“There must be 50 ways to leave your lover."— Paul Simon
It was February 2017 when Waymo, Google’s self-driving car unit, sued Uber in what would become the biggest trade secret case of the century. Waymo alleged that its former manager, Anthony Levandowski, had organized a competing company while still at Waymo, and before leaving had downloaded 14,000 confidential documents. As it turned out, Uber had known about this when it agreed to pay $680 million for Levandowski’s brand new startup; and we’ve already looked at how the hubris of that hasty transaction provides lessons for hiring in new markets driven by emerging technology.
But what about Waymo, the left-behind company? Is there anything to be learned from how it handled the matter? To be sure, it scored points for putting on a convincing case in court. After just a few days of trial, to the disappointment of hundreds of journalists, the dispute was settled, with Uber paying $245 million in stock. Levandowski was forced into bankruptcy and found criminally liable, saved from a jail term only by President Trump’s pardon. It certainly seemed as though Waymo had “won.” But would it have been even more successful if it had avoided the dispute entirely?
Waymo’s complaint, which you can find here, implies that it was in the dark about what Levandowski was up to when he left, despite the fact that while still employed he had downloaded all those documents describing its proprietary sensor technology. Over a month later (in late January 2016), after having established his deal with Uber, Levandowski resigned. In May, his new company, Otto Trucking, emerged from “stealth mode” and by August had been acquired by Uber. In the meantime, several other Waymo employees had left to join him, and on their way out of Waymo had also downloaded a few proprietary documents.
It wasn’t until December, almost a year after Levandowski’s massive collection, that Waymo claimed to have evidence that Otto/Uber was using its secret technology. This came in the form of an email from an Otto vendor attaching a circuit diagram, sent by mistake to Waymo instead of Otto. This drawing, according to the complaint, bore a “striking resemblance” to Waymo’s proprietary technology. It was the “smoking gun” that Waymo was waiting for to file the case.
But let’s pause for a moment and consider that if Waymo had known more of the facts at an earlier time, it might have been able to intervene to prevent Uber’s acquisition of Otto, or at least to limit the damage from whatever information Levandowski may have passed on to the Uber design team. What if, at the time he resigned his position, Waymo knew that he had taken the 14,000 files and was planning to start a self-driving truck company? It doesn’t take much imagination to conclude that the whole unfortunate drama could have been prevented.
Why didn’t Waymo realize that its trade secrets had been compromised immediately after the download? At the very least, considering Levandowski’s extensive access and knowledge, you would have expected the company to insist on questioning him before he left. That process, which is widespread among companies of all types and sizes, is referred to as an “exit interview,” and as we will see it can be a critical step for any business that is losing high-level talent.
But here’s the problem. Exit interviews traditionally are designed and executed by the Human Resources function. And HR professionals see them in a very limited way. Just take a look at any of the literature and you will see that the purpose of the exit process is to find out what made the employee decide to leave. Even if they are being let go, feedback from the interview might improve the company’s people management through insights from those who, because they are on their way out, will be brutally honest about perceived problems.
According to an article in the Harvard Business Review, the objectives of an exit interview are directed inward at the company being left, for example “gaining insight into managers’ leadership styles” and “soliciting ideas for improving the organization.” A leading HR association promotes exit interviews as “giving the company a unique perspective on its performance and employee satisfaction.” And there’s even a Wikipedia article on the subject, suggesting that they can be helpful to “reduce turnover . . . and increase productivity and engagement.” No one ever talks about the interview as a tool to reduce loss and maintain control over information assets.
In reality, the exit interview process forms a vital part of any trade secret management program. It represents the company’s last clear chance to both assess the risk represented by the employee’s leaving and to clarify expectations about how they should behave to protect the sensitive information they’ve been exposed to. Indeed, it is only by directly confronting the departing employee about their plans that the company can reach any useful conclusion about the risks and make informed decisions about reducing them. So don’t limit it to ticking off some boxes on a form, but insist on a thorough discussion. There’s a reason it’s called an “interview.”
Collecting relevant information doesn’t necessarily depend on getting straight, fulsome responses. Sometimes body language speaks loudly, and a direct “I don’t have to tell you that” can lead to an elevated concern and trigger a more intensive inquiry. If a high-level engineering manager claims that he’s leaving to start an ice cream shop with his cousin, you may be excused for thinking that something is not quite right and digging deeper. One way to do that is a forensic examination of the employee’s computer and recent history of system usage, including – ahem – unusual or excessive downloading of files.
A security-focused exit interview will certainly inquire about the sources of any discontent, but not merely to gather suggestions for improving the workplace. Instead, reasons for leaving can provide clues about what the employee intends to do. For example, if they were disappointed that the company didn’t immediately embrace their idea for a new product or process, they may think that they are free to use it themselves. That kind of misperception needs to be corrected, and this may be your final opportunity to do it.
Indeed, another critical part of the process is confirming and reinforcing the employee’s obligations to return all company devices and information. Usually, this discussion revolves around some sort of written termination statement by the employee acknowledging those obligations and confirming that all security policies have been complied with. They should specifically assure that they do not possess any company information, including in personal email accounts or in private cloud storage platforms like Dropbox. Any refusal to sign such a document should lead to escalation to relevant managers.
Having received both verbal and written assurances that the employee will leave behind all company devices and data, the interviewer should explore the risk represented by what the employee will be carrying in their head when they leave. That assessment requires a robust discussion of the new employment and how doing that job might pose a threat of even inadvertent disclosure or misuse of secret information. Frequently, this kind of concern can be addressed with the direct question: “Please help me understand how you will be able to do what you’ve described at the new job while respecting the confidentiality of the information you’ve been exposed to in this one.”
A final area of emphasis is not about gathering information but instead delivering a message about the integrity of your property. As we’ve already noted, this is the last practical chance to put a point on the employee’s continuing obligations after departure. If the company has provided a robust training program that emphasizes the role of the workforce in protecting trade secrets, this will be a straightforward reminder. Conversely, if the company has not invested in regular communication around these issues, then you will have to step up the intensity of messaging at the time of departure, perhaps extending to formal letters to the employee and their new employer.
The best time to deal with risks is before they have matured into reality. It’s not very efficient to discover and mitigate a harmful misappropriation later, when it could have been prevented at the outset.
“I think it is right to refresh your memory…”— Henry David Thoreau
I was recently reminded of a contest that we often played in Scouts, called Kim’s Game. Derived from a story in Rudyard Kipling’s 1903 novel Kim, it gave you a few minutes to stare at a tray full of diverse objects you might find in a junk drawer – things like a key, pocketknife, nickel, compass, button, crystal. At the end of the allotted time, you were challenged to write down as many as you could remember.
My recollection was triggered by a court order. Silicon Valley startups Wisk Aero and Archer Aviation have been slugging it out in trade secret litigation over “flying taxis” that are designed to take off and land like helicopters but fly with wings and propellers. The basic technology has been around for quite a while but making it practical as a battery-powered (and ultimately autonomous) taxi service demands a lot of creative engineering. Wisk, a joint venture between Boeing and a company owned by Google founder Larry Page, has been developing its models for more than a decade. Aero, which has a relationship with United Airlines, is a more recent entrant, and ramped up its workforce by hiring away 17 of Wisk’s engineers, including its vice president of engineering. For more salacious details, see this piece in Fast Company.
Like all lawsuits that require an exchange of confidential information, this one included a “protective order” that allows each side to designate documents and testimony as available only to the other side’s lawyers, with strict limitations on what can be done with it. But those restrictions actually lubricate the exchange, because the disclosing company knows that its information is only being seen by the lawyers. That is, until those lawyers perceive a specific need to share some of it with their clients. In the Wisk lawsuit, Archer’s lawyers petitioned the judge to allow each of the departed engineers to see the highly confidential trade secret description produced by Wisk, claiming that they needed their clients’ advice on how to defend the claim. Wisk adamantly opposed, arguing that the disclosure would serve to refresh the engineers’ memory about information they had (or should have) left behind two years ago, causing additional harm to Wisk.
The judge thought this argument had merit, but in the end modified the protective order to allow the requested access – up to a point. The engineers could only see the secrets that they had worked with at Wisk, and could not take notes; their lawyer had to chaperone the viewing; and their time was “restricted to no more than 15 minutes total per trade secret” (that’s what triggered my recollection of Kim’s Game). To reinforce the seriousness of the exercise, the judge ordered each individual to agree to the protective order, and to provide a sworn affidavit describing what they had looked at and for how long. (the order is available here). You might imagine that Aero viewed the 15 minutes as arbitrary and insufficient, while Wisk saw it as an invitation to steal all over again.
My purpose is not to get into the pros and cons of this particular order, but to shine a light on how judges in general, but especially in trade secret litigation, are called on to make judgments that allocate risk among competing legitimate interests. In this example, the main issue was the risk to the very same confidential information that Wisk filed the lawsuit to protect. Certainly, that’s a compelling interest, and it’s backed up in the relevant statute, the Uniform Trade Secrets Act, which directs that “a court shall preserve the secrecy of an alleged trade secret by reasonable means.” But pushing back against it is the defendant’s interest in defending itself by having access to information that might prove, for example, that the claimed secrets really don’t qualify for protection. The judge in this case acknowledged both perspectives and tried to find a creative way to manage the risk to each side.
Trade secret disputes are packed full of these competing interests. At the outset, the parties often engage in a tug of war about the subject matter of the lawsuit. This isn’t a problem with patents, copyrights or trademarks, where the dimensions of the right are laid out in a government certificate. But trade secret law in effect extends to protect any confidential information that helps a business define its competitive edge. And unlike most other commercial cases, the trade secret plaintiff has only a vague idea of what the defendant might have done to imperil the integrity of that information. Trying to discern exactly what portion of a vast collection of data might have been compromised is often difficult and sometimes impossible without discovery into what the defendant has done. But defendants reasonably argue that their own secrets shouldn’t be put at risk through the discovery process before the plaintiff has defined its claims, lest those claims be fashioned to match what is found in the defendant’s files.
As a result, judges in many trade secret cases are faced with trying to resolve whether the plaintiff should be required immediately to define its trade secrets with particularity, and then decide whether its attempt is sufficient. These decisions can require sophisticated understanding of the relevant technology, which judges typically don’t have at their fingertips. And it’s not just the parties that have a stake in the outcome; the court itself needs to understand the subject matter in order to make sensible rulings as the case goes on. Fortunately, judges have developed a general approach to this conundrum, in which they credit the views of a plausible expert offered by the parties and leave the boundaries of the secrets to be clarified through the discovery process.
A second area that requires careful balancing relates to employee mobility, in the sense that an employer’s interest in protecting against the risk of disclosure or misuse by a departing employee must be balanced against the basic right to seek new employment. In states like California, which have a strong public policy against noncompete agreements, courts naturally tend to be solicitous of the leaving employee; but in most other states, where noncompetes are accepted, they still are assessed for their reasonableness. Many judges want to see the hardship imposed on an employee reduced by payments from the former employer or narrowing of restrictions.
Closely related to this general tension around the free mobility of labor is the critical difference between information that qualifies as a trade secret and that which represents the individual’s skillset. A just-graduated software engineer in her first job learns how to write code efficiently, with fewer steps. When she leaves, she is entitled to take that learning with her, but has to leave behind the specific algorithms created for the employer. But where do you draw the line when, in her next job, she creates code that looks similar to what she had done before? Separating general industry knowledge and skill from genuine trade secrets is difficult—all the more so because the employee and employer each have reasonable concerns to address.
A fourth area demanding judicial judgment lies in deciding whether to issue an injunction early in the case, before there’s been a trial to resolve the contested facts. Typically, the plaintiff will claim some form of “irreparable harm” unless the court stops the defendant from finalizing some transaction or marketing some product, ostensibly to “maintain the status quo” pending the trial. But for a defendant, such an order could seriously harm its business, before it has had a chance to fully present its defense at trial. And in some cases – for example, the release of a new medical device or therapy – the public also has an interest in the outcome.
Finally, there is the trial itself, where the ultimate questions of secrecy and misappropriation get determined. But in this country, we have a tradition of public access to the court system, including civil cases. Where the dispute is about trade secrets, judges have to rule on whether documents should be sealed from view or even whether the public should be barred from portions of the trial. Today’s courtroom technology, where what is shown on the monitors can be limited to the judge and jury, makes this a bit easier; but with hotly contested or high-visibility cases, the court has to exercise extreme care to balance the need for secrecy with the imperative of an open court.
All of this is extremely complex, and there are no bright lines or clear, objective markers to guide judges through the resolution of these colliding interests. Instead, they must do the best that they can, using common sense and the inclination towards justice that drew them to the bench to begin with. In my experience, judges try very hard to avoid doing harm to any litigant. The best of them ignore the noise of excessive advocacy and emotionally charged rhetoric (all too common in trade secret disputes), and they try to sort out the real risks from the imagined ones. What we get from that are decisions which reflect sensitivity to these positions in tension, dealt with in a framework of ethical standards which represent the bedrock of trade secret law.
If while reading you’ve been thinking that this is really hard to do, you’re right. It’s not like the umpire who declares whether the ball is in the strike zone; it’s more like the quarterback faced with a rush, who has to quickly assess the available options and act. Indeed, judges, often with hundreds of contested matters on their docket, are squeezed for time while the lawyers are getting paid for it. Sometimes they have less than 15 minutes available to make a decision. In spite of that, they usually get it right. We should all be grateful.
Jim Pooley was recently interviewed as a guest on the Understanding IP Matters podcast about how companies are increasingly using trade secrets as the basis for competitive advantage. Jim spoke about the value of trade secrets, how they differ from patents, and what companies should do to protect their trade secrets.
You can listen to the full podcast episode below:
“What’s in a name?”— William Shakespeare
One of the most frustrating questions I get from clients asks “what is the difference between ‘confidential’ and ‘proprietary’ information?” Or, “how do I help employees distinguish between either of those terms and real ‘trade secrets?’” Then there are people, including some judges, who trivialize the importance of some useful business information by saying it doesn’t “rise to the level of a trade secret.” That last one makes no sense these days, as we’ll see shortly. But first let’s identify the source of this nomenclature problem: it’s an outfit you’ve probably never heard of called the American Law Institute.
The ALI is a volunteer organization of law professors who read, discuss and then “restate” the law in a form that courts can usefully refer to and consider authoritative. As with standards in other areas affecting the public (the internet protocol, railroad tracks, fire hydrant connections, food additives), it makes sense to try to harmonize the law so that we’re all reading from the same sheet of paper. But if it’s going to be a national standard, you’ve got to get it right. When it came to trade secret law, the ALI failed us terribly. To understand this story, we’re going to have to put on our history hats.
The year was 1939, and with everything else that was going on in the world at the time (Germany invading Poland, Russia invading Finland, and the release of both Gone with the Wind and The Wizard of Oz), maybe the professors were distracted. And in their defense, it should be pointed out that trade secrets were just one small part of the “Torts” (that is, wrongs done by one person to another) section of their work, which included eight other equally weighty sections like Contracts, Judgments and Trusts. So, they were very busy.
Nevertheless, they should have been aware that over 100 years before, trade secret law had been introduced into the United States, adopted from the English common law that imposed judicial oversight on commercial behavior. This first case, Vickery v. Welch in 1837, involved the sale of a chocolate factory, and the Massachusetts Supreme Court held that the seller’s promise to keep confidential the secret recipe was enforceable, even though it could be called a “restraint of trade.” Vickery v. Welch, 36 Mass. 523 (1837).
In 1868, the same court addressed the need to share secrets with factory workers. Peabody v. Norfolk dealt with an employee who left with secrets for manufacturing gunny cloth. Peabody v. Norfolk, 98 Mass. 452 (1868). Approving an injunction, the opinion set out many of the principles that would guide development of the law for decades to come: trade secrets are a form of property, just like patents and trademarks; but they depend on the trust of those who are given access to the secret information. So long as that trust is enforced, the secret may last forever – or until someone else independently discovers it. These notions about manufacturing secrets were extended to customer information in the 1913 case of Empire Steam Laundry v. Lozier, where the California Supreme Court held that a wagon driver’s knowledge of the location and preferences of his employer’s customers was a protectable trade secret. Empire Steam Laundry v. Lozier, 195 Cal. 95, 130 P. 1180 (1913).
Up to this point, no one questioned whether the theory of the law was more about the information as property, or more about the confidential relationship, or whether that even mattered. In fact, it seemed as though both ideas fit neatly together, since the property could be protected by enforcing the confidence.
But by the 1930s, a sense of disquiet had arisen within the legal academy, as some professors, used to the idea that all “property” had to be exclusive in order to deserve the name, focused on the fact that trade secrets were non-exclusive; in fact, more than one company in an industry could possess and protect the same secret formula. This couldn’t be justified, they thought, and the law had to be quietly “adjusted” in the direction of limiting the scope of the trade secret interest.
They found justification in DuPont v. Masland, a three-paragraph 1917 opinion of the U.S. Supreme Court, authored by Justice Holmes. DuPont v Masland, 244 U.S. 100 (1917). The decision approved of a trial court’s order that claimed secrets could be revealed to the defendant’s lawyer but not to a third-party expert. In explaining his reasoning, Holmes said, “The property may be denied, but the confidence cannot be.” Yanked from its narrow factual context, this dictum became the central reference point for those who sought to re-cast trade secret law more narrowly than the courts had been applying it.
The Restatement of Torts was issued by ALI in 1939, and it declared that “trade secrets” were strictly limited to “a process or device for continuous use in the operation of the business,” judged according to a non-exhaustive list of six abstract factors. Explicitly excluded was “information as to single or ephemeral events in the conduct of the business” such as secret bids, unannounced policies or products, financial information, “plans for expansion or retrenchment,” and presumably the entire record of a company’s experimental research leading to a protectable process or product. That kind of information, even if “confidential,” was protected only against deliberate espionage. Even information coming within the cramped definition of a trade secret would be unprotected against “innocent” possession by a third party who had changed its position before learning that the information was tainted.
Without apparent consideration of the contrary view expressed long before in Peabody v. Norfolk, the drafters of the Restatement flatly rejected the property rationale of trade secret law and deliberately distanced it from other forms of intellectual property by declaring that “protection is not based on a policy of rewarding or otherwise encouraging the development of secret processes or devices. The protection is merely against breach of faith and reprehensible means of learning another’s secret.”
The most consequential of these pronouncements was the shunting off into a separate category all “confidential” information that was not “in continuous use” in the business. This orphaned class, as we can appreciate from the perspective of the 21st century information age, contains some of a company’s most valuable data assets, including all of the records of experimentation leading to the launch of a successful product. The authors of the Restatement simply waved it away by observing that they weren’t dealing with it, unless there had been deliberate espionage. This maltreatment of “merely confidential” information naturally and understandably led courts to find other theories to justify its protection. This is how we came to use the law of “misappropriation” or “unfair competition” to try to protect information that doesn’t “rise to the level” of a trade secret.
If only everyone had waited until 1974. That happened to be my first full year of practice as a lawyer, and it was when the U.S. Supreme Court decided Kewanee v. Bicron, confirming that the state “common law” on trade secrets was consistent with, and not preempted by, federal patent law. Kewanee v. Bicron, 416 U.S. 470 (1974). The idea that it should be preempted had been promoted by a group of commentators – suspiciously thick with law professors – who saw supporting secrecy as antithetical to the patent law’s goal of public disclosure of innovations. No, said the Supreme Court, trade secret law in fact enhances innovation by ensuring continued control over secret processes, and it avoids hoarding and enables dissemination through licensing; in any event, it’s been around a long time (remember that chocolate recipe?), and Congress has not raised an objection. It is in fact a form of intellectual property.
Kewanee v. Bicron ushered in the modern era of trade secret law. We got the Uniform Trade Secrets Act beginning in 1979, the Economic Espionage Act in 1996, and the Defend Trade Secrets Act in 2016. All of these frameworks – along with the new (third) Restatement from ALI in 1995 – embraced an extremely broad definition of what could be a trade secret. Virtually any information that gives business some sort of advantage can qualify, as long as it’s not generally known and the business uses “reasonable efforts” to keep it secret. It applies to what the original Restatement authors disparaged as “ephemeral” information like bids or an unannounced product (making possible all those dramatic unveilings by Steve Jobs), as well as the “negative” secrets accumulated during a long and expensive process of experimental research and development.
So, as a practical matter, the phrase “not rising to the level of a trade secret” should have as much meaning as “it’s your nickel” (sorry, millennials, that’s from the time of coin-operated phones and it means “I’m ready to listen to you”). And realizing that “trade secret” now encompasses this vast sea of important business information that used to be treated separately, we can stop making the distinction, right?
Unfortunately, habits die hard, and there’s a lot of inertia built into the old nomenclature. Many companies insist on “confidential” as a separate category of data, distinct from secrets. And in fairness, businesses handle some personal information about individuals that has to be protected even though it doesn’t belong to the company. But for most organizations, there is a real benefit to treating “secret,” “proprietary,” “company private,” “confidential,” and other similar terms as just synonyms describing information for which the business wants to control access.
That doesn’t mean that you shouldn’t use “confidential information” as a broadly defined term in your contracts. It also doesn’t eliminate classification systems that distinguish among various kinds of information according to their sensitivity by using some of these terms like “private” or “restricted” or “top secret” to signal different levels of required care. But try to avoid suggesting to the workforce that there is a meaningful difference between the company’s “confidential information” and its “trade secrets,” because that might be interpreted to say that the former is not entitled to the same legal status as the latter.
Shakespeare’s question, posed by Juliet, was meant to be rhetorical – whatever name you pick (e.g., Capulet, Montague) doesn’t affect the essential quality of a person. You can’t say the same for valuable business data, because we have a lot of people dealing with it, and we don’t want them to be confused or to misunderstand. Modern trade secret law gives business very wide discretion about how to maintain control over its information assets. We should be careful not to surrender any of that discretion through misuse of terminology.
“Risk comes from not knowing what you’re doing.”— Warren Buffett
At this moment, there is a fellow riding a bus in London who will determine the fate of your secrets. To be more precise, he’s on the Clapham bus; but he has no name. In fact, he’s a fictional character originally imagined by 19th Century journalist Walter Bagehot, who thought that “public opinion” was best described as the “opinion of the bald-headed man at the back of the omnibus.” The idea was picked up by the English courts as a metaphor for the “reasonable person” standard that is applied in all sorts of cases, from criminal to personal injury to contract interpretation. It also has special application to trade secrets, which we’ll get to in a minute.
First, a bit more about the hypothetical “reasonable person.” As the UK Supreme Court explained in a 2014 decision, the “Clapham omnibus has many passengers. The most venerable is the reasonable man, who was born in the reign of Victoria but remains in vigorous health.” Others include the reasonable parent, the reasonable landlord and the “fair-minded and informed observer, all of whom have had season tickets for many years.” The point is for the judge or jury to put themselves in the mind of this fictive but “reasonable” person, for guidance on what the actual person in the case should have done.
If this strikes you as a vague and maybe unpredictable cop-out by judges who can’t come up with a more precise standard for acceptable behavior, you wouldn’t be alone. But at least it’s objective, in the sense that what’s reasonable is what that anonymous guy on the bus would think about the behavior of someone in similar circumstances. It’s not about what the person being judged thinks is sensible or right. In effect, being dim is no defense.
What does this have to do with trade secrets? Under modern law, as established by the states under the Uniform Trade Secrets Act (UTSA) or the federal Defend Trade Secrets Act (DTSA), a business that wants to protect the integrity of its confidential information has to provide evidence of “reasonable measures” to prevent the loss. This means that before you can get help from the courts you must have helped yourself by taking actions “reasonable under the circumstances” to maintain secrecy of your data. In other words, your preventive efforts will be judged under the “reasonable person” standard.
It wasn’t always like this. Back in the days when the rules came from the common law (individual decisions of judges), trade secrets were treated as a part of tort law, and the emphasis was on the confidential relationship between the business and those it had to share secrets with. Courts focused more on the defendant’s bad behavior in taking or misusing the secret than they did on whether the information deserved to be protected at all. This perspective found expression in the 1939 Restatement of Torts, which defined trade secrets in reference to a set of six factors to be weighed as the judge saw fit. One of those was “the extent of measures taken by [the trade secret owner] to guard the secrecy of the information.” That left a lot of room for judges to just do what felt right. Defendants who had been caught behaving badly had little luck in arguing that the plaintiff should have done a better job protecting its secrets from misappropriation. One judge compared the argument to the car thief that complains about the driver leaving his keys in the car.
Things began to shift in the 1980s. Trade secrets were viewed more like property rights, with owners being expected to draw boundaries and provide warnings. As more states adopted the UTSA, with its specific requirement (no longer just a factor) that the trade secret owner prove that it had exercised “reasonable efforts,” judges started to express more skepticism about those efforts, and that trend picked up with the adoption in 2016 of the DTSA, which allows most trade secret cases to be brought in federal court. Thirty years ago, trade secret claims were only rarely dismissed before trial based on a failure of reasonable efforts. Now, according to a recent study by the law firm Winston & Strawn, it happens in 11% of trade secret disputes. The “reasonable person” standard is now the “reasonable business” standard, and it really matters.
A recent case decided by the Second Circuit Court of Appeals, Turret Labs USA, Inc. v. CargoSprint, LLC, illustrates how things have changed. Turret had developed a software program for use only by freight forwarders operating at airports, but licensed the product to airlines, in this case Lufthansa. CargoSprint was alleged to have gotten access through Lufthansa by falsely presenting itself as a freight forwarder, acquiring secret algorithms and other information it used to create a competing product. Turret alleged that Lufthansa had “protocols” in place to ensure proper access, but it did not recite what provisions of its license required the airline to apply them. It also alleged various network security measures such as servers in locked and monitored cages, with data in transit secured by encryption. The appellate court affirmed the trial judge’s order dismissing the complaint for failure to describe reasonable efforts. Based on the allegations in its complaint, Turret had given full authority to Lufthansa to control access, but apparently without requiring it to do so. That basic surrender of control to a third party rendered irrelevant all of the technical measures that had been applied to secure the IT system.
Turret, and cases like it, teach us four important lessons. First, businesses have to pay close attention to trade secret management. That’s mainly about preventing loss or contamination of those assets, which these days represent the lion’s share of a company’s sustainable value. But it’s also about being ready in case you have to go to court to protect your rights. These cases often come at you very fast, after you’ve discovered that a departing employee or unreliable business partner threatens to abuse a trust. When that happens, you need to be prepared to explain not only what your trade secrets are, but also all the steps you have taken to demonstrate to the court that you have acted prudently to maintain control over these valuable assets. That means designing your relationships and transactions with a keen eye to this dimension of risk.
Second, the trade secret statutes require you to prove both that your secrets have competitive value and that you have exercised reasonable efforts to protect them. Don’t conflate those two related but distinct issues. Your secret process or other confidential information may appear to give you a significant advantage over the competition; but you also have to signal that special value to those who have access to it. Robust training for employees and careful contracting with third parties will be part of the story you may have to tell about how you made sure that everyone understood what your secrets were and how they were supposed to protect them.
Third, in designing your protection program, don’t fall into what I call the “checklist trap.” You can find lots of lists of protective measures culled from judicial decisions about what judges found to be sufficient in a particular case. More often than not, those decisions will be on motions to dismiss or summary judgment, where the court is making a narrow ruling, preserving for the jury the ultimate decision on what is or isn’t “reasonable.” What some other company has done may be interesting, but it’s not particularly relevant, unless they are protecting the same kind of information that faces identical risks. The question is what’s reasonable to maintain the secrecy of your unique secrets, in the light of the unique (and usually dynamic) risk environment they live in. Remember that Turret had apparently constructed a fairly secure framework against external attacks, but none of that mattered because it transferred access control to its licensee without limitations.
Fourth, approach the issue the same way that you would any other major area of business risk, by performing a classical risk analysis. Consider carefully the value of the information you want to protect as well as the security risks that it faces on a day-to-day basis in the business – with particular emphasis on the “internal threat” of uninformed or careless employees as well as the full range of third-party access through supply chains and collaborations. Examine what you can do to efficiently mitigate those risks, which will normally come down to careful relationship management, through contracts, communications and education. (For a thorough discussion of trade secret management, see the draft Sedona Conference Commentary on “Governance and Management of Trade Secrets”).
Your primary objective always is to maintain control over your data assets so that they don’t migrate or get infected. But if you ever have to go to court to protect them, resolution of the “reasonable efforts” issue will be driven mainly by whether or not your secrecy efforts taken before the litigation appear to be consistent with the high value you assert in the courtroom. Sitting in judgment on that question will be that bald-headed fellow on the Clapham omnibus.
The World Trade Organization last week approved a deal to loosen intellectual property protections that many policy professionals say will shatter investment and innovation incentives for drugmakers to meet the needs of major health crises. The deal was a blow to vaccine makers such as Pfizer Inc. and Moderna Inc., which fought to keep the current framework that enabled them to produce life-saving vaccines in record time.
“Anyone with a stake in preventing or responding to future crises should be concerned about the negative effect of this agreement,” said James Pooley, a former deputy director general at the United Nation’s World Intellectual Property Organization.
The IP waiver comes after nearly two years of debate and at a time when initial catalysts for a plan to spur vaccine access and production capabilities have largely been addressed—leaving many in the IP and drug spaces skeptical of the goals of the agreement beyond political gain.
“It delivers the worst possible result: coming at a time when there is an oversupply of vaccines, it is irrelevant to the current crisis; and by reducing the reliability and predictability of patent protection it makes it much harder to secure private investment in the research required to deal with the next global health crisis,” Pooley said.
The waiver indicates that patent rights include ingredients and processes necessary for the manufacture of the vaccine. Were that interpreted to include trade secrets, it could scare off investment capital, Pooley said.
“All warfare is based on deception. There is no place where espionage is not used.”— Sun Tzu
What does the invasion of Ukraine have to do with COVID-19? Would you believe intellectual property is the link? Stay with me on this; it’s an interesting story.
Recently, it was confirmed that the Main Intelligence Department of the Ministry of Defense of Ukraine – apparently with some help from volunteer hackers – managed to breach the network of Russia’s most guarded nuclear power facility and make off with extremely valuable trade secrets. The Beloyarsk Nuclear Power Plant contains the world’s only two operational “fast breeder” reactors. More than 20 countries, including the U.S., Japan and France, have been working for decades on this technology, which is supposed to be able to extract close to 100% of the energy from uranium, compared to about 1% for light water reactors.
In other words, this is a process that can produce large amounts of energy while completely consuming the fuel and creating virtually no nuclear waste. Whoever is able to commercialize it will make a fortune. So far, no one has come close to the Russians.
As you might expect, the Beloyarsk facility is closely guarded. But because it has to communicate with various suppliers, its network has electronic doors that can be unlocked. Ironically, at about the same time that the Russian army was in Ukraine overtaking the Chernobyl nuclear plant, Ukrainian hackers were worming their way into Beloyarsk’s business network, which in turn gave them access to control systems, parts lists, floor plans and other critical data. To the delight of power companies around the world, Ukraine has supplied this trove to a journalist who is publishing the documents on his website.
You can almost hear the public cheering for underdog Ukraine. Some commentators have suggested this hack represents the first “weaponization” of intellectual property to damage a nation. I’m not sure I’d go that far. In any event, the broader issue of “technology transfer” across borders has a long and interesting history, a brief review of which will bring us to the current pandemic.
State-sponsored commercial espionage started at least as early as the sixth century, when a pair of monks returning to Constantinople from a mission to China brought inside their bamboo staffs a colony of silkworms and in their heads the knowledge of how to breed them and weave their output. This broke China’s de facto monopoly on what had become the world’s most valuable commodity, more precious by weight than gold. Constantinople (now Istanbul) also nurtured a community of glass blowers, and when the city was sacked in the early thirteenth century, Venice welcomed them, and soon thereafter made it a crime for them to leave.
Besides beautiful glass, Venice created the first patent system, and it was emulated throughout Europe. But these patents were granted on the basis of “local novelty,” meaning that the applicant did not have to be the actual inventor, but just the first person to bring the innovation to the country. These so-called “patents of importation” were a sensible way for countries to move up the IP value chain quickly, because there were no journals or other mechanisms for rapid dissemination of new ideas, and national economies were largely independent of one another. So, what seems to us today like theft was viewed with more equanimity as a victimless act.
It wouldn’t be until 1883 that the first international treaty on intellectual property, the Paris Convention, established cross-border recognition of patent rights. In the meantime, what with the Enlightenment and empire building and all, Europe was rapidly becoming more economically interdependent and competitive. While patents of importation remained a more or less above-board way to force tech transfer between countries, there developed alongside them a system of outright economic espionage.
Government spying for commercial secrets reached its zenith in the eighteenth century, when Britain had become the acknowledged world leader in precision manufacturing. Many European rivals, particularly France, saw espionage as the way to catch up. They did this in part through “tourists” and academics gathering technical information, but they were primarily interested in the “know-how” of skilled workers, and so most of their efforts consisted of recruiting foreign artisans. As French civil engineer Trudaine de Montigny put it in 1752, “the arts [that is, technologies] never pass by writing from one country to another; eye and practice can alone train men in these activities.”
In this way, the French (and other countries) were able to disrupt Britain’s exclusive control over innovation in steel production, metalwork in general, including copper sheathing of ships, and especially textile manufacturing.
It is in this latter area that the U.S. is unfairly (in my view) characterized as having built its industrial revolution through theft of IP from Britain, after Samuel Slater violated its law against emigration of skilled textile workers by leaving for New England in 1789. You can read my take on his story here. Regardless of how you interpret that murky record, there is no denying the facts about how this country organized its own patent system.
In 1790, just months after Slater arrived, Congress passed the first Patent Act, based on the authority provided by the “IP clause” of the Constitution. Alexander Hamilton strongly favored patents of importation, the traditional way to generate rapid economic growth, especially in a country that was short on labor and needed to maximize efficiency through innovation. Thomas Jefferson – who originally described any form of exclusive patent grant as an “embarrassment” to a free society – favored instead a system that would recognize the true inventor based on global, not local, novelty. Jefferson’s view prevailed. In this way, the U.S. looked to the market, rather than government muscle or spying, as the way to achieve technological progress.
The situation today might be seen as both simpler and more complicated. We have made things simpler with some powerful international agreements that have reinforced global respect for IP rights based on national law. Besides the Paris Convention, we have the Patent Cooperation Treaty of 1970, which now guarantees recognition of patent filing priority in 155 countries. And since 1995, with the establishment of the World Trade Organization, we have enjoyed the benefit of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which sets minimum standards for recognition of all IP rights, including trade secrets.
In parallel with these developing international norms for the protection of IP, we have seen disturbing evidence of state-sponsored trade secret theft. Practiced mainly by countries with highly controlled economies, these efforts bring to bear the power and resources of a foreign government to target commercial enterprises around the world. The U.S. government has long issued warnings about state-sponsored industrial espionage by China, and recently, alarming messages have gone out about cyberattacks coming from Russia. Although those attacks are assumed to be directed mainly at disrupting critical infrastructure like banking and energy, once the enemy is “inside the system” they can easily gather commercial technology as well.
This now brings us to COVID-19 and efforts to ensure vaccine availability to the entire world. Here, the primary state actors are India and South Africa. At one very important level, they have spoken for the community of developing and least developed countries, properly pointing out the shameful disparity in distribution of vaccines between rich and poor nations. But as I have pointed out before (see here and here), their proposal that TRIPS protections be waived for any vaccine technology would be ineffective for the current pandemic and disastrous for the next one. And behind the proposal is a not-so-hidden agenda directed at the future enhancement of their own generic pharmaceutical industries.
The proposed TRIPS waiver is not really about patents, because the agreement allows countries to force a compulsory license during emergencies. Instead, it’s about old-fashioned tech transfer, as when the French wanted British manufacturing secrets and tried to hire skilled workers to emigrate. It’s the “know-how” that matters.
It may seem counterintuitive, but modern transfer of valuable technology from one country to another is enabled by strong trade secret laws that enforce voluntary agreements. Indeed, this fundamental truth is well illustrated by COVID vaccines, which couldn’t be produced alone by the companies that invented them. They had to find qualified commercial partners in other countries to collaborate, sending their scientists and engineers abroad for weeks or months to bring up to speed their colleagues about the “know how.”
In short, tech transfer for modern, complex technology is really hard to do, even when it’s voluntary and done according to a commercial agreement. The failed conceit of the “TRIPS waiver” project is the assumption that it’s even possible for governments to force that sort of surrender of private property.
Indeed, I think we can agree that any form of state-sponsored commercial espionage is wrong. Well okay, maybe when your country is under siege you may be excused for using whatever tools you have at hand to cause disruption to the aggressor. Also, the forced dissemination of efficient nuclear energy technology may be one of the few benefits to come out of this terrible tragedy in Ukraine.