In the course of preparing the Mid-Year Review for Trade Secrets law for the AIPLA's Spring Meeting, I had an opportunity to step back and evaluate what is really going on from a legal standpoint in the burgeoning area of cybersecurity. And while cybersecurity is exploding from an IT and data management standpoint, the law remains in its infancy. Why is that?
The Absence of Clear Cybersecurity Legal Standards: Gibson Dunn issued a white paper entitled "Cyber-security and Data Privacy Outlook and Review: 2013" in early May and I thought it would be a good resource as I prepared the "Cybersecurity Law" portion for my presentation (it proved to be, by the way, and I would recommend it as a resource).
While the report was very comprehensive, what was revealing to me was the absence of any true over-arching cybersecurity law or standard. Rather, the report detailed developments in related statutes and areas -- the Computer Fraud & Abuse Act, HIPAA, state and federal privacy statutes, the standards in class actions over data breaches, etc. -- but it could not identify any defining rules or guidelines for what, if any, legal standards surrounding the security for data and information. That is because they don't exist. So the question arises, in a nation known for its ability to legislate over anything and everything, why is there no federal or state laws regarding cybersecurity, an issue that is so dominating the national and business dialogue? I think there are four primary reasons for the absence of that legal standard.
First, the government cannot reach a consensus or does not fully understand the problem. Congress and the Obama Administration continue to bicker over what standards and carve outs for liability should be in place so that companies have the confidence to partner with the federal government to disclose cyber risks. The inability to trust anyone to properly manage or safeguard this information -- public or private -- compounds the problem. Some might argue that this is a good thing, that the less of a role that the government has, the better; however, once the financial consequences of these breaches become apparent, the need for some legal standard will arise.
Second, this is really a phenomena that emerged in the public eye last year. There is always a natural lag between the emergence of a problem and the ability to meaningfully evaluate that problem and arrive at a satisfactory compromise that can be reflected in legislation or judicial opinions.
Third, except in a few instances (to be discussed in my next post), the losses associated with a cyberbreach have not become apparent yet. Until a plaintiff can come forward with concrete proof of tangible loss against a defendant against whom recovery is likely, the perceived need for a cybersecurity standard will not be an urgent one worthy of judicial or legislative attention.
Finally, development of a standard is complicated by the fact that cybersecurity is inherently an issue of technology and highly involved technology at that. Very few of us fully understand the intricacies involved in transmitting, storing and securing information, particularly as those processes evolve so quickly. And frankly the IT community has contributed to the confusion by failing (or perhaps even refusing) to adopt and communicate in a vernacular more accessible to the public at large. So Where are We Headed? In my next post, I will discuss recent efforts by the federal government to impose standards in this vacuum as well as those few legal cases that have begun to emerge in this area.
Kenneth Vanko, Russell Beck and I have completed our eighth Fairly Competing Podcast, "Has the Time Come for a Federal Trade Secrets Statute?"
In Episode 8, Russell, Ken and I discuss the need for a federal statute for civil claims of trade secret theft. The Fairly Competing team discusses the proposed Protecting American Trade Secrets and Innovation Act (PATSIA), which would amend the Economic Espionage Act to allow private parties to sue for the theft of their trade secrets. We also talk about whether the proposed statute should be modified and confined to instances of international trade secret misappropriation and whether the ex parte seizure order under the statute should exist in its present form.
You can listen to the podcast by going to the Fairly Competing website or clicking the link below. Or you can subscribe to the podcast on iTunes. (As always, we'd appreciate your feedback).
If you are looking for more on the proposed federal legislation, see our posts here, here, here and here.
Our next podcast will address the recent conviction of David Nosal, the former Korn/Ferry International executive, under the Computer Fraud & Abuse Act.
Listen to the episode here.
Economic Espionage Act | Podcast Episodes | Trade Secrets | Weekly Wrap-Up Posts
In an important decision issued on Wednesday, a Massachusetts federal court has found that the absence of proof of actual use of the trade secrets was not fatal to claims brought by Advanced Micro Devices, Inc. (AMD) against four of its former employees. In AMD, Inc. v. Feldstein, Judge Timothy S. Hillman found that evidence that several of the employees downloaded and transferred significant data, coupled with other facts, was sufficient circumstantial evidence of misappropriation to justify an injunction. (A PDF of the court's decision can be found below).
This decision cuts against other recent cases holding that a trade secret claimant must come forward with evidence of actual misappropriation to make its claim. I have detailed the forensic analysis below, because it was critical in making the circumstantial case that trade secrets were taken and likely being used, and rendered the versions presented by the employees implausible.
Background: AMD brought this case in January 2013 against former employees Robert Feldstein, Manoo Desai, Nicolas Kociuk and Richard Hagan, each of whom had each left AMD to join a competitor, Nvidia. AMD secured a temporary restraining on the strength of non-disclosure and non-solicitation clauses in the employees' Business Protection Agreements that they had signed as a condition of employment with AMD and had moved for a preliminary injunction formalizing that TRO.
Feldstein, the most senior of the employees, was the first to leave and just before resigning in July 2012, he took a sabbatical during which time 8,148 files were copied from AMD's intranet via Feldstein's AMD-issued laptop. The files included a Gmail contacts file, a Microsoft Outlook inbox file and several business-strategy-related documents. He also downloaded a Technology Licensing Overview PowerPoint presentation that he later conceded was "problematic."
Desai, a Senior Manager, joined Nvidia in December 2012 and forensic analysis showed that 7,899 documents were transferred from her AMD-issued laptop to a folder located on the external hard drive. The night before she left AMD, her husband downloaded all of these files at her request because she wanted to preserve "her personal files, including family photos, personal emails and tax information" and she claimed that she "instructed him not to take any confidential AMD information." Desai accessed this information on her Nvidia-issued laptop later, but claimed she was searching for personal information. She obviously never returned the information.
Kociuk reported to Desai and was part of her integration team. Forensic analysis revealed that his user account was used to assist Desai in copying or transferring very large file systems for subsequent use (he said this was done only to help her erase her personal data from AMD). He admitted he used a utility application, Robocopy, to create duplicate images of the entire file structure of his two AMD-issued computers. More than -- wait, let me lift my pinkie to my lips -- one million files were copied onto a pair of external hard drives. Kociuk claimed that he did this to preserve copies of personal information and data. He left to join Nvidia on January 11, 2012, the event that triggered the lawsuit and TRO. After downloading the files, Kociuk signed an acknowledgement that he was not retaining any of AMD's confidential information.
In addition, AMD presented evidence of some solicitation of then-current AMD employees by Feldstein, Desai and Hagan. None would admit that the conversations were actual solicitations but it appeared from emails and text messages that some informal solicitation may have taken place.
The District Court's Reasoning: Judge Hillman addressed the split in authority in Massachusetts over whether acquisition of trade secrets by improper means is sufficient to establish misappropriation or whether, alternatively, a plaintiff is required to prove actual use above and beyond acquisition by improper means. He did not address the pros and cons of each line of cases, but instead, he simply elected to go with the line of cases permitting acquisition by improper means.
Judge Hillman recounted the forensic evidence outlined above and found that it was "compelling." He noted that all of the former employees made copies of confidential information of AMD, retained that information, and immediately began working for significant competitor. He noted that Feldstein in particular had access to extremely sensitive business strategy and licensing agreement information which he acknowledged was "problematic."
This circumstantial evidence, in the court's view, destroyed the credibility of the alternative explanations offered by the employees as well as their other testimony that they did not intend to misappropriate the trade secrets or that they could not possibly use that knowledge to benefit Nvidia in their current position.
The Takeaways: From the employee side, what were these people thinking? Kociuk's decision to copy one million files destroyed the believability of the employees' protestations of misappropriation. The strength of the forensic evidence also spilled over into the issue of whether improper solicitations occurred, because the ambiguous signals and communications at issue there suddenly took on more sinister overtones against the backdrop of the massive downloading of these and other files.
On the employer's side, forensic evidence saved the day here and was used to build a compelling story. Although there was no evidence of actual use of the trade secrets, the sheer amount of data transferred, the suspicious timing of the downloading and the timing of the employees' departures to the same competitor led the court to conclude that these employees were likely already using or likely to use these trade secrets in the future.
As I noted at the outset, several courts have recently required parties to come forward with actual proof of misappropriation (a decision out of Georgia imposing this standard can be found here). This new standard, in my view, is incorrect and difficult, if not impossible, to meet. Evidence of the proverbial "smoking gun" rarely exists and it is unrealistic to expect a tortfeasor to fall to his or her knees and admit "I did it!" To the contrary, in the crucible of litigation, one can reasonably expect the tortfeasor's story to harden now that he or she is confronted with tne consequences of his/her actions. Trade secret claims, like claims for fraud or unfair competition, are inherently based upon some degree of deceit and as a result, by their very nature, often can only be proven by circumstantial evidence.
Judge Hillman did not identify the particulars of the injunctive relief he was going to enter in the case, so I will keep you updated when he ultimately does issue that injunction.
AMD v Feldstein et al _Opinion .pdf (135.06 kb)
Injunctions | Non-Disclosure Agreements | Non-Solicitation Agreements | Trade Secrets
Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well as one or two that I missed over the past couple of weeks:
Trade Secret and Non-Compete Posts and Articles:
Cybersecurity Posts and Articles:
Computer Fraud and Abuse Act Posts and Cases:
Computer Fraud and Abuse Act (CFAA) | Cybersecurity | Florida | Injunctions | Patents | Legislation | New York | Non-Compete Enforceability | Pennsylvania | Restrictive Covenants | Texas | Trade Secrets | Uniform Trade Secrets Act (UTSA) | Weekly Wrap-Up Posts
Kenneth Vanko, Russell Beck and I have completed our seventh Fairly Competing Podcast, "Trade Secrets, Whistleblowers and The First Amendment."
In Episode 7, the Fairly Competing Team discusses the unique problems posed by trade secrets suits against so-called whistleblowers and assesses the realities of litigation involving whistleblowers, First Amendment concerns, and state SLAPP laws that may come into play in whistleblower litigation. We also talk about a recent case involving Anheuser-Busch where trade secrets law intersects with an alleged whistleblower's claim of First Amendment protection.
You can listen to the podcast by visiting the Fairly Competing website, clicking the link below, or subscribing to the podcast on iTunes. (We'd appreciate your feedback).
If you are looking for more on this topic (one that is near and dear to my heart), please see my earlier posts here, here and here.
Our next podcast will address our respective thoughts about recent efforts to enact a federal trade secrets statute, including the proposed Protecting American Trade Secrets and Innovation Act.
Listen to this Episode.
Podcast Episodes | Trade Secrets
Trade Secret and Non-Compete Posts and Articles:
China | Computer Fraud and Abuse Act (CFAA) | Cybersecurity | Economic Espionage Act | Illinois | Inevitable Disclosure | Injunctions | Legislation | Non-Compete Enforceability | Non-Solicitation Agreements | Pennsylvania | Social Media | Texas | Trade Secrets | Uniform Trade Secrets Act (UTSA) | Weekly Wrap-Up Posts
Following up on yesterday's post, I would like to detail the terrific Trade Secret Law Committee Meeting we had on Thursday with Assistant U.S. Trade Representative (AUSTR) Stanford McCoy. AUSTR McCoy had spoken earlier in the day on a panel about protecting intellectual property through foreign trade agreements and emphasized how trade secrets had emerged from an "obscure" issue to a "big priority" within the Administration. Afterwards, I approached him in the hope that he might join our Committee meeting; he told me he would have liked to but he was committed to another meeting while in Seattle.
Peter Toren's Presentation on the Obama Trade Secret Initiative and Strategy
At the Committee Meeting, Peter Toren provided a summary of the Obama Trade Secret Strategy announced on February 20, 2013 and shared his concerns that the Administration presently lacked the resources to prosecute trade secret theft under the Economic Espionage Act (EEA). He provided some sobering statistics that showed that there had been only 127 prosecutions under the EEA since its inception in 1996, and that with the exception of the Northern District of California, the majority of U.S. Attorney's offices had not been vigorously pursuing those prosecutions (for example, less than 45% had prosecuted a single EEA case).
Peter emphasized that while the Obama Administration's action items certainly represented a step in the right direction, its success would depend on whether the government actually followed through with the proposed action. Moreover, Peter noted that even if the Administration implemented the programs and increased protection of trade secrets, it could only do so much in this era of government cutbacks, a fact evidenced by his statistics on the EEA. Peter ultimately concluded that businesses must do more to protect their trade secrets. A copy of Peter's blog post on the presentation and his PowerPoint can be found here.
The Panel Discussion and AUSTR McCoy's Surprise Visit After Peter's presentation, I moderated a panel discussion with Peter, Dan Westman of Morrison & Foerster, John Durham of Poyner Spruills, and Seth Hudson of Clements Bernard regarding our thoughts over the recent Obama initiative. The concensus was that it was a welcome step but that a private right of action was needed. About mid-way through the panel discussion, AUSTR McCoy joined us unexpectedly. He participated in the discussion and after listening to our initial comments, he advised that he appreciated our comments but indicated that the administration needed to hear from the Committee more often. He said the administration would like to have had our input on recent requests for input on Section 301 proceedings and he asked that we work with Victoria Espinel, the U.S. Intellectual Property Enforcement Coordinator (IPEC) to provide comments to legislation affecting trade secrets. Dan Westman then spoke, emphasizing that there was a serious need for a civil remedy under the EEA. Dan said it was his understanding that the Administration might be privy to even more about China's role in the cyberattacks and trade secret theft than had been reported or suspected in recent months. For this reason, Dan noted that the time was right, especially given the fact that leading IP associations like the AIPLA and IPO had supported the civil remedy in their public comments. AUSTR McCoy indicated that he obviously could not comment other than to note that the Administration was obviously very concerned and that trade secret theft was now a big issue for the Administration.
Consistent with his presentation, Peter echoed that the Justice Department simply did not have the resources or the manpower to pursue the trade secret claims that were out there and that a private right of action would be the most effective way to ensure that American trade secrets were protected. I of course eventually chimed in and noted that in my experience, foreign companies were not enamored with American litigation and discovery. I said that arming American companies and their attorneys with a private right of action would allow the Administration to unleash the proverbial army of private attorney generals to enforce American trade secret laws much to the chagrin of those foreign companies who so loathe and fear the American court system. In terms of a timetable on the public comments, AUSTR McCoy said the IPEC was reviewing the public comments (13 of which were filed by the April 22 deadline), would circulate her thoughts to relevant constituencies within the Administration (with special emphasis with the Justice Department) and make a recommendation regarding the legislative proposals.
It was a marvelous and fun discussion. Members of the Committee that were present were active participants as well and asked questions not only of the panel but also AUSTR McCoy. We look forward to working with AUSTR McCoy and his office in the future.
Economic Espionage Act | International | Trade Secrets
The American Intellectual Property Law Association's (AIPLA) Spring Meeting in Seattle has wrapped up and I thought an update would be in order, especially of the Trade Secret Committee Meeting, in which we had an unexpected visit from Assistant U.S. Trade Representative (AUTR) Stanford K. McCoy. During that meeting, AUTR McCoy very patiently listened to the members of our panel vent and share their concerns that the Administration needed to engage the private sector by supporting enactment of a civil cause of action to the Economic Espionage Act.
To do the meeting justice, I will divide it up into two posts with the summary of the Committee meeting to follow in my next post. Today, I'll provide a summary of a genuinely entertaining afternoon session on the Computer Fraud & Abuse Act (CFAA) as well as fine presentations on litigating trade secrets before the International Trade Commission and an in-house perspective on protecting trade secrets overseas. Computer Fraud & Abuse Act Debate (a/k/a "The Thrilla in Seattle")
I had hoped that Professor Eric Goldman (whose Tech & Marketing Law Blog is a mainstay in the AmBlawg 100) and Morrison & Foerster's Dan Westman's program would turn into a spirited debate and it did not disappoint. (Before the battle, Eric warned me that he was not going to hold anything back; I told him I couldn't wait). It evoked memories of the classic 60 Minutes debates between James Kilpatrick and Shana Alexander (or, better yet, the brilliant SNL spoof by Dan Akroyd and Jane Curtin). Josh Durham played the moderator role splendidly, playing Dan and Eric off against each other and letting it rip. Dan opened with a discussion of the emerging Circuit Court split within the CFAA and emphasized the importance of retaining the broader interpretation of the CFAA espoused by the Fifth, Seventh and Eleventh Circuits. He emphasized the importance of having a federal remedy in the event that a state court might not hospitable to a particular claim or out-of-town client. Eric came out swinging, challenging Dan on the problems with the CFAA, the fact that it was not drafted to address trade secrets and identified the problems with its overuse. Eric rejected the idea of "computer exceptionalism," that the mere fact that a computer might be used to steal trade secrets should result in a criminal statute being created solely for that manner of stealing trade secrets.
Dan survived the initial flurry, and counter-punched effectively by emphasizing that the advances of technology and mobility rendered the computer a "very scary" thing in the hands of the wrong employee. He argued that the fact that the CFAA had both civil and criminal remedies had contributed to the present confusion, because courts would apply the rule of lenity (i.e., construe the CFAA's language narrowly) in criminal cases but that those narrower holdings in criminal cases would then be used in later civil proceedings. Eric weathered Dan's volleys, and emphasized that the CFAA remedy was something that Dan wanted, but not something that he truly needed.
Like Rocky and Apollo Creed, the two exhausted panelists agreed there "ain't gonna be no rematch." At the close, Dan tendered an olive branch, offering that his position for the CFAA in civil cases would be vitiated if the claim could be effectively moved into a federal trade secret statute where it would better fit. Eric magnanimously considered the proposal, noting that the Economic Espionage Act would be a better fit for the types of claims that Dan was seeking. A heart-warming hug followed and there was nary a dry eye in the room. Extra-Territorial Protection of Trade Secrets and Mobile Employees
Jay H. Reiziss of Brinks Hofer Gilson & Lione spoke next and he addressed international trade secret misappropriation, focusing on remedies within the Federal Trade Commission (FTC). Jay and his firm represented the American company Armsted, which prevailed in the Federal Circuit's seminal opinion in TianRui Group v. FTC. In TianRui Group, the Federal Circuit held in 2011 that the FTC could issue rulings for disputes involving the misappropriation of trade secrets or other unfair competition that took place entirely overseas. (For more on the ruing, see my post here). Jay discussed the uptick in trade secret cases before the FTC and also addressed the pros and cons of a FTC action, as compared to a traditional litigation. In fact, Jay described one very interesting advantage favoring a FTC proceeding -- namely, the leverage Jay said that comes from an ITC proceeding to force a foreign firm to open its plant to inspection to see if an American company's trade secrets have been incorporated or integrated into processes or equipment at that facility.
Jay noted that in traditional civil litigation, a party may find itself hamstrung by the limitations upon discovery imposed by the Hague Convention that could limit, interfere with or prevent the inspection of a foreign plant. However, he indicated that Administrative Law Judges have been persuaded to threaten to impose an adverse inference against a foreign company that refuses to allow such an inspection, which inevitably forces the foreign company to open their plant.
Paik Saber of IBM Corporation spoke next and began with some sobering statistics about employee mobility, an important factor in any trade secret protection program: U.S. employees change jobs on average every 4.6 years, and those between the ages of 25 to 34 change jobs every 3.2 years (these statistics come from the U.S. Census). For multi-national corporations, Paik said the turnover rate was 25% of the workforce.
As a former IT manager, Paik emphasized that an ounce of prevention was worth a pound of cure, especially in emerging markets. Paik noted that there remained a lack of cultural appreciation for IP in those emerging markets and that because laws and enforcement procedures remained a concern in some of those markets, it was critical to have a strong trade secret protection program overseas.
Paik emphasized the importance of implementing traditional safeguards in overseas operations, such as written agreements, ongoing and thorough education, monitoring of employees' use of confidential information, and notification of confidentiality policies. He emphasized the importance of clearly communicating a commitment to confidentiality and he shared an effective anecdote: at the start of each employee's tenure, a foreign manager would send him or her a polite but direct letter clearly spelling out the importance of preserving the confidentiality of the company's trade secrets. This letter, -- firm, cordial and clear -- was some times more effective to these employees than the perceived "legalese" accompanying any comprehensive policy or agreement drafted by an attorney.
Finally, Paik noted the importance of employee retention as part of a company's program of protecting trade secrets. He noted the tremendous financial investments made by companies in their overseas employees. He cited lack of career growth and money as the two main reasons for losing employees and he identified Google and Zynga as examples of two companies that had minimized the loss of trade secrets beecause they effectively retained key employees.
Again, a special thanks to Seth Hudson for organizing a tremendous panel and presentation.
Computer Fraud and Abuse Act (CFAA) | International | International Trade Commission | Trade Secrets
Computer Fraud and Abuse Act (CFAA) | Cybersecurity | Florida | Illinois | Inevitable Disclosure | Injunctions | IP Litigation | New York | Non-Compete Enforceability | Non-Solicitation Agreements | Ohio | Social Media | Trade Secrets | Weekly Wrap-Up Posts
Should confidential information shared with a customer lose its trade secret status if it is not accompanied by a confidentiality agreement? Courts are split on this tricky issue, but in State Ex Rel. Lukens v. Corporation for Findlay Market of Cincinnati, the Ohio Supreme Court ruled last week that, in the context of a commercial lease, information shared with tenants (i.e., customers) does not require a confidentiality agreement. (A PDF copy of the opinion can be found below).
Background: The lawsuit was filed by Kevin Luken, an attorney and brother of Mike Luken, proprietor of Luken's Poultry, Fish & Seafood, a longtime vendor at the Findlay Market in Cincinnati, a popular public market in Cincinnati. According a local media report, Luken sought the records for the sake of "accountability" because he "wanted to see if he was being charged the same rent as his competitors in the historic market."
Luken requested copies of those leases through a public records request with the City of Cincinnati, but the rental amounts were redacted in the city's response. The market facility is owned by the City of Cincinnati and managed by the nonprofit Corporation for Findlay Market (the Findlay Market).
Luken filed a writ of mandamus to compel production of the redacted rental information but the First Appellate District located in Cincinnati denied that public records request, reasoning it was protected from disclosure under Ohio's public records laws because it qualified as a trade secret.
On appeal, the Ohio Supreme Court affirmed that the rental information was a trade secret, focusing on two issues. First, the Supreme Court agreed with the Findlay Market that the rental information was potentially valuable to competitors. The Findlay Market presented expert testimony that the term and rental rate for subleases in the commercial context are secrets closely guarded by property managers and that knowledge of these items about competitors would be "invaluable" to competitors.
The Supreme Court appeared to accept a policy argument -- that public disclosure of this information would impair the landlord’s ability to get and keep tenants and “create a poisonous environment” among the tenants, who would inevitably compare notes. Disclosure of the information, therefore, would put the Findlay Market at a competitive disadvantage.
The second point, was in the Court's view, a "close call" -- namely, whether the Findlay Market had taken sufficient precautions to safeguard its trade secrets. Luken presented evidence that the Findlay Market failed to get acknowledgements or agreements from tenants that the terms of the leases were confidential, as well as evidence that some tenants shared the rental terms with vendors.
Nevertheless, the Supreme Court found that the Findlay Market's actions were adequate to safeguard the trade secrets under industry standards. The Findlay Market kept the only unredacted copies of the leases in a locked fling cabinet and limited access to employees on a need-to-know basis. Significantly, Findlay Market's expert provided unrefuted testimony that the precautions used by Findlay Market were standard for commercial property managers. The expert further testified that customers were unlikely to share the information because they realized it was to their benefit not to disclose. On this record, the Supreme Court found that Findlay Market had met its burden.
The Takeaways? First, in essence, sharing information with a customer or client does not waive trade secret status; this common sense notion seemed to predominate the Supreme Court's analysis. Businesses should not be expected to get non-disclosure agreements from their customers over pricing. Given the inherent sensitivities of customer relationships, it should not surprise anyone that a business might not demand confidentiality as a condition of doing business.
Second, given the relatively weak safeguards undertaken by the Findlay Market, expert testimony proved to be critical in this dispute. That testimony assuaged the Supreme Court's concerns about those efforts as it was heavily rooted on what was standard for the industry. In some respects, this makes sense, as determining what is reasonable may frequently require examining what others in an industry do in similar circumstances. However, it begs the question that if no one treats the information as a trade secret, is it entitled to protection?
State ex rel. Luken v. Corp. for Findlay Market of Cincinnati Slip Opinion No. 2013-Ohio-1532.txt (18.81 kb)
Ohio | Trade Secrets
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