A game of secrets
As the stakes get higher in the world of trade secrets, legal teams need to act swiftly and adopt a strategic mindset to ensure they are on the winning side, finds Muireann Bolger.
TRADE SECRETS PROTECTION HAS COME TO RESEMBLE a strategic game, with each move requiring a legal team with the insights and boldness required to win the best outcome for their clients.
Coca Cola’s recipe, the Big Mac’s sauce, Google’s algorithm: all have captured the public imagination as definitive, even iconic trade secrets, with safeguards posing insurmountable obstacles to anyone who might dare some foolhardy theft.
But the reality facing most trade secret owners is quite different. Increasingly, these intangible assets, especially in the fast moving tech sectors, are becoming easier to access, infiltrate—and to steal.
A June 2021 report published by The Economist Intelligence Unit, “Open secrets? Guarding value in the intangible economy”, showed that the cost of trade secrets theft had reached up to $1.7 trillion annually, and that corporate executives expect the risk of trade secret theft to rise further over the next five years.
Yet despite this risk, nearly half (45%) of senior corporate executives surveyed and located in China, France, Germany, Singapore, the UK and the US, had failed to implement strategic measures to protect their trade secrets.
PLAYERS AND PAWNS
Sophie Eyre, co-head of Bird & Bird’s international dispute resolution group, is emphatic about the threats involved and warns that players are applying the “full gamut” of tactics when it comes to trade secrets theft.
“We are seeing a ‘mixed bag’ of risks ranging from covert external breaches and disgruntled employees determined to exact revenge to inventors or co-founders who genuinely believe that the trade secret is theirs to take,” she explains.
And many players in the trade secrets world are becoming more ingenious in their efforts—especially if they have an axe to grind.
“There are a lot of games being played, and a lot of lies being told as well. When emotions run high, the trade secret dispute can become akin to a hostile divorce in which data, like children, are used as pawns. In these scenarios, we even sometimes see the alleged thief threatening to release the information to the competition, and ruin an initial public offering (IPO),” observes Eyre.
Corporate espionage is also a constant, if rarer threat, than that posed by disgruntled, or simply naive, former employees.
For example, tech company Appian found that Pegasystems had collaborated with a contractor in a scheme, code-named ‘Project Crush’, whereby a spy infiltrated the company and stole confidential information.
In May, a Virginia court delivered a record $2 billion jury verdict in favour of Appian’s lawsuit centring on corporate espionage and trade secret misappropriation.
By presenting a wealth of evidence, Appian convinced a federal jury that the plot had cost it 201 customers over eight years, which led to software company Pegasystems being “unjustly enriched” by $479 million.
According to Carolyn Hoecker Luedtke, partner with Munger, Tolles & Olson, this landmark case underscores that the presence of sensational details in a case—underpinned by solid evidence—could lead to a draconian penalty.
“One lesson from the Appian verdict is that when a plaintiff is able to uncover these types of ‘sensational’ facts, it can lead a jury to want to punish the defendant, and the flexibility of trade secret remedies allows for some pretty staggering numbers to serve as punishment,” she explains.
Senior corporate executives who failed to implement strategic measures to protect their trade secrets
Source: The Economist Intelligence Unit, June 2021 [surveying senior corporate executives in China, France, Germany, Singapore, UK and US]
BLINDSIDE RISKS
But not all companies are destined for a similar outcome following the discovery of a theft of a secret.
And with trade secrets, it is always costlier and messier to find solutions after a theft or a leak.
Given the threats posed and underhand tactics used, and the mammoth costs involved, it is vital that businesses and their IP practitioners become just as strategic, tactical and shrewd as their opponents.
As Andrew Pearson, principal at Fish & Richardson, explains, the best strategy is to implement policies and programmes to protect trade secrets from their inception onwards.
“As a plaintiff, the time to act is long before you want to file a lawsuit, or before you realise you have a misappropriation problem. Because if you don’t have the right security measures in place to protect your trade secrets, future defendants may successfully argue that you don’t have any trade secrets in the first place,” he warns.
Exit interviews, staff training, non-disclosure agreements, and formal company policies regarding confidential information are all essential arsenal in the armoury of any trade secret owner.
Conversely, similar measures, including onboarding interviews, are key for any company that unwittingly hires a person, thinking, as Eyre puts it: “that they’ve hired a wizard only to find they’ve brought a bag of tricks with them”.
Notes Pearson: “It’s shocking how many companies don’t take this issue seriously, before they realise they have a trade secret misappropriation issue. And by the time they implement those policies, or start looking at this, a trade secret has been misappropriated or litigation has started, and it’s too late.”
STATE OF PLAY
The good news is that the once-labyrinthine avenues for successfully pursuing a trade secrets theft have become more straightforward.
In 2016, the US Congress unveiled the Defend Trade Secrets Act (DTSA), removing the obstacles to filing a trade secrets complaint in the US federal courts.
Before the enactment of the DTSA, companies could only pursue trade secret litigation in federal courts under diversity jurisdiction (if the litigants were from different states) or pendent jurisdiction (where there was an independent federal cause of action that related to the trade secret misappropriation).
These exceptions, as John Williamson, partner at Finnegan, explains, were “broad in practice”, meaning that many seeking redress for trade secret misappropriation had no choice but to sue in state court.
This often posed problems as laws protecting against trade secret misappropriation tend to differ from state to state both in the text of the laws themselves and in their application.
For example, the definition of ‘trade secret’ differs from state to state, and different statutes of limitations may apply, with different remedies.
As Willamson explains, the DTSA was a gamechanger for many companies. “After 2016, civil cases brought in federal court could be brought under the new substantive federal law or both federal and state law as two separate causes of action if the trade secret owner desired—a common practice.
“THE TRADE SECRET DISPUTE CAN BECOME AKIN TO A HOSTILE DIVORCE IN WHICH DATA, LIKE CHILDREN, ARE USED AS PAWNS.”
SOPHIE EYRE, BIRD & BIRD
“THE TRADE SECRET DISPUTE CAN BECOME AKIN TO A HOSTILE DIVORCE IN WHICH DATA, LIKE CHILDREN, ARE USED AS PAWNS.”
SOPHIE EYRE, BIRD & BIRD
“Secondly, the plaintiff no longer had to establish diversity or pendent jurisdiction of the federal court because the statute gave a direct federal cause of action for trade secret misappropriation that involved interstate commerce.”
Elsewhere, in Europe and the UK, the EU Directive on Trade Secrets Against their Unlawful Acquisition, Use and Disclosure was introduced in 2018.
As Bethan Halliwell, senior associate at Withers & Rogers, notes, this legislation means IP owners around the world “are becoming increasingly aware of using trade secrets as an option to protect their intangible assets”.
However, the cost of litigation and the dearth of US-style punitive damages, means that parties in the UK are incentivised to make a concerted effort to settle the issue between themselves if at all possible.
But more stringent measures are achievable if, as Halliwell wryly puts it, “the injured party has a good story”.
Last year, the Court of Appeal of England and Wales handed its first injunction secured under the new directive to US company Celgard against Chinese company Shenzhen Senior Technology Material.
The court found that there was a reasonable likelihood that Shenzhen had stolen confidential information and trade secrets, and so it prevented the company from importing or supplying its battery accessory products into the UK.
“The Celgard case shows that poor conduct by one of the parties can sway things in favour of the other side, and so this might encourage parties to seek injunctions in cases where there is evidence that the other side has behaved poorly,” explains Halliwell.
US RIPPLES
The picture is different in the US, however. As Williamson explains, courts are seeing a marked rise in the number of trade secrets cases over the past six years as the impact of the DTSA reverberates.
“There has always been an active trade secrets docket in both state and federal courts, even prior to 2016,” he explains.
“But we saw a clear increase in the number of cases filed in federal court shortly after the DTSA passed in 2016. This might be attributable, in part, to a renewed awareness of the cause of action given the publicity that the DTSA received.”
And he adds that for some, the now smoother federal route can be a much quicker way to secure an injunction.
“Federal courts are more familiar with a uniform approach to preliminary injunctions and motions for temporary restraining orders. And some federal courts are very fast. So a party can potentially get relief under the Federal Rules of Civil Procedure quickly in a federal court, whereas in some state courts, this may not be the case. So the 2016 law provided both a new, uniform, federal substantive law of trade secrets and a different, arguably easier, procedural path to assert claims in federal court.”
CHECKMATE
But this doesn’t mean that all potential pitfalls have been removed: pursuing a trade secrets theft remains difficult, costly and can often lead to unexpected twists and turns.
Williamson explains that the onus remains on the trade secret owner to overcome three major hurdles.
“They have to prove that the information that’s been taken is truly secret, that it’s not known. And if it qualifies, that reasonable measures have been taken to protect the information, and it has independent economic value. And because it’s a secret, you’re going to have to work hard to establish those three elements,” he explains.
These difficulties can be compounded in certain jurisdictions. For example, California state courts insist on a standard called ‘reasonable particularity’ in trade secrets cases, which has been largely adopted by federal courts in that state as well.
“BECAUSE THERE ARE A LOT MORE NOOKS AND CRANNIES TO LOOK INTO OR ROCKS TO FLIP OVER IN TRADE SECRETS CASES, THERE CAN BE A BIGGER RISK WHEN IT COMES TO DISCOVERY ISSUES.”
JORDAN JAFFE, WILSON SONSINI
“BECAUSE THERE ARE A LOT MORE NOOKS AND CRANNIES TO LOOK INTO OR ROCKS TO FLIP OVER IN TRADE SECRETS CASES, THERE CAN BE A BIGGER RISK WHEN IT COMES TO DISCOVERY ISSUES.”
JORDAN JAFFE, WILSON SONSINI
This requires the plaintiff to provide a detailed definition to identify the secret in an initial disclosure statement before the defendant is required to respond to the plaintiff’s trade secret-related discovery requests.
Jordan Jaffe, partner at Wilson Sonsini, who represented Google’s Waymo in its landmark trade secrets dispute with Uber over driverless tech, explains that such tools can be powerful for defendants.
“It can drastically slow down a trade secret case, which is a big problem because in trade secret cases, information can go stale and it’s only protectable as long as it’s not generally known,” he explains.
“If you’re in a fast-moving industry, where people are publishing papers and patents, the value of a trade secret may disappear in a year or two. And during this time, the plaintiff can be stuck fighting the court on trade secret identification, while in the interim, the secret ceases to be one.”
What’s more, other courts are following California’s suit. While the requirement is currently only statutory in California’s state courts, federal courts across the US have adopted similar standards in the guise of case management and Rule 16 scheduling orders.
NOOKS AND CRANNIES
Additionally, trade secret cases are often more complex and expensive to pursue than other IP-related lawsuits because it can be more challenging to piece together the relevant facts for proving a claim in discovery—than the formal procedures used by parties to a lawsuit to obtain information before a trial.
Many factors, explains Jaffe, can lead to a ballooning of the relevant scope of discovery in trade secrets cases, meaning that the case can certainly evolve in unexpected and complex ways.
For example in a trade secret case, a company may need to show that an individual exfiltrated trade secrets via email, or an ex-employee discussed their knowledge of company trade secrets with a recruiter before leaving to take a job elsewhere.
“Trade secret cases often involve discovery in a multitude of systems. Maybe an executive cell phone would be relevant, along with the text messages between person A and person B,” notes Jaffe.
He contrasts this scenario with the relatively straightforward nature of patent infringement cases where people “are rarely collecting text and Whatsapp messages”.
“A patent is what it is, it is issued from the US Patent and Trademark Office, and its claims contain the words that they contain. That’s not going to change in the life of a case typically. But in a trade secrets case, where the definition of the IP right can change, that can lead to a more complex discovery playing field,” he reflects.
Then there’s also the risk of being accused of filing a ‘bad faith’ or frivolous complaint as a result of a misstep or oversight during discovery.
Inaccurately framing the facts and circumstances of alleged trade secret misappropriation can ring the death knell for any trade secrets case.
“Because there are a lot more nooks and crannies to look into or rocks to flip over in trade secrets cases, there can be a bigger risk when it comes to discovery issues. Anytime there’s an error or a mistake, the other side can always latch on to it and ask for sanctions. That is always a risk, so you want to avoid mistakes as much as you can,” notes Jaffe.
Consequently, it is critical that any legal team carries out its own forensic operation rather than relying on a client’s initial understanding of the facts or only a one-sided view of the available evidence.
“Discovery in trade secret cases can be much messier and more complicated than in patent infringement cases,” agrees Pearson. “If you’re tainted with a lack of credibility, that is a problem that will haunt you for the rest of your litigation.”
“AN UNSUCCESSFUL LITIGATION COULD POTENTIALLY BE WORSE THAN NO LITIGATION IN TERMS OF MESSAGING ABOUT PROTECTING TRADE SECRETS.”
CAROLYN HOECKER LUEDTKE, MUNGER, TOLLES & OLSON
“AN UNSUCCESSFUL LITIGATION COULD POTENTIALLY BE WORSE THAN NO LITIGATION IN TERMS OF MESSAGING ABOUT PROTECTING TRADE SECRETS.”
CAROLYN HOECKER LUEDTKE, MUNGER, TOLLES & OLSON
DEFT MANOEUVRES
For Seth Gerber, partner at Morgan Lewis, many companies are in danger of a knee-jerk reaction when they perceive that their precious secret has been swiped.
“It’s easy to get a phone call about the loss of confidential documents and rush into court. But before this happens, a company needs to really understand what it is that they’re claiming, and not overstate what their trade secrets are,” he cautions.
Given the minefield nature of trade secret cases, Gerber explains that plaintiffs are becoming more cautious about asserting that something is in fact ‘a secret’.
There can be, he explains, a new form of “gamesmanship” in defining what’s at issue.
“I’m seeing an increase in cases where plaintiffs are characterising the information as confidential to try and skirt around these hurdles when pursuing a trade secret claim,” he reflects.
Munger Tolles’ Luedtke agrees companies and their counsel should think carefully before litigating, and consider other avenues.
“A company may have decided upon sending a strategic message to the industry that they take their trade secrets seriously. And it may be important for a company to do that.
“But obviously, following a litigation path and losing could undermine that strategy. So it should always be top of mind that an unsuccessful litigation could potentially be worse than no litigation in terms of messaging about protecting trade secrets.”
In many scenarios, a simple low cost approach can achieve a satisfactory resolution.
“The best solution could be as simple as writing a cease and desist letter saying, ‘I think you’re using my trade secret, so stop’. And, that can work.
“Or if you’re facing a scenario where employees are moving on, it can be also simple as a letter that reads along the lines of: ‘You’ve hired John Doe, and he has a lot of trade secrets in his head, and I’m worried about that, please contact me, I want to talk about how you’re going to work out protections to make sure that he doesn’t use them.’”
WILY MOVES
But other more time sensitive and pressurised situations demand a creative, even wily, approach. “I was in a case a couple of years ago, where we knew there was a leak. And we needed to shut it down fast, because the client was about to do an IPO,” reflects Eyre. “The risks of this data being taken was that nobody would invest in the business, the IPO would fail, and the company might sink as a consequence.”
Eyre’s team proceeded to whittle the suspects down to one department within the client’s business, which had 50 employees.
But going to court to get an injunction, she explained, would have been time consuming, costly and potentially ineffective as the courts tend not to grant injunctions against a number of unknown people. So she decided on a different approach.
“SUCH QUICKFIRE MEASURES BECOME EVEN MORE NECESSARY WHEN THERE IS A DANGER OF CROSS BORDER VIOLATIONS, AND THE THIEF HAS SUCCESSFULLY SPIRITED THE PRECIOUS INFORMATION TO ANOTHER COUNTRY.”
“I went into the department, saying that I was conducting an investigation and inviting people to come and speak with me. And I just sat there and nobody came to talk to me at all. But that wasn’t the point of it. Instead, I had a forensic team monitoring the servers to see who was deleting stuff while I was there.”
Within an hour, Eyre had narrowed it down to two potential suspects, and the culprit was detected within another forty minutes. It was, as Eyre puts it, “a quick way” around the problem.
“But it worked: today you have to be creative, because so often, time is of the essence. It would have taken two days to get that into court, and then you would have to try and get an injunction against unknown persons. After that, you’d still have to penetrate the systems in a much more costly way.”
Such quickfire measures become even more necessary when there is a danger of cross border violations, and the thief has successfully spirited the precious information to another country—leading to even more obstacles.
“This is fine if the secret has gone to, for example, Singapore, because its legal system flows from the UK’s common law system. But if it’s someplace like Vietnam, it can take up to eight months to get into court,” she explains.
As for China, she ruefully describes it as an “absolute closed shop”.
“I’ve had cases where clients’ IP was misused in China; but it can be difficult to get a Chinese court to engage and restrain the party at fault, so you just have to try and get damages. And in the meantime, the thief can just sit there pretty,” she muses. (more analysis on trade secrets theft in China can be found here)
A LOGICAL END-GAME
Despite the nebulous nature of trade secrets, one thing is certain: this form of protection will continue to become widespread globally.
For Eyre, the underlying message for companies and their counsel is that in the event of a loss, it is best to do what’s feasible, and to be as ingenuitive as possible given the circumstances and the jurisdictions involved.
“Any strategy has to be dictated by your logical end-game,” she insists. “This means delivering the moves that will get the client what they need, which is basically to safeguard their data, or get it back as quickly as possible.”
Image: Shutterstock.com / Russell Johnson