Recently I shared the podium with an FBI agent who was asked what frustrated him the most when trying to help businesses with trade secret theft. His answer was a surprise: they fire the guy too fast! He explained that when you discover someone might be mishandling information, your most important objective is to know what’s going on, and you could learn a lot more by keeping them around and watching what they do.
That observation stayed with me as I pondered what many have accepted as standard operating procedure: when you are told that someone is leaving for the competition, walk him (or her) out the door immediately. The idea is to avoid having a provocateur in your midst, someone whose lost loyalty might rub off on others. But while that’s understandable, it may not always be smart, especially in the age of electronic communications.
I have seen too many cases where the company has reflexively marched the employee out, only to learn later that they spent their time that day at home, wiping data off their laptop. Whether they think they’re doing you a favor or covering their tracks is not the point; you may have lost the best proof of what they’ve been doing that puts your confidential information at risk.
When you first learn of a departure, you are engaged in triage with two parallel priorities: find out what’s going on, and lock down the evidence. In most circumstances that may give you time for an initial meeting to get some details and perhaps try to turn the situation around. But you also have to be ready immediately to take actions that guarantee you get control over your data.
The initial investigation is low key, brief and uses internal resources. Talk to the supervisor, find out what the departing employee knows and the apparent level of risk presented by the departure. Identify relevant contracts, especially noncompete, nonsolicitation and invention assignments. Get a quick read on any unusual recent behavior, including attempts to access information outside normal areas of responsibility, emailing documents to a personal website or uploading to a cloud storage site.
At this point you may be ready for an initial meeting to confront the employee with any disturbing facts or inferences and make a further assessment of the risk. Where are they planning to go and what will be their responsibilities? How long have they been looking at this? What are the attractions of this new opportunity, and what are the negatives with their current position? If you don’t want to lose them, ask about their willingness to change their mind and stay. If not, make sure that no one else is involved in the move, and assess whether there is any project that would be seriously hurt if they left immediately. (If so, then you might want to arrange a carefully controlled and swift transition process.)
Now you need to find out where all of your data are located. Where are the company laptop and other mobile devices, including USB drives and security keys? Is anything on a home computer system, in personal email accounts or stored in a cloud account such as Dropbox? All of these assets, as well as physical files, need to be located and secure in company premises. Be sure to emphasize clearly – and confirm this in writing – that nothing is to be deleted, even personal files, until the exit interview that will be scheduled to debrief and to separate personal from company data.
If the employee has given notice of willingness to stay on for a period of time, you can take them up on that without necessarily having them be present in the facilities. Beyond tasking them with gathering and producing all company devices and data, and remaining available to answer questions, you may want to just send them home. Preserve evidence by duplicating (preferably through a forensic service) all of the drives and accounts to which the employee had access. And avoid any new damage by terminating the employee’s access to electronic systems.
The initial phase is often completed in the same day that notice is received, and in the process you will have made a basic assessment of the significance of the departure and the level of risk it poses. If that assessment is moderate to serious, then the next step will often involve bringing in outside counsel to perform a deeper investigation. This carries several advantages. First, the entire process will be protected against disclosure by attorney communication and work product privileges. Second, you will have the benefit of specialists who know what questions to ask and how far they can properly and usefully dig for the story. Third, you will get sober, independent advice that is not affected by the emotional reaction of some managers when troublesome departures happen on their watch.
Outside counsel can assist with tying down the forensic record and reviewing it for evidence of improper behavior. They will help you prepare for the exit interview, and in some circumstances they may participate in that process. More typically you will conduct the exit interview internally, with two primary goals: first, learn as much as you can about where the person is going and what they are going to do; and second, deliver a clear and firm message about the importance of respecting their legal obligations, and the consequences if they don’t.
Here is a common exit interview checklist:
I certify that I do not have in my possession, nor have I failed to return, any files, data, notebooks, drawings, notes, reports, proposals, or other documents or materials (or copies or extracts thereof) or devices, equipment, or other property belonging to XYZ Corporation.
I also certify that I have complied with and will continue to comply with all of the provisions of the Proprietary Information and Employee Inventions Agreement which I have previously signed, including my obligation to preserve as confidential all secret technical and business information pertaining to XYZ Corporation.
Following the exit interview, review the results with counsel and formulate a strategy. In most cases, the only followup will be a “warning letter” addressed either to the employee alone or also to the new employer, noting the company’s concerns, citing any relevant restrictive agreements, and offering the assumption that everyone will comply with their obligations. A variation on this approach might include a request for a meeting to discuss assurances required to provide comfort that the employee will not be placed in a position that will imperil the integrity of your data.
Of course if you believe that there’s evidence not just of risk but of actual misappropriation of your trade secrets, you need to take prompt action. You should have outside counsel involved immediately, to help you balance the need for a basic understanding of the facts with the imperative of prompt legal action. But where you can afford the time to prepare before you act, your decisions will be better informed and less likely to cause collateral damage.
Whistleblowers – The first court opinion addressing DTSA whistleblower immunity (18 U.S.C. §1833(2)) was issued on December 6 in Unum Group v. Loftus, 2016 WL 7115967 (D. Mass.). The plaintiff alleged improper taking of company documents by an employee and requested an injunction prohibiting their copying and compelling their return. Although evidence suggested that Loftus had only provided the documents to his attorney for investigation of wrongdoing, the court determined that it could not resolve that fact question and ordered the documents surrendered to the court. The decision has provoked criticism. See link.
China – During the annual meeting of the Joint Commission on Commerce and Trade in DC in November, China announced various improvements to its law and practices on trade secrets, including evidence preservation and calculation of damages. See link.
On January 9 the USTR issued its report to Congress on China in the WTO, noting that China was strengthening its trade secret legal framework, but that the “protection and enforcement of trade secrets in China is a serious problem”. See link at page 9.
On the same day the U.S. Supreme Court declined to hear an appeal by Sino Legend Chemical Co. from a decision of the ITC barring certain imports into the U.S. The appeal sought to challenge the Federal Circuit’s ruling in TianRui Group v. ITC, 661 F.3d 1322 (Fed. Cir. 2011), approving ITC jurisdiction over trade secret misappropriation occurring entirely outside the U.S.
APEC – In November, the Asia-Pacific Economic Cooperation (APEC) group of countries issued a statement approving a set of eight “best practices” for trade secret enforcement at the national level, including providing for both criminal remedies and civil remedies that include damages, injunctions, seizure of goods and cost awards, as well as procedures to obtain and preserve evidence. See link.
The trade secret laws of most countries – including the recent U.S. federal Defend Trade Secrets Act – contain the same requirement: in order to enforce its rights, a trade secret owner has to show that it has made “reasonable efforts” to protect its information from loss. In other words, before judges get involved in your dispute, they want to know what you’ve done to help yourself.
But what’s “reasonable?” The laws don’t tell us. Like the “reasonable person” standard in negligence, courts are supposed to decide each case in the context of its unique facts. That said, looking back at several decades of decisions, we can get a good sense of the principles at work, and also how they may be shifting as the business environment becomes more digital and more global.
The good news is that the standard is flexible, taking into account the value of the information, the risk of loss or contamination, and the cost (in money and effort) of measures to reduce those risks. For most businesses, this means simply taking a close look at what drives your competitive advantage, and then applying ordinary risk management analysis to define the broad outlines of a protection plan. In practical terms, this can lead to a variety of specific actions, including the basic ones you find on a lot of checklists with items like confidentiality agreements, IT system access controls, staff rules and training, and facilities security.
So if you’re following one of those checklists, you should be fine, right? Not necessarily. Although judges historically have been forgiving of less-than-robust security measures, they now seem to be paying much closer attention to this issue, and have even thrown out claims without trial where the trade secret owner has been sloppy in its practices.
The best known of the early cases was decided in 1970. DuPont had been building a new chemical processing plant when the construction manager noticed a low-flying plane making several passes over the site. It turned out that a competitor had hired the plane to take aerial photographs of the layout of the facility, which would reveal information about the secret process that DuPont intended to use. Forced to defend its actions in court, the competitor argued that it was just taking a look at what was in plain view. The judge thought that was preposterous, calling the surveillance a “schoolboy’s trick,” explaining that DuPont didn’t have to pitch a tent over the construction site in order to protect its secrets, and that the competitor was guilty of misappropriation by “unfair means.”
So the DuPont case taught that judges will not be too demanding when it comes to the amount of self-help that they expect from trade secret owners. However, in a 1999 case a federal judge granted summary judgment to a defendant in part because the confidentiality legend on the plaintiff’s secret document was deemed not large enough. This result aligns with my personal experience, indicating that today’s courts – and federal courts in particular – are more skeptical and less forgiving than they used to be on this subject.
Context is everything, and circumstances change with time. The expectation of privacy from the skies is less settled today, with Google Earth and other satellite imagery readily available, not to mention the thousands of privately owned drones. The same point applies with even greater force when it comes to computer system security. With the proliferation and increasing sophistication of hacker networks, the risk profile for most businesses has changed dramatically in the last several years. Just ask Target, Sony, Anthem, and J.P. Morgan.
Naturally, as the risks increase, the market responds with tools and systems to prevent cyber attacks, or at least discover them early and frame an appropriate response. And government agencies, most notably the National Institute of Standards and Technology, have suggested frameworks for managing cybersecurity risks. It’s not hard to imagine that these voluntary processes may over time be interpreted by courts as best practices, and even as minimum standards of conduct.
Bottom line: what constitutes “reasonable” efforts is dynamic, and expectations may be increasing, so pay attention. Of course, there’s more to self-help than just preparing for litigation. Don’t confuse the minimum requirement to get into court with the practical goal to prevent loss and contamination of your most valuable assets. To keep your information secure and clean, you should think beyond “reasonable” efforts.
I was giving a talk recently when a senior executive asked me, “If we have the time and resources to focus on just one thing to improve our information security, what would you suggest?” I didn’t hesitate: “Train your workforce.”
As we know from multiple studies, the biggest threat to information assets comes from “insiders,” which means (mostly) your employees. It’s not that you have a team packed with spies; but employees notoriously misunderstand their confidentiality obligations. In a recent survey of software engineers, 55% reported that they thought it was acceptable for them to take their work product with them when leaving the company – and that they intended to do it!
But not understanding the rules is only a fraction of the problem. The main challenge lies in a negligent attitude, a mental fog of inattention that can lead to mistakes.
What kind of mistakes am I talking about? The kind that make you slap your forehead in disbelief. The sales manager at a trade show who, excited about closing the deal at hand, lets slip the existence of an unannounced product. The engineer who brags to his friends on Facebook about a patent application he’s just filed. The R&D director who hires someone from his former employer in order to get an “update” on what they’ve been doing since he left. The business development executive who examines potential licenses of technology without walling off company employees who are working in the same area. These are the kind of mistakes that provoke litigation, and they are all preventable.
Good training is the single most cost-effective step you can take to reduce the risk of information loss or contamination. What makes for an effective training program?
Whatever IT systems or management processes you deploy to mitigate the risks to your trade secrets, those systems and processes are operated by people. So the way that they engage is critical to success. Training reinforces their focus and attention.
This is especially important with today’s workforce, a population that has never been more distracted. Think about it: for years now, social media have been silently encouraging people to use their laptops and smartphones to share every last detail of their personal lives. Sharing information is a good thing, and the more the better. When these same people come to work the next morning and connect their mobile devices to the company network, can we really expect them to shift their mindset and suddenly become models of discretion? Remember, a great deal can be revealed in 140 characters.
Here are some principles for designing an effective training program.
First, make the process inclusive. Not just people who you think are most likely to be exposed to confidential information, but everyone in the company should understand the importance of the issue. Even contractors, consultants and interns should be part of the effort. In fact, they may be even more important because they have inherently less loyalty and are more likely soon to be working somewhere else.
Second, make the training interesting. To keep it fresh and positive, consider using specialized vendors or products that can present serious material in a lighthearted but memorable way, rather than relying only on internal managers to conduct classes.
Third, don’t focus exclusively on protecting information from loss or leakage, but also from contamination. This happens most frequently from new employees who think they’re being helpful by passing on what they learned at their last job. So focus on the on-boarding process and train employees to recognize off-limits information.
Finally – and this is the most important principle – be sure that training is not an event but a continuous process. A single orientation video is not enough. Follow up with email tips, stories, and refreshers. And if business conditions worsen and you start to lose employees, this is a time to increase your training effort, not cut back, because the people who remain represent the source of your intellectual capital.
Let me emphasize that last point. Training is not about ticking a box. You are conditioning the attitude of those who are the primary handlers and protectors of your most important and vulnerable assets. Pay attention to that attitude and they will pay attention to your assets.
“The greatest victory is that which requires no battle.”
— Sun Tzu
Recently I got a call from a client who had just received a letter from a competitor, complaining about an executive the client had hired, and threatening to sue. My client was a young company that had never experienced this sort of threat. But they were less worried than they were angry, and viewed the competitor with more scorn than respect. They wanted to know if we could strike first with our own lawsuit and how long it would take to prevail, as they were sure they would.
Indeed, emotions were running very high on both sides, mostly due to assumptions fueled by an absence of information. The former employer suspected that the executive, who had been evasive about his plans during his exit interview, was working on similar projects. The client believed that the threat was made in bad faith to slow them down, and that an aggressive response would force the other company to relent.
Unlike patent cases, trade secret disputes hinge on issues of fault. Emotional themes frequently dominate the background: breach of trust, treachery, revenge, resentment. But emotions shouldn’t drive decision-making. This is particularly important for a defendant, for whom there is usually no upside, since even “winning” is an expensive distraction. So maintaining objectivity and detachment is critical to the defendant’s primary strategic goal: get out and get on.
Happily in this circumstance, we were able to get the parties in front of a skilled mediator, who helped each understand the other’s perspective, correct some mistaken assumptions, and find a way forward that even left the door open for future collaboration. How different things would have been if the sword had been unsheathed . . . .
For more on this topic, please read my white paper, titled "How to Respond to a Claim of Trade Secret Misappropriation".
It’s a fact of business life that employees leave to join a competitor or start a competing business, armed with confidential information that is suddenly put at risk. While you want to protect those assets, pulling the trigger on litigation may be premature. Unless you have evidence that you’ve been ripped off, a concise warning letter is a typical and prudent first step.
In its classical form, the warning letter serves as a reminder of the employee’s obligations and as a notice that you are prepared to act. The goal is compliance, and it often works. When you get the usual response with soothing reassurance that your concerns will be respected, the risk of loss is not eliminated, but it is mitigated. The exchange is polite, with each side reserving its options.
But the Defend Trade Secrets Act creating original jurisdiction for trade secret claims, the assumptions behind this common minuet may no longer be valid. If there is going to be litigation, you may want to avoid federal court, and for the same reason your opponent may want to go there. (For more information, check out the article “Be Careful What You Ask For”) So your warning letter needs to be crafted to prevent triggering a preemptive federal declaratory judgment action.
The key is to inquire, not accuse. This helps you stay in control of the process while you become better informed. You can find a sample warning letter below:
To Departing Employee
Dear Mr. Smith,
Since you have recently terminated your employment, we wish to remind you of your obligations to the company that continue after your employment ends. As you know the company possesses a great deal of highly sensitive and confidential business information. This includes customer lists, marketing plans, engineering data, product plans, and the like. During your employment you have been provided, or had access to, such information.
Both the law and the contract you signed when you came to work for the company prohibit any use or disclosure of such information after you leave. For your convenience, we enclose a copy of the agreement you signed. Because you have taken employment with a competitor of the company, it is especially important that you take care not to violate your obligations to keep this information confidential. While we have no reason at this time to believe that you have violated your obligations, it would be helpful to understand from you the steps that you intend to take in your new position to ensure that the confidentiality of our information is respected.
We look forward to your early response to this request.
Very truly yours,
To New Employer
Dear Mr. Jones:
We understand that Mr. John Smith, who until recently was employed by us, has decided to join your company. We draw your attention to the fact that Mr. Smith worked in our Advanced Widgets Department as a Senior Research Engineer. In that capacity, he became quite familiar with all aspects of our de-flanging process, which we consider and treat as confidential.
While he was with us, Mr. Smith signed an Employee Confidentiality and Invention Assignment Agreement, a copy of which we enclose for your reference. As things now stand, we have no reason to believe that any of our trade secrets in this area have been misused, and we expect that Mr. Smith will continue to comply with his obligations. We also trust that your company will not assign Mr. Smith to a position that might risk disclosure or use of this sensitive information.
If you have any questions regarding any of these matters, we will be happy to discuss them with you. For the moment, we ask that you describe what steps you are taking to protect against inadvertent misuse of our trade secrets.
We look forward to your early reply.
Very truly yours,
The new Defend Trade Secrets Act for the first time lets you file your case in federal court. but just because you can do it doesn't necessarily mean you should. Federal court provides a lot of advantages for certain kinds of disputes. But there can be a downside.
The easy decision is in a case that the DTSA was designed for, where some of the actors are in other states or countries. Federal courts give you nationwide service of process and uniform rules of procedure that can streamline litigation. Federal judges, with their experience handling crossborder cases, are better suited to resolving complex issues of personal jurisdiction. And if you find out about a threatened theft of valuable data before it happens, the new ex parte seizure provision of the DTSA can give you a powerful remedy.
But federal court is not for everyone. Its judges are "single-assignment," meaning that they have a case from beginning to end, and therefore also have a motive to end it early if it lacks substance. As a result, federal judges (who by the way are not getting any additional resources from Congress along with their new trade secret jurisdiction) often demand more specificity in pleadings and in trade secret definitions, which can end up looking like patent claims. State courts, in contrast, usually run on a "departmental" system, where early issues are handled by specialist judges, giving close cases a better chance to squeak through to trial, and giving plaintiffs more leeway in describing the subject matter of their claims.
Federal judges may be more inclined to transfer venue. And when it comes to substantive issues, the trade secret plaintiff's requirement to demonstrate its "reasonable efforts" to protect its data may get a more skeptical eye. Once a federal judge granted a defense summary judgment because the "confidential" legend on plaintiff's documents was not in a big enough font! So even after the DTSA, trade secret owners need to have an open mind about their strategy in deciding whether, and where, to litigate.
Well, not quite. But $940 million is a lot of money, and that's how much a federal court jury awarded on April 15, 2016 to Epic Systems, a Wisconsin healthcare software company, against the U.S. subsidiary of Tata Consultancy, part of the Tata Group headquartered in India. There may be a lot of lessons to come out of this case - and we don't know if the jury's award will be reduced - but what I want to talk about today is inspired by that verdict: how is it that trade secret damages can be so large?
Of course, every case rests on a unique set of facts, and trade secret disputes typically involve allegations of treachery and deceit that can turn a jury's head. But at a time when proving damages in patent cases feels restricted by issues like extraterritoriality and the entire market value rule, it seems that trade secret verdicts keep going up. In a quick search of awards in the past five years, I've found eight (including the Epic case) of more than $25 million, and three of those were in the hundreds of millions.
What is it about trade secret damage law that allows such seemingly generous results? Mainly it's because trade secrets are grounded in tort principles, where the primary objective is to make the plaintiff whole, and where doubts are resolved against the wrongdoer.
Setting aside willfulness for the moment (while we await the Supreme Court's rulings in Halo and Stryker), patent law tries to calculate the rent due for no-fault infringement. Trade secret law, in contrast, tries to return the plaintiff to where it should have been but for the defendant's wrongful behavior. The difference makes trade secret damages harder to predict.
Back in 1974, when a lot of people thought that trade secret law couldn't survive alongside a patent system that encouraged public disclosure, the Supreme Court in the Kewanee case patted us on the head and said, "don't worry," assuring us that anyone with a patentable invention would be crazy to elect secrecy instead. Patents were exclusionary and "strong" while secrets were "weak." And for a number of years after the Federal Circuit was formed it seemed that patents kept getting stronger all the time, while the risks of secrecy (what if my competitor gets a patent on this?) were pretty obvious.
How times have changed. The courts have been shrinking the universe of what can be patented (business methods, software, therapies), the bars to patenting (obviousness, indefiniteness), and the enforceability of patents (injunctions, damages, fee-shifting). And Congress, through the America Invents Act, has made it easier and cheaper to challenge patents without going to court, establishing the Patent Trial and Appeal Board, which some have referred to as "patent death squads." While patents seem under attack, trade secrets are basking in a new level of attention from industry, reinforced by provisions of the AIA that virtually eliminate the old risks of protecting innovation by secrecy.
So does this mean that we should abandon patenting as a strategy? Not at all. Good patents remain strong, not only in protecting novel inventions from theft, but also in building recognized value, enabling financing and collaborations. Yes, our calculus needs to change, particularly in some technologies. But it was never an either/or situation anyway. The question of patenting or secrecy is less like arriving at an intersection than it is like eating at a buffet: you get to have something of everything that you like.
Hardly a week goes by without seeing a post or article by some well-meaning lawyer who insists that the first step in protecting your trade secrets is to know what you have, therefore you need to do an "inventory." That's only half right: knowing what you own is critical, but you don't have to create a detailed list, as if you were ticking off the contents of a hardware store. In fact, you shouldn't do that.
First, you don't have to. The legal standard is "reasonable efforts," and judges are generally understanding and flexible about the quality of a trade secret owner's efforts. And from a management point of view, making prudent decisions requires only that you assign a risk profile to categories of data, not to individual records.
Second, it's dangerous. Getting too granular risks counting the leaves on the trees, and passing over what makes the forest vulnerable (or valuable). You will end up wasting time and probably abandoning the project. Or worse, you'll miss some important things altogether.
Instead of counting all the leaves in your forest, start by pulling together an interdepartmental team and talking about what drives your competitive advantage, and identify your key vulnerabilities. You'll probably be surprised - and certainly will be better informed - by the different perspectives brought to the meeting.
With this grounding, you will be in a good position to begin designing an approach that will work for your unique organization. And don't worry, the categorization and labeling will come!