protecting & enforcing your company's trade secrets: legal

© 2014 Kilpatrick Townsend & Stockton LLP

Protecting & Enforcing

Your Company’s Trade Secrets:

Legal Requirements & Best Practices

June 4, 2014

John M. Moye

“There are only two categories of companies

affected by trade secret theft: those that know

they’ve been compromised and those that don’t

know it yet.”

--Attorney General Eric Holder

2/20/13

TRADE SECRET THEFT IS EVERYWHERE

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TRENDS IN TRADE SECRET LAWSUITS

• In over 90% of state trade secret cases, the alleged misappropriator was an employee or business partner of the owner.

• Nearly half of all state trade secret cases occurred in five states: California, Texas, Ohio, New York, and Georgia.

• Reasonable measures were usually not satisfied if confidentiality agreements with employees and third parties were not in place.

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Trade Secret

Fundamentals

WHAT ARE TRADE SECRETS?

• In the U.S., trade secrets are creatures of state law.

• Uniform Trade Secrets Act (UTSA):

– Adopted in 47 states (including California) and District of Columbia.

– Each state free to modify; there are variations even among states that have adopted UTSA.

– Massachusetts – statute of its own.

– New York and New Jersey follow common law.

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ELEMENTS OF A TRADE SECRET

A trade secret is “information, including a formula, pattern, compilation, program, device, method, technique, or process” that:

(i) derives independent ECONOMIC VALUE;

(ii) 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

(iii) is the subject of efforts that are reasonable under the circumstances TO MAINTAIN ITS SECRECY.

See N.C. Gen. Stat. §66-152 et seq.

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• North Carolina courts look at the following six factors

in assessing whether information is a trade secret:

1) the extent the information is known outside of the business;

2) the extent the information is known within the business;

3) measures taken to guard the secrecy of the information;

4) the value of the information to the business and its

competitors;

5) the effort expended in developing the information;

6) how easily the information could be duplicated.

See Area Landscaping LLC v. Glaxo-Wellcome, Inc., 160 N.C. App. 520, 526, 586

S.E.2d 507, 511 (2003); Combs & Assocs., Inc. v. Kennedy, 147 N.C. App. 362,

370, 555 S.E.2d 634, 640 (2001).

ELEMENTS OF A TRADE SECRET

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formulas

procedures

techniques

methods of manufacture

customer lists

supplier lists

sales forecasts drawings

blueprints

models

quality

control

data

designs

measurements

recipes

source code

test records strategic

business

plans customer

purchasing

history

POTENTIAL TRADE SECRETS

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Forever . . .

. . . until disclosed (how long can you keep a

secret?), reverse engineered, or becomes

part of the public domain.

HOW LONG DOES A TRADE SECRET LAST?

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HOW DO PATENTS DIFFER FROM

TRADE SECRETS?

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Patent Trade Secret

Term Fixed (20 years

from filing date)

Unlimited

Cost Known (PTO fees &

attorney’s fees)

Depends on costs to

maintain/administer

Enforcement Expensive & lengthy

Federal court

Open courts (but must

maintain secrecy)

State & Federal courts

Other Factors Public disclosure Requires discipline and

procedures to keep

secret

BENEFITS OF TRADE SECRETS

• Preserves competitive advantage indefinitely (at least until the secret is discovered).

• Free – sort of (at least until enforcement).

• Maintaining secrecy does not have to be expensive.

• May be available when patent is not.

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DRAWBACKS OF TRADE SECRETS

• Increasingly difficult to keep information and

processes secret.

• Difficult (but not impossible) to put the genie back in

the bottle once public.

• Must be identified with specificity and precision.

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Guarding against theft and loss of trade secret status:

• Identify most valuable confidential information.

• Require confidentiality and non-disclosure commitments from employees.

• Insist that customers and potential customers execute non-disclosure agreements.

• Confidentiality/non-disclosure policy, consider:

– Inclusion in Employee Handbook

– Separate policy

– Free-standing agreement

PROTECTING TRADE SECRETS

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Guarding against theft and loss of trade secret status: • Control employee access.

• Distribute information on a “need to know” basis.

• Use “confidential” designations.

• Employ copy protection and embedded codes to trace copies.

• Restrict downloading of company information.

• Regulate visitor facility and premises access.

• Enforce employee compliance with prior confidentiality

obligations.

PROTECTING TRADE SECRETS

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Protecting Trade

Secrets With

Employee Mobility

Guarding against theft and loss of trade secret status:

• Identify most valuable confidential information.

• Require confidentiality and non-disclosure

commitments from employees.

• Insist that new hires do not bring/use any information

from former employers.

NEWLY HIRED EMPLOYEES

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RISK OF RESPONDEAT SUPERIOR THEORY OF LIABILITY

Courts in Virginia, Georgia, California, and Minnesota

have recognized an employer’s potential liability for hiring a new employee who stole trade secrets, under a theory of respondeat superior.

Rationale: Employee who acts within scope of employment when improperly using another party’s trade secrets allows the new employer to “reap the benefit” who “therefore should be liable for the harm.”

Newport News Indus. v. Dynamic Testing, Inc., 130 F.Supp.2d 745, 754 (E.D. Va. 2001)


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To Guard Against Respondeat Superior Theory

• In employment agreements, expressly define the

scope of employment NOT to include unauthorized

use of trade secrets obtained in previous

employment.

• Such language may make “within the scope of

employment” argument more difficult.


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• Control employee access; restrict downloading.

• Password security.

• Distribute information on a “need to know” basis.

• Use “confidential” designations.

• Enforce employee compliance with prior confidentiality obligations.

• Employ copy protection and embedded codes to trace copies.

• Regulate visitor facility and premises access.

• Use global employee “tip line.”

• Consider anti-eavesdropping techniques.

CURRENT EMPLOYEES

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Conduct recurring training on established policies:

• Conveys that employer takes policies seriously.

• Training should occur when employment begins and

periodically during employment.

• Remind employees of confidentiality obligations.

CURRENT EMPLOYEES

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• Use written BYOD polices to demonstrate

company has undertaken reasonable

measures to protect trade secrets.

• Consider “remove wipe” and “tracking”

tools.

BYOD: MOBILE DEVICES AND TRADE SECRETS

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• Address in onboarding, use during employment, and termination of employment.

• Sets protocols for appropriate use and data protection.

• Establishes confidentiality of trade secrets and company’s restrictions.

• Creates consent to access.

• Curtails privacy expectations.

BYOD POLICY CHECKLIST

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• Remind employee of confidentiality agreements previously

executed and explain that the obligations are ongoing.

• Use a checklist!

– “Do you have any company documents or materials at

home?”

– “Have you returned all flash drives that contain

company information?”

• If doubtful, consider requesting the employee sign affidavit

or certification.

• Must have ability to inspect or wipe mobile devices before

employee separates!

DEPARTING EMPLOYEES:

THE EXIT INTERVIEW

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• Does posting information on the Internet or on social

media sites destroy trade secret status? A: Not

necessarily.

• Syncsort, Inc. v. Innovative Routines Int’l, Inc., 2011 WL

3651331 (D.N.J. Aug. 18, 2011) – Defendant IRI argued that Syncsort’s “Reference Guide”

pertaining to its software could not be a trade secret.

– On two occasions the entire Reference Guide appeared briefly on the Internet – once in Japan and once in Korea. Other smaller portions of the Reference Guide were also available on the Internet.

– Judge Walls held that Syncsort’s Reference Guide maintained trade secret status despite Internet posting, noting that Internet is a vast sea of information and disclosures were discrete.

TRADE SECRET RISKS:

THE INTERNET AND THE CLOUD

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• Risks of posting trade secrets “in the cloud” or on cloud-

based storage sites like DropBox:

– Information is being hosted by an unknown third party provider.

– Risk of information leak to the public could destroy trade secret

protection.

– Challenges in recovering information following a breach.

– Lack of clarity over what jurisdiction’s laws apply (particularly if the

server is not located in the U.S.).

• Practice Pointer: If you choose to store information in the

cloud, negotiate a robust contract with the cloud service

provider–barring any disclosure or misuse to third parties

and clearly defining the terms of the provider’s services.

TRADE SECRET RISKS:

THE INTERNET AND THE CLOUD

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Recent Trade Secrets

Legislation

• EU:

– In 2013, European Commission proposed a directive to

create a uniform framework for trade secrets law.

– Intended to have consistent protection of trade secrets

across the EU and “harmonize national laws.”

– Previously EU was a “patchwork” of approaches with

no uniform definition of trade secrets and some

countries (including Estonia and Bulgaria) offering no

remedies for trade secret theft.

– The directive proposes a uniform definition and a

uniform method of trade secret enforcement…

• ….but it still must be formally approved by the

European Commission (in 2014 or beyond)

TRADE SECRET LEGISLATION

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• Private Right of Action Against Theft of Trade Secrets Act of 2013 (H.R. 2466) (PROPOSED) – Creates a private, federal claim for trade secret

misappropriation under the Economic Espionage Act (EEA).

– EEA is currently used by federal prosecutors seeking to impose criminal penalties for trade secret theft.

– This bill is currently pending before the House; previous attempts to amend EEA have failed in committee.

• Future of American Innovation and Research Act (S. 1770) (PROPOSED) – Creates a private right of action against foreign actors who

misappropriate trade secrets.

– Extends the jurisdiction of federal courts to cover trade secret theft by foreign entities causing an injury in the U.S.


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• The Defend Trade Secrets Act of 2014 (S. 2267)

(PROPOSED)

– Like the House Bill, this Bill proposes amending the

Economic Espionage Act to provide for a private, civil

cause of action for trade secret misappropriation.

– “The owner of a trade secret may bring a civil action . .

. for misappropriation of a trade secret that is related to

a product or service used in interstate commerce.”

– Also provides federal court jurisdiction over trade

secret cases.


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John M. Moye

[email protected]

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