Analysts estimate that companies will spend more than $76 billion this year on cybersecurity; however, the greatest security risk may be posed by their own unsuspecting employees. A danger called “spear phishing” is causing more and more sleepless nights for information technology departments trying to prevent their colleagues from inadvertently compromising their companies’ confidential information.  

Spear phishing is an e-mail fraud attempt that targets specific individuals within an organization, seeking unauthorized access to confidential data or trade secrets. Spear phishing attempts are not typically initiated by hackers but by perpetrators specifically seeking financial gain, trade secrets or military information.  In order to succeed, spear phishing really requires three things: (1) The supposed source must appear to be a known and trusted individual, (2) it must contain information within the email that validates that the source is who he/she claims to be, and (3) the request being made seems to make sense to the recipient.

To pull this off, many fraudsters troll for publicly available information on the Internet to build digital dossiers on the employees they target. This process has become known as “social engineering” and in the age of LinkedIn, the details of a potential target’s career and responsibilities may be on the web for all to see, and for some to misuse in an email that may sound more credible.

Experts say it is not “technically difficult” to search for websites hosted by a specific provider and obtain e-mail addresses of the registered owners and administrators. With the information in hand, the employees receive a phishing e-mail requesting them to log in to confirm or update some information.  The fraudsters are then able to intercept the username and passwords used to manage the sites.

How serious is the problem? Well, Symantec recently reported that at least 50 companies, many of them in the defense and chemical industries, have been attacked through spear phishing efforts aimed at stealing research and development data. The “Nitro” attacks, as Symantec called them, started in late July 2011, and lasted through September. Two months ago, more than 400 Websites hosted with domain registrar GoDaddy were compromised, redirecting unsuspecting visitors to a malicious site, in an apparent spear phishing attack. GoDaddy admitted that “many” sites hosted on its servers had their Apache configuration files modified to include rules to redirect visitors to another domain. GoDaddy’s security team identified approximately 445 hosting accounts that had been compromised and ahd cleaned up the affected accounts within the next day.

Junior or inexperienced employees are not the only ones being duped. In 2008, nearly 1,800 senior executives took the bait of messages masquerading as an official subpoena requiring the executive to appear before a federal grand jury. The emails correctly addressed CEOs and other high-ranking executives by their full name and included their phone number and company name. Recipients who clicked on a link that offered a more detailed copy of the subpoena were taken to a website that informed them they had to install a browser add-on in order to read the document. When they clicked “yes,” a back door and key logging software was installed that stole log-in credentials used on websites for banks and other sensitive organizations. This practice of targeting high profile recipients is better known as “harpooning” or “whaling.”

How can companies protect themselves?  A recent Wall Sreet Journal article noted that corporate IT “needs a new defense doctrine,” quoting RSA’s head of identity protection, Uri Rivner. “You need to have security cover inside your organization, rather than your perimeter. You need to understand what your users are doing, and then spot any type of suspicious activity inside.” RSA was the subject of a well-publicized spear phishing attack earlier this year; after that attack, RSA purchased a firm called Netwitness that monitors network traffic for suspicious patterns.

Other companies have invested in technology that moves employee-generated network activity (such as that from a personal iPad or iPhone) into a separate network, so that the risk of employees inadvertently introducing viruses into the company’s systems are minimized. 

Another approach some companies are using to prevent the unsuspecting disclosure of log-in and passwords is through the use of key codes. This technology, also known as two-factor authentication, provides employees with an algorithmically generated number that can only be used for a limited number of log-ins.  Employees typically enter the key code after their username and password. This safeguard may be particularly useful in protecting information on employees’ iPhones, Droids or other similar devices.

Other companies have even gone so far as to stage spear phishing attacks against their own employees to make sure they are alert to these dangers. According to the Wall Street Journal, former hacker Kevin Mitnick has built a new career out of offering training on social engineering and hacking techniques, and running test attacks on companies to help executives and employees understand how vulnerable they are. “There is always a way to manipulate somebody by changing their perception of what is reality,” says Mitnick.

At the end of the day, none of these safeguards can replace employee vigilance against the fraudsters trying to dupe them. Companies should consistently remind employees about good practices, such as never emailing a company username and password, even if they think the request is from their supervisor or from their IT department. In short, it comes down to training and reinforcing a culture of security and vigilance.

As many of you already know, the Internet coupon king Groupon sued two of its former executives last week after they joined Google, alleging that they were violating their two-year non-competes and would inevitably disclose their trade secrets to Google. Womble Carlyle’s Trade Secrets Blog has a nice summary of the case that also notes that Groupon has recently sued a sales representative in Illinois state court to enforce that rep’s non-compete.

Groupon’s fear is that Google will use those trade secrets in its recently launched Google Offers. One of the ways Groupon touts itself over its smaller rivals is its 5,000 sales representative network and 143 million-strong email list. However, as Rolfe Winkler reports in The Wall Street Journal’s “Heard on the Street” column, Google presents a real threat to Groupon because it can dilute that advantage by enabling those smaller rivals to benefit from Google’s vaunted search technology. Winkler succinctly notes, “As the undisputed search leader, Google has the potential to reach many more users than simply those signed up for daily-deal emails.”

It was widely reported that Google had offered to buy Groupon for $6 billion last year, and Groupon’s COO recently left to rejoin Google in September, so clearly there is a nice narrative there for a trade secret dispute. Despite those facts, (at the time of this post) Groupon has not yet joined Google in the lawsuit.

Aside from protecting its IP, there is another very important reason that Groupon needs to stem any perceived bleeding: it is in the process of launching an IPO this week. The valuation of high tech companies is notoriously tricky, and you don’t have to be an investment banker at Goldman Sachs to figure out that the desire of the world’s largest Internet company to aggressively compete against Groupon by hiring its former executives and sales managers introduces even more uncertainty into that equation. As of this morning, Groupon will sell 30 million shares in its IPO, priced at $16 to $18 per share. Groupon estimates its net proceeds will be $478.8 million, down from the $750 million Groupon originally expected to pull in.

It will be interesting to see how aggressively Groupon pursues the two employees after the IPO launches. I will keep an eye on this one.

So to follow up on yesterday’s post, how should you handle a Qualcomm situation? Of course, there is no “one size fits all” answer, but it seemed to me that this situation was most analogous to an organizational crisis. As a result, I looked at a number of crisis management articles and books for my presentation, and I settled on two in particular: Former Medtronics CEO and Harvard Business School professor Bill George‘s “7 Lessons for Leading in Crisis” and British consultant Anthony Holmes‘ “7 Principles of Crisis Management.” I incorporated some of their advice into the suggestions below. Although some of the suggestions are a matter of common sense, they may become obscured in the fog of litigation and therefore bear repeating.

 

1. Identify The Scope of the Breakdown
A client must first acquire a full understanding of the scope of the problem. Is it confined to one person or have a number of employees failed to gather or produce the information at issue? Where was the breakdown? Is it the result of an honest mistake or does it appear to be an effort at concealment? These and other questions need to be addressed immediately.

From this point forward, one should expect that each and every step that is being taken will be second-guessed or evaluated by the court, and most certainly by opposing counsel. This may mean having to revisit the search process from the very beginning. As the opposing side and the court may assume the worst about the conduct of the individuals involved, to protect everyone’s interests, it is important to demonstrate that a thorough and prompt follow through has been conducted. Depending on the severity of the breach in question, it may make sense for the investigation or search to be handled by new individuals, or in a very serious case, by another law firm. If there are concerns that the employees in question were involved in the alleged misconduct, this will be essential. Even if they are not suspected of misbehavior, having a fresh set of eyes or someone who is not emotionally engaged or committed to prior events will allow for a thorough and dispassionate search to be undertaken.

2. Engage an “Ombudsman” – Don’t Become Atlas
The impulse to minimize the situation or postpone an evaluation of the mistake is a powerful one.

Probably for this reason, Holmes’ first principle is to “obtain multiple opinions in the decision making process.” Whatever the scope of the problem, reaching out to a trusted or objective advisor, whether it is the firm or company’s general counsel, or a mentor, outside counsel or trusted consultant on whom a decision-maker has relied upon in a past, is critical. This is particularly important in a crisis, as there is a tendency to turn inward. George has characterized this as allowing yourself to become “Atlas,” to carry the weight of the organization on your shoulders. Focus on remedying the problem, not the organizational or personal failures that may have led to the present crisis.

Again, using Qualcomm as an illustration, the trial team in that case would have been well served to vet the discovery of the emails with a lawyer unconnected with the case. Perhaps that objective eye might have helped them appreciate the enormity of the problem that they were facing.

This ability to communicate with objective advisors is complicated by the crucible of litigation. For that reason, it is important to make sure that the privilege is maintained during the course of this dialogue.

3. Maintain a United Front
Dwelling upon the breakdown in communication or mistakes that contributed to the present problem will not improve the situation. Whatever the degree of culpability, avoid the temptation for finger-pointing. It is not only counter-productive as it distracts from the task at hand but it reinforces that someone is seriously and truly at fault and simply allows the opposing party and the court the opportunity to allocate blame. It may also embolden an adversary to pursue a “divide and conquer” strategy that will only compound the problem.

4. Reduce Time Pressures
If time pressure is a factor, to the extent possible, seek an extension of any pending due dates that may compromise the decision-making process. This will permit a full investigation, the opportunity to consult with an ombudsman and the opportunity to remedy the situation.

5. The Decision to Come Clean
By this point, you will have conducted your investigation, you will have a full understanding of the severity of the problem, you will have conferred with all decision-makers, and you will be ready to address what happened. Whether the situation has been brought to your attention by the opposing party or whether it is a situation that your organization has discovered on its own, there will likely have to be a reckoning with a court as to what occurred.

Don’t allow inconsistent positions previously taken to influence the decision. In Qualcomm, it appears that the trial team and client may have disregarded the import of the emails because it challenged their fixed assumptions about the case and might have been fatal to their claims. Rather than looking at the case with a fresh eye and determining what the consequences might be by electing not to disclose, they put their careers at risk.

Gather and present evidence of efforts to remedy the situation. Although a subjective or good faith mistake is not a defense, it is nevertheless important to allay any argument that the client has flouted or disregarded the court’s authority. Consequently, it would be prudent to be prepared to present evidence to the court of other aspects of compliance and the steps that have been taken since learning of the problem to remedy any failure to provide the information.

Resistance is Futile. One need only review the Qualcomm decision to sense the irritation, if not outright anger, of the court at Qualcomm’s efforts to justify its conduct. Whatever the merits of a defense addressing the underlying conduct giving rise to the court’s review, the best approach may be to accept responsibility, provide transparency to the court about what took place and about the investigation, and assure the court that effective measures have been undertaken to avoid future problems.

Don’t Underestimate the Power of an Apology. The idea of an apology or mea culpa is anathema to many in litigation. However, few approaches defuse the emotional force of a contentious situation more than a genuine expression of condolence and acceptance of responsibility. Some consultants in the crisis management community have long advocated the value of an apology in litigation; as Jim Lukaszewski of the Crisis Guru Blog wrote:

Many in the legal profession remain against aggressive apologizing, claiming that it will increase lawsuits and payouts. But years of evidence is accumulating that prompt acknowledgement coupled with clear apologies and sensible offers of settlement can eliminate the litigation phase of legal interaction between victim and perpetrator, in favor of an attitude of settlement.

That same rationale may apply in these situations. Although the apology may have a ripple effect on the rest of the litigation or perhaps other litigation, that concern may be akin to worrying about closing the barn door after the horse has departed. If the violations in question are serious, an apology may go a long way to alleviating the court’s concerns about your client’s good faith and the unlikelihood of future violations.

6. Never Waste a Good Crisis
Every crisis should serve as a catalyst to improve and strengthen an organization. See it as an opportunity to implement better controls and strengthen internal communication.

In sum, as a crisis can emerge in any number of unexpected ways, navigating through these troubled waters requires a clear head, the opportunity to reflect, and a willingness to take an unconventional approach.

Although it happened three years ago, the events giving rise to Qualcomm Inc. v. Broadcom Inc., 2008 WL 66932 (S.D. Calif., Jan. 7, 2008), still keep many lawyers, in-house and outside, up at night. My recent presentation to the AIPLA addressed how to best manage crises that may arise in trade secret litigation (i.e., contempt situations, spoliation of evidence). I thought a post applying some of those suggestions to a Qualcomm-like situation might be worthwhile.

Given the details of the case and the thorough treatment it requires, I am going to break this discussion down into two parts:  Part I will cover the background of the case, while Part II will cover the suggested steps.

For the uninitiated, Qualcomm brought a patent infringement case against Broadcom for two of its patents. One of the central issues was whether Qualcomm had participated in a Joint Video Team (“JVT”) in 2002 and early 2003 for the H.264 standard for video coding. In the words of the court, “this argument was vital to Qualcomm’s success in this litigation because if Qualcomm had participated in the creation of the H.264 standard, it would have been required to identify its patents that reasonably may be essential to the practice of the H.264 standard, including the [two patents at issue], and to license them royalty-free or under non-discriminatory, reasonable terms.” Qualcomm, 2008 WL 66932 at *3.
 
During discovery, Qualcomm never produced documents showing it participated in the JVT in 2002 and early 2003 and its designated Rule 30(b)(6) witness on the issue apparently lied. According to the court, that witness testified falsely that Qualcomm only began participating in the JVT in late 2003, after the H.264 standard had been published.
 
As Qualcomm aggressively argued at trial that it did not participate in the JVT, an associate preparing a key Qualcomm witness discovered 21 relevant emails, none of which had been produced. Those emails showed Qualcomm had participated in the JVT in 2002 and early 2003. When the associate shared the emails with Qualcomm’s trial team, they concluded that they were not responsive to Broadcom’s discovery requests. The Qualcomm trial team did not conduct any further investigation to determine whether there were other emails that had not been produced.
 
The failure to identify or produce the emails came crashing down on Qualcomm when the witness admitted their existence during cross-examination. Qualcomm agreed to search the current and archived emails of five trial witnesses and discovered thousands of other emails that “revealed facts that appear to be inconsistent with certain arguments that [counsel] made on Qualcomm’s behalf at trial and in the equitable hearing following trial.” Id. at *6. It ultimately discovered approximately 46,000 documents (totaling 300,000 pages) that were not produced. Id.
 
After trial, the district court found that Qualcomm wrongfully concealed the patents while participating in the JVT and then actively hid this concealment from Broadcom, the court and the jury. The court further found that Qualcomm’s counsel participated in an organized program of litigation misconduct and concealment through discovery, trial, and post-trial. The court imposed a number of sanctions, including an award of $9.2 million in attorneys’ fees against Qualcomm and its attorneys, as well as post-judgment interest of $8.5 million. 
 

At this morning’s plenary session, Wil Rao of McAndrews Held & Malloy in Chicago presented “Illuminating the Dark Side of IP: A Practitioner’s Look at Recent Thefts, Crimes and Other Developments in Trade Secrets Law in 2010-2011.” It was an excellent summary of the significant developments in trade secrets law over the past year. Wil covered all the bases — the high profile cases (including the Mattel/MGA and DuPont/Kolon verdicts), the legislative developments (the recent proposed amendment of the Economic Espionage Act and proposals in New Jersey and Massuchusetts to adopt the UTSA), the many recent criminal convictions, and, of course, the many important civil cases (including the SyncSort, Tewari, Faiveley and TianRui Group cases, among others). I will write a post or two in the coming weeks discussing some of the other developments Wil raised.
 
Also, I joined a fine panel on Thursday afternoon entitled “Ten Things In-House Counsel Would Like to Tell Outside Counsel about Trade Secrets and Vice Versa.” Dan Westman of Morrison & Foerster, Chair of the Trade Secret Law Committee, moderated the panel, which included Phil Petti, Chief Intellectual Property Counsel for USG Corporation and member of AIPLA’s Board of Directors, Dewayne Hughes, and experienced IP lawyer and currently IP counsel at Drager, and Warrington Parker of Orrick Herrington, an experienced trade secret litigator. It began as a standing-room-only presentation and the vast majority of the audience stayed for the entire 2 hour presentation. Thanks to those who attended and for your thoughtful questions, and a special thanks to Dan for organizing the presentation and panel (and, not the least of which, inviting me).
 
For us outside counsel, the key takeaway was the importance of providing objective advice to your in-house clients. The panel made clear that in-house counsel do not want their outside counsel serving as cheerleaders; instead, they want direct and straight evaluations of the litigation, with the risks and rewards stated plainly so they, as business advisors, can in turn advise their management and board. The panel also agreed that efforts by outside counsel to work with other officers or managers within the client’s organization (IT, sales, management) are important. They reinforce the ‘team” approach in litigation and provide an opportunity for other employees to become familiar with the status and responsibilities of that litigation.
 
Budgeting, as you would expect, remains an important tool. The development of project management skills to accurately predict and control costs was suggested as a course that should be offered in law school, or by law firms. One of the panelists noted that the most important communication an attorney has with his/her client is the invoice. As a result, we, as outside lawyers, need to make sure that it accurately explains and conveys the value that the client expects. In-house counsel also recognize that there may be unexpected developments in the litigation that require a budget’s adjustment; that being said, it is important for outside counsel to promptly advise in-house counsel of that possibiity to minimize any surprises. Finally, Dan made the inspired point that it might be prudent to budget senior management’s time so they fully appreciate the commitment that they will need to make in discovery and trial preparation.

Finally, there was an awful lot of discussion about the impact of the America Invents Act on the future of patents and trade secrets protection throughout the Annual Meeting. For brevity’s sake, this will be the subject of a future post.
 
All in all, a very productive few days. 

For those of you attending the American Intellectual Property Law Association’s Annual Meeting from October 20-22 in Washington, D.C., I hope you will find time to attend a panel discussion in which I am participating on Thursday, October 20 at 3:30 p.m. The AIPLA’s Trade Secret Law Committee and Corporate Practices Committee are hosting the two-hour CLE panel discussion entitled, “Ten Things You Always Wanted to Tell Your Outside Counsel about Trade Secret Litigation and Vice Versa.” 

Daniel P. Westman of Morrison & Foerster, the Chairman of the Trade Secrets Committee, will moderate the discussion.  Joining Dan and me are Victoria Cundiff of Paul Hastings, Philip Petti of USG Corporation, Dewayne Hughes of Drager, and Warrington Parker of Orrick, Herrington & Sutcliffe. The discussion will address a wide range of issues aimed at improving communications between inside and outside counsel, with topics addressing the preservation of electronic information, strategies for avoiding Qualcomm v. Broadcom problems, budget and cost controls, timely and realistic case evaluations, post-litigation advice about litigation avoidance, and managing potential contempt issues arising in connection with injunctions. 

After the panel discussion, the Trade Secret Committee will consider whether to (1) recommend Senator Kohl and Coons’ proposed amendment adding a civil cause of action to the Economic Espionage Act and (2) take a position on the Federal Circuit’s recent decision in TainRui Group v. International Trade Commission, Fed. Cir., Case No. 2010-1395 (Oct. 11, 2011), which recently found that a Section 337 violation based in part on acts of trade secret misappropriation occurring overseas. Both of these developments have been the subject of recent posts.

An important decision by the Federal Circuit supporting a robust application of irreparable injury in the patent context should prove useful to trade secret plaintiffs. While that decision, Robert Bosch LLC. v. Pylon Mf’g Corp., 2011-1096 (Fed. Cir., Oct. 13, 2011), acknowledges that the U.S. Supreme Court’s decision in eBay Inc. v. MercExchange, LLC, 547 U.S. 388 (2006), “jettisoned the presumption of irreparable harm as it applies to determining the appropriateness of injunctive relief,” it cautions district courts not “to ignore the fundamental nature of patents as property rights granting the owner the right to exclude.” (Thanks to fellow partner Deborah Coleman for bringing this to my attention and to my colleague Robert Latta for his help with this post; a copy of the opinion is attached below).

Writing for the majority, Judge Kathleen O’Malley noted that while categorical rules for the application of injunctive relief have been abolished and district courts enjoy inherent discretion to fashion equitable relief, that does not mean that district courts “act on a clean slate.” Bosch, at *11. Rather, district courts should apply traditional legal standards in fashioning equitable relief. Id. 

To that end, the Federal Circuit reversed the District Court of Delaware’s denial of a permanent injunction, reasoning that the plaintiff, Robert Bosh LLC, had more than adequately proven irreparable injury. For example, the Federal Circuit held that the presence of multiple competitors in a single market place, without more, does not negate a finding of irreparable harm. Id. at *14. According to the court, a patentee is not obliged to sue all infringers at once and to hold otherwise would abolish injunctive relief in all market places operating with more than two competitors. Id. Additionally, the Federal Circuit rejected the district court’s reasoning that a patentee could be denied injunctive relief simply because the patent represents technology which makes up a non-core part of the patentee’s business. Id. at *15. “Injuries that affect a “non-core” aspect of a patentee’s business are equally capable of being irreparable as ones that affect more significant operations.” Id. To hold otherwise, reasoned the court, would encourage large industrial corporations to subdivide their operations into child companies, each focusing on a different product line. Id. 

Finally, the Federal Circuit emphasized that a district court should assess the financial condition of the infringer before the alternative of money damages is found to be adequate. Id. at 23. It held that a district court’s failure to ascertain whether monetary damages are truly a meaningful or viable alternative to an injunction may qualify as reversible error. Id. Additionally, in assessing the third eBay factor, the balance of hardships, the court recognized that an injunction cannot be avoided simply because the infringer is a smaller company or because the primary product sold by the infringer is an infringing one. Id. 

The takeaway? Any decision affirming the element of irreparable injury in an IP context is generally a good thing for the trade secrets bar, but the Federal Circuit’s vigorous defense of the application of irreparable injury in Bosch is an especially welcome development. eBay should have had minimal impact on trade secret injunction requests since irreparable injury is rarely, if ever, presumed in the trade secret context. However, because eBay was perceived as a “bell weather” decision in the IP context, it may have caused courts to hesitate in issuing otherwise appropriate injunctions. In other words, eBay may have had a “spill over” effect on trade secret claims. Likewise, the Federal Circuit’s recognition of the necessity of a defendant’s solvency when considering the adequacy of a remedy at law (i.e., money damages) should benefit all potential plaintiffs seeking an injunction.

 Bosch v. Pylon.pdf (1.10 mb)

Fairly or unfairly, China is perceived as the Wild Wild West (or East) when it comes to the protection of intellectual property and trade secrets. Given the perceived lack of protection afforded IP, U.S. companies have become more aggressive in using state and federal remedies to protect their trade secrets. A significant ruling by the U.S. Court of Appeals for the Federal Circuit this week expands the ability of U.S. companies to sue Chinese parties for the misappropriation of trade secrets even though a substantial amount of the activity may have taken place in China. In TianRui Group Co. v. International Trade Commission, Fed. Cir., Case No. 2010-1395 (Oct. 11, 2011), the Federal Circuit has held that the International Trade Commission has statutory authority over conduct occurring in China in the course of a trade secret misappropriation investigation.  

The dissent takes the majority to task for allowing extraterritorial jurisdiction over the following undisputed facts: a Chinese licensee (Datong ABC Castings Company) used a manufacturing process in China which another Chinese company (TianRui Group) misappropriated when it hired Datong’s Chinese employees to make railway wheels in China. 

Amsted Industries, an American manufacturer of cast steel railway wheels, had licensed that manufacturing process to Datong for a foundry in China. TianRui approached Amsted in 2005 to negotiate a similar license but was unable to reach an agreement with Amsted; it then hired nine of Datong’s employees trained in the process at issue to manufacture the wheels. All of the employees had been notified that the Amsted process was confidential and eight of the nine had signed confidentiality agreements. TianRui ultimately sold the wheels in the U.S. through a joint venture.
 
Amsted filed a complaint with the ITC, arguing that the importation of the wheels violated § 337 of the Tariff Act of 1930, 19 U.S.C. §1937, because the manufacturing process at issue was developed in the U.S. and protected under domestic trade secret law. The administrative judge agreed and rejected arguments by TianRui that Congress did not intend for § 337 to be applied extraterritorially. The ITC elected not to review that decision and issued a limited exclusion order.
 
After a review of the relevant legislative history, the Federal Circuit found that the ITC properly applied § 337 based on TianRui’s conduct in the U.S. — namely, the importation of the wheels into the U.S.  Conceding that most of the offending conduct took place in China, the Federal Circuit emphasized the ITC was empowered by Congress to set the conditions for which products may be imported into the U.S.
 
The TianRui Group holding is sure to stir controversy; however, what cannot be disputed is the fact that U.S. companies now have a meaningful remedy to address concerns about protecting their IP in China.

Last week, Senators Herb Kohl (D-WI ) and Christopher Coons (D-DE) introduced a bill that would amend the Economic Espionage Act of 1996 (EEA), 18 U.S.C. §§ 1831-1839, to include a civil cause of action for trade secret theft provided a plaintiff provides a sworn declaration that  there is either a “substantial need for nationwide service of process” or there has been “misappropriation of trade secrets from the United States to another country.”  This amendment, styled as the Protecting American Trade Secrets and Innovation Act, appears to be the first step to providing a long-desired federal remedy to private trade secret claimants.

The EEA criminalizes two types of activity: (1) § 1831(a) criminalizes the misappropriation of trade secrets with the knowledge or intent that the theft will benefit a foreign power; and (2) § 1832 criminalizes the misappropriation of trade secrets related to or included in a product that is produced for or placed in interstate or international commerce, with the knowledge or intent that the misappropriation will injure the owner of the trade secret. While the EEA authorizes civil proceedings by the Department of Justice, it does not supply a private cause of action.

Some notable voices in the trade secret community, in particular, Mark Halligan and David Almeling, have argued for a federal statute for trade secrets. David has argued that the Uniform Trade Secret Act (UTSA), while well-intentioned, has failed its purpose of providing the requisite certainty and uniformity. Mark, on the other hand, has advocated the path proposed by Senators Kohl and Coons, that the EEA simply be amended to supplement existing state remedies and provide federal access and nationwide service of process.
 
Substantively, the EEA does not differ radically from the UTSA, which has been adopted in most states. Like the UTSA, the EEA broadly defines what information can qualify as a trade secret, electing to go the route of greater specificity in detailing the categories of information which may qualify as a trade secret. The EEA permits a lower threshold on the “economic value” component, allowing a subjective as opposed to objective measure of valuation. On the flip side, the EEA imposes higher burdens on proving the requisite intent for misappropriation.
 
The proposed amendment would provide an ex parte seizure remedy for property being misappropriated under the EEA or to preserve evidence in the civil action. As a practical matter, getting any ex parte relief in either state or federal court is difficult, if not impossible, as courts are reluctant to entertain ex parte proceedings. Under the amendment, an ex parte order could be secured if a party can demonstrate by clear and convincing evidence that the ex parte order is necessary to prevent irreparable injury.  This could be a significant procedural advantage.  (A copy of the proposed amendment is attached in a PDF format below for those that would like to review it).
 
One important question, however, appears to be whether the proposed civil statute would be available to most trade secret claimants. Russell Beck’s Fair Competition Law Blog has expressed the concern that the bill’s sworn declaration requirement may present a severe procedural obstacle and unduly limit the amendment’s protections to only a few trade secret claimants. Russell points out that the vast majority of state courts provide for adequate service of process throughout the United States, which would make it difficult for a party to supply the requisite sworn declaration of substantial need. The alternative basis, misappropriation of trade secrets to another country, would require international activity.
 
The American Intellectual Property Law Association’s (AIPLA) Trade Secret Committee will be considering a resolution on whether to recommend support for the amendment at its meeting on October 20, at 3:30 p.m. in Washington, D.C.  I am speaking on a panel at the AIPLA’s Annual Meeting, so I am planning on attending that meeting and will report back on what the Committee decides.
 
Whatever its shortcomings, the proposed amendment is an improvement over the existing situation as it provides the first step in establishing a long-sought federal remedy for trade secret plaintiffs.

 EEA Amendment.pdf (25.96 kb)

In the employment context, courts frequently construe the language of a non-compete against the employer who drafted it, reasoning that the employer’s stronger bargaining position and the public policy against restraints of trade favor that approach. As a result, drafting errors, ambiguities or other issues can come back to not only haunt the employer who drafted an agreement but a business that ultimately acquires or merges with that employer. Case in point is the recent ruling in OfficeMax v. Levesque, Case No. 10-2423, U.S. Court of Appeals for the First Circuit (Sept. 29, 2011); in that case, the First Circuit applied a literalistic approach to the non-competes at issue and found that they were no longer enforceable because they had expired 15 years before. (A PDF copy of the opinion is below and thanks to Zachary C. Jackson who wrote an article about this case in JDSupra).
 
In 1996, David Levesque and Dana Rattray were asked by their employer LS&H, an office services company, to sign non-competes in anticipation of its acquisition by another office services company, BCOP. The non-competes expressly contemplated that the acquisition was the reason for the non-competes; in addition, Levesque and Rattray specifically agreed to enter into substantially similar non-competes with BCOP after the acquisition. However, the specific provisions detailing the scope of the non-competes stated they would run “[f]or a period of 12 months after termination of my employment with LS&H.” After BCOP completed the acquisition, Levesque and Rattray refused to sign new non-competes but were permitted to continue working at BCOP. In 2004, BCOP merged with OfficeMax.

Levesque was terminated in 2009 and Rattray resigned in 2010. Both tried to find work in the printing services business, but ultimately found that they could only find work in the office supply business. (This factor, although not discussed, likely had some impact on the First Circuit’s determination). When OfficeMax brought separate actions to enforce the non-competes, the district court enforced them. The First Circuit, however, reversed. The First Circuit empahsized the fact that despite the parties’ awareness of the imminence of the acquisition, the non-compete’s language was nevertheless limited to LS&H and did not mention BCOP or any successor or assign. As a result, the plain language of that provision had to control.
 
There are three lessons to be drawn from OfficeMax: (1) from the drafting standpoint, broadly defining the “employer” or “company” to include affiliates and successors and assigns would have included BCOP and OfficeMax; (2) insisting upon execution of the new non-competes as a condition of employment after the acquisition would have eliminated this possibility; and (3) from the acquirer’s perspective, thorough diligence and insistence on new agreements with broader language prior to the acquisition would have remedied this problem.

OfficeMax v. Levesque.pdf (81.51 kb)