Posts Tagged: "Trade Secrets"

Much has already been written in a relatively short period of time since the Eleventh Circuit decided Compulife Software, Inc. v. Newman, __ F.3d __, 2020 WL 2549505, (11th Cir. May 20, 2020). However, such commentaries have not addressed whether this decision is legally supportable and whether other circuits should follow this decision, which would provide a legal basis for website operators under certain circumstances to pursue unwarranted scraping of their websites. This is particularly important because the Supreme Court is currently considering whether to grant certiorari in a case involving whether website scraping is legal under the Computer Fraud and Abuse Act (CFAA). Depending on the outcome of this matter, website operators may be extremely restricted to prevent scraping under that statute.

It happened to Japan in the 1950s. Then it happened to Taiwan, and then Korea. Rapidly-developing countries started out relying on copying foreign technologies to drive their economies. But as growth increased and investments in education led the way to domestic innovation, each country found that a framework of strong intellectual property (IP) laws was necessary to sustain economic expansion. For many years, the relationship between China and the United States (as well as other Western countries) around IP has felt like pulling uphill on a very heavy wagon, as we tried to convince, cajole and threaten, often demanding reforms as part of trade negotiations. The relationship with China was further weighed down by the perception that the government was itself involved in misappropriation and that in general it was a proponent of weak IP protection. This past January, in the midst of a tariff war, China signed the “Phase One Agreement” that promised certain improvements in its trade secret regime in return for the United States dialing back some of the trade pressure.

An employee comes to you with a recipe for your competitor’s “secret sauce.” You know she worked for your competitor before coming to work for you. How do you respond? It’s an important question, because it may go to the core integrity of your organization and because exploring this trade secret conundrum may offer some decision-making principles that businesses can apply when addressing other difficult decisions that they are being called to make in these stressful COVID-19 times.  

On May 11, 2016, President Obama signed into the law the Defend Trade Secrets Act (DTSA) which extended the Economic Espionage Act of 1996 (EEA), which provides a broad basis for civil federal jurisdiction for the theft of trade secret thefts. Thus, trade secret owners can sue in federal court so long as there is a connection between the trade secret and interstate or foreign commerce. However, the DTSA does not preempt states laws and parties can still bring an action under a state’s version of the Uniform Trade Secret Law. Two recent reports highlight a number of significant findings that are relevant to companies looking to protect and defend their trade secrets: In April 2020, finance consulting firm Stout Risius Ross, LLC published its 2020 “Trends in Trade Secret Litigation Report (the SR) and Lex Machina released its 2020 Trade Secret Litigation Report (LMR), in which it summarized data from the past decade and compared it against data from the previous year’s report.

If you run a business that depends on data to drive success — and what business doesn’t these days? — this tendency of information assets to escape is a major, perhaps existential, risk. Given that those assets are handled by human beings, the management challenge can feel a lot like trying to contain . . . a virus. The metaphor is not perfect. After all, a virus, unlike bacteria, is rarely considered valuable or helpful. But I believe the comparison is apt and useful in many ways, not least as a mnemonic device to help us stay focused on the difficult but necessary discipline of caring for the integrity of the company’s most valuable property, just as we care for our individual health. So stay with me as we look at several main areas of overlap between trade secret management and pandemic response. To begin with, let’s recognize that our concerns are not only about our own information propagating outwards, but also about blocking unwanted information from infecting our data systems. So our control systems are naturally tuned toward containment: keeping our data in and others’ data out.

In a precedential opinion, Intellisoft v. Acer, the Court of Appeals for the Federal Circuit (CAFC), in a decision authored by Judge Dyk, held that the United States District Court for the Northern District of California (the district court) erred in refusing to remand a case where removal was improper under 28 U.S.C. § 1441 and §1454… Despite Acer’s contentions, the CAFC found that Intellisoft’s trade secret misappropriation claim did not “necessarily” raise patent law issues that would result in district court original jurisdiction. The CAFC first noted that ownership of a trade secret under state law does not require proof of patent ownership.

An essential element of trade secret protection is that the owner has made “reasonable” efforts to keep the information a secret. But as the Uniform Trade Secrets Act tells us, those efforts must be reasonable “under the circumstances.” When circumstances change, as they have recently, we need to recalibrate. In fact, when things return to whatever normal turns out to be, this will be an excellent opportunity for every organization to revisit the way in which it approaches management of its most important information assets.

Trade secrets have become an increasingly valuable asset to many companies, but compared to other types of intellectual property, including patents, copyrights and trademarks, they are extremely “fragile,” and require that an owner undertake as many steps as possible to protect their information and be vigilant about the need to protect such information to the fullest extent possible. The failure to do so may lead to a court’s finding in a misappropriation case that the information in question is not protectable as a trade secret. As described below, it is very easy for trade secrets to lose protection under a variety of circumstances, even where the owner has taken what it believes are “reasonable measures” as required for trade secret protection under 18 U.S.C. § 1839(3)(A. In short, authorities in this area teach that the more steps a party undertakes to protect its trade secrets, the more likely that a court will find those steps to constitute “reasonable measures.”

In last month’s post, Part 1 of this series, we considered the view of European academics that trade secrets are not “intellectual property” because they don’t give the power to exclude others, like patents, copyrights and trademarks do. But considering that trade secrets are treated throughout the world like a kind of property – they can be transferred and taxed, and stealing them is considered theft – we concluded that what matters is not exclusion, but control. It is the ability to control access to secret data that can give companies an advantage over others that don’t know about it. We considered the example of an Armenian family that has managed to keep – and profit from – the secrets of making the very best orchestral cymbals for four centuries. They did this by sharing only within the family, where presumably they had available some compelling ways to enforce trust. For the rest of us in the modern, globalized and digital economy, we have what looks like an impossible task. How do you protect the company’s secrets when they are zooming around the globe at the speed of light and accessible by thousands of employees, contractors, partners and vendors, each with a small supercomputer in their hands? More specifically, what do you do when those people go home in the evening and use those same little devices to participate in various forms of social media, where they are relentlessly instructed to share the most molecular details of their lives with hundreds or thousands of “friends”?

Open innovation is a key ingredient to the development of valuable intellectual property. Research institutions, universities, and private businesses work in close collaboration with one another, sharing confidential business information, processes, and trade secrets in order to create content. But while open innovation is a boon to creativity it is also a vulnerable entry point for bad actors to exploit the open and collaborative mindset of research-focused institutions (like universities) or the faith in contractual confidentiality obligations that many companies rely upon to conduct business. Several recent U.S. government findings have placed the blame for some of the most significant threats to domestic intellectual property at bad actors in the People’s Republic of China. A report by U.S. Trade Representative Robert Lighthizer found that Chinese sponsorship of hacking into American businesses and commercial networks has been taking place for more than a decade and posed a significant threat to our nation’s economic prosperity and competitiveness.

Part I of this series covered (1) Food Marketing Institute v. Argus Leader Media, 139  S.Ct. 2356 (2020) in which the Supreme Court held that commercial or financial information that is customarily and actually treated as private by its owner and provided to the government under an assurance of privacy is “confidential” under exemption 4 to the Freedom of Information Act and is therefore shielded from disclosure; (2) trade secret cases dismissed on the statute of limitations; (3) improper acts for unclean hands doctrine must be related to the misappropriation claim; (4) the Department of Justice’s continued and increasing focus on theft of trade secrets involving a Chinese connection; and (5) award of “head start” damages. In Part II, we will look at some additional important 2019 trade secret decisions and trends.

The primary purpose of the Defend Trade Secrets Act (DTSA) is to provide federal remedies to individuals and companies that have had their trade secrets misappropriated. That is not, however, its sole purpose. One of the DTSA’s more controversial provisions actually protects certain alleged misappropriators by precluding DTSA liability when an individual discloses trade secrets in the context of “whistleblowing” activity. Indeed, the DTSA’s immunity provision dictates that a whistleblower may not be held criminally or civilly liable for disclosing a trade secret, provided that the disclosure satisfies certain requirements. 18 U.S.C. § 1833. This immunity provision creates serious risk for companies: A whistleblower could expose a company to civil and criminal penalties stemming from the company’s alleged misconduct and simultaneously reveal valuable trade secrets, and the company would have no recourse. Fortunately, the immunity provision itself and the applicable case law, which is still in its infancy, can be used to develop a strategy for trade secret holders to avoid and/or mitigate this risk.

Sometimes it seems that trade secrets are always fighting for respect. I recently ran into a friend who teaches at a European university. He somehow found a way to squeeze into the conversation a pronouncement: “You know, trade secrets are not property.” Stay with me; this gets interesting. I sighed, because I knew what was coming. I’d heard it many times before. “The essence of property,” he said, “is the ability to exclude others, and that doesn’t exist with trade secrets. Anyone is free to discover the same information, or to reverse engineer a product to learn how it is made.” I acknowledged that trade secret rights are not exclusive, and it’s easy to reverse engineer some things. “But what about secret formulas, like Coca-Cola’s, and secret algorithms, like Google’s? And companies often make products using processes that you can’t figure out by looking at what’s public.” He was ready with the ultimate squelch: “Sure, but all of that is not property, because you can’t exclude anyone; you might not even know when someone is using the same so-called secret. If you can’t order them off, it’s not property.”

In general, a trade secret is any information used in business if the owner has taken reasonable measures to keep such information secret, and the information derives independent economic value, from not being generally known to, and not being readily ascertainable through proper means by the public. Almost every state has adopted some form of the Uniform Trade Secrets Act. In addition, with the enactment of the Defend Trade Secrets Act of 2016 (DTSA), trade secrets are also protected under civil and criminal federal law. See 18 U.S.C. § 1831, et seq. Due to the enactment of this Act and the weakening of patent protection in the United States, trade secrets are becoming an increasingly important means for companies to protect their intellectual property. This article provides a summary of important 2019 trade secret decisions and trends.

According to Merriam-Webster, the “Word of the Year for 2019 is “they” when used in the singular, typically to avoid ascribing a gender to the person being referred to. The larger point is this: language matters. Since this is a space dedicated to secrecy, let’s consider how we use language to determine who gets access to our trade secrets. For today, we’ll be looking specifically at how government does this. After all, they write the laws and so should be practiced at defining exceptions to property rights. Why should the government care at all about business secrets? Examples will help us here. Locally, the fire department needs to know what hazardous chemicals you might be storing at your plant, in case they have to come and put out a fire there. For different but equally compelling reasons, the Food and Drug Administration (FDA) insists on knowing exactly how drugs are made, and the Environmental Protection Agency (EPA) requires submission of pesticide ingredients. And then there is the government as consumer: last year the U.S. spent over $550 billion on purchasing goods and services from the private sector, and with all that economic clout comes the right to demand access to a lot of related data.