Trade Secrets Litigation is About to Change with the Passage of the Federal Defend Trade Secrets Act

trade secrets label on folder

The federal Defend Trade Secrets Act (DTSA), that has been subject of rigorous debate over the past few years, is just days away from becoming the law of the land. 

On April 4, 2016, the Senate passed the DTSA bill with a vote of 87-0 (S-1890). Yesterday, the House passed the bill by a vote of 410-2. The bill will now move to the White House, but given that the Obama Administration has already voiced strong support in its favor, it is expected that President Obama will sign the bill into law in the next several days. 

The DTSA amends the Economic Espionage Act of 1996 to create a federal civil remedy for stealing trade secrets.  Currently, trade secrets are governed by a patchwork of 50 state trade secrets statutes.  The DTSA will provide an additional uniform federal statute that trade secrets owners may use to protect themselves and fill the perceived gaps in the state statutes. 

One of the most salient features of the DTSA that has received a lot of attention is a provision that allows a plaintiff in a trade secrets lawsuit to obtain an ex parte seizure order “only in extraordinary circumstances” of the “property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.”  I foresee many litigants in the future arguing over what constitutes “extraordinary circumstances” that justify seizure of somebody’s phone, computer, or other property, in order to prevent further dissemination of trade secrets. 

Stay tuned for a detailed analysis of the statute once it becomes the law…

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and has advised hundreds of clients regarding non-compete and trade secret issue. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Common Ways Businesses Leak Trade Secrets Without Their Knowledge

bookkeeping-online-sofware-computer-tablet-phoneIf you have a business, you have trade secrets. It is really that simple. In Texas, any information can be a trade secret as long as (1) it has economic value because it is not generally known and (2) the owner of the information has used reasonable efforts to keep it secret. Customer lists, pricing and discounts, manufacturing designs, financial data, food recipes – are all common examples of trade secrets.  However, virtually any information that meets the above two criteria can be classified as a trade secret in Texas.

When a trade secret information is stolen by a competitor or a former employee, the owner can seek injunctive and monetary compensation in court.  To get that, however, he will have to show that the information that was stolen is, indeed, a trade secret, i.e. that it has economic value and that he has used reasonable efforts to keep it secret. Unfortunately, many business owners do not realize what their trade secrets are until they are taken, unwittingly exposing such information to the public and destroying its trade secret status. Here are some common ways that companies are unknowingly sharing their trade secrets causing them to lose protection under the Texas Uniform Trade Secrets Act: 

Company Websites.  Many companies will post their customer lists and customer endorsements or recommendations on their websites to help attract other customers. Some companies also provide their pricing, rebates or discount information on their websites as well. While this may be very useful in attracting new clients, once such information is posted on a website, it loses its trade secret status.

Social Media.  Information shared on social media is not considered to be confidential or secret. Sometimes, companies will share their customer names or even pricing information on social media to attract a wider customer base.  Other times, company employees will share such information on their personal social media.  In either case, putting information out into the public domain means that the owner of the information probably will not be able to pursue a legal claim against anyone who decides to use such information.

Vendor and Third-Party Contracts. Even those companies that have non-disclosure agreements with employees often fail to include such restraints in their contracts with vendors and other third parties, which means that any information shared with such parties may lose its trade secret protection.

Public Filings. Unless filed under seal, any documents filed in court are open to the public, which means anyone can get a copy.  A business that voluntarily files documents containing trade secrets with the court may make the confidential information lose its trade secret status.  For example, filing a client contract in a collections lawsuit without redacting the pricing information will waive the confidential nature of that information.

Conclusion: The first step in avoiding an unwitting disclosure of trade secrets is taking stock of all information that your business has that might be a trade secret and implementing the processes and measures that would be considered reasonable to preserve the confidentiality of such trade secrets. When in doubt, consult with an attorney to conduct an audit of trade secrets at your company and devise the proper protection procedures. 

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

A Former VP of Operations Ordered to Pay $1.9 Million for Taking Company’s Trade Secrets in Violation of a Separation Agreement

Toshiba_HDTD105XK3D1_BLACK_LAPTOPAccording to some studies, more than 60% of employees copy their employers’ documents or files before leaving their employment. They are even more likely to do so if they had been laid off, fired, or passed over for promotion. With senior executives who have access to top level confidential information, such actions can cause irreparable damage to their former companies.

In 2015, Cheasapeake Energy Corp. sued its former CEO and co-founder for emailing himself highly sensitive information and instructing his assistant to print confidential maps after he resigned due to a public falling out with the company.  The year before that, Lyft sued its former COO for transferring to himself thousands of Lyft’s files before joining its arch-rival Uber.  The former COO apparently left Lyft after unsuccessfully pursuing the CEO position. 

A similar drama played out last year in Texas and it involved a VP of Operations of a publicly traded Houston company.  According to Ginn v. NCI Building Systems, Inc., Ginn had been working for NCI for 20 years when he was told that his position of Executive VP of Operations was being eliminated.  The company offered him a separation agreement, which stated that he was resigning on his own accord and imposed a 5-year non-compete, non-solicitation and non-disclosure covenants. In return, NCI immediately vested all of his unvested stock that he had earned over the years – about $1.5 million – and retained him as a consultant for 1-year with a $300+K salary. 

According to the Court of Appeals, while consulting for NCI, the VP began to plan a competing company. Once his consulting gig with NCI expired, he began competing with it. NCI filed a lawsuit alleging violation of a non-compete and non-disclosure covenants, fraud, breach of fiduciary duties, and a few other claims. Two years into the suit, NCI discovered that the night before the VP signed the separation agreement representing that he had returned all of NCI confidential information, he had actually downloaded more than 18,000 files on his private hard drive. The jury found, and the Court of Appeals upheld, that the VP made knowing representations to NCI on which NCI relied in giving him $1.5 worth of stock, thus, committing fraud.

In its lawsuit, NCI asked for a legal remedy called “rescission,” which is meant to put the parties into a position they were in prior to entering into an agreement. Here, NCI asked that the VP return the consideration that the company paid to him in return for his promises, i.e. his salary and the vested stock.  Since he no longer owned the stock, NCI asked that he pay the value of such stock of $1.5+M.  The First Texas Court of Appeals found such compensation legally appropriate and upheld the trial court’s order requiring the VP to pay NCI the compensation he had received. 

Takeaways: There a certain behavioral triggers that cause high-level employees or employees with access to large swaths of confidential information to take or share that information with a competitor.  A company should have a red-flag alert system that notifies them of the increased risk and allows them to take preventative measures before a disgruntled employee downloads or shares the company’s trade secrets with the outside world.  Demotions, denial of a promotion, increased complaints to a supervisor, inadequate bonus, etc., may all serve as triggers for trade secret theft.  Having a system, a checklist, and a designated person who monitors the situation around the company can go a long way in protecting the company secrets. 

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Employers Should Consider Protection of Trade Secrets When Responding to EEOC Charges

imagesWhen responding to an EEOC charge of discrimination, employers should always separate and clearly mark any trade secrets or confidential information included in the position statement to the EEOC. This is especially important in light of the EEOC’s new procedures that provide for the release of employers’ position statements and non-confidential attachments to employees who filed charges or their representatives upon request during the EEOC investigation.

The new procedures apply to all EEOC requests for position statements made to employers on or after January 1, 2016.

During the investigation of a charge, the EEOC may request that the employer submit a position statement and documents supporting its position. The statements should discuss the facts relevant to the charge of discrimination and identify the specific documents and evidence supporting the position. See my previous posts on how to draft a position statement here, here, and here.

If an employer relies on confidential information in its position statement, it should provide such information in separately labeled attachments. After the EEOC reviews the employer’s position statement and attachments on a specific charge, the EEOC staff may redact confidential information as necessary prior to releasing the information to a charging employee or his or her representative.

According to the EEOC:

The position statement should refer to, but not identify, information the [employer] asserts is sensitive medical information, confidential commercial or confidential financial information.  If the [employer] relies on confidential information in its position statement, it should provide such information in separate attachments to the position statement labeled “Sensitive Medical Information,” “Confidential Commercial Information” or “Confidential Financial Information,” or “Trade Secret Information” as applicable.  The [employer] should provide an explanation justifying the confidential nature of the information contained in the attachments.  

What type of information is “confidential” that should be put into separately labeled attachments? According to the EEOC, the employer should segregate the following information into separate attachments and designate them as follows:

  • Sensitive medical information (except for the charging employee’s medical information).
  • Social Security Numbers.
  • Confidential commercial or confidential financial information.
  • Trade secrets information.
  • Non-relevant personally identifiable information of witnesses, comparators or third parties, for example, social security numbers, dates of birth in non-age cases, home addresses, personal phone numbers, personal email addresses, etc.
  • Any reference to charges filed against the employer by other charging parties.

The EEOC will review attachments designated as confidential and consider the justification provided.  Thus, employers should be judicious in what information they mark as “confidential” or “trade secrets information” and be able to explain why that information is designated that way. Disclosing such information to the EEOC without confidentiality or trade secret designation may later result in the company not being able to claim such information as “trade secret” under the Texas Uniform Trade Secrets Act.

Leiza Dolghih frequently advises employers on how to handle troublesome employees, assists with responding to EEOC charges and investigations, and litigates employment disputes. For additional information, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

9 Basic Steps For Minizing Trade Secrets Theft From Your Company

ArtCaption_DataExplosionLawsuits involving trade secrets theft have become an almost weekly occurrence. In 2015, Fitbit, Nike, Angie’s List, and Oculus Rift became entangled in high-profile legal battles arising out of former employees and competitors allegedly stealing the companies’ trade secrets such as customer lists, software codes, and design patterns. 

Considering the technological progress, with each passing year, more confidential information is stored, shared, and transmitted electronically.  At the same time, the number of devices that employees can use to easily and quickly copy and transmit such information is also increasing every year.  Given these parallel trends, those companies who have not taken stock of their trade secrets and implemented measures to protect them, are extremely vulnerable to having such secrets stolen by disgruntled employees or aggressive competitors, resulting in an irreversible loss of competitive advantage. 

There are simple steps that any business – small or large – can take to minimize the risk of trade secret theft. Here is short list of basic precautions that any company should be undertaking. 

  1. Figure out what trade secrets your business has. What gives you a competitive advantage? Is it a list of repeat customers? Pricing formula? Design patterns? Procedures that your company follows? Business plans? Product development plans? If this information is not publicly available, it most likely qualifies as a trade secret. 
  2. Who has access to your trade secrets? Can all of your employees access the information or is access limited only to key employees or on a “need to know” basis? The less people have access to your trade secrets, the better. 
  3. What systems do you have in place to limit access to trade secrets? Is the information password-protected? Do you have a way of keeping track of who accessed it, when, and for what purpose? Can you lock people out if you discover a security breach? Do you have alarms set for when somebody downloads a large amount of information or uses a personal device to access it?  Do you limit physical access via locked doors, thumb-print access or other security measures? 
  4. Do you have a confidentiality policy? Does your employment handbook include a confidentiality policy? Do all of your employees sign the policy? 
  5. Do you provide confidentiality training? If you have a large company, make confidentiality training part of your on-boarding process. If you run a smaller business, explain to employees what you consider confidential business information and how your expect them to treat it. 
  6. Do your employees sign non-disclosure agreements? If not, 2016 should be the year when all of your employees who work with confidential information sign enforceable Non-Disclosure Agreements (NDA).
  7. Do your vendors, suppliers, joint venture partners, etc., sign non-disclosure agreements?  Anybody – and I mean anybody – with whom your company either does business or plans on doing business – who gets access to your company’s confidential information, should  be signing a NDA before such information is shared with them. 
  8. When employees leave, do they sign a document stating they’ve complied with the NDA? All key employees should have an exit interview, during which they should reaffirm that they are aware of the NDA obligations and they have complied and intend to comply with them.  If an employee refuses to sign such a document, a forensic analysis of his or her devices might be necessary. 
  9. Do you back up devices of the key employees after they leave?  For key employees, before recycling their laptops, blackberries, etc. to be used by others, image those devices so that any evidence of confidential information being copied, transmitted or emailed outside the company is preserved for future investigation and, if necessary, litigation. 

Make 2016 the year that you proof your business against trade secret theft and ensure that it doesn’t fall victim to unscrupulous employees or unfair competition practices from business rivals.

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

 

Two Common (and Costly) Mistakes in Trade Secrets Litigation


kkTrade secrets litigation can be expensive, and if you can avoid it by implementing the measures that I’ve previously described here, then you are off to a good start.  But if your trade secrets have been misappropriated and you have no choice but to go to court, here are two important issues that are often not given enough attention until much later into a lawsuit, when it’s, often, too late.

How will your company’s trade secrets be protected during the lawsuit?

Typically, when sensitive information is going to be exchanged by the parties to a lawsuit during litigation, both parties will ask the court to enter, what is called, an “agreed protective order,” which describes how the parties will handle the confidential information that they receive from each other. It also imposes restrictions on how a party in a lawsuit may use the information or with whom it can share it.  Such an order is, basically, a contract between the parties, blessed by the court.

In my experience, however, a standard protective order used in many business litigation cases does not address many of the issues that arise in a litigation battle between two direct competitors, where the risk of confidential information being misused by the other side is magnified in comparison to a typical business case. Some standard protective order provisions are not restrictive enough, while others are so restrictive that the parties may run into roadblocks during discovery, increasing the costs of the lawsuit and frustrating the discovery of relevant documents.

Therefore, when deciding how to proceed with a trade secrets lawsuit, a company and its litigation counsel should discuss the specific aspects of a protective order and consider whether additional above-the-board protections should be put in place once the lawsuit is filed.  Since an agreed protective order is viewed by courts as a contract between the parties, the courts are often reluctant to change their terms unless both parties agree, which can make it difficult to add protections down the road if the other side objects to them.  Thus, it pays to analyze what trade secrets are likely to be disclosed during the litigation and what a provisions a protective order should include to ensure the preservation of their confidential nature during the discovery stage and trial. 

How will you calculate and prove the damages your company suffered from the misappropriation?

Many companies spend a lot of money and time proving that their trade secrets were taken and used by a competitor, only to receive a big fat “zero” in damages from the jury or to have a judge throw out their expert’s opinion regarding the damages the company suffered as being too “speculative” or “unreliable.”  

Sometimes, all that a company wants is for the person or entity that took the trade secrets to return them and/or a court order restraining that person or company from using the information they took. However, if the cat is out of the bag, so to speak, and the information has already been used by the time the company finds out that something was stolen, then the company might want to seek monetary compensation. In that case, analyzing what type of damages a company might be able to recover and how such damages may be proven must be done before the lawsuit is filed or shortly thereafter. Knowing whether a company might have a problem showing the amount of damages or linking such damages to the misappropriation can help the company set a realistic litigation budget and devise a settlement strategy.

Bottom line is that the two issues identified above should be addressed and analyzed early on, rather than in the middle of a costly litigation battle, when substantial funds and resources have been invested by the plaintiff and a non-suit might no longer be an option. 

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. Contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

A Few Lessons From the Morgan Stanley Trade Secrets Debacle

bitcoin-data-mining-online-currency-theftEarlier this month, a financial advisor at Morgan Stanley copied information of 350,000 of the company’s wealth management clients. A few days later, a sample data from 900 clients was posted on Pastebin, with the poster offering more in exchange for the payment in SpeedCoin, a type of virtual currency similar to BitCoin.

As it happens, earlier that year, Morgan Stanley hosted a bitcoin event at its headquarters, which all employees were invited to attend. And while Morgan Stanley CEO was busy announcing to the world that he does not understand what Bitcoin is, some lower level employees were apparently taking notes.

As you can imagine, the stolen data had a wealth, pun intended, of information about each client.  A six-year advisor was able to get the information by simply running reports within the company’s database. Although he was quickly fired after the breach was discovered, and is now subject to a FBI investigation, the damage to the company’s reputation in terms of clients’ trust has been done.  My guess is that the damage is quite significant, whether the company will admit it or not.

Unfortunately for business owners, trade secret theft is a daily occurrence. With the proliferation of personal electronic devices and the increasing connection of office devices, such as printers, faxes, etc. to the internet, confidential information can be stolen and shared with third parties in a matter of minutes.  The Morgan Stanley debacle shows that even the international powerhouses who have almost unlimited budgets and resources to protect their confidential information and the information of their clients can suffer from blind spots in their security systems that are meant to protect sensitive data. My guess is that Morgan Stanley relied a little too much on the criminal penalties bestowed upon those who misuse client data in the banking world and did not implement as strong of a security system as it should have.

As a business owner, manager, or a person in charge of the confidential information within your organization, it is your responsibility to make sure that that data is protected.  While it is impossible to keep up with every technological advantage, it is relatively easy to set up a protection system within the company that will prevent most, if not all, data theft. How, you say? Here’s how:

1.  Take a few hours and write down a list of every type of information that your company considers proprietary or confidential, even if it’s an obvious one.  This can include customer list and information, vendors list, source code for your software program, design plans for your product, your marketing plans, your financial data, etc.  Any successful business will probably have more than one type of confidential information.

2.  Consider who within your company or business has access to each type of confidential information.  Then, consider whether they need to have access to it.  For example, does your marketing department need to have access to your manufacturing schemes? Does your manufacturing department need to have access to your financials or customer list? It might seem silly, but I guarantee that after taking stock, you will find that some people or departments incidentally have access to the data that they don’t need or use in their jobs. Eliminate such access.  Of course, be careful not to deprive people of the information that they need to do their jobs.

3.  Consider whether each person with access to confidential information has signed proper agreements. Do your employees have non-compete agreements, non-solicitation agreements, and non-disclosure agreements? If they do, are the agreements consistent? Do they have all the necessary bells and whistles to make them enforceable? How long ago were they updated?  Having thorough yet clear agreements will discourage most employees from attempting to steal trade secrets.

4. Take stock of all electronic devices issued to employees.  Do you consistently keep track of what electronic devices are issued to employees by the company? Do you have a policy governing how such devices are used? Do you have security measures on such devices? Do you have a way to determine whether a device has been used to transfer confidential information? This is particularly important for the employees who work from home.

5. Do you have appropriate agreements with vendors, suppliers, business partners, and other parties who receive confidential information from you? If not, you need to add such agreements into your relationship with such parties to make sure that your confidential information is not used to replace or cut you out.

LESSON:  What happened at Morgan Stanley, can happen anywhere. But, it is less likely to happen in a company where employees get a sense that the company is serious about protecting its trade secrets and confidential information of its customers.  The serious attitude is conveyed to the employees by having an organized framework – from legal agreements, to passwords, to restricted access to non-essential employees – within the company. When employees see that a company’s efforts to protect its information are disorganized or haphazard, they are more likely to attempt theft of such information because they believe that they will not be caught. In Morgan Stanley’s example, it appears, that the company did not even know that the employee obtained its client data until weeks after it was posted for sale on the internet, which means that its internal database did not alert the company when large amounts of reports were being generated.

Make 2015 the year that you insulate your business from trade secret theft.

If you are facing a trade secret misappropriation claim or are suspecting that a theft of trade secrets occurred at your company, contact Leiza Dolghih at Leiza.Dolghih@GodwinLewis.com for a consultation.