Recent Federal Developments in Trade Secrets Law:

Transcription

1 Recent Federal Developments in Trade Secrets Law: R. Mark Halligan Nixon Peabody LLP 300 S. Riverside Plaza, 16th Floor Chicago, Illinois (312)

2 Economic Espionage Act: S. 3389

3 Historical Background: The Legislative History of the EEA (1980s to 1996) Wire and Mail Fraud Statutes National Stolen Property Act ASIS Trends and Proprietary Information Loss Surveys 3

4 The Information Age/Internet: Computers and Trade Secrets (1996-Present) The Internet and Security Issues State-sponsored Economic Espionage and Organized Crime Cyber-Attacks and Spear- Phishing Trade Secrets "In Motion" and Trade Secrets "At Rest" Recent Studies, Reports and Warnings 4

5 Federal Protection of Intellectual Property Assets Patents Copyrights Trademarks Trade Secrets 5

6 The Existing EEA Statutory Framework Section 1831: Foreign Economic Espionage Section 1832: Trade Secret Theft No private civil cause of action See R. Mark Halligan, Protection of U.S. Trade Secret Assets: Critical Amendments to the Economic Espionage Act of 1996, 7 J. Marshall Rev. Intell. Prop. L. 656 (2008). pdf 6

7 Proposed S. 3389: "Protecting American Trade Secrets and Innovation Act of 2012" The addition of private civil cause of action for violations of Sections 1831 or Section 1832 "Misappropriation" and the interstate commerce requirement Special Pleading Requirements Describe with specificity the reasonable measures taken to protect the secrecy of the alleged trade secrets Sworn representation by the party asserting the claim that the dispute involves either: substantial need for nationwide service of process or misappropriation of trade secrets from the United States to another country 7

8 Proposed S. 3389: "Protecting American Trade Secrets and Innovation Act of 2012 (cont.) Civil Ex Parte Seizure Orders Ex Parte Application Clear and Convincing Evidence that Issuing the Order is Necessary to prevent irreparable harm Seizure of property (including computers) used or intended to be used, in any manner or part, to commit or facilitate the commission of the violation alleged in the civil action Preservation of Evidence 72-hour Initial Order (which may be extended after notice to the affected party) Counterclaim for injured party by a bad faith seizure order 8

9 Proposed S. 3389: "Protecting American Trade Secrets and Innovation Act of 2012 (cont.) Civil Remedies for Trade Secret Misappropriation in EEA federal civil claim: Injunctive Relief to Prevent the Actual or Threatened Misappropriation of Trade Secrets Damages for Actual Loss Damages for Unjust Enrichment (no double recovery) Reasonable Royalty (if unreasonable to prohibit public use of the trade secret) Willful and malicious misappropriation: exemplary damages 1:1 ratio with compensatory damages Reasonable Attorney's Fees to the "prevailing" party on 3 applications: If a claim of misappropriation is made in bad faith If a motion to terminate an injunction is made or opposed in bad faith If a trade secret is willfully and maliciously misappropriated 9

10 No Preemption The District Courts will have original jurisdiction (not exclusive) jurisdiction of EEA civil causes of action Preservation of the UTSA and centuries of principal/agency and fiduciary duty common law Similar to the Lanham Act: Trademarks 10

11 Three-year Statute of Limitations Identical Provision in the UTSA 11

12 Addition of a Definition of Misappropriation" to the Definitions in the EEA Identical to the definition of "misappropriation" in the UTSA Includes definition of improper means Does not include reverse engineering and independent derivation 12

13 Policy Considerations Protecting Trade Secret Assets is in the US National Interest Economic Considerations National Security Considerations Uniformity Inadequate Protection in Foreign Jurisdictions No Right To Discovery No Effective Relief to Prevent the Threatened Misappropriation of Trade Secrets International Trade and Treaty Obligations 13

14 United States v. Aleynikov

15 United States v. Aleynikov, 676 F.3d 71 (2nd Cir. 2012) Prosecution of a former Goldman Sachs employee for stealing and transferring certain proprietary computer source code used in Goldman's high frequency trading (HFT) system in violation of the National Stolen Property Act (NSPA) and the Economic Espionage Act of 1996 (EEA). Conviction reversed: On February 16, 2012, the United States Court of Appeals for the Second Circuit heard oral argument on his appeal and, later that same day, ordered his conviction reversed and a judgment of acquittal entered, with opinion to follow. Mr. Aleynikov was immediately released from custody the next day. On April 11, 2012, Hon. Dennis Jacobs, Chief Judge of the United States Court of Appeals, published an unanimous decision: (1) the source code that the defendant uploaded to a server in Germany, then downloaded to his computer devices in New Jersey, and later transferred to Illinois, did not constitute stolen "goods," "wares," or "merchandise" within the meaning of the NSPA; and (2) Goldman's HFT system was neither "produced for" nor "placed in" interstate or foreign commerce. 15

16 United States v. Aleynikov, 737 F. Supp. 2d 173 (SDNY 2010) The district court, in its Sept. 3, 2010 opinion, rejected Aleynikov s argument that source code for Goldman s trading system is not a product that is produced for or placed in interstate and foreign commerce under the EEA. In maintaining the EEA charge against Aleynikov, the court clarified the meaning of product and produced for interstate commerce and explained how the source code that comprised Goldman s Trading System fell within the ordinary meaning of the terms. The district court concluded that the EEA does not define the term product and defined the term according to its ordinary meaning and held that [t]he ordinary meaning of product is something that is the result of human or mechanical effort or some natural process. Aleynikov, 737 F. Supp. 2d at 178. Specifically, the court rejected arguments that the word product only pertained to tangible items and held that it was inappropriate to use a definition from products liability for a statute created to protect intellectual property. The court held that Goldman s trading system fell within the ordinary meaning of product, and further that Goldman s lack of intent to sell or license the trading system did not alter its definition as a product under the EEA. 16

17 People v. Aleynikov, New York State Supreme Court, New York County, No /2012 NEW YORK, Aug 9 (Reuters) - A former Goldman Sachs Group Inc. computer programmer who was cleared of federal charges in February faces new charges of illegally using and copying the firm's highfrequency trading code, according to an arrest warrant filed in Manhattan criminal court. The charges, brought by the office of Manhattan District Attorney Cyrus Vance, are a new twist in a case first brought by U.S. federal prosecutors in July The programmer, Sergey Aleynikov, was found guilty at trial in December 2010 of theft of trade secrets. A U.S. appeals court reversed his conviction and he was released from prison in February after serving nearly one year of an eight-year sentence. The felony arrest warrant, dated last week and signed by an FBI agent, charges Aleynikov with "unlawful use of secret scientific material" and "unlawful duplication of computer related material." 17

18 Computer Fraud and Abuse Act 18 U.S.C. Section 1030 et seq.

19 International Airport Centers v. Citrin, 440 F.3d 418 (7th Cir. 2006) Judge Richard Posner: "When an employee accesses a computer or information on a computer to further interests that are adverse to his employer, he violates his duty of loyalty, thereby terminating his agency relationship and losing any authority he has to access the computer or any information on it." Cessation-of-agency" theory Compare Carpenter v. U.S., 484 U.S. 19 (1987) Same reliance on common law agency principles to uphold a "scheme to defraud"--the key element of the mail and wire fraud statutes 19

20 LVRC Holdings LLC v. Brekka, 581 F.3d 1127 (9th Cir. 2009) The Ninth Circuit rejects Citrin on the basis that "[n]othing in the CFAA suggests that a defendant's liability for accessing a computer without authorization turns on whether the defendant breached a state law duty of loyalty to an employer. It is the employer s decision to allow or to terminate an employee s authorization to access a computer that determines whether the employee is with or without authorization. 20

21 U.S. v. Nosal, 642 F.3d 781 (9th Cir. 2011) [3-judge panel] An employee exceeds authorized access when he or she obtains information from the computer and uses it for a purpose that violates the employer s restrictions on the use of the information. Exceeds authorized access Employees were subject to a computer use policy that placed clear and conspicuous restrictions on the employees access both to the system in general and to the Searcher database in particular. 21

22 U.S. v. Nosal, 676 F.3d 854 (9th Cir. 2012) [en banc] Chief Judge Kozinski: "Computers have become an indispensable part of our daily lives. We use them for work; we use them for play. Sometimes 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? This depends upon how broadly we read the Computer Fraud and Abuse Act (CFAA)." The CFAA prohibits improper "access" of computer information. It does not according to the 9th Circuit - prohibit misuse or misappropriation of computer information. 22

23 U.S. v. Nosal, 676 F.3d 854 (9th Cir. 2012) [en banc] Dissent Judge Barry Silverman (and Judge Richard Tallman): "This case has nothing to do with playing sudoku, checking , fibbing on dating sites, or any of the other activities that the majority rightly values. It has everything to do with stealing an employer's valuable information to set up a competing business with the purloined data, siphoned away from the victim, knowing such access and use were prohibited in the defendants' employment contracts. The indictment here charged that Nosal and his co-conspirators knowingly exceeded the access to a protected company computer they were given by an executive search firm that employed them; that they did so with the intent to defraud; and further, that they stole the victim's valuable proprietary information by means of that fraudulent conduct in order to profit from using it. 23

24 CFAA Circuit Court Split: Current Lineup Employee Trade Secret Theft Not Actionable Under the CFAA WEC Carolina Energy Solutions LLC v. Miller, 2012 WL (4th Cir. July 26, 2012) U.S. v. Nosal, 676 F.3d 854 (9th Cir. 2012) [en banc] VERSUS Employee Trade Secret Theft Is Actionable Under the CFAA 24

25 CFAA Circuit Court Split: Current Lineup (cont.) EF Cultural Travel B.V. v. Zefer Corp., 318 F.3d 58 (1st Cir. 2003) [CFAA...is primarily a statute imposing limits on access and enhancing control by information providers.] U.S. v. Tolliver, No , 2011 U.S. App. (3d Cir. Sept. 15, 2011) [unauthorized access--access without a legitimate business purpose] U.S. v. John, 597 F.3d 263 (5th Cir. 2010) [exceeded authorized access violating corporate policy re customer account information] U.S. v. Teague, 646 F.3d 1119 (8th Cir. 2011) [unauthorized access--access without a legitimate business purpose] International Airport Centers LLC v. Citrin, 440 F.3d 418 (7th Cir. 2006) U.S. v. Rodriguez, 628 F.3d 1258 (11th Cir. 2010) [obtaining information from Social Security Administration databases without a business reason] 25

26 International Trade Commission

27 Section 337: TianRui Group Co. v. ITC, 661 F.3d 1322 (Fed. Cir. 2011) The vast majority of Section 337 actions involve the importation, sale for importation, and/or sale within the U.S. after importation of articles that allegedly infringe U.S. patents. See 19 U.S.C. Section 1337 (a)(1)(b). However, Section 337 also prohibits, inter alia, "[u]nfair methods of competition and unfair acts of importation of articles...into the United States,... the threat or effect of which is...to destroy or substantially injure an industry in the United States." 19 U.S.C. Section 1337(a)(1)(A). The ITC has long recognized that Section 337 encompasses trade secret misappropriation. However, until the TianRui decision, it was unclear whether Section 337 could prohibit the importation of articles manufactured abroad using purloined trade secrets where the acts of misappropriation occurred entirely outside the United States. 27

28 A Powerful Tool for Trade Secret Owners: Two New ITC Section 337 Complaints 1. Certain Electric Fireplaces On January 13, 2012, the U.S. ITC issued a press release announcing their vote to institute an investigation of Certain Electric Fireplaces, Components Thereof, Manuals for Same, and Products Containing Same, Certain Processes for Manufacturing or Relating to Same, and Certain Products Containing Same (Inv. No. 337-TA- 826). The investigation is based on a December 13, 2011 complaint filed by Twin-Star International, Inc. of Delray Beach, Florida and TS Investment Holding Corp. of Miami, Florida alleging violation of Section 337 in the importation into the U.S. and sale of certain electric fireplaces, components thereof, manuals for same, and products [involving] the misappropriation of Twin-Star s trade secrets. 28

29 A Powerful Tool for Trade Secret Owners: Two New ITC Section 337 Complaints (cont.) 2. Certain Rubber Resins and Processes On June 20, 2012, the U.S. ITC issued a press release announcing their vote to institute an investigation of Certain Rubber Resins and Processes for Manufacturing Same (Inv. No. 337-TA-849). The investigation is based on a May 21, 2012 complaint and June 12, 2012 letter supplementing the complaint filed by SI Group, Inc. of Schenectady, New York alleging violation of Section 337 in the importation into the U.S. and sale of certain rubber resins made using misappropriated SI Group trade secrets. 29

30 Presenter Bio R. Mark Halligan Esq. Partner, Nixon Peabody, LLP, Chicago Office Practice Areas: Intellectual Property, Intellectual Property Litigation, Litigation & Dispute Resolution, Technology Accomplished trial lawyer focused in intellectual property litigation and complex commercial litigation in federal and state courts Experienced patent litigator focused on protection and enforcement of trade secrets Frequent author and lecturer on intellectual property issues; Adjunct Faculty of The John Marshall Law School in Chicago where he teaches trade secrets law. Northwestern University, J.D.; University of Cincinnati, B.A. summa cum laude Chambers USA: America s Leading Lawyers for Business 2011 and 2012 for Intellectual Property Top-flight IP strategist in IAM 250: A Guide to the World s Leading IP Strategists, 2011 and in IAM 300: A Guide to the World s Leading IP Strategists, 2012 Illinois Super Lawyer consecutive years since 2005 Legal 500 leading lawyer in trade secrets litigation 30

31 Questions R. Mark Halligan, Nixon Peabody LLP 300 S. Riverside Plaza, 16th Floor, Chicago, Illinois (312)

32 This presentation contains images used under license from Thinkstock.com. These images may not be re-distributed or re-used for other purposes. This presentation may be considered advertising under certain rules of professional conduct. The content should not be construed as legal advice, and readers should not act upon information in this publication without professional counsel. Nixon Peabody LLP. All rights reserved. 32