

Improper acquisition

-or-

Improper use of a trade secret

-or- (must know or have

Improper disclosure reason to know it is

a trade

secret)

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Available Remedies

• Civil remedies

—UTSA (CA): Injunction and damages (actual loss, reasonable royalty, or punitive) provided by statute

—Non-UTSA (NY): Variety of remedies including constructive trust

• Criminal law protection

— Fines and imprisonment under Federal Law

—UTSA (CA): Available

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Inevitable Disclosure Doctrine (from 1995 PepsiCo case)

• A person may be prevented from working for another company if the person’s job duties (at the new company) would inevitably cause the person to rely upon former employer’s trade secrets

• Generally requires a showing that:

— Person knows former employer’s trade secrets;

— Departing employee’s new job at competitor is so similar to those in former job that it would be extremely difficult for him to avoid using former employer’s trade secrets; and

— Departing employee and new employer cannot be depended upon to avoid using former employer’s trade secrets.

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Why Use Trade Secrets?

• To protect non-patentable subject matter (e.g., non-technical info., non-patentable info., etc.)

• To avoid risk of patent becoming invalid (which amounts to disclosure without benefit)

• More than a year beyond patenting window (situation is different outside U.S.)

• Extended protection (no finite term as in patents)

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When Are Trade Secrets At Greatest Risk?

• Departing employees

• Failed business dealings

• Corporate espionage

Most breaches are caused by insiders (at company), often lower level employees, through carelessness, lack of training, or greed.

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DuPont v. Kolon (E.D. VA 2011)

• DuPont sued Kolon Industries for “theft of trade secrets and confidential information” re. production and marketing of Kevlar (high strength synthetic fiber)

• Jury awarded DuPont damages of $919 million

• Departing employee (Michael Mitchell) retained confidential information and illegally gave to Kolon

• Mitchell pleaded guilty and was sentenced to 18 months in prison

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Trade Secret Protection In The ITC

Tian Rui Group Co. Ltd. v. U.S. Int’l Trade Comm’n, 2010-1395 (Fed. Cir. 2011)

• Confirmed that § 337 applies to trade secret misappropriation even where unfair act occurs exclusively overseas.

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Trade Secret Protection In The ITC (cont’d)

In The ITC Complainant Must Prove:

• One or more trade secrets exist and are not within public domain;

• Complainant is owner of the trade secret or has proprietary interest in it;

• The complainant disclosed the trade secret to the respondent while in a confidential relationship or the respondent wrongfully obtained the trade secret by unfair means; and

• The respondent used or disclosed the trade secret causing injury to the complainant.

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II. Economic Espionage Act (EEA) of 1996- 18 U.S.C. § 1831-1839

Criminalizes Theft Or Misappropriation Of Trade Secrets:

• To benefit a foreign government, instrumentality or agent § 1831

• Related to or included in a product that is produced for or placed in interstate or foreign commerce to the economic benefit of anyone other than the owner and with the intent to cause injury § 1831

• Knowing possession, receipt or purchase of stolen or misappropriated trade secrets falling into either 1or 2 above § 1831 and 1832

• Attempting or conspiring with others to commit 1, 2or 3 above § 1831 and 1832

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Economic Espionage Act (EEA) of 1996- 18 U.S.C. § 1831-1839 (cont’d)

Remedies For EEA Violations:

• Although there is no private right of action under EEA, the government may obtain injunctive relief to prevent further disclosure of a trade secret by the defendant or third parties.

• Fines up to $10,000,000 for organizations and $500,000 for individuals.

• Imprisonment up to 15 years for individuals.

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United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012)

Court Of Appeals Reversed Lower Court Conviction Holding:

• §1832 of EEA – Theft of Trade Secrets – applies to “a trade secret, that is related to or included in a product that is produced for or placed in interstate or foreign commerce. . .”

• “Goldman’s HFT system was neither ‘produced for’ nor ‘placed in interstate or foreign commerce’ – Goldman had no intention of selling its HFT system or licensing it to anyone.”

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III. Theft Of Trade Secrets Clarification Act

Expanded EEA In Two Major Ways:

• Expands the scope to include services as well as products.

• Expands the scope of trade secrets covered by § 1832 from those trade secrets “included in a product which is produced for or placed in” interstate or foreign commerce to “a product or service used in or intended for use in” interstate or foreign commerce.

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IV. Foreign and Economic Espionage Penalty Enhancement Act of 2012 (H.R. 6029)

• Amends the federal criminal code to increase the maximum fine for economic espionage, became law Jan. 14, 2013,

• Individuals found guilty of economic espionage can be fined up to $5,000,000.

• Organizations found guilty of economic espionage can be fined up to $10,000,000 or three times the value of the stolen trade secret to the guilty organization including expenses for research, design and other costs of reproducing the secret that the guilty organization was thereby awarded.

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Internal Trade Secret Program

Internal Trade Secret Procedures

• A. Employment Practices

• B. Confidentiality Program and Records Management

• C. Monitoring and Auditing

• D. Response procedures

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Internal Trade Secret Program (cont’d)

A. Employment Practices

• Require all employees to sign confidentiality agreements:

—Acknowledging ownership of confidential information

—Specifying obligations during and after employment

—Addressing IP assignment issues

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B. Confidentiality Program And Records Management

• Identify and update secrets to be protected

• Train employees and consultants on record-keeping

• Limit Access

— Meaningful difference between confidential and non-confidential information

• Physical Security

— Restrict access to information and certain physical areas

— Need to know basis

— Security measures including locks, keys, shredding, dumpsters

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Coca Cola’s Famous Secret Recipe

• Perhaps the most famous trade secret is the secret recipe for coca-cola (Coke)

• Invented by John S. Pemberton on 1886, only shared with a small group and not written down

• 1919 Ernest Woodruff purchased the Coca-Cola Company, and deposited the secret formula (on paper) in a bank vault in N.Y. as collateral for the loan

• When the loan was paid off in 1925. Woodruff moved the formula to SunTrust Bank in Atlanta

• In 2011, formula was moved to a vault at a public, interactive exhibit at the World of Coca-Cola in Atlanta

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C. Monitoring And Auditing

• Monitoring compliance

• Exit interview and related procedures

—Return/seizure of all company property at termination, including electronic copies of materials

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D. Response Procedures

• Response procedures when suspecting a departing employee taking confidential with him?

— What to do immediately?

• e.g., secure computer and other storage devices, access to email/network

• e.g., suspend record destruction

• Response procedures when a security breach caused by potential espionage is discovered?

— Should one get law enforcement involved?

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External Business Relationships:Collaboration Agreements

Key Considerations

• Any disclosure of proprietary information must be protected by written agreements

• Must clearly define the scope of what is confidential

• Must clearly define the purpose of the disclosure to the collaboration partner

• Must clearly define the use that can be made with that information (including further disclosure)

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External Business Relationships:Collaboration Agreements (cont’d)

Exploratory Discussions: NDAs And Feasibility Studies

• Narrow Disclosure – disclose only what is needed to achieve purpose

— Disclosure may not lead to deal and potential partner is likely also considering competitors

— NDA is critical not only for protecting trade secrets, but preserving patent rights

— Keep most valuable (and enabling) information to yourself

— Example: results, but no methods, no formulas, compositions, etc.

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Exploratory Discussions: NDAs And Feasibility Studies (cont’d)

• Limit Right to Use and Disclose

—To evaluate technology for purpose of business of business relationship

—Limit sharing of information within each company

—Require return of any documents/presentation handouts

• Don’t progress to the next stage without a new agreement

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Joint Work (cont’d)

• Clearly define scope of disclosures

— Limit disclosures to “need to know”; use point persons for party interface

— Train your project team in what you consider proprietary and in what can and cannot be shared

— Require written consent before any third party disclosures

• Clearly define scope of use of confidential information

— Define purpose of agreement

— Define each party’s rights and responsibilities

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• Build a record

— Clearly identify and document all exchanges of Confidential Information

— Keep written records of all internal work under the JDA.

— Keep written records of all oral exchanges of information (including informal calls) and of all documents exchanged

• Clearly define IP rights (including trade secrets and know-how)

— Background IP rights

— Joint discoveries and collaboration IP

— Separate discoveries during collaboration term

— Require cooperation in patenting to avoid harm to respective patent portfolios

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• Be Vigilant

—Monitor publications and presentations made by collaborator

—Monitor patent filings

—Periodically exercise audit or inspection rights

—Track inventory and use of confidential information

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Thank you for your attention. Questions?

John (Jack) J. PennyNutter, McClennen & Fish LLP

155 Seaport Blvd.Boston, MA, 022110

1-617-439-2566

[email protected]

John (Jack) J. Penny* Special thanks to Joe Calvaruso for providing many of the slides on which this presentation is based

mailto:[email protected]

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