TRADE SECRETS Changing Landscape, US and Abroad 2017 In House Counsel Conference
Presenters: Jenny Papatolis Johnson Endo Pharmaceuticals Tracy Zurzolo Quinn Reed Smith LLP Matthew P. Frederick Reed Smith LLP
Overview Trade secret law general overview Recent developments: US European Union China
What Is a Trade Secret? Information Subject of reasonable efforts to maintain secrecy Has independent economic value from not being generally known or ascertainable
Classic Trade Secrets
Commonly Litigated Trade Secrets Customer lists Marketing plans Sales data Detailed information about customers Recipes Chemical compounds Manufacturing processes
Trade Secret Misappropriation: Who Does It? Insiders (i.e., employees or former employees) Competitors Business partners (or potential) Foreign governments 50-80% of all IP theft (all categories) globally and in US traced back to China (2013) Recent Symantec study: 50% of employees who leave their jobs retain employer confidential info; 40% plan to use it in new jobs not necessarily malicious use, just think it is ok to do so
Impact of Theft: Macro Stats IP = 70% of value of U.S. public companies Valued at $5 trillion Value of trade secret loss = $300 billion/year
Trade Secret Civil Actions State Law UTSA Unfair competition Breach of contract (employment, NDA, consulting, etc.) Tortious interference with a contract Breach of employee s duty of loyalty or fiduciary duty to the employer Defamation Federal Law Computer Fraud and Abuse Act ( CFFA ) ITC DTSA (NEW!!!)
UTSA State court remedy 48 states have adopted some version Designed for intrastate litigation Not so uniform Patchwork quilt of protection
Benefits of Federal Action Federal hammer (nationwide injunctions) Uniform body of federal law Federal court resources / IP experience / experience of the bar Procedural advantages (service, discovery) Timeliness changes in patent law have narrowed patent protection
Defend Trade Secrets Act of 2016 Federal private right of action Grants original jurisdiction to federal courts No need for diversity jurisdiction Covers trade secrets used in interstate or foreign commerce Effective May 11, 2016 for any misappropriation after that date
Key Provisions of DTSA Substantive consistency with UTSA Three-year statute of limitations UTSA same, but some states have extended No state law preemption Ex parte seizure provision unlike UTSA Whistleblower protection unlike UTSA
DTSA: Trade Secret Broad categories of information (tangible / intangible) Reasonable measures to keep secret Derives independent economic value from not being generally known
DTSA: Misappropriation The term `misappropriation' means (A) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (B) disclosure or use of a trade secret of another without express or implied consent by a person who (i) used improper means to acquire knowledge of the trade secret; (ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was (I) derived from or through a person who had used improper means to acquire the trade secret; (II) acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or (III) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or (iii) before a material change of the position of the person, knew or had reason to know that (I) the trade secret was a trade secret; and (II) knowledge of the trade secret had been acquired by accident or mistake;
DTSA: Misappropriation cont. The term `improper means' (A) includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means; and (B) does not include reverse engineering, independent derivation, or any other lawful means of acquisition
DTSA: Remedies Injunctive relief No prevention of employment relationship None based on inevitable disclosure None conflicting with state law Actual damages / unjust enrichment Reasonable royalty Exemplary (punitive) damages Reasonable attorneys fees
A Note on Inevitable Disclosure Not recognized by DTSA Some states recognize, but availability limited Based on theory that new position requires that former employee use/share trade secrets Most often alleged in cases without a non-compete Employers should emphasize in their pleadings that: Employee s new company is a direct competitor in a narrow market The former employee was a high level executive privy to strategic plans or information It would be impossible for the former employee to work at new employer without using or disclosing Circumstantial evidence (e.g., employee dishonest or misleading regarding departure)
DTSA: Ex Parte Seizure New Order for seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action Ex parte Court holds property Hearing within 7 days
Seizure: Extraordinary Circumstances Plaintiff must show: Likelihood of success and immediate irreparable harm TRO insufficient (because target will flee, move, destroy) Reasonable particularity Target possesses secret and property to be seized Identity and location of property No publicizing seizure Court must order: Narrowest seizure of property necessary Minimize interruption of target/business Clear guidance to law enforcement, including use of force Bond to make target whole if seizure inappropriate
Use of the Seizure Provision to Date To date, over 50 cases filed with DTSA claims about a dozen seizure requests Most seizure requests have failed: Failure to formally move for seizure Failure of plaintiff to explain why other remedies are not sufficient Failure of court to maintain ex parte process AVX Corp. v. Kim, No. 6:17-00624-MGL (D.S.C.) Granted DTSA ex parte seizure order Court emphasized defendant s alleged record of lying about the misappropriation while employed by plaintiff
Wrongful Seizure: Action for Damages Civil action Damages lost profits, cost of materials, loss of good will Punitive damages Attorneys fees
DTSA: Whistleblower Protection Whistleblowers get civil and criminal immunity for disclosure of a trade secret: In confidence to an government official or an attorney In a document filed under seal in a legal proceeding Tension with purpose of protecting disclosure of trade secrets
DTSA: Whistleblower Notice Requirement Employer must give notice of whistleblower protection to: Employees, consultants, contractors In any new or updated agreement after May 11, 2016 Failure to give notice bars punitive damages and attorneys fees DTSA does not dictate form of notice For employees, contract can cross-reference employee manual For third parties (and/or employees), entire section from DTSA can be included (example included in materials)
Extra-territorial Effect of US Trade Secrets DTSA added to Economic Espionage Act Applies to conduct abroad by US person/entity: Citizen or permanent resident alien of US US legal entity US state or political subdivision or an act in furtherance of the offense was committed in the US Suit under DTSA would still require personal jurisdiction over defendant
Extra-territorial Protection for US Trade Secrets International Trade Commission Better known for patent, trademark, copyright enforcement Requires only a threat to domestic (U.S.) industry Section 337(a) of the Tariff Act of 1930 prohibits [u]nfair methods of competition and unfair acts in the 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. Applies to trade secrets Higher standard Only a few investigations in the last several years Benefits of ITC In rem jurisdiction without personal jurisdiction
Extra-territorial Protection for US Trade Secrets TianRui Grp. Co. v. Int l Trade Comm n, 661 F.3d 1322 (Fed. Cir. 2011) US Company had trade secrets stolen from a division in China by another Chinese company Product (train wheels) imported into US and blocked by the ITC Products protected by US trade secret misappropriated abroad Sino Legend v. Int l Trade Comm n, 137 S.Ct. 711 (2017) ITC banned imports (rubber additives) relying on TianRui Federal Circuit affirmed without opinion, Supreme Court denied cert
DTSA and the ITC TianRui applied federal common law ITC will likely apply federal law under DTSA Congress had to specifically mandate ITC authority for patents Unlikely to be an issue under the DTSA Plaintiffs now have options to redress trade secret misappropriation abroad Foreign entities can use ITC so long as the act affects US Industry
Recent Developments in the European Union: EU Trade Secrets Directive 2016 E.U. Trade Secret Directive Similar objective as the DTSA: harmonize patchwork quilt of member state trade secret laws Implementation deadline: June 28, 2018
Recent Developments in the European Union: EU Trade Secrets Directive Significant changes to legal framework for several member states, e.g.: Confidentiality Reverse engineering Timing of implementation Relief (usually) does not have cross-border effect
Recent Developments in China Trade secret protection is a relatively new concept (1993 landmark legislation) 2014 launch of Intellectual Property Courts
Thoughts for In-house Counsel Review your company s intellectual property assets Identify valuable intellectual property Consider best form of IP protection For trade secrets, ensure appropriate confidentiality protections/protocols are in place Review/update employment contracts, on-boarding and exit protocols Review/update third party contracts
Questions? Comments? Jenny Papatolis Johnson Patent Counsel Endo Pharmaceuticals 484 216 6830 johnson.jenny@endo.com Tracy Zurzolo Quinn Partner, Philadelphia Reed Smith LLP +1 215 851 8286 tquinn@reedsmith.com Matthew P. Frederick Senior Associate, Philadelphia Reed Smith LLP +1 215 241 7992 mfrederick@reedsmith.com Anette Gaertner Partner, Frankfurt Reed Smith LLP +49 (0)69 22228 9818 agaertner@reedsmith.com