James Pooley, member of the Center for Intellectual Property Understanding and former deputy director general of the World Intellectual Property Organization, understands the full seriousness of cyberespionage.
Pooley agrees that COVID has created a riskier environment because employees are away from their usual offices. But the problem is not entirely current, he notes, explaining that a new risk environment emerged in the last 15 to 20 years, as we moved into an information-based economy, where the asset base shifted from tangibles to intangibles.
In addition, “the imperatives for sharing information and trusting other people went up like crazy because of globalisation”, he says. Supply chains have become longer and more complex, as companies shifted to vendors abroad and therefore have to manage their operations at a distance.
During the early-1970s, “all that a company needed to do to protect its information assets was to guard the photocopier and watch who went in and out the front door, because there were no networks, no internet and records were stored on paper”, says Pooley. But, over the last decades, digitalisation coupled with globalisation has changed the playing field. Some of the most valuable assets have become intangible, opening up a whole new world to hackers.
So how does sensitive data end up in the wrong hands? Pooley argues that swathes of valuable information is lost because of employee inadvertence. In rough numbers, he says, “some 80 to 85 per cent of information loss occurs through employees, as opposed to hackers worming their way in from outside”. While organisations can spend effort and money on secure IT infrastructure, they neglect employee behaviour at their peril.
“I see it over and over again,” says Pooley. “I get hired as an expert to critique the protection systems for companies in litigation over trade secrets, because they have to prove they took reasonable steps to prevent the things from happening.” What he sees is companies neglect to train their employees on how to identify and handle confidential data.
Meanwhile, hackers look for the weakest link in a company’s information chain, for instance when employees use the public wifi of a restaurant near their office for work purposes. He mentions the 2014 hack of Target, when the company’s heating and air conditioning contractor was used as an entry point by hackers, who exploited the vendor’s weaker system to gain access to the Target system.
“It's just astonishing to me that more companies don't pay better attention to these issues, but there we are,” says Pooley. “Maybe I'm a Cassandra, but remember, Cassandra was right.”
How can companies train their employees to be more vigilant? “Preventing bad behaviour is usually about awareness, because people want to do the right thing and they want their jobs to be preserved,” he says.
When Pooley advises companies, he begins with a high-level strategic examination of what the company’s most important information assets are, what risks or vulnerabilities they face and what mechanisms there are to reduce these risks.
“Being really attentive to where the risk points are will alert you to pay special attention to areas that are likely to be used as points of entry,” he says. Companies need to set up policies and procedures to ensure their IP is protected and training employees is a big part of that.
“I worked with one company that built a consumer product primarily manufactured in China, so there were obvious leakage risks connected to that.” As they went through the process of developing a comprehensive system to protect their IP, Pooley asked for all the senior managers of the company to get together in one room to discuss the matter. Even though this was not easy to arrange, he insisted.
Once all senior managers came together, including the supply chain managers who talked about issues they experienced directly, sharing information triggered insights for managers across the board.
“‘Wait a minute, I don't think I've ever really looked at the non-disclosure agreement that we have with company x and when it expires.’ All of a sudden, they're seeing vulnerabilities, where they hadn't really thought about them before,” says Pooley. “No one expected the specialty arm of the organisation that dealt with all these companies in China would have something to say to the other business units, but vulnerabilities can overlap.”
Are silos and inefficient communication partly to blame for companies’ vulnerability when it comes to countering cyberthreats? Pooley argues organisations need to confront the fact that separate units within their business may have set up unnecessary walls. In reality, information flows and risks are usually shared across the business.
Part of the solution could be found through automation, he says, because automation includes behavioural analytics and insight tools that help companies monitor what exactly it is employees do on their platforms. However, using these tools always has to be balanced with individuals’ expectations of privacy.
Pooley concludes: “The message that I often give is cyberespionage is scary and ugly, and we need to do everything we can to prevent it and deal with it. But if we're not managing our employees in a smart way, it's almost like we’ve left a couple of doors open.”
“You never have trouble if you are prepared for it.”
— Theodore Roosevelt
My head was turned by the recent news of President Trump’s final-day pardon of Anthony Levandowski, the former head of Google’s self-driving car unit who was recruited into Uber with full knowledge that he had downloaded 14,000 confidential files on his way out, and who was later convicted of trade secret theft. I was struck by the White House statement of justification. It said that Levandowski – who hadn’t yet served a day of his 18-month sentence – “has paid a significant price for his actions.”
Mr. Trump also noted that Levandowski “plans to devote his talents to advance the public good.” We of course wish him luck with that, and hope that his next public interest venture turns out better than the Way of the Future Church, which he created to focus on “the realization, acceptance and worship of a Godhead based on artificial intelligence (AI) developed through computer hardware and software.” I promise I’m not making that up. But you can’t prove it by going to the church’s website, which has been taken over by a company hawking fidget cubes, digital cameras and sewing machines. (Also true.)
But back to the main story. I have no doubt that Levandowski has “paid a significant price” for his misdeeds, but it caused me to think about the price paid by others who were involved in this fiasco of a hiring, most specifically Uber. It all started out well, with Uber building a team of bright engineers focused on a future of autonomous vehicles that would – um – replace all those “independent” drivers. Anyway, the company’s young president, Travis Kalanick, was so smitten with Levandowski that he got his board to agree to hire Levandowski at a cost of $250 million in Uber stock, plus $680 million to acquire his new self-driving truck company.
When Google found out about Levandowski’s midnight download and what he was doing at Uber, the lawsuit came quickly. As I’ve pointed out in an earlier article here, the optics weren’t so good, since Uber had agreed to indemnify their new head of engineering against his prior “Bad Acts” (yes, that’s what they were called in the agreement; not making that up either). This turned into Silicon Valley’s favorite soap opera for a couple of years, the civil case finally settling early in the trial, with Uber paying out another $245 million in stock, this time to Google. Kalanick lost his job. And Uber ended up selling off the autonomous vehicle business. As for Levandowski, he pled guilty to trade secret theft, the judge calling it the “biggest trade secret crime I have ever seen.”
Now, I’m sure that your company wouldn’t get itself into a mess like that. But salacious stories like this one serve as a reminder of all the things that can go wrong when we hire someone from the competition. Especially when we stop thinking about risk and see only upside. So, let’s talk about that risk and what you can do to keep yourself out of trouble – and never, ever need a presidential pardon.
The problem starts with what I call the “recruiter’s dilemma.” Management solemnly tells those in charge of hiring that the company is looking only for great talent, bringing them on for their “skill and experience.” However, at the same time, and ever so subtly, a parallel message may go out: but by the way, we’re struggling with this really tough problem, and if you can find someone who knows how to solve it – who has done it before – that would be terrific. As a result, the recruiter suffers from cognitive dissonance, and management has injected potentially unknowable risk into the process.
Of course, this is just human nature at work. We act under the influence of the strongest force in the universe, which is denial, along with its close cousin, justification. The job of management is to impose some discipline on the recruiting effort, both to erect guardrails against cavalier behavior and to help drive the message to the workforce that ethical behavior is the best way to mitigate most risks.
Here are my top eight suggestions for keeping this function under control so you can hire the best people but avoid lawsuits.
First, examine your motives and plans. Are you sure you want this person (or this team) solely for their skill, or is it possible that, somewhere in the mix, you’re trying to solve a specific problem with someone else’s solution? Be honest to yourself.
Second, design the recruitment with a clear-eyed, sober assessment of what can go wrong. Don’t let urgency overcome your common sense. High-level employees come with a lot of sensitive information packed into their heads. How likely is the current employer to feel betrayed? Has the company sued others on the way out? Will this cause internal problems for which they will need a scapegoat? Thinking through all the risks will help you determine the extent to which you may need to take special measures to head off a fight.
Third, engage your recruiters with an unambiguous message about avoiding contamination with a competitor’s data. Depending on the sensitivity of the hire, this may be the primary imperative for those doing the recruiting, and they need to have those concerns top of mind. This may translate into specific guidelines and checklists for promoting the position and for speaking with candidates. Those involved in interviewing all need to be trained to radiate respect for others’ intellectual property, and to avoid asking questions that might lead to inappropriate disclosures.
Fourth, create a system for communicating with potential recruits that consistently reinforces your company’s respect for others’ confidential information. Consider requiring candidates to sign an agreement before the first interview in which they promise not to share any information that might be considered confidential. Insist on getting copies of any restrictive agreements at that point, rather than waiting until the offer is made. Be clear that if they are hired they must arrive “clean,” with none of their former employer’s information with them, at their home, or on their personal devices or cloud storage, and that violation of that policy may lead to termination.
Fifth, before the new recruit submits their resignation, meet to review and reinforce the ground rules and to surface any areas of concern. Remind them that they must continue to devote their full time and loyalty to their employer. Suggest that they take the time to organize current projects and separate their personal belongings and files, so that they can be ready if they are “walked out.” Warn against any significant downloading of files, wiping of drives, or other activity that might be misunderstood. Ensure that all electronic computing and storage devices are left behind intact. Discuss how the employer is likely to react, and suggest ways in which the recruit can deliver their resignation diplomatically and demonstrate their good faith during the departure process. Find out if they have any specific concerns around confidential information and direct them to their own counsel as appropriate. Finally, be sure that they are able to answer this question honestly and comfortably: can you explain how you will be able to do the job that we’re hiring you to do and still honor your obligations to your former employer?
Sixth, if the new hire is a manager in their current company, you need to discuss how they will handle communications with those who report to them. Most state laws place special duties on managers to avoid using their positions of authority to encourage others to leave. Generally, it is best that managers be isolated from the process of recruiting others, and that careful records be kept of those who reach out to express an interest to follow them.
Seventh, prepare co-workers for integrating their new colleague in a way that avoids any transfer of sensitive information. Set clear rules that are grounded on avoiding contamination by not asking inappropriate questions or putting the new arrival in a position that could be compromising. Let everyone know that there may be some meetings or projects where the new person will be deliberately excluded for a period of time. In some cases, it may be a good idea to role play how to handle awkward situations.
Eighth, carefully plan and execute onboarding of the new hire. Have them sign the standard agreements that include a promise to respect the intellectual property rights of others. Discuss how they will be expected to handle the transition, and how they should conduct themselves with their new colleagues. Create a point of contact to answer questions or concerns. And perhaps most important, ensure that they receive meaningful training on how the company handles its own and others’ confidential information.
You’re unlikely to ever find yourself in a lawsuit approaching the scale of the Uber case, or need a presidential pardon. But every trade secret dispute carries with it the risk of crippling costs and distractions. Because employees are the most frequent vector for information loss, you can help yourself by being prepared.
One of the uniquely fascinating aspects of trade secret disputes is that they are laced with unbridled emotions, accusations of treachery, and actors who angrily disagree over basic facts. In other words, they provide a perfect metaphor for the year 2020.
Let’s take a look back at the cases this year that are worthy of comment, either because they involved some unusual set of facts or because they provide useful guidance for behaving better in 2021.
First, this year brought two massive verdicts in trade secret cases. February’s Chicago jury verdict in Motorola v. Hytera came in at $764 million, of which $418 million was for punitive damages. Then, in October, a jury in the New York case by Cognizant against Syntel awarded $854 million, including $570 million in punitives. Even more remarkable, the same trial counsel represented the plaintiffs in each case. Congratulations, Kirkland & Ellis! See, some people had a very good year in 2020.
A big award in another case got reduced, in Epic v. Tata, 971 F.3d 662 (7th Cir. 2020). The jury had awarded $240 million in compensatory damages and $700 million in punitives. The trial court reduced the damages to $140 million and limited the punitive award to twice that amount under the Uniform Trade Secrets Act (UTSA). On appeal, the 7th Circuit held that constitutional due process required a further reduction in the punitive award to $140 million. Still, the case is another reminder that unethical behavior (here, accessing a competitor’s data by misleading a customer) can lead to enormous awards.
In Ajaxo v. E*Trade, 48 Cal.App.5th 129 (2020), the court confirmed that it was acceptable to use the “Georgia-Pacific factors” from patent law in order to inform the damage analysis in a trade secret case.
One of the lingering questions since enactment of the Defend Trade Secrets Act (DTSA) in 2016 has been whether the pre-existing provisions of the Economic Espionage Act establishing jurisdiction over foreign misappropriation would apply to civil cases as well. The first decision analyzing this question came in January, in Motorola v. Hytera, 436 F.Supp.3d 1150 (N.D. Ill. 2020), ruling that the statute did apply where at least one act in furtherance of the “offense” occurred in the U.S. That ruling enabled the large verdict referred to earlier; but its continuing impact is potentially much broader, given the international character of many business relationships. And just to sharpen the point, the court in vPersonalize v. Magnetize, 437 F.Supp.3d 860 (W.D. Wash. 2020) ruled that the “act in furtherance” need not have been committed by the defendant.
To qualify information as a trade secret, the owner must show “reasonable efforts” to keep it confidential. Increasingly, courts are unwilling to excuse what looks like sloppy behavior by the plaintiff. In Amgen v. California Correctional, 47 Cal.App.5th 716 (2020), the court said that merely putting the word “confidential” on an email blast to 170 people wasn’t enough. And in a real sign of our times, the contents of a Zoom meeting among franchise owners lost confidentiality protection because the organizers did not require passwords or keep accurate track of who gained access to the call. Smash Franchise v. Kanda, 2020 Del.Ch. LEXIS 263. On the other hand, in Ultimate Timing v. Simms, 715 F.Supp.3d 1195 (W.D. Wash. 2020), the court found that an email request to treat information as confidential was sufficient.
The DTSA defines an owner as one who has rightful possession of a secret, such as through a license. So mere possession is enough to establish standing to sue, even though the plaintiff had developed the information under a “work for hire” contract that gave title to a third party. Advanced Fluid v. Huber, 958 F.3d 168 (3d Cir. 2020). But merely claiming ownership of a patent improperly derived from a trade secret does not invoke a question of “inventorship” under the Patent Act, so removal on that basis to federal court is improper. Intellisoft v. Acer, 955 F.3d 927 (Fed.Cir. 2020).
Taking someone else’s secret by “improper means” is unlawful. Back in the 1970s, aerial surveillance of a construction site was condemned by a judge as a “schoolboy’s trick.” The same expansive view of unethical business behavior animated the finding in Compulife v. Newman, 959 F.3d 1288 (11th Cir. 2020) that using “bots” to “scrape” information from the plaintiff’s publicly accessible website that was designed to provide data only to individual humans amounted to “improper means.” That said, in the more common circumstance of departing employees, early intervention by lawyers can help their clients avoid liability. In Flatiron v. Carson, 2020 U.S. Dist. LEXIS 48699 (SDNY), counsel advised, and the client adopted, a plan to reduce the risk of misuse of secrets by a former employee. As a result, the court rejected the plaintiff’s claim of “threatened misappropriation.”
Employee confidentiality agreements are typically viewed as fair and non-controversial. But if the employer gets aggressive and limits post-employment use of publicly available information, the nondisclosure agreement can be analyzed under the rules applicable to noncompete contracts, and declared unenforceable. TLS Mgmt. v. Rodriguez-Toledo, 966 F.3d 46 (1st Cir. 2020). In California, employee noncompete agreements have long been outlawed. But oddly for the first time this year, a California court ruled what should have been obvious, that the prohibition does not apply during the term of employment, when duties of loyalty justify imposing that restriction. Techno Lite v. Emcod, 44 Cal.App.4th 462 (2020). In another case dealing with California’s ban on noncompetes, the court held that strict application of Business & Professions Code § 16600 is applied only to employee agreements, not to contracts between businesses, which are examined under a rule of reasonableness. Ixchel Pharma v. Biogen, 9 Cal.5th 1130 (2020).
Because trade secret claims often come as a surprise to the defendant, and early procedural moves such as preliminary injunction applications can consume counsel’s attention, it is possible to overlook some of the finer points about litigation holds and other aspects of evidence preservation. But turning off an autodelete function on the defendant company’s email server is not viewed as one of the fine points. In Weride v. Kun Huang, 2020 U.S. Dist. LEXIS 72738 (N.D. Cal.), the resulting destruction of evidence justified terminating sanctions and a fee award. So, pay attention; you have been warned.
As we in the trade secret bar are fond of saying, ours is the only area of intellectual property where the subject matter is not laid out in a government document, and where a dispute may be the first time that anyone is required to articulate what the thing is. But even if a plaintiff as part of its sensible trade secret management program has made a list, you can be sure that it will be challenged in litigation as insufficient to inform the defense. Indeed, identification of trade secrets has become one of the most hotly contested aspects of any claim. There are legitimate competing interests at stake, and one of the positive developments in 2020 was the publication by the Sedona Conference of a Commentary addressing this singularly challenging issue.
While everyone is reading this helpful guide, the cases keep coming. In Jabil v. Essentium, 2020 U.S. Dist. LEXIS 24371 (M.D. Fla.) the court held it sufficient to define secret software by providing file names and paths for 16,000 files. Sometimes litigants use experts to explain that because they can understand the description, the court should approve it. But the expert’s elucidation itself has to be understandable. In Calendar Research v. StubHub, 2020 U.S. Dist. LEXIS 112361 (C.D. Cal.), the court rejected what it characterized as “a circuitous path of unexplained jargon.” By comparison, the judge in Caudill Seed v. Jarrow, 2020 U.S. Dist. LEXIS 94821 (W.D. Ken.) allowed the plaintiff to broadly claim a “knowledge base” derived from years of R&D.
Finally on this subject, I refer to the recent opinion in Inteliclear v. ETC, 978 F.3d 653 (9th Cir. 2020), not because it creates new law on identification, but only because some people think it does, and I respectfully disagree. The case is highly unusual because on the first day of discovery the defendant filed a motion for summary judgment directed at the insufficiency of the trade secret description. In opposition, the plaintiff provided additional information about its claim, but the trial court granted the motion anyway. On appeal, the Ninth Circuit held that the dimension of the plaintiff’s trade secret was an issue of fact that couldn’t be resolved summarily. The only real lesson of this case is never to challenge an initial trade secret description by an early motion for summary judgment; file a request for protective order instead. The case does not, as some have suggested it does, represent some new federal standard regarding identification of trade secrets.
Protecting trade secrets in litigation is a concern in many kinds of cases where sensitive information has to be presented and the parties confront the tradition and constitutional requirements regarding public access to courts. Those requirements are not absolute, of course, but proper balancing of interests requires careful observance of court procedures for sealing. In Uniloc v. Apple, 964 F.3d 1351 (Fed. Cir. 2020), the party filing its sealing motion was hardly discriminating; it asked the trial court to seal almost everything in the parties’ briefs, “including citations to case law and quotations from published opinions,” along with a number of exhibits containing publicly available information. When that motion to seal was denied, the litigant came back with a more restrained request, but the court denied it, and the order was affirmed on appeal. The lesson: on motions to seal, which can consume a great deal of the court’s time and effort, get it right the first time. And by the way, be scrupulously aware of variations in rules among district courts. In the Western District of Washington, for example, the sealing rules state that a request to withdraw material in case the motion is denied must be made at the time the motion is filed; asking for return of the material once you get a ruling is too late, and the information will be placed in the public record. Rydman v. Champion, 2020 U.S. Dist. LEXIS 51101 (W.D. Wash.).
It’s been a long, and occasionally very frustrating, year. Having made it through 2020, we can all use a bit of comic relief. Sometimes it shows up in trade secret cases, usually unintentionally. In PB Legacy v. Am. Mariculture, 2020 U.S. Dist. LEXIS 62947 (M.D. Fla.) we learn that trade secret protection extends to . . . shrimp. Who knew?
The World Trade Organization will decide on Thursday whether to approve an Indian and South African proposal that would allow countries to disregard intellectual-property protections on Covid vaccines and therapeutics. Proponents claim the move would increase patients’ access to vaccines, especially in the developing world, by enabling companies to mass-manufacture generic copies of those drugs. In reality, suspending intellectual-property rights would make things much worse. The proposal is cynical—designed to benefit India’s and South Africa’s domestic drug industries at the expense of patients around the world.
India is the world’s largest manufacturer of generic drugs, and South Africa is another big producer. They lament that the U.S. and Europe have blocked intellectual-property rights suspension, even though a greater number of WTO member countries are in favor.
I’ve heard this line of attack before, and it is fraught with danger.
“The single biggest problem in communication is the illusion that it has taken place.”
— George Bernard Shaw
The conversation begins,
“Can you keep a secret?”
“Yes, of course,” they say.
What happens next? Naturally, you tell them what it is that you are going to trust them with.
That’s the way it happens in personal relationships. In business, it’s usually more complicated. And it depends a lot on who you’re talking to.
Let’s first consider the employee confidentiality agreement. In some smaller businesses, especially in the “low tech” economy, employee non-disclosure agreements (NDAs) may not be necessary, because workers neither create nor are they exposed to company secrets. But if you’re making things from a private recipe, or if employees learn sensitive information about customers, it’s a good idea to have these contracts. And if you’re in a knowledge-based industry, they’re more or less essential.
With the NDA (and related agreements like invention assignments) in place, the employer feels comfortable sharing all the information that the employee needs to know to do their job. But what do these agreements actually say about what the confidential information is? In other words, what do they tell the employee about what it is that they’re supposed to be protecting?
The answer usually is “not much”. Crafted by lawyers or copied from a form, employee NDAs can be hilariously broad, citing categories of data that have no relationship to what the person is actually doing. It’s common to see a definition of “confidential information” that “includes but is not limited to” 30 or more topics ranging from “ideas” to “techniques” to “samples” to “know-how” to “sketches” to “formats” to “business models” to “documentation” to “research”. Got it? I didn’t think so.
Despite the ubiquity of employee NDAs, and their usefulness – in the abstract – as a reminder that the relationship is confidential, some courts have started reading them closely and finding some that sweep too broadly to be enforceable. After all, unless restrained by a noncompete agreement, an individual should be free to take another job and use their accumulated general knowledge and skill. And yet, it’s not possible as a practical matter to customize the NDA for each of hundreds or thousands of employees whose job responsibilities are likely to change over time.
So, what’s an employer to do? The answer lies not so much in the contract – although there’s probably room to increase clarity of expression. Instead, the most appropriate way to communicate to employees about what they are expected to protect is through training. This instruction can take many forms, including published rules, online tutorials and in-person lectures and role playing. The goal is to imbed understanding of what kinds of information provide the company with its competitive advantage, the security risks that the business confronts, and what employees can do to reduce those risks.
Ideally, training extends beyond early orientation and continues, in varied contexts, throughout the period of employment. Well informed about what the company believes to be its most important data assets and how they may be threatened, the employee will be far more likely to proactively protect those assets. And they will be less likely to confuse the employer’s secrets with the personal skill they are entitled to take to the next job.
But it’s not just the workforce that needs clear communication about secrets. In the modern economy businesses have to entrust sensitive information to vendors, for example, to enable design and manufacture. And customers may be given early access to unreleased products. In these relationships, we find some of the same communication problems as can occur with employees. But instead of the definition of what’s confidential, the issue is more often about what they’re supposed to do with the information.
One of the more common provisions of a commercial NDA requires the party that receives the secret simply to protect its confidentiality in the same way that it protects its own. That sounds good, but way too often the disclosing company has no idea what the recipient’s information protection program is, or how well it is executed. So rather than just accept the “boilerplate” language and assume that everyone treats their secrets as you do, it may be more prudent to state specifically what controls you expect them to use, and what mechanism (such as an audit) you can invoke to ensure compliance.
And then there is the collaboration partnership or joint venture, where two organizations have swooned over their compatibility and the synergies that promise a successful outcome to the project. The mutual infatuation can lead to dangerous assumptions about division of responsibility and particularly about ownership and control of innovations, or at least credit for them. Remember that these relationships are designed to be temporary, and the inevitable divorce has to be negotiated at the same time as the impending marriage. It helps to be clear-eyed about these things and to discuss them in advance.
But by far the most common sources of misunderstanding are potential acquisitions and license transactions. Here, the parties have a legitimate need to share information in confidence, but an equally legitimate basis to fear that it will lead to trouble. For the acquisition target or potential licensor, there is the risk that the suitor will take a close look at the technology and then walk away in favor of another target or an internal project. And on the other side there is always concern that looking too closely at these external opportunities will contaminate your best engineers or scientists with unwanted information, making it difficult for them to prove that what they develop later was done independently.
The level of risk, on both sides, varies with the intensity of the due diligence that is required to inform the transaction. And this is where robust communication comes in. It’s to the advantage of both participants to discuss risk openly, and to explore ways in which they may be able to reduce it, for example by exposure to the secrets in small steps. If a no-go decision can be made based on access to a smaller dataset, then the two sides can more easily part ways without the threat of litigation.
\The common theme in all these situations is the need to work towards a clear and common understanding. Even in a close, trusting personal relationship we know it’s a mistake to assume that our partner knows what we’re thinking. In business, if you’re going to allow someone access to important information, it is usually a good idea to help them understand what it is that you consider to be sensitive.
In the wake of urban unrest in the early 1960s, local governments imposed nightly youth curfews, and a Massachusetts legislator suggested that all radio and television stations begin their 10:00 evening programming with an announcement: “It’s 10:00 PM. Do you know where your children are?” The phrase was quickly picked up across the country and became a common (and sometimes mocked) cultural artifact of the era.
The idea that parents need to be reminded of their responsibility for their children’s safety and well-being may seem quaint or silly. But parents can get distracted, and there’s little harm in prompting someone to pay attention to a risky circumstance.
For modern business, if you can indulge the metaphor, we may think of data assets as the children of the enterprise, at least in the sense that valuable information is vulnerable to loss or compromise. Reminding companies of the need to be vigilant makes a lot of sense.
That is exactly what the Securities and Exchange Commission has tried to do with its December 2019 Guidance on “Intellectual Property and Technology Risks Associated with International Business Operations.” Although specifically directed at public companies, the advice is equally applicable to private corporations and startups, since management always has a fiduciary obligation to care for corporate assets.
The document begins with an observation applicable to almost every business. “The increased reliance on technology, coupled with a shift in the composition of many companies’ assets from traditional brick-and-mortar assets towards intangible ones, may expose companies to material risks of theft of proprietary technology and other intellectual property, including technical data, business processes, data sets or other sensitive information.”
These risks, the SEC points out, are particularly acute when doing business in foreign countries or dealing with foreign partners. However, the underlying concern is comparable for many domestic transactions, where information has to be shared with others in order to extract value from it. We might expect that the SEC will at some point broaden its guidance accordingly.
In the meantime, having been reminded that it’s a dangerous world out there and that our trade secrets need careful monitoring, how do we even begin to think about it? In other words, how do we know what secrets we have in the first place? And since we’re talking about any competitively useful information, how do we get our arms around the potentially millions of bits of it that help drive the success of any single company?
This is where the parent/child metaphor becomes a bit challenging to apply. Measured against most of the rest of nature, humans tend to have just a few offspring, making it relatively easy to keep track of them. The most fecund of invertebrates, the ocean sunfish, can produce 300 million eggs at a time, although only a tiny fraction of them are fertilized. But consider the African driver ant, where a single queen can lay 3 to 4 million eggs a month, most of which actually hatch. How can she possibly know where they are, no matter what time of day it is?
Let’s leave this fascinating metaphor by recognizing that businesses don’t need to specify each discrete piece of data, but only the ones that matter, what we often refer to as the “crown jewels.” When thinking of trade secret management, don’t fall prey to the notion that you have to identify everything that could prove useful to the business. Even a hardware store doing inventory doesn’t count individual nails. You can count all of your patents, but not all of your secrets – at least not comprehensively.
In an earlier article, we looked at a process of risk analysis to inform a company’s trade secret program, balancing value, threats and mitigation options. That process naturally begins with understanding the dimensions of the property that you’re dealing with. So how do you do that?
A number of tools have appeared in recent years to help companies create a secure “catalog” of secrets. For example, “WIPO Proof,” offered by the World Intellectual Property Organization, provides the ability to time stamp a file to later prove its existence, using blockchain technology. Other services add forms and checklists to enable a company to sort its secrets by priority. But I believe that the most promising emerging methodology consists of a guided process for creating a flexible catalog that describes assets sufficiently to communicate real value, but without disclosing them.
One example of this approach is the Trade Secret Registry. (Disclosure: I have helped to design this system.) Assets of the “crown jewel” variety are defined through a descriptive label tagged permanently to a file that contains the details and remains undisclosed. Relative values are established in a way that does not compromise future litigation. Room is provided for additions and modifications that reflect product lifecycle management.
Ideally, a trade secret catalog should establish the basis not just for informed decisions about access and other risks, but also about unlocking the value of the asset through internal development or other commercialization. We are past the time when the classical corporate patent committee passed innovations only for patenting, leaving trade secrets on the scrap pile. Now, systems for tracking secrets need to enable proactive management to be sure that commercial value is realized.
One dimension of these more robust systems is the ability to bring previously nebulous trade secret information into a category of “recognized” assets that can be insured and also used as collateral for loans. Specifically, companies that certify the integrity of the cataloging process can also act as intermediaries to procure insurance against trade secret loss or liability. And they can deploy the same assets to procure non-dilutive debt financing.
Do you know where your trade secrets are? Finding out may put you ahead of the next SEC bulletin. And it may actually be easier than tracking your own kids.
Unlike other forms of intellectual property, trade secrets are rarely clearly defined anywhere before a lawsuit begins, making it critical for counsel for defendants to know what exactly was allegedly stolen. But at such an early stage in the litigation, even overbroad or ambiguous claims of trade secrets require motions seeking clarity, not pre-discovery victory, intellectual property attorney James Pooley of James Pooley PLC said.
“My impression was the real lesson of the case is ‘Don’t try to challenge the sufficiency of a trade secrets identification with an early motion for summary judgment,’” said Pooley, who focuses on trade secrets cases and practices in California, where the case originated.
ETC’s summary judgment motion “put all its marbles on a risky maneuver, when it could have made a lower risk procedural attack,” he said.
Pooley said he could see how one could worry the decision takes the decision on what constituted a viable trade secret claim out of the hands of judges and hands it to a jury. But that reading takes the decision out of its context of a pre-discovery summary judgment motion.
“I think that’s a superficial and strained reading,” Pooley said. “A fair reading is that judges decide whether you’ve rung the bell enough to go forward, juries decide whether you’ve proved the case.”
When people say that “data is the new oil,” they’re talking about new ways of creating wealth. No matter what business you’re in, success today depends on learning everything you can about your customers and competitors. And there’s so much information sloshing around the internet, every industry—from restaurants to manufacturers to sports teams—is busy extracting insights from “big data” analysis.
But, like drilling for oil, prospecting for data sometimes gets your hands dirty. Recently, a court ruled that a startup company providing life insurance quotes to consumers had created its database – the engine of its busines – by taking data from an existing company (Compulife) that had built theirs from scratch. The new company didn’t break in and steal the whole thing. Instead, it used robotic software to “scrape” the information from Compulife’s website, by pretending to be a member of the public – actually by pretending to be 43 million members of the public, which is how many rate quotes they were able to extract in only four days.
Having pumped out all that data, they were able to understand the competitor’s system and replicate it. When hauled into court, they shrugged their shoulders and pointed out that the source website was open to the public and they were just gathering what was readily available. Surely, they argued, this couldn’t be trade secret misappropriation because the information wasn’t secret. Not so fast, said the court. Compulife expected that real individual people, not swarms of automated “bots,” would be using their website. The data, it concluded, had been acquired by “improper means.”
Peter Toren, a fellow trade secret practitioner, recently penned a two-part article lamenting this decision. While I very much respect Peter’s views, on this one I firmly believe he was wrong and the court was right.
Whether or not information can be gathered from the internet this way is obviously important. But the issue is not so much about bots and data as it is about your Mom.
Stay with me here, you’ll see what I mean.
Back in 1970, the DuPont company was building a new chemical plant. If a competitor could get into the building site and examine the layout it could understand important aspects of DuPont’s secret processes. So, DuPont erected a fence around the perimeter, with guards and no-trespassing signs. One day the construction manager noticed a plane making multiple passes at an altitude low enough to read the registration number. It turned out that a rival company had hired the pilot to fly over the site and take pictures.
Faced with a lawsuit, the competitor claimed that the construction was in “plain view,” and it had broken no laws. The judge wasn’t impressed. DuPont shouldn’t have to erect a tent over the worksite to prevent what it called “a school-boy’s trick.” This should be no surprise, he explained, because “our ethos has never given moral sanction to piracy” and the “marketplace should not deviate far from our mores.”
Four years later, the U.S. Supreme Court relied on the DuPont case in describing why we enforce trade secret rights. It said that the “maintenance of standards of commercial ethics and the encouragement of invention” are the twin policy pillars of trade secret law, reflecting the “necessity of good faith and honest, fair dealing” in business.
Five years after that, the first version of the Uniform Trade Secrets Act was published, and it defined theft as including acquisition of information by “improper means.” The identical standard applies under the more recent federal law, the Defend Trade Secrets Act. And both of those statutes say that “improper means” “includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.”
In much of the IP world, we love bright lines and sharp edges. For example, to attack a patented invention for lack of novelty, it’s enough to find an academic paper covered with dust in an obscure library. Publication is sudden death. Predictability is highly valued.
Perhaps that’s why some IP lawyers find trade secret laws to be uncomfortable, because they are so, well – flexible. Perhaps this is why my friend Peter misread the Uniform Trade Secrets Act (UTSA) and Defend Trade Secrets Act (DTSA) as restricting “improper means” to a closed set of behaviors, rather than providing a list of examples, which the official comments to the UTSA describe as “a partial listing.” Perhaps that’s why he claimed that the Compulife case was the “first appellate decision in more than 50 years that has relied upon” the DuPont case, when the Supreme Court had leaned on it so firmly back in 1974.
Trade secret laws in the U.S. grow from our common law tradition, in which judges wrestling with novel arguments end up adding bricks to the edifice of principles. The foundation of it all, as the Supreme Court said, is the idea that business behavior should be ethical. And as we all know, ethics is highly contextual and situational. Faced with trying to regulate our own personal conduct, we have to be content with suggestive questions, such as “would you be comfortable with this appearing in the front page news tomorrow morning?” or – this is my favorite, and what I promised you earlier – “what would your mother think if she were looking over your shoulder right now?”
It’s not just the idea of “improper means” that imposes flexibility on trade secret law. Other key concepts are similarly driven by context. For example, we require that the trade secret holder have exercised “reasonable efforts” to maintain control over information it claims as a trade secret. We disallow protection for information that is “readily ascertainable,” but only when it can be ascertained “by proper means.” And we approve of reverse engineering (taking something apart to discover how it works), except when the thing was acquired unfairly.
None of this should be particularly troubling in the abstract, since we all (or the vast majority of us) want to be ethical actors. But the law keeps us on our toes with its ambiguity. Saving space to condemn creative thieves means that we risk getting in trouble if we go too close to the line, such as it is. This risk is made more complex by changing context. Today, DuPont would be out of luck trying to keep its construction site private, what with Google Earth and other satellite imagery.
Indeed, with rapid advances in technology we regularly introduce not only useful innovations to serve society, but also tools that can be used to capture another’s competitive advantage. The public-facing website resting on a large database gives us a good example of the conundrum. How do we balance the rights of those who want to make useful information available in limited ways against those who claim the right to use what can be found in plain sight?
As I’ve already explained, from the legal perspective, I think that the court in the Compulife case got it right, because what the startup did seemed unfair and improper. But how do we translate this modern version of the DuPont case into some guidelines for handling data in the age of ubiquitous data? What can owners of collections of useful data do in order to keep control of their competitive advantage?
First, where the commercial relationship is business to business, rely on carefully drafted contracts to limit the risk that the other party may misuse the information to which they’ve been given access.
Second, in a more public-facing environment, use not only restrictive EULA’s (end user license agreements) but also technical measures to make data extraction difficult, at least where this is possible without degrading the usefulness of the product or service being offered.
Third, make it obvious to any user that you don’t want your data misused. Provide warnings that are impossible to miss, like the “no trespassing” sign hanging on the fence. If this ever turns into a legal fight, the court will likely be impressed by evidence that the defendant must have known he was stepping over a line.
And what about those of you who are looking for creative ways to gather data? Whatever you’re thinking of doing, know that Mom is watching.
Tuning in to the recent sentencing of Anthony Levandowski for criminal trade secret theft, I was reminded of the wise observation about relationships, that remembering the ending is a way to forget about the beginning. But while that way of thinking can be a salve for the heart, it’s not so helpful when it comes to the kind of critical self-analysis that we need to improve our behavior, or at least certain outcomes, in business.
It’s natural for us to be attracted to the drama of trade secret litigation. These cases typically involve claimed treachery of some kind, contrasted against an alternate narrative of entrepreneurship and helpful market disruption. Indeed, as I have often remarked to my students, trade secret cases are a trial lawyer’s dream, because you are dealing with the kind of emotional issues that can draw in a jury and make it easy to keep attention focused on the story you’re trying to tell.
So it was with Mr. Levandowski and his fall from grace as the wunderkind of autonomous vehicle technology. Having led Google’s project since its founding in 2009, he was the primary target of interest for another high-profile young Silicon Valley founder, Travis Kalanick of Uber. Even though Kalanick knew that Levandowski had taken confidential Google documents when he left, they went ahead with an almost $1 billion acquisition of Levandowski and his truck startup. When Google sued, Uber claimed it was clean, but Levandowski refused to testify, and so we all were assured of some riveting theater. Indeed, until the case settled four days into trial, it was the hottest ticket in San Francisco, with spectators lined up around the block.
And the drama didn’t end when the two corporations reached a deal giving Google $240 million in Uber stock. The judge referred the case to the U.S. Attorney, who charged Levandowski with criminal trade secret theft. In what appeared to everyone as the denouement of a Silicon Valley tragedy, Levandowski finally spoke, describing his regret to the judge, who sentenced him to 18 months in federal prison (delayed so he wouldn’t be exposed to Covid).
Although trade secrets are ubiquitous in almost every modern business (think about data as an asset class), we tend to focus our attention on the disputes, especially the ones involving departing employees. But that’s not really where most of the action is— certainly not the action that matters. While the high-visibility cases can provide teachable moments (and Levandowski’s is a good example), they can also distract us from the everyday transactional work we do for our clients.
Having in mind that it is so much better to avoid litigation than to win it, let’s take a look at some typical business transactions that in my experience are the most common source of problems, even though usually less dramatic than what happened with Uber.
Where can lawyers have the greatest impact in preventing trade secret disputes? I believe it is the lowly confidentiality agreement, or NDA. This kind of contract is so widely used in information sharing that we tend to think of it as a simple form, rather than something important to negotiate. My NDA or yours? It doesn’t matter; let’s just get this part done so we can start looking at what you’ve got.
Where are the risks? Initially, it’s in becoming exposed to something radioactive without knowing in advance what it will be. One way to address this is to begin without any secrecy, insisting that the discloser give you enough information for “free” so you can make an informed judgment about how dangerous it might be to see some aspect of the secret design or process. In that case, you should confirm in writing that the exchange is non-confidential.
If you decide to get exposed, your primary risk is in the scope of what is agreed to be confidential. The “form” NDAs simply say that there will be an exchange of information considered by each side to be confidential. Especially if you are likely to receive a lot of information, it’s in your interest to be as specific as possible about what it will be. Besides the usual exceptions – publicly known, later disclosed without fault, previously (and probably) known to the recipient, or later learned without fault – there may be ways to limit exposure, perhaps through stages of increasing disclosure, pausing to assess risk (on both sides) before you go on.
Most securely, all confidential information should be expressed in a document with a prominent label. But typically, a significant portion of it will be transferred in meetings, and so you should negotiate how that will be handled. If you agree that verbal disclosures must be confirmed in writing within a certain time, then the discloser has to ensure that document is prepared and delivered, and (this is where a lot of trouble happens) the recipient has to be ready to review it and object where the description is not accurate.
What is the recipient going to do with your data? The typical form just says it will be used only to assess a potential transaction. But are there more specific ways that you can maintain control, such as limiting exposure to specified individuals? Should those people be required to sign separate NDAs? Are there other handling instructions that might be negotiated to reduce the risk of misuse or disclosure? For the disclosing side, beware of the “residuals clause” that allows those who are exposed to use any information “retained in unaided memory,” which amounts to a license to your data. Some large organizations may believe they need this protection, but you should be aware of the consequence.
The issues to negotiate are almost limitless, as the discloser tries to maintain maximum control and the recipient tries to avoid unnecessary restrictions on its future plans. The point is to treat this as you would any other commercial transaction and be clear about issues such as term and termination, choice of law, choice of forum and remedies.
One specific area of negotiated confidentiality that often leads to litigation is in mergers and acquisitions. Whether the objective is to acquire a company or a license to some technology, the terrain is treacherous, because so much is at stake. The acquisition target or potential licensor is in an obviously precarious position, because a large part of its value may consist of secret information, and if that’s disclosed to inform a transaction that never happens, it has been harmed by an undefinable loss of control over that asset. As for the other side, an honest attempt to assess value may end up exposing some of its best people to secrets that limit their freedom to operate if the deal isn’t done. Legal counsel acts as the choreographer of a very delicate dance through the “due diligence” process, attempting to identify and mitigate a range of risks.
Meanwhile, the client wants to get the deal done (or withdraw and move on), putting a premium on speed. This external pressure can lead to sloppy behavior. For the target/licensor, it usually means excessive disclosure and access by more people; and for the acquirer, it most often means bringing people into contact with the deal team who were supposed to be walled off. Here, in contrast to the basic NDA situation, the issues are mostly about execution, not negotiation of confidentiality. Litigation results when the deal is terminated, with one side feeling jilted and the other infected with information it may wish it didn’t have. Preventing trouble consists of anticipating those outcomes and reducing the peril by focusing on strict compliance, recordkeeping and robust communication.
Closely related to the acquisition is the potential collaboration. In this transaction, each side feels that it has a lot to offer and a lot to gain from the relationship. Indeed, like a romance, both may tend to be a bit infatuated and as a result overlook some of the ways in which the transaction can hit the rocks. In my experience this happens most often through a casual attitude about ownership: that is, who owns what the venture has created, which side (or individuals) get credit for it, and where lies the boundary between that creation and what each company brought to the party, in terms of pre-existing technology. Again, part of this is about providing for these stresses and risks in the contracting phase, anticipating that this relationship will end at some point. But equally important – and an opportunity for counsel to add value – is the management of the effort, to help prevent misunderstandings and ensure that records are clear and consistent.
Finally, a great deal of trade secret litigation can be avoided through careful onboarding of high-level employees. This brings us back to Uber and Levandowski. The latter’s star shone so bright that Uber was prepared to do almost anything to bring him over. One reflection of that intense interest was its granting Levandowski an indemnity – that is, a guarantee that Uber would shoulder the risk – for what the deal documents called his “Bad Acts” in having downloaded all those confidential documents. (Yes, they actually defined his behavior in the contract as the “Bad Acts,” with initial caps.) But they went even further, and gave Levandowski another indemnity, this one for any use he might make of “information . . . retained in [his] unaided memory.” Recall the “residuals clause” that some companies try to get in an NDA to give them a free pass? In effect, Uber gave that pass to Levandowski to use any of Google’s secrets he happened to remember.
Rarely does an act of onboarding senior talent become that reckless. But it stands as a clear lesson that a great deal of trade secret litigation is much more easily prevented than won. At the transaction stage, the risks may seem distant, but disciplined thinking and careful management will pay dividends. The trade secret trial may be a fascinating morality play. But let it be someone else’s drama.