August 05, 2019 Feature

What to Expect When You’re (Not) Expecting Misappropriation

Aarti K. Wilson

©2019. Published in Landslide, Vol. 11, No. 6, July/August 2019, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

Trade secret litigation has been steadily on the rise since the enactment of the federal Defend Trade Secrets Act of 2016 (DTSA). This trend is particularly pronounced in California’s booming tech sector where—in light of recent state court decisions limiting the viability of noncompete clauses—employers are turning to trade secret law to protect competitively valuable business information when employees start their own businesses or are hired away by competitors. As a lawyer, I like to read about legal developments and trends. But, what my clients really want to know is: what can I do when misappropriation (allegedly) happens to me?

Before Misappropriation: Getting Your House in Order

Protecting valuable trade secrets begins long before any misappropriation is suspected. Trade secrets are not like patents, copyrights, and trademarks. The methods that define and protect other forms of intellectual property rely on disclosure: use of marks in the stream of commerce, applications with precisely crafted claims, publication, and registration. But trade secrets are valuable because they are kept secret and protected from unauthorized disclosure by business practices. If a trade secret ever goes walking out your door, your company’s information practices and policies—including but not limited to human resources and IT security—will be put under a microscope. So, those policies and practices should be set up with an eye toward protecting your valuable trade secrets.

First things first: in order to protect valuable trade secrets, you need to know what your trade secrets are. Legally, a trade secret is “information” that “derives independent economic value . . . from not being generally known to” the public or to other persons who can use it, and that is subject to measures “reasonable” under the circumstances to maintain its secrecy.1 But that definition doesn’t tell you much: trade secrets are “information,” so almost anything and everything—including knowledge about how not to do something, gained from trial and error—could possibly be a trade secret, as long as it has economic value and isn’t generally known.

Identifying a technical trade secret can sometimes be easy, like the recipe card for Coca-Cola or algorithms for an autonomous vehicle. Secrets that are easy to identify are relatively easy to keep secret (and also relatively easy to track, if they go missing). A company can mark confidential records, restrict access to the lab where formulas are developed, require nondisclosure agreements from all employees and visitors, or impose a “no photos” policy for a building—these are just a handful of methods that could work, depending on the circumstances, to physically protect secrets. Likewise, digital secrets (like source code or important data) stored on computer networks can be protected by “need to know” access, encryption, heightened password protections on specific files or folders, or download restrictions.

But when trade secrets look like day-to-day business information, they are not so easy to identify or keep track of. Trade secrets can take the form of nonpublic financial information or business strategies, cost and pricing information, manufacturing information, or marketing plans for existing or future products. These secrets can take shape during conversations that happen in meetings (and the only record is in an employee’s handwritten notes) or over a group chat (which may or may not be automatically deleted, or stored locally on an employee’s phone, depending on an app’s settings). To protect these types of secrets, companies can use robust confidentiality and nondisclosure agreements, ownership and invention assignment agreements, and employee handbooks. Careful employee onboarding,2 training, and reminders help employees understand what information the company considers proprietary or confidential, what their obligations are with respect to that information, and who else at the company does (or does not) have access to that information. But, from a litigation perspective, perhaps the most important step in protecting trade secrets is conducting a comprehensive exit interview of departing employees, during which all company electronics and materials are returned and cataloged (but not immediately wiped—more on that later), and soon-to-be former employees are reminded of their continuing confidentiality obligations.

Of course, employees are not the only people who can and do misappropriate trade secrets. Companies should also guard against the disclosure of trade secrets to or by vendors, suppliers, contractors, customers, and investors. Companies that monetize trade secrets through licensing should know that reverse engineering is not considered to be misappropriation of a trade secret, unless the licensing agreement expressly prohibits reverse engineering.3 And a tip: make sure your sales team isn’t using proprietary information in sales pitches or marketing materials without a nondisclosure agreement in place. Confidentiality or nondisclosure provisions can also be appropriate when recruiting or interviewing job applicants (whom you definitely should not ask to disclose confidential information about their current employers); in vendor agreements, letters of intent, or requests for bids; and for your board of directors.

What constitutes appropriate or reasonable measures in particular circumstances can vary widely. Companies should obtain advice from an experienced lawyer when developing internal policies, to identify trade secret risks and determine what protection measures may be useful.

When Misappropriation Happens: Defending Trade Secrets

Misappropriation can take three forms: (1) improper taking, (2) improper use, or (3) improper disclosure, and the degree of “improper” conduct can run the gamut. Protective measures make it harder to misappropriate trade secrets, but people who want to steal can (almost) always find a way. Sometimes, even generally well-meaning employees who have access to your trade secrets negligently do or say something to someone that they really shouldn’t have. Regardless of how it happens, your secret has been compromised, and you (probably) need to do something about it.

Be Prepared to Hit the Ground Running

If misappropriation does happen, having strong internal practices and policies to protect your trade secrets can help your company move quickly. When a trade secret is misappropriated, time is of the essence: the faster you can identify a misappropriation, the easier it is to send a demand letter and take other steps to stop the thief before much (or any) improper disclosure or misuse has occurred. If you suspect a trade secret has been taken and is already being used, you may want to skip the demand letter and file a lawsuit so that you can promptly seek a preliminary injunction from the court. Waiting too long may result in a court “preserving” the “status quo” with an injunction that allows any misuse that occurred during the delay.4

A company that strictly controls access to its trade secrets (by tracking, for example, who logs in to secured file folders on a shared server) may be able to spot suspicious activity and identify potential misappropriation when or shortly after it happens. Otherwise, spotting misappropriation can be difficult—after all, trade secrets are meant to remain secret, so a bad actor is unlikely to publicly disclose that he or she has taken your trade secret. Often, companies may not realize what has happened until a former employee, vendor, or customer brings a new and competing product to market—at which point much of the evidence may have long since been deleted. So, another tip: when key employees with access to sensitive information leave, preserve (even if you do not immediately review) an archival copy of their electronic devices before resetting them. If you suspect misappropriation down the road, these images can provide valuable evidence.

After identifying a potential misappropriation and deciding to file a lawsuit, you (and your retained counsel) should move for a preliminary injunction to prevent the disclosure or misuse of your valuable trade secret information during the litigation. To get a preliminary injunction, you will need to explain why the information taken meets the definition of a trade secret. Keep in mind that you may be talking to a judge who is not a technological expert. If your trade secret is industry specific or highly specialized, it can be helpful—even at the preliminary injunction stage—to retain a third-party expert who can explain your technology and distinguish it from what is generally known in the industry. You will also, of course, need to spell out the reasonable measures you have used to keep it secret, since the law won’t protect your so-called “secret” if you didn’t.

Getting a preliminary injunction in a trade secret case can require a fair amount of prefiling work. But, once you have it, a preliminary injunction—and the court’s determination that you’re likely to succeed on the merits of your claim—can provide valuable leverage to drive early resolution of the lawsuit.

Be Prepared for a Long Haul

On the other hand, if a trade secret case cannot be resolved after a preliminary injunction, you are likely in for a slog. Trade secret cases are discovery intensive—particularly for defendants—and usually involve lots of secondary disputes.

Perhaps the most significant quirk of trade secret cases is that plaintiffs are required to identify their trade secrets up front. The requirement of trade secret identification is less onerous under the DTSA, but California’s trade secret act requires specific identification of the trade secrets at issue in the suit before any discovery can be taken on a trade secret claim.5 Defendants can, and do, use this requirement to delay fact discovery; it is not out of the question to have multiple rounds of motions to compel more detailed identification. And, of course, detailed disclosures of trade secrets cannot be made before entry of a protective order, which is often a point of serious negotiation in trade secret cases.

A key point to keep in mind is that trade secrets must be kept secret even during litigation. Any intentional or even inadvertent disclosure of trade secret information during litigation can strip the secret of its protection. Secrecy is accomplished, first and foremost, by a protective order that requires that any discovery or disclosure of claimed trade secret information can only be done on an attorney’s eyes-only basis. A protective order may also restrict the retention and use of third-party experts—for example, to prevent the disclosure of trade secret materials to retained experts who are currently employed by competitors. Finally, and this is important, trade secret information should be filed and maintained under seal in the court’s record, because information that is available in the court’s public records may lose its protection as a trade secret.

Once the trade secret discovery is underway, both plaintiffs and defendants can expect extensive and invasive requests. For example, defendants may have to turn over their personal electronic devices for forensic examination, or allow access to their new company’s confidential information, so that a plaintiff can determine whether its trade secrets have been incorporated into the new company’s work. To protect both sides’ information, this analysis should be done by a data forensics specialist pursuant to a formal protocol—and, of course, under the supervision of counsel to avoid the risk of either intentional or inadvertent spoliation.

At the end of the day, if a plaintiff does discover misappropriation and misuse, defendants can expect to pay damages or disgorgement, and perhaps exemplary damages and attorney fees for willful or malicious misappropriation. Defendants may also be subject to an injunction or other equitable relief.

Beyond Misappropriation: Considering the Alternatives

Often, when a company learns that its information has been stolen, it approaches litigation with a justified feeling of righteous indignation. The hardest lessons for potential trade secret plaintiffs to learn are that: (1) not all valuable information is a trade secret, and (2) most, if not all, trade secrets have a shelf life. Information that is easily recreated (for example, lists of targeted customers who publicly offer similar products for sale) or that can be obtained from a third party (like a mutual customer) who is not obligated to keep a secret will not be protectable trade secrets, even if the information is valuable to the business. And, the value of trade secrets can be time-limited. Public announcements, product launches, new technological developments, and shifts in business cycles can diminish or eliminate the economic value of a secret. Employees, especially in California, have substantial freedom to change employment and to use their expertise or skills to build similar widgets for new employers.6 So, the length of an injunction or the amount of any “head start” remedies will be limited by how long it would take a skilled employee to reinvent the wheel.

Trade secret litigation may not be the best or only choice in all instances of suspected or actual misappropriation. Related claims—such as breach of confidentiality or nondisclosure agreements, breach of fiduciary duty, or claims under the Computer Fraud and Abuse Act—can often be brought either alongside or instead of trade secret claims. And, in certain situations, it may make sense to pursue criminal remedies instead of, or in addition to, civil claims. Anyone who is considering filing or who is potentially facing trade secret misappropriation claims should consult an experienced lawyer for advice.

Endnotes

1. Defend Trade Secrets Act of 2016 (DTSA), 18 U.S.C. § 1839(3); California Uniform Trade Secrets Act (CUTSA), Cal. Civ. Code § 3426.1(d).

2. A thorough onboarding process also enables companies to tell new hires not to bring along or use information belonging to their former employers, and to have new employees sign an agreement not to do so, which can be helpful in the event the company gets sued.

3. See DTSA, 18 U.S.C. § 1839(6)(B); CUTSA, Cal. Civ. Code § 3426.1(a).

4. In extraordinary cases where a plaintiff can show that even injunctive relief would be inadequate to prevent the harm caused by misappropriation, the DTSA permits the seizure of any trade secret information in a defendant’s possession. DTSA, 18 U.S.C. § 1836(b)(2).

5. Cal. Civ. Pro. Code § 2019.210. Federal district courts in California have applied California’s trade secret case law to claims brought under the federal DTSA. Founder Starcoin, Inc. v. Launch Labs, Inc., No. 18-CV-972, 2018 WL 3343790, at *6 (S.D. Cal. July 9, 2018); see also Space Data Corp. v. X, No. 16-cv-03260-BLF, 2017 WL 5013363, at *2 (N.D. Cal. Feb. 16, 2017) (requiring further specification of the trade secret in the plaintiffs’ complaint).

6. California courts have rejected the doctrine of inevitable disclosure, so trade secret owners cannot prevent former employees from working for competitors based on a presumption that the employee will “inevitably” misappropriate trade secrets. Whyte v. Schlage Lock Co., 125 Cal. Rptr. 2d 277, 293–94 (Ct. App. 2002).

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Aarti K. Wilson is an attorney at Willenken LLP, a boutique trial firm based in Los Angeles, California. She regularly represents plaintiffs and defendants in trade secret and employee mobility matters, and also represents clients in copyright and trademark disputes and complex commercial litigation.