"I am willing to put the case into any shape you choose."
— Lord Ellenborough, 1816
It’s a challenge to resolve business disputes when emotions run high, which includes almost all trade secret cases. So, I was especially pleased when, in a hard-fought litigation where I had been appointed as a “referee” to resolve discovery disputes, both lawyers eventually reached out to tell me how much they appreciated my involvement in the case, which had settled.
What was it about this variation on typical legal combat—where a private party is selected to rule on some important aspects—that they found so satisfying? First, they had saved their clients a lot of time, and probably money, compared to the cost of dealing with unpredictable court calendars. And second, they felt that the decisions they received were thoughtful, balanced and practical, reflecting an understanding of the relevant business environment.
So-called “private judging” can be particularly useful in trade secret cases between companies. Confidential information of both sides can be more reliably protected. Important context gets the attention it deserves, which is often just not possible for a judge who handles a caseload of several hundred matters. And decisions can be informed by the special background and experience of the person selected to do the job.
The most popular way of getting more streamlined resolution is arbitration, in which the dispute is handed over to a trusted private party hired to hear the evidence and render a decision. A major advantage of arbitration is that it is completely private. When the dispute involves exchanging important confidential information of both companies, this feature can be compelling.
Arbitration also allows the parties to pick the decision-maker, rather than take their chances with the court system. This is about more than just choosing a reliable and experienced former judge or senior lawyer. You can select for specific attributes like industry or technical background, or specialty in an area of law. And whoever is chosen, the arbitrator will be able to devote substantially more time and attention to the matter than the typical judge.
So why don’t companies in trade secret disputes always choose arbitration? There are some systemic drawbacks. One of those is that the decision of the arbitrator (or panel of three arbitrators) is almost always final, without the possibility of meaningful review through the court system. While that expediency can be an advantage in many cases, it also can create risks in trade secret disputes, where the range of possible outcomes can be large and unpredictable.
In one recent case from Texas, an arbitrator awarded $6 million to the founder of a company who had invested only a small fraction of that amount. On appeal from that decision, the court explained that it was powerless to do anything about it, even if the arbitrator had been mistaken about the law.
Besides offering only limited review of decisions, arbitration also typically restricts the kind and amount of available discovery—that is, the ability to get information from the other side in advance of trial. This can be a serious problem for a trade secret owner. Misappropriation rarely happens in broad daylight, and usually the facts are known only to the defendant. Although reasonable suspicion of theft is enough to make a claim, the plaintiff usually needs discovery from the defendant in order to prove what actually happened.
Whether because of this asymmetry of available proof, or some other aspect of arbitration that both sides find wanting, seldom do both companies in a trade secret dispute agree to arbitrate if their contract doesn’t require it. It is just too difficult to identify a mutual interest once a major disagreement emerges. Instead, one side or the other (and occasionally both) sees it to their advantage to stick with litigation.
But even within the framework of existing court procedures, there may be some opportunities to enhance efficiency in the interests of both sides. For example, in the case that I referred to at the beginning, I was acting as a “discovery referee” (also known in some courts as a “special master”). Basically, the judge in the case, with the approval of the parties, had outsourced the management of all pre-trial disputes over the exchange of information: document requests, depositions and the like. As with arbitration, private referees have more time to consider those specific disputes and to propose a resolution to the judge. Although more costly than using normal court procedures, a referee can move the discovery process much more quickly and efficiently, which is usually in the interest of both companies.
Several states, most notably California, even allow an entire civil case to be handled through trial by a private person, usually called a temporary judge, whose ruling can be appealed through the court system just like any other case. Unlike arbitration, however, this form of judging is private only in the sense that you get to pick (and pay for) the decision-maker; all the filings and hearings will be subject to the same rules on public access as apply to the courts.
The vast majority of trade secret disputes are resolved by an agreement of the parties, without a trial. In an upcoming article, we’ll look at the most effective way to make that happen: mediation, in which an experienced professional helps the combatants find success, often in ways they never would have discovered on their own. Mastering mediation is an art of its own.
It’s football season, so of course we should be talking about beer. Specifically, beer secrets. For fourteen years James Clark had an enviable job at Anheuser-Busch, where he had access to the brewer’s confidential recipes. For unexplained reasons he resigned. Instead of joining a competitor, he went to see a lawyer about planning a class action against his former employer for “intentionally overstating the alcohol content” of the company’s “malt beverages.”
Building his case would be a problem, however, without a copy of something mysteriously called “Page 13.” Having neglected to take this document with him when he left, he contacted a friend still working at Anheuser-Busch, who readily passed it on, even though it was obviously top secret. Apparently alerted to the disclosure, the company demanded that Mr. Clark certify, as required by his contract, that he had not used or disclosed any confidential information. He refused, and a few days later the class action lawsuit was filed. A week after that, Anheuser-Busch sued him for misappropriation of its secrets for making beer.
There are multiple ways we could now turn with this story. There’s the history of beer, which goes back over five thousand years, beginning with a wet and presumed ruined grain cellar that fermented into a happy ending. There’s the difference between corporate and craft beers. And then there’s the high cost of lawyers relative to beer.
But instead we’ll focus on civil procedure. Mr. Clark filed a motion to dismiss the company’s lawsuit, in effect suing them for suing him. This turnabout is called an “anti-SLAPP” motion, based on a California statute enacted in 1992. The law, which stands for Strategic Litigation Against Public Participation, was intended to punish those who file frivolous, but expensive, suits for the sole purpose of intimidating and silencing critics. A legitimate goal, you might say, since it protects freedom of speech. But then the First Amendment also guarantees the right to petition the government, including by filing litigation. So the legislature crafted a long, carefully worded set of instructions to judges, expecting that this would strike the right balance between competing interests.
But as happens so often, a higher law – that of unintended consequences – intervened. It turned out that far too many legitimate lawsuits were being shut down. So the legislature added a new law to cut back on the original. And then it layered on another a few years later, so that in addition to anti-SLAPP motions, we now have “SLAPPbacks” through which the frustrated plaintiff can recover its damages and fees against an over enthusiastic SLAPP-er.
Mr. Clark’s case has wound its way twice to the Ninth Circuit Court of Appeals, which is now considering whether Anheuser-Busch opposed his motion with sufficiently strong evidence that it actually had trade secrets for making beer.
In the meantime, Texas followed the lead of California and enacted its own anti-SLAPP law, called the Texas Citizens Participation Act. It applied to any lawsuit that seemed to target not just a person’s free speech, but also their constitutional right of association. In one notable case, a high-end restoration shop called Elite Auto Body sued former employees who formed a competing company, allegedly taking with them “proprietary client forms, such as payment sheets and vehicle check lists,” and unfairly using confidential information to recruit other employees. These allegations, the defendants argued, invoked their right of association among themselves and to speak freely during their recruiting.
The trial court denied the anti-SLAPP motion, but the appellate court reversed, holding that the TCPA applies in any action that involves “communications,” and that it requires the plaintiff to prove the substance of its claims – the misuse of its proprietary information – by “clear and specific evidence.” Here, the former employer, with no opportunity to take discovery, fell short. The action was dismissed and the plaintiff ordered to pay the defendants’ attorneys fees.
Cases like these are a reflection of the struggle in trade secret law to balance legitimate competing interests. For every employer that has invested in developing proprietary techniques to improve its business, there are employees that have accumulated skills on the job and would like to use them elsewhere. When they leave, the risk of disclosure or misuse may be high, but as a society we not only want to protect investment in innovation, but we also value a freely mobile workforce.
When I arrived at law school in 1970, the Freedom of Information Act was only a few years old. It was supposed to increase public understanding of the workings of government by providing access to records. But the vast majority of requests for information come not from ordinary individuals, but from lawyers representing the competitors of companies who have been required to file confidential information with agencies. Those agencies need the information to do their job, and FOIA has arguably made some companies reluctant to share data with the government.
Tensions abound in the courtroom too. We need a place to resolve disputes over trade secrets; but how can we do that when the courts are supposed to be open to the public? In cases of broad interest, like regulated industries, what should we be doing to protect the public’s right to know through media access? And what about trade secret injunctions? It’s not just departing employees or whistleblowers that need protection from overreach; sometimes the public does too. In one case a judge had to consider whether to shut down an ambulance service that was operating unfairly but was also relied on by a hospital.
Judges frequently have to weigh in the balance diametrically opposed but valid interests. Although this is true in many other areas, it seems woven into the fabric of trade secret law. We should be thankful that our independent judiciary does such a good job dealing with these conflicts and finding thoughtful, fair resolutions.
I’m sure that many people find it exciting to read about U.S. college athletics, although it’s hard to imagine how that could result in any trade secrets. But consider this: Andy Bitter, a former sports journalist covering the travails and triumphs of the Virginia Tech football team, was recently sued by his former employer, a local newspaper, for trade secret theft. The violation? Refusing to turn over the login and password for his Twitter account when he left.
Never mind that the account had been given to him by a previous writer and that he had renamed it “@AndyBitterVT” to reflect his personal devotion to Virginia Tech. According to the plaintiff Roanoke Times he was obligated by the company’s employee handbook to turn over all company property, and this necessarily included the Twitter account he had used to stay in touch with his fans (more precisely “followers” of which he had about 17,000). The information associated with the account was alleged to be worth $150,000. (One fellow journalist, commenting on the story, wondered out loud how a sportswriter’s tweets about a single college team could be “worth as much as a small yacht.”)
As often happens in trade secret cases, it seems that the plaintiff didn’t think this one through before filing. After all, they call it “social” media because people tend to form communities of interest online, and those who had signed up to follow Mr. Bitter’s commentary on their favorite football team were pretty unhappy about how he was treated by his former bosses. One of the scores of reader comments to stories about the lawsuit read, “You guys are out of your minds. I follow Andy Bitter, not you.” Subscription cancellations followed.
In spite of the mess it created, the Roanoke Times has reminded us of some important questions for industry in the information age. Who owns social media accounts? What role do they play in building competitive advantage? And how should companies manage their use?
In ancient times (that is ten years ago, before Facebook, Twitter, LinkedIn and the like), businesses could control their own messaging to the public, through advertising and public relations firms. Social media, like other aspects of the internet, disrupted and “disintermediated” this structure, allowing not just traditional journalists but everyone else with a computer or smartphone to step out in public and (occasionally) be heard. Companies (and a few politicians) recognize the advantage of this direct marketing opportunity and have jumped on the bandwagon with their own accounts and campaigns.
But then there are the hundreds of millions of individual accounts, including in the hands of employees. What new challenges do employers face as a result?
One of the biggest threats is to corporate information security. Social media companies have succeeded, through incessant and automated behavioral conditioning, in convincing an entire generation of workers that sharing is a good thing. And sharing more is even better. That is what many employees do in the evening on their smartphones: reveal everything about what is going on in their lives.
And then we expect them to come into the office the next morning and use those same devices – which by the way are connected to the company’s networks and databases – with mature, sober discretion? If someone wants to brag, why not talk about the cool (but unannounced) product they’re working on? If they want to complain, why not troll management (anonymously of course) for its blunders? And if an engineer faces a knotty technical problem on a project, why shouldn’t she just post a description to a Facebook group where other engineers can see it and offer suggestions?
The inclination toward sharing, reinforced constantly by social media, represents a serious challenge that can only be addressed through training and consistent management, providing the antidote of a culture of confidentiality. Click here to read my October 2016 newsletter about training, “The Most Cost-Effective Way You Can Protect Your Trade Secrets?”.
But getting back to the more specific set of problems reflected in the litigation filed against Mr. Bitter, the good news is that managing these accounts, and separating the personal from the corporate, is straightforward. It begins with establishing and communicating a company policy about the use and ownership of social media. Accounts created by the company, which can be usefully deployed for sales and marketing purposes and to enhance the company’s image, should be designated and named appropriately, with control over credentials and content just as with company networks and data.
It may be best simply to prohibit employee use of personal accounts for any company business. But if you allow it, employees should be obligated by contract to provide access and to transfer ownership and control when asked, or at termination.
Employees and contractors who are employed to create content need special attention, to ensure that what they do for you is designated a “work for hire” and that they have agreed to assign to the company all rights to the content.
A word about managing the risk of new hires. In addition to getting the usual assurances that they will not bring to the job any information that doesn’t belong to them, you may want to inquire about whether they intend to use any pre-existing social media accounts to help them in their new assignment.
As for suing departing employees over their Twitter accounts, be careful what you ask for. In addition to provoking the rage of many of his followers, the Roanoke Times was just countersued by Mr. Bitter for defamation. Remember, the emotionalism that drives trade secret litigation can take it in unpredictable directions.
It was late 2010. The technician, an American in northwestern China, was performing a software check on a wind turbine when he noticed something strange. After the diagnostic program finished running, the turbine was supposed to stop. But this time the blades kept spinning. The same thing happened at the next turbine at the wind farm. And the next, and the next.
Back at the headquarters of American Superconductor Corporation near Boston, the news confirmed executives’ worst fears. Their biggest customer, Sinovel, a Chinese wind farm company financed in part by the government, had recently refused to pay an outstanding bill and had canceled all future orders, citing what it claimed as poor quality and performance of AMSC’s software. That software had supplied the brains for Sinovel’s massive turbines, enabling an efficient flow of electricity into China’s electric power grid. But Sinovel had decided to build its own controller software and had already begun to install it.
The relationship had started out so well just four years before. Following the enactment of China’s first clean energy law, Sinovel had been launched to supply wind power to vast stretches of the country, and ultimately abroad. AMSC, originally formed to apply futuristic superconductor technology to high voltage transmission networks, had pivoted to the more mundane but still complex and profitable business of wind turbine controllers. Their agreement was heralded by the companies in a joint announcement as an“example of Sino-U.S. cooperation in the new energy area,” and both companies became wildly successful in a very short time.
As happens so often, the bilateral enthusiasm was overtaken by greed as Sinovel found a way to eliminate its partner from the business. AMSC had sent a team to China to help support Sinovel. Among them was a programmer named Dejan Karabasevic, a Croatian from AMSC’s Austrian subsidiary. Recently demoted from the design group, Karabasevic was unhappy – and vulnerable.
Sinovel encouraged him to leave AMSC, promising to pay him a million dollars over five years (along with an apartment, and, reportedly, a prostitute). His advance was only 15,000 euros, but it did the trick. Karabasevic resigned, but his supervisor asked him to stay on for a while, with full access to the company’s systems. This allowed him time to create a bootleg version of the AMSC controller software, and to transfer it to his future employer in China.
This was the software that evaded the AMSC technicians’ diagnostic tools and allowed the windmills to keep turning when they should have turned off. It would be some months before the company learned about their former employee’s treachery, but in the meantime it had lost almost 90% of its revenue, shed a billion dollars in shareholder equity, and had to lay off 700 employees.
A flurry of lawsuits followed, in China, the U.S. and Austria. Karabasevic quickly confessed and spent a year in jail but cooperated in AMSC’s pursuit of Sinovel.
In 2013 the Department of Justice joined in, indicting Sinovel and two of its Chinese employees. On January 24, 2018, after an 11-day jury trial, the defendants were convicted in Wisconsin federal court of conspiracy, wire fraud and theft of trade secrets under the Economic Espionage Act. On July 3 AMSC and Sinovel announced a settlement totaling $57.5 million, including a license for Sinovel to use the AMSC technology in its current model turbines. Within a week the judge sentenced Sinovel to a year’s probation, on condition that it pay the agreed amount.
Analysts have pointed out that Sinovel’s available cash had dwindled to less than $100 million, so the outcome was probably a good deal for AMSC under the circumstances. But after six years of litigation and proven losses of over $550 million, this was a “victory” only in a very relative sense.
What lessons can be drawn from AMSC’s experience dealing with a business partner that stole its most valuable information assets? The most obvious is probably not to let enthusiasm mask obvious risks when relying on one customer, particularly in a foreign country. When you are that exposed, your trade secret protection systems need to be proportionately robust.
Of course, you can also reduce risk of theft by continuous improvement of your technology, proving to your customer the futility of trying to compete. But for your crown jewels, you must control access as if the life of your business depended on it. Because it does.
Always remember that insiders (employees, embedded contractors and temporary workers) account for 90% of information loss. Be aware of circumstances that could turn their loyalty around, and manage accordingly. Don’t keep people on after they resign without carefully assessing the risk of their maintaining access to your systems and what you can do to mitigate that risk. More broadly, use data loss prevention software that can alert you to potential problems through real-time analysis of unusual behavior by those with trusted access.
And if you suspect actual espionage, call the FBI. There’s nothing to concentrate the mind like possible jail time.
It seemed like such a good idea at the time. Quicken Loans affiliate Title Source had signed an agreement with start-up HouseCanary to build specialty software. The relationship deteriorated, and Title Source sued to avoid the $5 million fee it had agreed to pay. To underscore its determination, it served the lawsuit personally on HouseCanary executives at their trade show booth, right in front of their customers.
Commercial litigation often starts with this sort of bravado, and Title Source apparently felt it had been seriously wronged. But less than two years later, in March 2018, a jury disagreed. It decided that Title Source had used HouseCanary’s secret data to build a competing product and slapped it with a verdict for $706 million.
The back story of this turnabout case provides some important lessons, grounded in the special nature of trade secret disputes. But first let’s understand how a hopeful software development deal turned so ugly.
Real estate appraisals traditionally rely on a physical inspection by a trained professional. But much of the data they collect about a house is already available online, or can be extrapolated. So just like many other industries, this one is undergoing disruption through automation, as firms develop Automated Valuation Models, or AVMs.
Title Source, one of the country’s largest title insurance and real estate valuation companies, signed a contract with software start-up HouseCanary to develop an AVM. The product would be licensed to Title Source for an annual fee of $5 million, but HouseCanary would maintain ownership and rights in its own data. The relationship began to break down over requested changes, and Title Source decided that it wasn’t getting what it bargained for. In the meantime, HouseCanary had shared its secret information with Title Source engineers.
Those same engineers were tasked with building their own AVM. From the perspective of Title Source, this project was necessary in order to cover for HouseCanary’s failures and to mitigate the damage it was suffering. When the time came to pay the $5 million fee, Title Source decided that an aggressive litigation strategy would best serve its needs and reflect its frustration.
This is where the drama begins its teaching. Title Source believed its own narrative, in which it was a victim of HouseCanary’s breach. Its commitment to that narrative masked the possibility that hidden in the records of the two companies’ dealings lurked a massive potential liability. When emails were produced as part of the litigation, it appeared that the engineers tasked with building Title Source’s AVM had used HouseCanary’s confidential information to do it. (One email exhorted colleagues to “think big and wide about how to maximize the value of the HouseCanary data to our business.”)
Some of this evidence was ambiguous, and Title Source argued that what it did was within its rights. But it was looking through its own lens, and didn’t fully appreciate the risk that HouseCanary’s alternative narrative of deliberate misappropriation would be accepted.
Why didn’t Title Source see the potential disaster when deciding whether to sue? The answer almost certainly lies in the emotional content of disputes where information has been shared between companies. The relationship starts, as it must, with declarations of trust on both sides. So when things start to go downhill, disappointment morphs into loathing and a sense of victimhood. Each side, anxious to see its own behavior as fully justified, develops a committed perspective.
Here, the miscalculation had very serious consequences. HouseCanary, having convinced the jury that its information had been misused, was able to present a simple and compelling damage model. It argued – again, using its adversary’s own records – that Title Source planned to save a certain amount of money on each AVM that it sold. Assuming that it would have taken two years to develop that product legitimately, and using internal projections of likely use, the benefit to Title Source worked out to be over $201 million.
The jury accepted that calculation, and added HouseCanary’s lost profits of almost $34 million. Then, because it had embraced HouseCanary’s narrative of a deliberate misappropriation, the damages were tripled, for a total of $706 million.
The first lesson we can extract from this story is cautionary: assessment of risk in potential litigation requires a sober, objective analysis of the evidence, with plenty of “devil’s advocate” scenario planning. This means resisting the kind of confirmation bias that can interfere with management’s ability to appreciate how the same facts can be interpreted in different ways.
Second, and closely related to the first point, we need to be aware that trade secret cases often spring from facts learned in unrelated litigation. In one case I worked on, a patent infringement claim led to the production of records showing that a misappropriation had occurred more than fifteen years earlier. Because the statute of limitations runs from the time of discovery, the accumulated damage claim was massive, and immediately the trade secret claim eclipsed the patent dispute.
Third, the HouseCanary verdict provides a reminder of the flexible and often generous way that damages are calculated in trade secret cases. The aggrieved party can collect not only for the damage it has suffered, but also can recover the perceived benefit received by the defendant, even if it hasn’t produced any profits or even any products.
Finally, this case suggests that companies engaged in collaborative development of technology need to manage the process very carefully to reduce the risk of later disputes. Clear protocols and careful record keeping around the receipt and use of confidential information will go a long way to prevent problems.
And a bit of training in how to draft emails wouldn’t hurt.
In the wake of Uber’s blockbuster trade secrets lawsuit, prompted by its hiring of the manager of a competitor’s self-driving car program, one of the company’s lawyers published an articlecomplaining about the law that protects “negative information” stored in a person’s head. It was crazy, he argued, to force employees to feign amnesia and to deliberately repeat mistakes made in their last job, in the name of protecting confidential information.
As you may recall, a few months ago I wrote positively about negative trade secrets, invoking Edison’s string of failed experiments that led him to a working light bulb. That kind of information in the hands of a competitor would allow it to catch up without the effort, investment and risk faced by the original innovator. So it makes a lot of sense that the law protects against disclosure of the failures, mistakes and dead ends of research.
But how can we provide that protection in fast-growing industries where employees often leave to work for the competition? How can they be expected to apply their well-earned skill but to remain silent when they see their new team going down what they know is a hopeless path? And even if they are careful never to signal with an eye roll or grimace, won’t the former employer sue them anyway once it sees a competing product? Wouldn’t it be more fair – and more efficient – to just allow them to use whatever “negative” information they remember, so long as they don’t take records with them?
I don’t think so. Protecting knowledge of failed experiments encourages companies to invest in deep, long-term and risky research, since they know others can’t easily catch up. And there is other social value in the “inefficiency” of requiring competitors to do their own homework. That’s because they probably won’t follow the same path. What the first company considered a “failure,” when encountered by the second company, may provoke a new and unique insight. Indeed, this is how a lot of innovation happens, and it’s why some organizations deliberately set up competing teams to pursue identical objectives.
The same principle that recognizes value in redundancy of effort can apply to individuals as well as companies. Rather than lamenting the prospect of wasted re-work, departing employees can look forward to a new environment to apply their skills. They can challenge the assumption of past “failures” by taking a fresh look at the process of discovery, searching for new ways to tackle old problems.
But while that sounds fine in the abstract, the practical challenge remains: how does someone take his or her accumulated experience to a competitor without getting sued? And from another perspective, how do you hire someone with experience and skill, to make sure that’s all you’re getting? Here are a few suggestions.
First, recognize the risk that is wrapped inside the opportunity. Is this new position likely to put the employee in an ethical hot seat? If everyone has asked the right questions in the interviews and has been honest about what challenges the new company is facing, you can also identify the risk of having addressed the same or similar problems for the competitor. If so, are these issues critical to the expected work assignment, or merely incidental?
Second, discuss the nature of the risk at a high level, without getting into the specifics of the previous assignment, but identifying the areas where there may be some concern about applying prior knowledge of what doesn’t work. You should both agree that no one will ask for, or provide direction from, that learning. But if the discussion leads to real anxiety about whether confidentiality can be managed this way, it may make sense to temporarily steer clear of any project that looks like it will cover the same ground as the previous job. In any event, you should establish an understanding that all of the work to be done will be firmly grounded on general knowledge and skill.
Third, you should directly address what is that knowledge and skill, and how you expect it to add value in the new position. To be especially safe, the employee might also want to prepare by brushing up on the state of the art in the relevant field of work, so that they can think, speak and act comfortably from that platform.
Even in highly competitive industries we can enjoy the benefits of labor mobility while still respecting the value of “negative” trade secrets. All it takes is a healthy respect for risk and a willingness to start over in the pursuit of something better.
Here in the U.S. we have a litigation system for pre-trial “discovery” that allows access to virtually every email and every record a company owns. It costs businesses more than $40 billion every year. Foreign countries, where there is no “discovery,” sneer at this self-inflicted injury, and foreign companies do all they can to avoid getting involved in it.
Except when we give them a free pass to visit and try it out.
What would you think if I told you that anyone from France or China or Brazil that was just thinking about some legal action in their country could come here and easily force discovery from a U.S. company, even though they couldn’t dream of getting the same information through their home courts? Crazy, right? That is exactly what has resulted from a law that’s so obscure it doesn’t even have a name, so we call it by its legal citation: 28 U.S.C. Section 1782.
Congress put Section 1782 on the books decades ago, motivated by the generous impulse to help foreign courts and litigants get information they needed, and to encourage foreign countries to pass similar laws that would give our citizens the same kind of access. On the first objective, the law has been a resounding success. In recent years petitions under Section 1782 have grown to over sixty per year.
On the second one, here’s a quick quiz: how many countries do you think have enacted laws inviting our litigants to come and get discovery from their corporations? Sorry, no prize for guessing the correct answer, zero. In fact, a number of countries have responded rather rudely by passing laws that prohibit any use inside their borders of otherwise reliable information, just because it is the product of the U.S. discovery system.
But we have forged ahead anyway with our unilateral offer, nursing the hope that someone will emulate our generosity. What exactly is the offer? Under Section 1782, any “interested person” can petition a U.S. federal court to force someone “found” here to produce documents and testimony for use in a foreign “proceeding.”
It used to be that everyone assumed that getting an order like this would be at least modestly difficult. Naturally the discovery would have to be really helpful, and so you would have to show at least that the information would be admissible in the foreign court. And of course it had to be a court that wanted it, to help inform a proceeding that was, well, proceeding. And the petitioner, you would assume, would have to be a party to that foreign proceeding.
All of these were reasonable assumptions, but they all turned out to be wrong. About 15 years ago AMD tried to use Section 1782 to get discovery from Intel that it could then turn over to the European Commission, which it hoped would begin antitrust enforcement against its competitor. The federal district court denied the petition: no proceedings were underway, only “contemplated.” No foreign court was involved, only a government agency. AMD was not a party. And if the information had been located in Europe it would not have been accessible to the Commission.
The U.S. Supreme Court reversed, holding that the statute was broadly worded, and if Congress wanted to put limitations on it, it had to say so. Needless to say, this ruling caused a lot of lawyers to dust off their statute books and take another look at Section 1782, causing a dramatic uptick in filings. In fact, some law firms are now marketing this law to foreign companies as a way to collect information that they couldn’t get in their home courts.
Congress has taken notice, and the House Judiciary Committee recently held a hearing at which I was invited to testify. There I described the Section 1782 process as a “one way street for the acquisition and export of U.S. information.”
But I wasn’t there to focus on the asymmetry of this law. My concern was rooted in the fact that it includes no safeguards to ensure that the discovery material — which often can include very sensitive trade secrets — is protected against disclosure or misuse once it lands in the foreign court (or agency).
This is not an abstract problem, I explained. While U.S. courts regularly issue “protective orders” closely guarding information exchanged in litigation, foreign courts and governments often don’t have any similar tools. In fact, most countries’ laws are insufficient to protect trade secret rights in general, and even less so when information is in the hands of courts that have to guarantee public access. Even the European Commission, in proposing the EU Trade Secrets Directive to its member states, recognized that Europe had a serious problem, saying that the “main factor that hinders enforcement of trade secrets in Court derives from the lack of adequate measures to avoid trade secrets leakage in legal proceedings.”
So if we really want to help our sister courts in other countries, we should send them sensitive information only when we have first wrapped it up in limited use restrictions. That is why I suggested in my testimony to Congress that an important “fix” to Section 1782 would be to require that federal judges consider the risk to U.S. trade secrets when ruling on these petitions. And if they allow the discovery, it should come with serious, specific requirements on how it can be used in the foreign “proceeding” to avoid loss or damage.
Let’s hope that closing this loophole is something that both political parties can agree on.
You can read my formal remarks here and watch the entire hearing here.
In a boat out on the lake, the little boy says, “Grandpa, why are we holding our poles out here?” I say, “Because that’s where I think the fish are.” “Will we catch any?” “I don’t know. Let’s wait and see.”
To anyone familiar with the discovery process in U.S. litigation, involving production of millions of emails and other electronic records, and dozens of pre-trial depositions of witnesses, it may be surprising to learn that less than a century ago we allowed none of that. Trial was the place where documents were introduced and testimony taken. The idea of getting early access to the other side’s evidence was widely derided as a fishing expedition, casting about for something you weren’t sure existed.
It took over twenty years of fierce infighting within the American Bar Association before the idea of requiring disclosure to an adversary was embraced and reflected in the 1938 Federal Rules of Evidence. Within a decade, the Supreme Court declared the corner fully turned: “No longer can the time-honored cry of ‘fishing expedition’ serve to preclude a party from inquiring into the facts underlying the opponent’s case. Mutual knowledge of all the relevant facts gathered by both parties is essential to proper litigation.” Hickman v. Taylor, 329 U.S. 495, 507 (1947)
Unfortunately, old taboos tend to linger. The first major revision to the Federal Rules issued in 1970, liberalizing the framework to make discovery easier. Objections were still framed as encouraging “fishing expeditions,” or sometimes the more dramatic “draining the swamp” of evidence. (Of course we no longer use that metaphor, since it’s been usurped by people who want politicians out of Washington.)
Broad discovery can be critical in trade secret cases, where the plaintiff may not know which of its secrets have been taken or misused. Misappropriation rarely happens in broad daylight. Although forensics can sometimes show that information has been copied or accessed improperly, often the alleged victim can only provide an educated guess as to what happened. Here in the U.S. the basic rule allows a plaintiff to file its case based on reasonable suspicion, and to use the discovery process to fill in the gaps.
Of course, modern discovery can be quite disruptive and expensive. Recognizing that there is a particular danger of abuse in trade secret cases, where defendants are often individuals or vulnerable start-ups, courts long ago began to manage this risk by requiring plaintiffs to identify the relevant secrets with “reasonable particularity.” In 1985, California decided to reinforce that requirement with a statute that prohibits a plaintiff from taking any discovery until it has complied.
Some courts outside of California have embraced this approach as sensible case management, explaining that it prevents unbounded rummaging through the defendant’s own secrets. But a few have gone further, posing the issue as not just potential harassment of the defendant but also the risk that the plaintiff, once given access to the defendant’s files, will – in the words of the judge who presided over the Waymo v. Uber case – “cleverly specify whatever happens to be there as having been trade secrets stolen from plaintiff.”
The problem with this observation is that it is unsupported by empirical evidence. And logically, one would expect – and courts can insist – that a plaintiff will be able to prove its own trade secrets by pre-existing records, eliminating the abstract concern about copying.
Naturally, discovery in trade secret cases can be abused. It’s part of a court’s job to avoid deliberate damage to a party inflicted by the cost of litigation. But in an information economy, disputes over trade secrets require access to information. We should allow all parties to a case to be properly informed by giving them access to the facts, in a way that is reasonably managed.
It’s important that trade secret owners consider this tension before filing litigation, especially in cases involving departing employees, where the relative burdens of litigation can affect how the court handles discovery.
Here are some tips to help keep your case from being stalled by aggressive demands for details about your secrets.
The overall objective is to get the discovery process moving while demonstrating that you have given careful thought to the court’s and the defendant’s need to know what you are claiming as trade secrets. Getting that issue out of the way will make it more likely that you can use discovery in the way it was intended, to “discover” facts that are important to your case.
That a plaintiff seems to be fishing is no reason by itself to view its discovery as unreasonable. In trade secret cases, just like when we’re out on the water, we go to where we think the fish are, and then we wait and see.
As I explain to my grandchildren, if we knew we would always succeed, we’d call it catching, not fishing.
There are many lessons to be drawn from Waymo v. Uber litigation. This is perhaps the most important. Lawsuits are about history, while business is about the future.
By the standards of most litigation, the suit by Waymo (a Google company) against Uber was fast-tracked, getting to trial within a year after it was filed. And what a year that was. Waymo started the case with forensic evidence showing that Anthony Levandowski, its former head of self-driving cars, had helped himself to 14,000 confidential files as he was leaving to form a start-up that Uber later acquired.
Then things started going downhill for Uber. Levandowski asserted his constitutional right not to testify. And the evidence extracted from Uber looked pretty damning. Motivated by what he called an “existential” need for autonomous vehicle technology, Uber’s CEO Travis Kalanick had secretly agreed in advance to buy Levandowski’s new company for $680 million and to give Levandowski $250 million in stock. He also agreed to indemnify Levandowski against his prior “Bad Acts” and even some future mischief. (For more details on this very unusual transaction, see my earlier article, The Most Dangerous Hire.)
The federal judge overseeing the case, William Alsup, told Waymo “You have one of the strongest records I have ever seen in a long time of anybody doing something that bad.” He issued a preliminary injunction against Uber, and he referred the case to the U.S. Attorney for investigation of criminal trade secret theft.
But Uber punched back, demonstrating that nothing from the Levandowski files had made its way into the company, and challenging Waymo’s trade secrets. Judge Alsup joined in, requiring Waymo to describe its claims with patent-like precision, and forcing the company to pick only 10 of 131 secrets to take to trial. Later, he disqualified Waymo’s damages expert and limited the damages it could claim.
While all this was going on, Uber replaced Kalanick, who had come under fire for other executive misbehavior. But each company, represented by some of the best lawyers and PR firms in the country, kept slugging it out in the courtroom and in the press. Then, just before trial, the court found that Uber suppressed an employee’s letter that seemed to confirm Waymo’s allegations of trade secret theft.
The lawsuit had all the earmarks of a classic trade secret fight, with each side emotionally invested in proving that the other was morally wrong, if not corrupt. The difference here was scale: two Silicon Valley giants acting out a riveting, continuous public drama about the next innovation wave in an already disrupted industry. So when it came to the trial, it was the hottest ticket in San Francisco.
And then at the end of the first week, to the surprise of hundreds of spectators, the case suddenly settled. Waymo would get Uber stock nominally work $245 million, and Uber’s new CEO would express contrition for having bungled the recruitment of Levandowski. An inspector would ensure that Uber’s autonomous vehicle program was uncontaminated with Waymo information. The civil case would be dismissed, leaving Levandowski without a job and under investigation for criminal trade secret theft.
What happened here? Is there anything useful we can learn from it? I think so.
Most trade secret litigation is fueled by emotional reactions to perceived wrongs. Plaintiffs feel betrayed and abandoned, and defendants feel blamed and misunderstood. Each side wants to fight in order to validate its perspective. So the lawsuit begins with great energy. But over time, new facts emerge, and the parties begin to reconsider the cost/benefit analysis of continuing the struggle.
Well before trial, Waymo had managed to achieve most of its basic objectives. Levandowski was gone from the scene. Uber in its defense had erected strong barriers against the migration of any Waymo secrets, and this prophylactic was reinforced by the judge with a pre-trial injunction. Uber had also undergone a profound shakeup at the top, and its new leaders had no attachment to the posturing of their predecessors.
Still, the lawsuit ground on for months, pushed by the momentum of early (if fleeting) victories coupled with competing hopes for a meaningfully favorable outcome. Presumably the executives of each company knew they had better things to do. But it can be hard to come to agreement when each team is engaged mostly among themselves, preparing for battle. Sometimes it takes the transparency of a public trial, where everyone sees the same facts unfolding before them, to get to yes.
The leadership of these two companies, together with their teams of advisors, have demonstrated that it is possible to recalibrate once rock-hard positions, and to shift attention to future opportunities instead of past disappointments. We should all take note.
When the auctioneer’s hammer went down, the violin sold for almost $16 million. It was one of the masterpieces of Cremona, the small northern Italian town that was the 18th-century center of violin-making. Ever since, the world’s best violinists have insisted that instruments made by Antonio Stradivari and his colleagues demonstrate a uniquely wide dynamic range and subtle tonal quality. So why can’t we make them like that now? Nobody really knows.
To begin with, the masters left no instructions. Some critics of trade secret law have cited Cremona as an example of progress “lost” because it was buried instead of published through a patent application. There are several reasons why that argument fails, but for today let’s consider the possibility that the violin makers couldn’t have passed on their secrets if they wanted to, simply because they didn’t know what made their violins sound so good.
Maybe they thought it was just their extraordinary skill. Stradivari, who worked until he was 92 and is credited with creating over 1,100 instruments, was not shy about promoting both his talents and his violins to royal buyers. His friend Guarneri was almost as commercially successful, and the Cremona luthiers as a group did nothing to dispel everyone’s assumption that the beautiful sounds were a product of nothing more than their superior individual craftsmanship. In any event, it was the result that mattered, even if no one could say what produced it.
Within the last century, as the remaining instruments were collected and prices began soaring, the search was on to re-discover the secrets of Cremona. For years, many credited the varnish. Recently, scientists discovered a particular bacterium had infested logs floating down river from the alpine forests, munching away enough of the interior of each cell to create an unusual resonance when the wood was dried and fashioned into a violin body.
So can you have a trade secret just because it produces results, if you don’t know how it works? The answer is yes; the law doesn’t require that you fully understand the mechanism that generates the effect. This is a good thing, since otherwise we might spend an inordinate amount of time peeling back the onion layers of causation in the search for the “ultimate” explanation.
In medicine, we long have used natural materials or drugs that are correlated with improvement or cure without knowing exactly how they work. Even when we think we know it, the human body’s systems, being almost infinitely complex and interdependent, laugh at us.
That doesn’t mean that the search for causation is a fool’s errand. Frequently, in trying to understand how we get good outcomes, we stumble on a related discovery that proves very helpful. This is what happened with the Cremona violins. On the heels of the revelation about cellulose-eating bacteria, researchers identified two types of fungus that perform roughly the same feat, after the fact. Applied to existing violins of lesser quality, these fungi do just enough of the right kind of damage to help the instruments approach the sublime quality of a Stradivarius.
A child, by trial and error, learns to ride a bike, but ask her how she does it and she can’t really explain. It has something to do with balance, but what is that? How many adjustments per second does she have to make? What role does speed play? (If you’re thinking none, then just compete with other family members to see who can ride the slowest without falling over.)
Machine learning, a kind of artificial intelligence, allows us to recognize patterns and establish correlations but not necessarily causation. Instead, multiple variables breed multiple hypotheses, and these become multiple opportunities for mining useful insights. A pattern extracted from big data can be applied by itself to improve the functioning of some systems, but it can also point us toward deeper understanding and even greater advantage. Discovering a secret often begs many questions, and leads to the discovery of more.
One lesson is that, when it comes to outputs, the assumptions we make about causation can sometimes mislead us, preventing us from using information about the phenomenon to developing new innovations. While we don’t have to know how our valuable trade secrets work, it usually pays to keep looking while we’re exploiting the advantages they provide. In fact, there may be some nuggets waiting to be uncovered by reverse engineering the good results produced by others. That is one of the ways that secrecy incentivizes innovation every bit as well as patenting.
We can enjoy the music at the same time that we try to understand how it’s made and why it moves us.