When David Almeling took me to task for my views on the prior commercial use defense under the America Invents Act and its impact on trade secrets, I invited him to present his view on my blog. David and his colleague, Darin Snyder, the Chair of O’Melveny & Myers IP and Technology Litigation Practice group, have taken me up on that offer and provided the following post responding to those (such as Gene Quinn of IP Watchdog and to a less apocalyptic extent, me) who believe that the prior commercial use may shift the balance between patents and trade secrets. 

David, Darin, and their colleagues at O’Melveny & Myers have been powerful voices in the trade secret community over the past five years. Perhaps most notably, in 2009 and 2010, David and Darin wrote two groundbreaking articles for the Gonzaga Law Review that were the first serious empirical analysis of trade secret litigation in state and federal courts over the past 50 years. These two articles concluded, among other things, that trade secret cases were growing exponentially in federal courts and steadily growing in state courts; that written agreements were essential to establishing adequate trade secret protection; and that the vast majority of trade secret disputes arose in relationships in which the plaintiff knew the defendant reasonably well (i.e., former employee, business partner).

I am really pleased to have David and Darin’s contribution, even if we don’t agree on the value of the prior use defense.

The New, Improved Prior Use Defense: The Same Patent vs. Trade Secret Calculus

By: David S. Almeling & Darin W. Snyder

As lawyers who litigate both patent and trade secret cases, we are often asked to address the merits of each strategy. Should a company protect its intellectual property by seeking a patent or by keeping it a trade secret?

Lawmakers added a new factor to that calculus in September 2011, when President Obama signed the Leahy-Smith America Invents Act (“AIA”), the most significant reform to patent law in half a century. Among its many provisions, the AIA expanded the prior use defense: once limited to business method patents, it now covers all patents. With this broader defense, a company sued for patent infringement can argue that it was already using the asserted invention — and is thus entitled to exploit it — provided the company’s use meets certain conditions. 35 U.S.C. § 273. 

Some attorneys view this development as reconfiguring the balance between patents and trade secrets. Those attorneys encourage companies to scrap their time-tested IP strategies and embrace trade secrets as their go-to protection. As they see it, if a company can keep its use secret, and then rely on that prior use to defend itself against an infringement claim, why risk disclosing confidential information in a patent application?

We don’t. We view the prior use defense as limited and insufficient to warrant major changes in how companies manufacture or protect their manufacturing activities. Even in cases where the prior use defense might be attractive, it can still impair a company’s defense strategy and complicate its defense burdens. No company should assert it lightly. Instead, companies should think of the defense as a specialized tool — the toothpick in a Swiss Army knife — to be summoned only in narrow circumstances.

The Prior Use Defense Is Limited and Risky to Assert in Litigation

Our doubts about the defense’s value are many. Let’s start with five.

Only a defense. The prior use defense is, by its terms, just that: a defense.  Unlike a patent, which a company can assert offensively to exclude a competitor from using an invention, this defense works only when a company is accused of infringement.  We’d rather bring a patent sword to an IP fight than a prior use shield.

Imperils noninfringement strategy. A company that advances the prior use defense likely does so at the expense of a noninfringement defense. By arguing that it was already using the patented invention, the company essentially asserts what a noninfringement defense would require it to refute. When comparing the respective burdens of proof — the defendant must prove prior use by clear and convincing evidence while the plaintiff must prove infringement by a preponderance of the evidence — the company should argue noninfringement when both arguments are equally viable.

The defense is static. It expressly “extends only to the specific subject matter for which it has been established as a commercial use.”  35 U.S.C. § 273(e)(3). If a company’s prior use differs from the accused subject matter, a finding of infringement is still possible. The defense thus presents little value to manufacturing activities that change frequently. And the long lag between the activities that would constitute a defense (i.e., at least a year before the patent’s filing) and the company’s assertion of the defense (i.e., potentially years after the patent’s issuance) also undermines its usefulness. Before relying on this defense, companies should ask themselves: Will this manufacturing process be unchanged five or ten years from now? Given the pace of innovation, we expect the answer to be no for all but the most mature technologies in the most mature industries.

Requires continued use. If a company has “abandoned” use of the asserted invention, the company “may not rely on activities performed before the date of such abandonment in establishing a defense . . . with response to actions taken on or after the date of such abandonment.”  35 U.S.C. § 273(e)(4).  For companies that have stopped or will stop using the invention, this limitation is dispositive. And for companies that use the invention only intermittently, such as for seasonal manufacturing or one-off orders, this limitation raises significant concerns about what constitutes “abandonment.”

Discovery burdens. Because the defense raises factual questions not present in standard patent cases, a company that asserts prior use will add to its already heavy discovery burdens. Was the company “acting in good faith” when it commercially used the subject matter? Did the company establish a commercial use for the specific accused subject matter? Did the company “abandon[] commercial use” of the invention at any time? And since this defense is new, courts are likely to permit broad discovery in the absence of case law to limit that scope.

The Prior Use Defense’s (Limited) Value

Still don’t believe the defense’s value is limited?  Look at its impact on every country that has it — including the United States. The prior use defense for business method patents was established here in 1999, yet it has led to only two reported decisions. PB Farradyne, Inc. v. Peterson, No. 05-03447, 2006 WL 132182, at *5 (N.D. Cal. Jan. 17, 2006); Sabasta v. Buckaroos, Inc., 507 F. Supp. 2d 986, 1004-05 (S.D. Iowa 2007). In neither case did the defendant successfully use the defense to defeat a claim of patent infringement. And while most first-to-file countries feature a prior use defense, there has been little relatively litigation of the defense.

Despite its limits, the defense is not entirely superfluous. If a company were using an invention claimed in another’s patent, then that company might be left without an invalidity argument (because the activity was secret) or a noninfringement argument (because the invention was, in fact, being used). In these rare cases, the company’s best defense could be prior use.

In short, the prior use defense does little to alter the current trade secret vs. patent calculus. Companies can and should continue to patent their manufacturing activities as they always have, and they should approach the defense with caution. Rather than an all-purpose fix, it’s more of a fallback — a complement to a company’s IP strategy, not an overhaul.

 

David Almeling is a counsel and a member of the Intellectual Property and Technology Practice within O’Melveny’s Litigation Department. David represents clients in intellectual property litigation, with a primary focus on patent and trade secret litigation. He also represents clients in trademark, copyright, and unfair competition matters. David frequently speaks and publishes on issues concerning trade secret law and patent law. Most recently, he was lead author on two articles (coauthored with Darin and others) that presented the largest-ever statistical analysis of trade secret litigation in state and federal courts. David graduated from Duke University School of Law.

  

 

Darin Snyder is a partner and the worldwide Chair of the Intellectual Property and Technology Practice within O’Melveny’s Litigation Department. Darin has over 20 years experience litigating major civil and criminal matters involving intellectual property and technology-intensive business sectors. The Daily Journal named Darin among the top 75 Intellectual Property litigators in California in both 2010 and 2011. The Legal 500 has acknowledged Darin for his work in patent, copyright, and trade secret litigation, repeatedly recognizing his excellence in trade secret litigation and quoting clients who call him “[o]ne of the West Coast’s biggest names in the area.” Darin graduated from the Law School at the University of Chicago.

 

 

On April 11, 2012, the U.S. Court of Appeals for the Second Circuit issued its eagerly-awaited opinion explaining its reasons for vacating the conviction of former Goldman Sachs’ programmer, Sergey Aleynikov, under the Economic Espionage Act (EEA). A New York jury had convicted Aleynikov in December 2010 of stealing source code for Goldman’s high frequency trading (HTF) program under the EEA. On appeal, Aleynikov successfully argued that the source code was not related to a product “produced for . . . interstate or foreign commerce” under §1832(a) of the EEA. 

Did the Second Circuit get it right or wrong? And what are the ramifications of the decision, particularly now that Congress is contemplating adding a civil remedy to that section of the EEA? (I have attached a PDF of the decision below). 

Unfortunately, I think the Second Circuit’s analysis is wrong, for the reasons that I explain below. Fortunately, however, Congress has the opportunity to rectify that mistake as it deliberates over the Kohl/Coons Amendment to the EEA. 

Background: Aleynikov was responsible for developing Goldman’s HFT computer programs for various commodities and equities markets. In April 2009, Aleynikov resigned from Goldman and accepted a job at Teza Technologies to help develop that firm’s own version of a computer platform that would allow Teza to engage in HFT.

On his last day, Aleynikov transferred thousands of computer files, including source code to the HFT trading system, to a server in Germany that was not blocked by Goldman’s firewall. That evening, at his home, Aleynikov downloaded the material from the German server to his personal computer and then to his laptop and a thumb drive so that he could make it available to Teza.

My Concerns About the Second Circuit’s Analysis: The conviction and its reversal have generated a fair amount of buzz in the blogosphere, partly because Goldman remains a lightning rod in any debate and party because some members of the open-source community feel that he did nothing wrong. I don’t have a dog in either fight, and but I would note that, whatever your opinion of Goldman, Aleynikov’s conduct (downloading the software to a German server, deleting evidence of the transfer, etc.) falls well short of someone who believed he was copying open source code not proprietary to Goldman. But whether prosecutors should have indicted him is not the subject of this post. 

Turning to the Second Circuit’s opinion, I, too, struggled with some of the issues that vexed the court when it tried to read the language of §1832(a) as a whole, and give meaning to all of the statutory language at issue. Nevertheless, the Second Circuit has effectively read the words “produced for” out of the statute. 

Here is the key passage from the opinion:

“Goldman’s HFT system was neither ‘produced for’ nor ‘placed in’ interstate or foreign commerce.  Goldman had no intention of selling its HFT system or licensing it to anyone. . .. It went to great lengths to maintain the secrecy of its system.  The enormous profits the system yielded for Goldman depended on no one else having it.  Because the HFT system was not designed to enter or pass in commerce, or to make something that does, Aleynikov’s theft of source code relating to that system was not offense under the EEA.”

But if Goldman’s HFT system was not produced for interstate or foreign commerce, then for what was it produced? The software was certainly not produced for development purposes or limited to research. Although it was not physically placed in commerce or actually sold in commerce, it was certainly produced for interstate commerce — namely, to facilitate the profits for Goldman identified by the court.

Essentially, the Second Circuit imposed a requirement that the product be intended to be sold in an open market to qualify for prosecution under the EEA. In its opinion, the Second Circuit reasoned the words “produced for” had likely been intended to cover a prototype or developmental product, but the court could not identify any particular legislative history in support of that position. Had Congress intended that narrow construction, it would have selected those words or at least supplied legislative history demonstrating that was what those words were meant to convey.

In sum, the Second Circuit was troubled that the interpretation applied by the district court was simply too broad.  However, the district court’s interpretation was consistent with the language of §1832. In other words, the language is what the language is. If the Second Circuit instead believed that the statute was facially ambiguous because of the breadth of that language (a point it briefly made), then that should have been the basis of its decision.

In a concurring opinion that has garnered some interest, Justice Guido Calabresi wrote that Congress probably intended to criminalize this type of conduct and he “express[ed] the hope that Congress will return to the issue and state in appropriate language, what I believe they meant to make criminal in the EEA.” I have to confess that if Justice Calabresi thought that was the intent, and if the words were present in the statute, he should have dissented rather than joining in the opinion.

What are the Ramifications of this Decision? The obvious fallout is that prosecutors in the Second Circuit have lost the ability to prosecute anyone for the theft of software not actually included in a product that is sold or is being developed to be sold in the open market. (Peter Toren makes the interesting observation that federal prosecutors could have avoided this problem if they had included a criminal copyright claim). It remains to be seen whether other federal courts will follow the Second Circuit’s lead. 

My greater concern is the impact this decision may have on the Kohl/Coons Amendment to the EEA that is still in Committee. As readers of this blog will recall, that Amendment adds a civil remedy to §1832 (but not to §1831, which is the provision that addresses trade secret theft for the benefit of a foreign power). As a result, any future civil cases could be restricted by this holding and certainly those in the Second Circuit. Fortunately, there may be an opportunity to rectify the request voiced by Justice Calabresi and provide language that resolves this issue.

U.S. v. Aleynikov.pdf (85.90 kb)

The big news this week was the Ninth Circuit’s decision in U.S. v. Nosal and the Second Circuit’s decision in U.S. v. Aleynikov (briefly addressed below).  Here is a rundown of the notable decisions and posts of another busy week: Trade Secret and Non-Compete Posts and Articles:
  • Yesterday, the U.S. Court of Appeals for the Second Circuit issued its opinion explaining why it vacated the criminal conviction of former Goldman Sachs programmer Sergey Aleynikov in February.  As expected, the Second Circuit held that the actual software he stole was “not produced for or placed in interstate or foreign commerce” as required under the Economic Espionage Act. (A PDF copy of the decision can be found below).  I am in the process of reviewing it more closely and I will have a post addressing it over the weekend. 
  • Massachusetts may be the next state to adopt the Uniform Trade Secrets Act according to Foley Hoag’s Massachusetts Noncompete Blog.  Brian Bialas is reporting the bill was introduced in late January and testimony addressing the pros and cons of the bill was presented to the Massachusetts Joint Committee on the Judiciary on February 28, 2012.  Brian’s take is that bill has received lukewarm support from the legal community because of potential complications with the pending non-compete legislation as well as concerns by lawyers about their ability to recover treble damages.
  • The long-running prosecution of a former Intel engineer who stole technology estimated at $1 billion has resulted in a plea on the eve of trial.  Biswamohan Pani, who prosecutors say downloaded Intel’s confidential documents after joining rival Advanced Micro Devices Inc., could see 20 years’ imprisonment, a $250,000 fine and three years of probation for each count, according to the plea agreement.
  • Akerman’s HR Defense Blog warns of the dangers of failing to tailor your non-competes to how your employees perform their job in “Horse Doctors Make Housecalls: A Lesson in Why Boiler-Plate Non-Compete Agreements May Not Hold Up in Court.”  Kenneth Vanko has a thorough post about the Florida decision, Heiderich v. Florida Equine Veterinary Svcs., Inc, as well.
  • For those doing business in China, a non-disclosure agreement is not enough.  Rather, in a post entitled, “NNN Agreements: Watching the Sausage Get Made,” Dan Harris’ China Law Blog advocates provisions that also restrain competition and forbid use of the trade secrets, and his post details the factors to consider when drafting and negotiating those agreements.
  • U.S. District Court Judge Robert Payne has dismissed Kolon’s antitrust counterclaim against DuPont.  While DuPont had moved for summary judgment on various grounds, including a request that the case be dismissed because of Kolon’s spoliation of evidence (see the update on this request in this previous post), Judge Payne’s summary judgment ruling focused on the the merits of the antitrust issues.  (A copy of the 51-page opinion is attached below).  I believe there are no further claims remaining in this case and Kolon will now be left to appeal this decision to the Fourth Circuit.
  • Watch out for inconsistent forum selection clauses in transactions involving multiple agreements warns Seyfarth Shaw’s Trading Secrets Blog.  The post details a recent ruling by the District Court of Colorado in Robert Stuart v. Marshfield Doorsystems, Inc. which declined to dismiss an action filed in Colorado because only one of the integrated agreements (the employment agreement with the non-compete) specified Chicago as the forum for the dispute. 
Cybersecurity Posts and Articles: 
  • “Why Aren’t Companies Better Prepared for Data Breaches?” asks Catherine Dunn on Corporate Counsel’s website. 
  • The Threat Post Blog has an article warning “Executives Abroad May Get Owned Before They Get Off the Tarmac.” 
  • According to The Wall Street Journal, “The Enemy Within: For the IT staff, the biggest security risk is…the IT staff.” 
News You Can Use:
  • The New York Times’ Personal Tech page has advice for “Eluding a Barrage of Spam Text Messages.”
U.S. v. Aleynikov.pdf (85.90 kb) Dupont v. Kolon – Opinion dismissing antitrust counterclaim.pdf (4.18 mb)

Yesterday, the U.S. Court of Appeals for the Ninth Circuit issued its highly-anticipated ruling in United States v. Nosal, 10-10038. In a 9-2 en banc decision written by Chief Judge Alex Kozinski, the Ninth Circuit reversed its previous ruling by a three-member panel and rejected its expansive reading of the Computer Fraud and Abuse Act (CFAA) finding that violations of an employer’s computer use policy could qualify as the requisite “exceeded authorized access” under the CFAA, and therefore subject a defendant to the CFAA’s criminal provisions. (A copy of the opinion can be found below).

When the three-judge panel of the Ninth Circuit issued the initial ruling last April, there was a firestorm of controversy that the CFAA could now potentially criminalize the conduct of employees who reviewed personal websites like Facebook at work if their employer’s computer usage policy forbid looking at personal websites. And there was also concern that the ruling’s reasoning could be used to criminalize conduct that was inconsistent with the many online Terms and Conditions to which we mindlessly click “AGREE” so we can access that website. 

Indeed, as I wrote last fall, at least one California district court, in Facebook v. MaxBounty, had applied Nosal’s reasoning to that very situation when it found that the CFAA’s civil remedies could apply if a business failed to follow the online instructions of Facebook. There was a remarkable amount of commentary about Nosal, with Professor Orin Kerr and The Wall Street Journal both expressing concern over its potential scope. As a result, many lawyers and businesses have been anxiously waiting for a definitive ruling.

Chief Judge Alex Kozinski’s introduction in many ways evokes U.S. Supreme Court Justice Sonaa Sotomayer’s recent statements in U.S. v. Jones, where she expressed concern about our evolving expectations of privacy and computer usage in the context of the Fourth Amendment. Judge Kozinski wrote:

“Computers have become an indispensable part of our daily lives. We use them for work; we use them for play. Some times we use them for play at work. Many employers have adopted policies prohibiting the use of work computers for nonbusiness purposes. Does an employee who violates such a policy commit a federal crime? How about someone who violates the terms of service of a social networking website?”

Later in the opinion, Judge Kozinski emphasized that very concern, noting that “[t]he government’s construction of the statute would expand its scope far beyond computer hacking to criminalize any unauthorized use of information obtained from a computer. This would make criminals of large groups of people who would have little reason to suspect they are committing a federal crime.”

For a thorough analysis of the opinion, see Robert Milligan’s post at the Trading Secrets Blog. I am certain there will be plenty of commentary in the coming days.

U.S. v. Nosal.pdf (103.39 kb)

04072012Last November, I wrote about the basics of cloud computing as well as some best practices for protecting trade secrets stored in the cloud. Given the fast pace of innovation, and the exponential number of recent reports of hacking and cybertheft, my colleague John Molnar and I decided an update was in order. We have assembled a number of posts on the cloud issue and incorporated our own recommendation.

The Legal Analysis: To date, no court has yet considered the question of whether a company’s placement of trade secrets in a cloud-based network would be unreasonable.  However, as the title of my post suggests, there has been no shortage of articles and posts from legal and technical commentators. 

For example, in a guest post for Forbes entitled “Is It Safe To Store Your Trade Secrets In the Cloud?”, Finnegan lawyers Rob McCauley, Ming Yang, and Jared Schuettenhelm worry about the legal ramifications of storing trade secrets in the cloud. According to their post, if the cloud is known to not be 100% secure, a court might find that a company failed to take reasonable efforts to maintain the confidentiality required for most trade secret claims. Such a ruling would have potentially great ramifications when one considers the fact that cloud computing typically includes e-mail services like Google’s Gmail and Microsoft’s Hotmail as well as document synchronization like Apple’s iCloud. 

To demonstrate that a company protected its trade secrets, Peter Vogel of Gardere recommends negotiating the right to regularly conduct audits, as well as a provision ensuring deletion of all information if and when the relationship with the cloud provider is terminated. These provisions would help insulate a business from any claim that it acted unreasonably in storing confidential information in the cloud.

In a post entitled “How to Avoid Losing Your Trade Secrets When Moving to the Cloud,” IP blogger Peter Toren proposes a two step test for determining if a trade secret owner has made a reasonable effort to ensure confidentiality in the cloud. First, Peter advocates that a business require its cloud service vendor to certify that it has appropriate security procedures. Second, the trade secret owner needs to do more than simply accept the vendor’s assurances at face value, and Peter believes a showing that a company performed due diligence to verify the vendor’s claimed security procedures would demonstrate that it acted reasonably. I would tend to agree.

Technical Considerations: Given the importance of due diligence for verifying the security of cloud storage, what should be checked? Jon Brodkin of InfoWorld gives seven recommendations from the technology research firm Gartner, Inc. While his post is several years old, it provides sound advice like demanding transparency from the cloud service vendor, checking on the specific jurisdiction where the data will be stored in, and ensuring data segregation — all of which remain important today. 

Similarly, as Mary Beth Hamilton of Eze Castle Integration notes in the Wall Street & Technology Blog, a trade secret owner needs to check how the vendor handles external security threats as well as internal data comingling.  But it is not just a vendor’s technology that needs to be investigated. Due diligence should include the vendor’s physical facility as well. Cloud computing expert George Hulme recommends redundant data backup beyond the cloud vendor. Trade secret data would be saved to the cloud while still being backed up locally.

The Takeaway? If concerns about security cannot be resolved, a company may want to consider an in-house private cloud as Bart Copeland, CEO of cloud software provider ActiveState, recommends. While a private cloud might not be right for every enterprise, it would allow the trade secret owner to exercise full control. Of course, some of the benefits of cloud computing would be lost  but the risk of losing those trade secrets and the inability to get legal relief to retrieve or protect them should outweigh those considerations.

Lastly, the best defense of trade secrets in the cloud may be the simplest. A trade secret owner needs to be sure that the benefits of storing a trade secret in the cloud outweigh the risks. Put differently, that which is not stored in the cloud cannot be stolen from the cloud. Consequently, the best protection for a company’s crown jewels is to keep them out of the cloud entirely and only store trade secrets of lesser value in the cloud. 

My colleague Art Stein and I will be speaking on Thursday, April 12th at 12:30 p.m. at the Columbus Intellectual Property Law Association’s April Meeting for the presentation, “The America Invents Act, The Economic Espionage Act and Other Tumultuous Developments in Patent and Trade Secret Litigation.”   

 
This will be the fifth year in a row that Art and I have spoken together at CIPLA and it is truly one of my favorite presentations of the year. Some of the topics we will address will include:
  • Identifying some of the most noteworthy changes to U.S. patent and trade secret law as a result of the America Invents Act (AIA) and how it may affect the strength and the versatility of trade secret protection;
  • Discussing how the interplay between trade secret and patent prosecution may shift under the AIA;
  • Providing insights on likely changes to both patent and trade secret practice as the new provisions of the AIA come fully into effect; and
  • Addressing other major developments in patent and trade secret litigation, including recent developments under the Economic Espionage Act and other relevant trade secret statutes.
Lunch begins at 11:30 a.m. I have attached a brochure with additional details for the presentation in a PDF below. 
 
Art and I hope to see you there. 
 
 
 

Neither snow, nor rain, nor a family Spring Break vacation in Orlando can prevent the Trade Secret Litigator from delivering his Thursday Wrap-Up. Without further ado:
 
Trade Secrets and Covenants Not to Compete Posts and Articles: 

  • China’s role in the theft of the trade secrets of American companies is now the focus of The New York Times Op-Ed page, courtesy of a piece by former counter-terrorism czar Richard Clarke. Following up on the concerns he recently expressed in an interview with The Smithsonian (see my post from last week), Clarke doubts the effectiveness of the various cybersecurity bills pending in Congress and advocates regulations or legislation that would empower the executive branch to notify and assist American companies whom it believes are going to be attacked. 
  • PepsiCo was able to vacate a suspicious $1.26 billion default verdict on a trade secret claim in Wisconsin by demonstrating the claim was barred under the statute of limitations. Todd Sullivan’s Trade Secrets Blog reports on the case, James v. PepsiCo, Inc. The plaintiffs claimed that they met with representatives of PepisCo in 1981 and disclosed certain trade secrets, including their ideas about bottled water called Ultra-Pure. In 2007, one of the plaintiffs tasted Aquafina and concluded it was a copy of Ultra-Pure, the bottled water that they had disclosed over twenty years before. After vacating its own $1.26 verdict, the Wisconsin trial court then dismissed the claims as untimely. 
  • The fine British IP Blog The IPKat is shocked, shocked, I say, to discover that trade secrets are actually very popular here in the U.S. (a bias one would readily expect from our patent brothers here in the U.S., and not from our more enlightened cousins from across the pond).  Last week, Neil Wilkof was aghast about the recent NSF report finding that more businesses used trade secrets than patents to protect their IP and so advised in a post entitled “Whatever the Report Says: Can Trade Secrets Really Be that Important?” In a guest post rejoinder entitled “Much, Much More on the Centrality of Trade Secrets,” James Pooley, the World Intellectual Property Organization Deputy Director General for Innovation and Technology, confirms the importance of trade secrets particularly in process technology and software. 
  • For those in Illinois, Kenneth Vanko’s Legal Developments in Non-Competition Agreements Blog thinks that the main fallout from the Illinois Supreme Court’s decision last year in Reliable Fire Insur. v. Arredondo will be that TROs enforcing non-competes will be tougher to get. Kenneth believes the requirement that a business show a legitimate business interest supporting a non-compete based on the “totality of the circumstances” will require companies to be more creative.
  • Employee handbooks and policies do not qualify as agreements, Littler’s Unfair Competition & Trade Secrets Blog reports. In a recent case in New Jersey, Metropolitan Foods v. Kelsch, the district court found that handbooks did not qualify as agreements and rejected the breach of contract claim, but allowed their use in support of a breach of the duty of loyalty claim. 
  • In light of the circumstantial nature of many trade secrets cases, digital forensics are always important and Seyfarth Shaw’s Trading Secrets Blog has the first of three guest posts by Jim Vaughn of Intelligent Discovery Solutions to walk you through the basics. 
  • Lemko has sued its insurers, claiming that they improperly denied it coverage for its epic trade secret dispute with Motorola, Law360 is reporting. It will be interesting to see how a court rules, given that the Northern District of Illinois found sufficient evidence of Lemko’s misappropriation of Motorola’s trade secrets to go to trial in the underlying case.

Cybersecurity Articles and Posts:

  • The big news this week was the breach of what is now estimated to be 1.5 million credit card accounts processed by Global Payments. For a quick recap, see the Washington Post’s summary, “FAQ: The Global Payments Hack.”

News You Can Use:

  • In light of the last bulletpoint, Forbes offers the following timely advice on “How to Protect Yourself from Credit Card Breaches.”
  • The Wall Street Journal warns “Beware Apps Bearing Unwanted Gifts.”

Former U.S. counter-terrorism czar Richard Clarke was always known as a refreshingly blunt official (few can forget his apology to the 9/11 families for the government’s failure to avert the attacks). True to form, in a recent interview with The Smithsonian, Clarke says Chinese hackers have been systematically stealing trade secrets from American firms on behalf of Chinese and foreign companies for years. 

“I’m about to say something that people think is an exaggeration, but I think the evidence is pretty strong,” Clarke tells Ron Rosenbaum. “Every major company in the United States has already been penetrated by China.” Clarke, who served three presidents as counter-terrorism czar, now operates a cybersecurity consulting firm called Good Harbor in Arlington, Virginia. He believes that, unlike U.S. covert activities which focus upon diplomatic and military secrets, China has been actively using the same techniques to cull information to assist its companies in stealing U.S. technology.

“My greatest fear,” Clarke says, “is that, rather than having a cyber-Pearl Harbor event, we will instead have this death of a thousand cuts. Where we lose our competitiveness by having all of our research and development stolen by the Chinese. And we never really see the single event that makes us do something about it. That it’s always just below our pain threshold. That company after company in the United States spends millions, hundreds of millions, in some cases billions of dollars on R&D and that information goes free to China….After a while you can’t compete.”

Clarke’s fears are not confined to industrial espionage and the commercial losses associated with them. According to the interview, Clarke is worried about the U.S. “supply chain of chips, routers and hardware we import from Chinese and other foreign suppliers and what may be implanted in them—“logic bombs,” trapdoors and “Trojan horses,” all ready to be activated on command so we won’t know what hit us. Or what’s already hitting us.”

The article is a great read and has many other fascinating tidbits. For example, Clarke says he believes the U.S. worked in concert with Israel to launch the infamous Stutnex attack, a worm that temporarily disabled Iran’s nuclear fuel enrichment facility in Natanz, and may have disrupted its operations for months if not years. 

Fascinating stuff and an easy, although disconcerting, weekend read.

Here are the past week’s noteworthy posts, as well as one or two that I didn’t include last week: Trade Secret and Covenant Not to Compete Posts:
  • Nixon Peabody is reporting on the latest social media case involving trade secrets, Christou v. Beatport. In that case, the District Court of Colorado found that an employer had adequately asserted a trade secret claim over log-in and contact information relating to a My Space account. Seyfarth Shaw’s Trading Secrets Blog also has a post on this case.
  • Xiaorong Wang, a former Bridgestone Tires engineer from Hudson, Ohio, has been indicted for allegedly stealing Bridgestone’s trade secrets and giving them to a Chinese polymer maker, Shanghai Frontier Elastomer Co. Wang’s alleged espionage involved burning proprietary information from Bridgestone computers onto six CDs during a five-hour stretch on April 14, 2010, the FBI said in an affidavit. 
  • Speaking of China, Dan Harris’ China Law Blog has an important analysis of the best way to protect trade secrets in China. Dan’s blog is very highly regarded (a regular member of the ABA’s Blawg 100) so those in the trade secret community should take what he says seriously. According to the post “China Corporate Espionage: The Real Problem and the Real Solution,” Dan acknowledges that “[t]heft of trade secrets is common and is encouraged by government policy.” However, “the actual thefts are done the old-school way: copying done by corporate insiders and trusted employees. Even worse, much of the theft is done based on gifts from the owner of the trade secrets.”  As a result, according to Dan, technical efforts to safeguard the trade secrets are doomed to fail and the best solution is a solid written agreement that will be enforced in China.
  • Should you make sure that your covenant not to compete includes a provision explicitly tolling the covenant for the period in which it is violated?  Epstein Becker’s Trade Secrets & Noncompete Blog says you should in New York and reports on a recent case, Delta Enterprise Corp. v. Cohen, that enforced such a tolling agreement.
  • Non-Solicitation Agreements in California remain viable, according to Littler’s Unfair Competition & Trade Secrets Counsel Blog. The post describes the Eastern District of California’s recent decision in Pyro Spectaculars North v. Souza that rejected arguments that would have gutted the enforceability of non-solicitation agreements under California Professions and Business Code 16600.
  • Estoppel and claims of moral turpitude were not enough to derail a non-compete in A.R.S. Services v. Baker, as Foley Hoag’s Massachusetts Noncompete Law Blog reports.  The employee claimed that the company had engaged in an unsavory business practice but the Superior Court of Middlesex disagreed, characterizing the employee’s claim as simply a business disagreement.
Cybersecurity:
  • In the post “Cybersecurity Researchers Team Up to Combat Online Crime,” The New York Times Bits Blog is reporting that a sort of “Justice League for Nerds” has been created to combat cybercrime.
  • However, they have their work cut out for them, as the FBI’s top cyber cop, Shawn Henry, has testified that the “U.S. [is] Outgunned in Hacker Wars.”  According to the Wall Street Journal, Henry says “[t]oo many companies, from major multinationals to small start-ups, fail to recognize the financial and legal risks they are taking—or the costs they may have already suffered unknowingly—by operating vulnerable networks.” 
  • “Here’s How Law Enforcement Cracks Your iPhone’s Security Code (Video)” demonstrates Forbes’ Andy Greenberg.  Required reading for the parent of every teenager with an iPhone.
News You Can Use:
  • Caveat Hoarders! “The Dangers Of A Messy Desk” by Jenna Goudreau of Forbes has instilled in me a resolution to start cleaning my office next week, or perhaps the week after.

The uproar over the recent op-ed piece by former Goldman Sachs derivatives trader Greg Smith in The New York Times has drawn attention to the special challenges of dealing with current or former employees who believe that they are whistleblowers.  I have written before about the unique risks presented by whistleblowers like WikiLeaks, anonymous bloggers who post confidential information over the Internet, and former employees like Bruce Gabbard, who accused Wal-Mart of spying on media and other critics.  A situation, however, that I have not covered yet is the one where an employee gathers trade secrets or confidential information in support of claims that he or she may have against his or her employer, individually or as a part of a class action. 

In these settings, an employer’s efforts to restrict dissemination may backfire in the form of bad publicity, a claim of retaliation, or reinforce the employee’s bona fides as a whistleblower in the eyes of the workforce, a court or the media following the dispute.  Not surprisingly, there are federal and state statutes that protect employees from retaliation for opposing unlawful practices or participating in litigation over those unlawful practices. 

A company should not underestimate the powerful tradition romanticizing whistleblowers in our history — think Ida Tarbell and Standard Oil, Upton Sinclair and the meat packing industry, Ralph Nader and the Chevrolet Corvair, and Daniel Ellsberg and the Pentagon Papers.  Whistleblower cases, therefore, are by far the most difficult cases to manage because the company is invariably going to qualify as the villain in this narrative and efforts to set the record straight may be perceived as retaliatory smears.  Alternatively, in some situations, communicating with the media may lead to the “Barbara Streisand Effect” — namely, drawing more attention to the situation and pouring kerosene on what was previously only a smoldering fire.

As we can see, this situation can turn into a real mess.  To the extent that a current (or more likely former) employee is about to publicly divulge important trade secrets or confidential information, an injunction may be the only means of preventing disclosure of the information.  In this litigation, an employee will likely invoke the First Amendment and the public interest (especially if the information in question implicates a matter of public debate or safety).  Federal courts are particularly sensitive (arguably overly so) to these arguments, so you need to select your battle and forum wisely and be prepared to fend off these issues with a strong showing of trade secrecy.
 
Another common whistleblower situation may arise in existing litigation, where an employee is already in a full-blown dispute with his or her employer (frequently a discrimination case) and decides to copy, misappropriate or steal documents to support his or her claims.  A frequent question is to what extent an employer can discipline or terminate the employee for violating its rules and what are the consequences within that litigation. 

As one might suspect, there is no bright-line rule.  Fortuntely, several federal courts have been reluctant to endorse this behavior and have looked at many factors to determine whether retaliation has in fact taken place.  These courts have focused on the circumstances of the copying (did the employee rifle through a supervisor’s desk or was it left on a copier?), what the employee did with the documents (simply share it with his/her lawyer or give it to other employees or to the media?), the safeguards that the employer undertook (are there policies and agreements that prohibited the copying and disclosure?), the relevance of the information to the employee’s claims, and the interests of the employer (how sensitive is the information? Does it include trade secrets? How disruptive is its disclosure to the employer’s business?).  

If there are genuine trade secrets and an employer has taken the right steps to protect them (clear policies, written agreements), the employer should be in a better position to defend any discipline or termination decision that follows the improper copying and use of that information.  Of course, any legal analysis involving this many factors hardly provides the certainty most employers would like in these situations. 

For those looking for more detail, please check out the excellent article written by Kevin O’Connor of Pecker & Abramson for the American Bar Association’s Litigation Section; it provides a good summary of the law in this area. Also, Seyfarth Shaw’s Trade Secrets Group is providing a webinar tomorrow on this topic for this interested in learning more (I hope to participate, schedule permitting).

What can an employer do?  Tread carefully.  If you are not in litigation yet but you feel your trade secrets are genuinely at risk, be prepared to preempt any disclosure and file first to frame the issue and prevent disclosure.  If you are already in litigation, monitor the employee appropriately, ensure that your policies and agreements are in place, and be prepared to face a bruising battle if the employee decides to start gathering and using confidential documents against you.