Posts Tagged: "misappropriation"

In Part I of this article, we recapped some of the most notable trade secret cases of the past year that dealt with issues such as proving secrecy and exercising reasonable efforts, as well as the publication of a key judicial resource for trade secret cases. Below, we continue with some of the top trade secret cases and subject matter the courts addressed in 2023.  

The story seems to unfold the same way every time, whether the actor is a high-level departing employee or a customer or business partner. When sharing confidential information in a long-term relationship results in the release of a similar product by the recipient, the reaction is a claim of theft, laced with accusations of treachery and betrayal. And the response is equally strong: “no, I did this on my own”; in legal terms, “I engaged in ‘independent development.’” Strictly speaking, this means that the development of the new product was accomplished “independently” of the information shared in the confidential relationship. As a practical matter, this can be difficult to prove. Once you have been exposed to the secret process or design, or other related information, how do you demonstrate that your work was entirely your own?

Corporate espionage is as old as the day is long. The modern digital world has made it easier than ever to gain access to sensitive “secret sauce”, such as software, customer and vendor lists, business methods, techniques, formulas and recipes. With a significant shift to a remote working environment and the relative ease of employee portability, protecting and defending confidential information and trade secrets must be at the top of the priority list for any organization. In May 2022, in Appian v. Pegasystems, a jury awarded likely the largest sum in the history of Virginia state court proceedings, finding that Pegasystems was liable for $2 billion-plus in damages to Appian for planting a corporate spy at Appian for over 10 years…. While the facts of the Appian case are not particularly unusual, the measure of damages is quite stunning.

The end of even the best employer-employee relationship can be fraught with challenges, not the least of which is the possibility that the employee may — unintentionally or with malice — depart with valuable trade secrets, proprietary data, or sensitive information. To minimize the likelihood of such misappropriation, employers should establish, communicate, and follow clear policies and procedures at each stage in the hiring, employment, and separation process: When recruiting employees, at regular intervals during an individual’s employment, when the employment relationship is terminated, or if evidence of theft or misappropriation is uncovered during routine and follow-on investigations. Trade secrets are protected under the federal Defend Trade Secrets Act (DTSA), which defines a trade secret as business or technical information that derives value from not being generally known or readily accessible to the public through proper means and which the owner has taken reasonable measures to protect. Trade secrets are also covered by numerous state laws, the overwhelming majority of which have been based on the model Uniform Trade Secrets Act.

Last year at this time we thought we had been through the worst of it and, with the new vaccines arriving, that life would return to normal in 2021. Hahaha, how naïve we were! But take heart; some things hold steady through the storm, such as the popular sport of trade secret litigation. Unlike most patent and copyright cases, every dispute is guaranteed to unfold as a morality play—a story of good guys and bad guys. Let’s now look back on the year when remote work dug in to become a permanent fixture, and remind ourselves of the broad sweep of trade secret law by looking at some of the more instructive and interesting opinions issued by the courts – and one inexplicable decision by our government.

Last week, the United States International Trade Commission (ITC) issued a notice in the Matter of “Certain Botulinum Toxin Products, Processes for Manufacturing or Relating to Same and Certain Products Containing Same,” Investigation No. 337-TA-1145, stating that the ITC has “determined to review in part a final initial determination (FID) of the presiding administrative law judge (ALJ) finding a violation of section 337 of the Tariff Act of 1930.”Last year, Allergan, the U.S. manufacturer of Botox, and Medytox, the Korean manufacturer of a similar product, filed a joint complaint against Daewoong, a Korean drug maker, under Section 337 of the Tariff Act of 1930, alleging that Daewoong had stolen Medytox’s botox strain trade secret in Korea and introduced it to the U.S. market. The FID was issued on July 6, 2020, wherein the ALJ found that certain products sold by the Korean drug maker Daewoong and its partner Evolus, Inc. violated section 337 through their importation and sale in the United States of a botulinum neurotoxin product “by reason of the misappropriation of trade secrets.”

When an employee who has left a company to work for a competitor shares a coveted trade secret, his or her former employer can experience devastating effects, including lost business and reputational damage. As a result, the former employer may want to file a lawsuit; and to stop the former employee and the competitor from using the proprietary information while the suit is pending, the employer can also seek preliminary injunctive relief. Preliminary injunctive relief requires an evidentiary showing that the former employer is suffering irreparable harm. That is, harm that cannot be remedied with money damages. The former employer must also show a likelihood that the employer will prevail on its claim against the former employee. As such, the former employer must develop preliminary evidence that the information taken is a secret that is not readily ascertainable from public sources, that the employer took reasonable precautions to protect the information from disclosure, that the former employee took the information without authority and is using the information or has disclosed the information to others. If successful, the former employee, and those acting in concert with the former employee, will be enjoined from using the former employer’s information while the litigation proceeds. As such, seeking and obtaining preliminary injunctive relief can, and is often, an important milestone in a trade secret case.

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.

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.”… Anheuser-Busch sued him for misappropriation of its secrets for making beer.

Today, the biggest reason to have a strict regime in place to protect trade secrets, according to Gambhir, is because technology has made misappropriation of trade secrets so much easier than ever before. Compare the days when trade secrets resided in physical forms (blue prints, coca cola formula etc.) and were stored in locked file cabinets, safes etc. with the trade secrets in the digital world. “In most situations, they may be stored in a computer file that has restricted access on a secure network,” he said. “Yet, even given all that, an unhappy employee can easily download that file on a USB drive and walk out of your building directly to your competitor’s office. Access to trade secrets has become so much easier. In turn, misappropriation has become so much easier.”

The current extraterritorial reach of U.S. trade secret law may seem ironic given trade secret law’s “local” roots. In the United States, common law trade secret principles emerged through a diverse patchwork of state court decisions addressing local commercial disputes. These local common law principles were first distilled in the Restatement of Torts and the Restatement of Unfair Competition and then codified in the Uniform Trade Secrets Act in 1979. Underscoring the local prerogative of trade secret law, state legislatures modified and tailored the Uniform Trade Secrets Act to reflect their state-specific concerns and needs. For many years, despite a push for national uniformity, a number of states chose not to adopt a statutory scheme at all (some still haven’t).

Earlier this year, President Obama signed into law the new federal “Defend Trade Secrets Act of 2016.” It arms with substantial new weaponry those whose trade secrets have been taken. What has been less heralded, but might just affect you more directly, are new requirements that might lead you to revise your standard confidentiality and non-disclosure agreements.

The DTSA amends the definition of misappropriation from what was found in the EEA to bring the definition more in line with that of the Uniform Trade Secrets Act (UTSA) that has been adopted by almost all U.S. states. Indeed, apart of explicitly recognizing certain potential defenses that are discussed in the commentary of the UTSA, the DTSA is identical to the UTSA. According to the House Report, “The Committee intentionally used this established definition to make clear that this Act is not intended to alter the balance of current trade secret law or alter specific court decisions.” House of Representatives, Report No. 114-529, April 26, 2016, at 14. Federal courts therefore, will look to state decisions involving the state’s version of the UTSA for guidance.

On April 27, 2016, Congress passed the Defend Trade Secrets Act (“DTSA”), which President Obama is scheduled to sign later today. The DTSA extends the current Economic Espionage Act of 1996 (“EEA), which criminalizes trade secret thefts, to the civil arena. This means for the first time, trade secret owners can now bring suits in federal district courts, without having to resort to another basis for jurisdiction, such as the ill-fitting Computer Fraud and Abuse Act. While not without critics, the DTSA is a major step forward in the protection of intellectual property in the United States, not least because federal law now fully recognizes four types of intellectual property (patents, copyrights, and trademarks). This article highlights five important things that every trade secret owner should know, which includes almost every company in the U.S.