Trade Secret Piracy: Fending Off Treasure Hunters

By Kathleen Archer, Esq.

In case you missed it, you might want to put in on your 2015 calendar:  International Talk Like a Pirate Day Trade is September 19 – every year. Between that and Johnny Depp’s Keith Richards-inspired portrayal of fictional buccaneer “Captain Jack” Sparrow in Pirates of the Caribbean, swashbucklers seem like a hoot. For companies though, trade secret piracy is anything but.

Trade secret protections abound at the state level, and there is a move afoot to add more regulation to existing federal law.

What Is Trade Secret Piracy?

The U.S. Uniform Trade Secrets Act defines a trade secret as property. The Restatement (Third) of the Unfair Competition provisions defines a trade secret as information. As applied by the law, a trade secret is a hybrid of both – it is proprietary information owned by a commercial enterprise. Trade secrets include processes, compilations, programs, techniques, formulas, and patterns that are valuable because they are not generally known and are kept secret by their owners. Colonel Sanders’ fried chicken recipe is a trade secret, as were Facebook’s now public and somewhat infamous experiments with the users’ newsfeeds.

Unlike public intellectual property, such as patents and trademarks, the owner of a trade secret does not have a legal monopoly on the information. Instead, the owner of a trade secret relies on employees, contractors, licensors and other people “in the know” to keep the secret “secret.” Generally, as Judge Richard A. Posner explained, the holder of a trade secret “tries to keep secret by executing confidentiality agreements with employees and others and by hiding the information from outsiders by means of fences, safes, encryption, and other means of concealment, so that the only way the secret can be unmasked is by a breach of contract or a tort.” Confold Pac., Inc. v. Polaris Indus., 433 F.3d 952, 959 (7th Cir. Wis. 2006)

Trade secrets can give their owner a distinct advantage over competitors, and revelation of trade secrets can cause serious financial damage to the owner. In the past, most litigation surrounding trade secrets has concerned unauthorized disclosure by former employees or others with whom the owner did business. More recently, however, trade secret piracy has come into the forefront of trade secret regulation. Piracy involves the theft of a business’s secrets by an outside entity which, more often than not, has gained unauthorized access to the business’s computer network. This is industrial espionage. And the stakes are huge, with trillions of dollars and multinational interests at stake. 

Recent Trade Secret Cases

Claims for trade secret misappropriation are generally included in cases involving other claims relating to intellectual property or employment contracts. There are, however, a number of cases relating to outright theft of trade secrets. These cases typically involve unrelated, but competing, businesses and often a computer hack. Some recent trade secret theft cases include:

• Denarii Systems v. Omar Arab, et al. 1:12-cv-24239 (Aug. 2014; Florida Federal Court – Southern District) – Software company recovers $390,422, including $38,000 from former employees on claim under Florida's Uniform Trade Secret Act.

• Dynamo Recruiting Inc. v. RBL Partners, LLC, et al. 12-2-10769-1 (Sept. 2014; Washington State Court – Pierce County) – Company recovers nothing on claim against business partner whose employee reportedly downloaded database to set up competing business.

• Patriot Rail Corp. v. Sierra Railroad Company, 2:09-cv-00009 (March 2014; California Federal Court – Eastern District) – Jury finds in favor of defendant on counterclaim, awarding $22 million for misappropriation of trade secrets during parties’ acquisition discussions.

• Anthony Francis, et al. v. API Technical Services LLC, 4:13-cv-00627 (Pending; Texas Federal Court – Eastern District) – Judge upholds magistrate’s recommendation for Texas jurisdiction, finding that alleged hacking and computer fraud engaged in by plaintiff’s former employer were "purposeful activities directed at a known resident of Texas.”

• Sleek Audio, LLC. v. Curtis Jackson A/K/A 50 Cent, 9:13cv80881 (May, 2014; Florida Federal Court – Southern District) – Rapper 50 Cent is ordered to pay $16 million to a former partner in a joint venture to create a line of over-the-ear wireless headphones to be called "Sleek by 50." After the partnership fell through, 50 Cent proceeded to use designs from Sleek Audio headphones to make his own lines, "Street by 50" and "Synch by 50."

• E.I. DuPont De Nemours & Company v. Kolon Industries, Inc., (April, 2014; Fourth Circuit) – Appellate court vacates $919 million jury award in favor of chemical company against competitor that allegedly willfully and maliciously misappropriated trade secrets in violation of the Virginia Uniform Trade Secrets Act.

Regulation of Trade Secrets in the U.S.

The states currently dominate the landscape of trade secret laws in the United States. Although most states have adopted a version of the Uniform Trade Secrets Act, they have also adopted a number of minor variations in the laws relating to the statute of limitations, damages, and criminal prosecution for misappropriation of trade secrets. As a result, a larger company seeking to bring a trade secret lawsuit involving multiple states would be looking at a patchwork quilt of laws. Recognizing the issue, the federal government is looking to get into the game with proposed legislation by both the U.S. House of Representatives and the Senate.  The Trade Secrets Protection Act is currently working its way through the House, and a similar bill, The Defend Trade Secrets Act, is working its way through the Senate.

Many software and other technology companies welcome the federal legislation, seeing it as another layer of protection in the economic espionage wars. Both bills would allow holders of trade secrets to bring private civil lawsuits under the Economic Espionage Act — which currently provides only for criminal trade secrets cases lodged by prosecutors. A number of critics, however, see the bills as unnecessary and even harmful. They point to the current protections afforded by state law and also express concern about inconsistency and lack of preemption by the federal legislation. In addition, some fear that during litigation, plaintiffs will be forced to an earlier and potentially more public disclosure of the trade secrets themselves – an unintended effect that would thwart the entire purpose of the protective laws.  

How to Combat Trade Secret Piracy?

Different businesses require different tools to protect trade secrets. While an office supplier, like television’s Dunder Mifflin, might not require a cyber resilience team (even though that might make a hilarious episode), a large software or financial services company certainly would. That said, there are certain themes common to most trade secret misappropriation cases and certain preventative steps that can be taken. In a twist on President Teddy Roosevelt’s famous phrase, companies should tread lightly, but carry a big stick. Here are some absolute musts:

1. It’s All in the Contract. Because so many trade secret theft claims are brought against former employees and business partners, companies with trade secrets should take extra care in drafting employment contracts. The rubber hits the road with non-compete provisions – make sure that your trade secret protections are not discarded because they are later found to have been a restraint on your former employee’s trade. In addition, all of those businesses with whom your company does business need to be kept in check with a written contract to protect trade secrets.
2. It’s All in the People. Be careful of who you hire and with whom you choose to do business. It is clear that companies need to protect their trade secrets from the employees of their business partners who might choose to compete against those companies later. But it is less obvious, but equally important, that companies protect themselves from trade secret misappropriation suits. Do you really want to defend a suit that will come your way when a former employee goes rogue, setting up shop to compete against your business partners?
3. Run a Tight Ship. It’s harder for pirates to steal trade secrets from companies that have procedures in place to protect sensitive data. This includes proper protection of company emails, data encryption, password compliance, and limitations on portability or copying of information.
4. Act Quickly in the Event of a Breach. Immediately investigate any potential trade secret theft so that quick action can be taken and evidence can be collected for potential litigation. Consider contacting local law enforcement; many states provide for criminal prosecutions of trade secret theft. In addition, the FBI has prioritized investigation and prosecution of intellectual property violations. If the theft occurs outside the U.S., a claim with the U.S. International Trade Commission may be warranted.

Conclusion

Trade secret protection has been long regulated by states and litigated by businesses. With bipartisan support and a strong cheering section in the technology industry, new federal trade secret legislation seems poised to become the latest twist. With trillions of dollars at stake, in-house counsel and other forward-thinking attorneys would do well to keep their eyes on their prized possessions and the evolving legal remedies available for a breach.

The views and opinions expressed in this article are those of the individual sources referenced and do not reflect the views, opinions or policies of the organizations the sources represent.