March 01, 2014

Endangered Species and Trade Secrets: Part Two

Michael Klein

In the previous issue, the first part of this two-part article provided answers and guidance on some frequently asked questions about trade secrets that arise in the practical, day-to-day world of environmental consulting in the Endangered Species Act (ESA) context. This second part of the article will continue with slight variations on the two factual scenarios set forth in the first part of the article.

Fact Scenario No. 3 contains all the same facts as Fact Scenario No. 2, but, in addition, a few months after you provide the information to your client, your client puts its project on hold indefinitely because a federal investment tax credit (ITC) has expired. Without the ITC, the economic viability of the project is drastically diminished, and the project may never get built. In the meantime, you are approached by a competitor of your client. The competitor thinks his project can be viable without the ITC, and he wants your firm’s assistance with the exact same things you did for the first client. Coincidentally, the geographic area the competitor wants you to survey includes about 25,000 acres of the 100,000 acres you previously surveyed for your first client. Based on your report to your first client, you already know that those 25,000 acres are unsuitable for any alternative energy project. The competitor knows nothing about the work you performed for the first client, and the first client does not know you have been approached by his competitor.

Question No. 3: From a trade secret standpoint, should you take on the engagement with the competitor and use the data collected for the first client, since you already know that you will advise both that the 25,000 acres is an unsuitable location? Taking on the assignment for the competitor probably would put you at risk for trade secret misappropriation. Under trade secret law, even so-called “negative information” can be a trade secret. Integrated Cash Mgmt. Servs., Inc. v. Digital Transactions, Inc., 732 F. Supp. 370 (S.D.N.Y. 1989), aff’d, 920 F.2d 171 (2nd Cir. 1990). That is, knowing what won’t work can be as valuable as knowing what does work. As one court noted, knowledge gained by a software programmer of what would not work was valuable for the next employer, as the software programmer was “simply too bright to ‘make the same mistakes twice’ in writing his programs.” In Fact Scenario No. 3, knowing where to avoid locating the alternative energy project can be as valuable as knowing where it should be located.

In most jurisdictions, trade secret misappropriation can occur through disclosure or actual use of the trade secret. Trandes Corp. v. Guy F. Atkinson Co., 996 F.2d 655, 664–65 (4th Cir. 1993). Under Fact Scenario No. 3, using the knowledge of the survey of the 25,000 acres in the report to the competitor likely would be considered “use” of the first client’s data. If that data is indeed a trade secret, then using it in the report to the competitor might constitute misappropriation.

In addition to common law remedies for trade secret misappropriation, some states provide statutory remedies as well. For example, the Texas Theft Liability Act provides a statutory remedy for unlawfully appropriating property, including a trade secret. Tex. Civ. Prac. & Rem. Code § 134.002.

In addition to civil remedies, most states have criminal penalties for trade secret misappropriation. See, e.g., Tex. Penal Code § 31.05(b). There are many examples of individuals who have been convicted of trade secret misappropriation in Texas. See, e.g., Schalk v. State, 767 S.W.2d 441 (Tex. App.—Dallas 1988), aff’d, 823 S.W.2d 633 (Tex. Crim. App. 1991)(en banc).

If a trade secret involves a product or service used in or intended for use in interstate or foreign commerce, then misappropriation also may be a federal criminal offense under the Economic Espionage Act of 1996. See, 18 U.S.C. § 1832 and United States v. Krumrei, 258 F.3d 535 (6th Cir. 2001).

Fact Scenario No. 4 is the same as Fact Scenario No.1, except that, after you provide the 200-page report to the first client, one of your senior and most experienced biostatisticians provides her two-week notice. On her last day of employment, she cleans out her desk and returns her company-owned laptop. You hear nothing further from her until almost a year later, when you attend an endangered species conference. To your surprise, you learn that she is employed by one of your competitors, and she is speaking at the conference about the use of statistical algorithms in preconstruction risk assessments, as well as site screening and ranking (under the Land-Based Wind Energy Guidelines) to help determine whether endangered species would impact project location and successful operation of alternative energy projects.

When you return to your office, you decide to hire a computer expert to perform a forensic examination of the ex-employee’s laptop. After conducting his examination, the expert informs you that the day after she gave her two-week notice the ex-employee connected certain external devices to her laptop and downloaded large quantities of data, including the complex statistical algorithms that employed the k-means clustering in the calculations. She did not, however, download any of the underlying field data contained in the report to the first client.

Question No. 4: Are the statistical algorithms a trade secret? If so, whose trade secret is it, hers or your firm’s? First of all, are the statistical algorithms a trade secret? An employee is entitled to use the normal skills of her trade or profession and to take that knowledge with her to the next employer. As one court put it, “[a]n employee, upon the termination of his employment, is free to draw upon his general knowledge, experience, memory and skill, howsoever gained, provided he does not use, disclose or impinge upon any of the secret processes or business secrets of his former employer. This rather piously oversimplified principle is much easier to state than to apply.” Cataphote Corp. v. Hudson, 422 F.2d 1290, 1295 (5th Cir. 1970).

As alluded to by the court, there is a fine—and sometimes cloudy—line between the normal skills of a trade or profession and a trade secret. For example, some courts allow trade secret protection for so-called “know-how” but not for “general knowledge and skill.” But drawing the line between the two sometimes can be very difficult. As one court noted, “the concept of ‘know-how’ is . . . a very fuzzily defined area, used primarily as a short-hand device for stating the conclusion that a process is protectable. It covers a multitude of matters, however, which in the broad sense are not protectible, e.g., an employee’s general knowledge and skill.” Van Prods. Co. v. Gen. Welding & Fabricating Co., 213 A.2d 769, 777 (Pa. 1965). With regard to engineering formulae, it sometimes may require expert testimony to help a court distinguish between non-protectable “general knowledge and skill” in engineering and protectable engineering “know-how.” In one case, the court held that certain engineering formulae were trade secrets, stating that “[t]hough some of the formulae reflect common engineering knowledge, the district court found, based on expert testimony, that others were based on experimental data and assumptions not in the public domain. Empirical formulae used in systems design are clearly at the very core of trade secret law protection.” SI Handling Sys., Inc. v. Heisley, 753 F.2d 1244, 1260–61 (3rd Cir. 1985).

In Fact Scenario No. 4, it is difficult to determine whether the statistical algorithms are nonprotectable “general knowledge and skill” in engineering or protectable engineering “know-how.” A point in favor of protection is the fact that your company’s engineers and biostatisticians developed the complex statistical algorithms through years of trial and error, and the biostatistician stumbled upon the k-means clustering purely by chance. In other words, it did not appear to be the result of the application of well-known statistical principles. Ultimately, the issue may require expert testimony for determination, and perhaps could go either way. As with most trade secrets, you may not know for sure it a trade secret exists until a court issues a final judgment.

Assuming the statistical algorithms are a trade secret, who owns it? Does the departing biostatistician or your firm own it? The answer may depend on whether the departing employee was hired specifically to invent the statistical algorithms, and the answer may vary from state to state. In McClain v. State, the court reversed a conviction for an employee’s theft of trade secrets because the state could not prove that the employer had exclusive ownership of the trade secrets. 269 S.W.3d 191, 197 (Tex. App.—Texarkana 2008, no pet.). In that case, McClain, an engineer, worked for Didrickson Associates (Didrickson) to repair circuit boards that were part of the control panels of GE gas turbines. The diagram of a circuit board is called a “backsheet.” While working for Didrickson, McClain developed work-saving, typewritten set-up sheets that summarized some of the information on the backsheets. McClain’s notes were considered to be improvements to the backsheets, as they allowed for quicker repairs. At some point, McClain left Didrickson and started his own business repairing circuits, in competition with Didrickson. Ultimately, McClain was convicted of theft of trade secrets, and appealed his conviction.

The appellate court reversed the conviction, holding that the employer, Didrickson, had only a nonexclusive right of ownership, known as a “shop right.” The court recited a rule of law from patent law that an employer has a “shop right” when the invention was developed by his employee during the employer’s time or with the assistance of the employer’s property or labor. The court pointed out that McClain and Didrickson did not have an employment agreement assigning any inventions to Didrickson or restricting McClain from using any inventions in other employment. In that situation, the court ruled, since McClain was not hired to invent or devise the improvement, Didrickson had only a nonexclusive “shop right” to the improvement, but the improvement belonged to McClain. Hence, McClain could not be guilty of stealing something that he owned.

Applying the rationale of McClain to Fact Scenario No. 4, the biostatistician was not hired specifically to invent or devise the statistical algorithms. Indeed, the discovery of the use of the k-means clustering statistical algorithm came about “purely by chance.” Also, the biostatistician has no written employment agreement assigning any inventions or restricting the use of any inventions in other employment. Thus, under the rationale of McClain, the biostatistician might own any trade secret associated with the k-means clustering algorithm, but perhaps not all the statistical algorithms, as some were developed jointly with other employees. And remember, if the statistical algorithms (without the k-means clustering algorithm) are merely “general knowledge and skill,” then they may not be trade secrets at all. Thus, the only trade secret might be the particular use of the k-means clustering algorithm, and that might be owned by the departing biostatistician, with your company having merely a nonexclusive “shop right” to use it as well. Obviously, the answer to this question can be extremely factually intensive. Of course, these problems can be lessened or avoided if the parties address these issues in a written employment agreement. But there is no such agreement in Fact Scenario No. 4.

In Texas, even if the data is not a trade secret, the departing employee may have civil liability for harmful access by computer if the unauthorized access to the computer was committed knowingly or intentionally. Tex. Civ. Prac. & Rem. Code § 143.001(a). In addition to civil liability, if all the statistical algorithms are determined to be a trade secret and if the trade secret is not owned by the biostatistician ex-employee, she may be subject to the kinds of criminal provisions referenced above. Further, if this occurred in Texas, and even if the data is not a trade secret, the biostatistician’s conduct may run afoul of another penal statute entitled “Breach of Computer Security,” which provides that a “person commits an offense if the person knowingly accesses a computer, computer network, or computer system without the effective consent of the owner.” Tex. Penal Code § 33.02(a). When the departing biostatistician connected certain external devices to her laptop and downloaded data, with the apparent intent to take the data with her to her new employment, this access to her laptop computer likely was without the effective consent of the owner of the laptop. This point would be easier to prove if the company has an employee handbook clearly stating that the company’s computers and computer systems are to be used only for company business. Finally, if the company laptop is a “computer . . . which is used in or affecting interstate or foreign commerce or communication,” then the conduct might subject the departing employee to federal criminal liability under the federal Computer Fraud and Abuse Act. 18 U.S.C. § 1030.

As the discussion of these fact scenarios shows, trade secret issues can arise in many areas of endangered species work. Also, whether a trade secret exists—and, if one exists, who owns it—can depend on minor factual subtleties. In most instances, ambiguities and uncertainties can be eliminated through well-drafted agreements between the parties. With financial penalties and potential criminal liability in some situations, it is best to err on the side of caution.

Michael Klein

Mr. Klein is a partner in the Austin office of Sedgwick LLP. The factual hypotheticals used in the article are totally fictional. Any resemblance to actual situations is purely unintentional and coincidental.