Association of Corporate Counsel
August 19, 2015
Trade Secrets Law 201:
Developing Issues in Protecting Company Proprietary
Information
Wayne Gross, Esq.
Michael Katz, Esq.
Partner
Greenberg Gross LLP
Partner
Greenberg Gross LLP
Data Points on Trade Secret Theft Issues
• US companies: $5 trillion in trade secret
assets
• Theft of trade secrets cost U.S. businesses
$160-500 billion/yr.
• Will increase exponentially over next decade
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Profile of IP Thieves
• Technical positions
• male employee, 37 yrs.
• Has IP agreements
• At time of theft
• 65% of employees already accepted positions with a
competitor or started their own company
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Profile of IP Theft
Trade Secrets Make Up 52% Of All IP stolen
• Billing info, price lists, administrative data (30%)
• Source code (20%)
• Proprietary software (14%)
• Customer information (12% )
• Business plans (6% )
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Profile of IP Theft
Insiders use technical means to steal IP
• 54% of subjects used a network (email, a remote
network access channel, or network file transfer) to
remove stolen data.
• Steal what they have authorized access to
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What can you do to protect your company’s trade secrets?
1.
Update/communicate policies
2.
Maintain enforceable agreements
3.
Build a culture of confidentiality
4.
Protect use of smartphones
5.
Preserve Evidence
6.
Conduct Exit interviews
7.
Be Aware of Social Media Pitfalls
8.
Enforce your rights
9.
Manage Inbound Risks
10.
Conduct audits
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1 - Update and Enforce Policies
• Update electronic monitoring policies.
• Publish and enforce IT acceptable use policies
– email
– Internet
– social media
– mobile devices (“BYOD”)
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2 – Ensure Enforceable Agreements
• Employee confidentiality, nondisclosure,
noncompetition, and non-solicitation agreements.
• Avoid everything but the kitchen sink; if everything is
“confidential” then nothing is.
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2 – Ensure Enforceable Agreements - SEC
• SEC recently found Confidentiality Agreements used in
internal audits violated whistleblower protections
• Required a “whistleblower carveout”
• Nothing in agreement interferes with right under any
whistleblower provision of any federal law or reg.
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3 - Build a Culture of Confidentiality
– Establishing “dos and don’ts”
– Explain consequences of disclosures
– Treat confidential information consistently
 Secure confidential files
 Need to know basis
 Use security or encryption features
 label information as “CONFIDENTIAL” or “TRADE SECRET”
– Periodically have employees acknowledge obligations in
writing.
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4 - Be Smart About Smartphones
Company-Issued Device
Bring Your Own Device (BYOD)
Pros:
Pros:
•
Stronger data protection.
•
Reduces employer expenses
•
Helps fight alleged claims of offthe-clock work when companyissued devices are only given to
those employees required to use
them.
•
Increase employee satisfaction
Cons:
•
Increase cost of devices and
administration
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Cons:
•
Risk losing control over confidential
information and data if a welldrafted BYOD policy is not in place.
• Greater risk of
misappropriation.
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Measures to Prevent Employee Disclosure of
Company Data Via Smartphone
• Remote wiping
• Limit downloading apps
• return of company devices and content.
• Electronic monitoring and privacy policies
• require encryption for travel or mandate use of a
“clean” device.
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BYOD: Reasonable Efforts to Preserve Secrecy
Wayman Fire Protection, Inc. v. Premium Fire & Security, LLC, (Del.
Ch. Mar. 5, 2014)
• “merely password protecting” information not “reasonable
efforts to protect the confidentiality of that information”
PatientPoint Network Solutions, LLC v. Contextmedia, Inc., (S.D. Oh.,
Mar. 21, 2014)
• No written demand upon termination for return of
confidential information or devices
• separation agreement lacked nondisclosure provision
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BYOD: Reasonable Efforts to Preserve Secrecy
Art of Living Foundation v. Does (N.D. Cal. 5/1/12)
• Advising employees that info is a trade secret
• Limiting access on a “need to know” basis
• Requiring confidentiality agreements
• Keeping secret documents under lock
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BYOD & Reasonable Efforts
• Detailed Agreement providing employer control of
devices, and consistent application. City of Ontario v.
Quon, 560 U.S. 746, 760 (2010)(“employer policies
concerning communications will of course shape the
reasonable expectations of their employees, especially
to the extent that such policies are clearly
communicated.”)
•
•
•
•
Orientation/Training
Audits/Reminders
Device Security
Exit Procedures
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BYOD – Device Security
•
•
•
•
•
mobile device management software
sandbox technology
Require password protection
mandate encryption of corporate data stored on the device
permit company monitoring of the device, including any
data stored on or transmitted from it
• clarify no right to privacy if used for work purposes
• permit remote wiping in event device is lost or stolen
• permit the company to access the device to copy data to
meet litigation/discovery obligations
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BYOD – Device Security
• Require reporting of lost devices
• Prohibit sharing with friends/family
• No use as wi-fi hotspot
• No synching with servers/devices co. does not control
• Restrict software/applications
• Changing/disposal of devices by employees
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BYOD – Consequences
• Cost of Discovery
• Sanctions
• Credibility of Company Witnesses
• Finding of Failure to Preserve Secrecy
• Terminating Sanctions?
• Bad Faith Prosecution?
• Malpractice?
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EID: Employer Issued Devices
• EID allows employer to control use for business
purposes and limit expectation of privacy.
• Is Cost Truly Greater?
– Direct cost savings of BYOD has been reduced because
cell phone reimbursement is now expressly required.
Cochran v. Schwan’s Home Service, Inc., 228 Cal.App.4th
1137 (2014)(“An employee need only show that he or she
was required to use a personal cell phone to make workrelated calls”).
– Externalities: Hidden costs of BYOD
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5 - Devices & the Duty to Preserve
Williams v. Russ, 167 Cal. App. 4th 1215 (2008)
• Failure to preserve is intentional destruction and raises inference that
after cherry-picking favorable information, the party charged with
spoliation chose to allow rest of the information be destroyed.
Jones v. Bremen High School Dist. 228 2010 U.S. Dist. LEXIS 51312 (N.D. Il.
2010)
• On a motion for sanctions for failure to preserve, the failure to issue a
litigation hold establishes harm to the moving party because distinct
possibility that evidence relevant to moving party’s case was
destroyed.
Small v. Univ. Medical Center of Southern Nevada, 2014 U.S. Dist. LEXIS
114406 (D. Nev. 2014)
• case-ending discovery sanctions for failure to institute timely and
effective litigation hold, which resulted in spoliation of several classes
of electronically stored information.
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5 - Devices & the Duty to Preserve
Christou v. Beatport, LLC, 2013 U.S. Dist. LEXIS 9034 (D. Colo. Jan. 23,
2013)
• Sanction: jury instruction that adverse inference for failing to preserve
text messages lost while under litigation hold.
• Defendant stated they “found no responsive text messages,” but failed
to state whether counsel had reviewed the phone.
In Re Pradaxa (Dabigatran Etexilate) Products Liability Litigation, MDL
No. 2385 (S.D. Ill. Dec. 9, 2013)
• Court ordered production of business-related text messages on
employee-owned phones
• rejected argument that the failure to preserve text messages should
not be sanctioned because burdensome
• rejected argument that employees were reluctant to turn over their
personal phones, finding that the litigation hold and production
obligations apply
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5 - Devices & the Duty to Preserve
Barrette Outdoor Living, Inc. v. Michigan Resin Representatives, No.
11-13335 (E.D. Mich. April 26, 2013)
• Court sanctioned plaintiff’s former employee because he disposed
of his cell phone after his duty to preserve arose.
• PTSI, Inc. v. Haley, No. 684 WDA 2012 (Pa. Super. Ct. May 24, 2013)
• Court declined to impose spoliation sanctions against two
defendants who deleted text messages from their smart phones.
• defendants routinely deleted text messages from their phones to
free up storage space and there was “no showing that the innocent
cleanup of personal electronic devices to allow them to function
was unusual, unreasonable or improper under the circumstances.”
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6- Maximize the exit interview
• Identify and obtain return of property
• Exit interview checklist addressing trade secrets:
– Where employee is going to work and do duties relate to
his/her job with your company
– Confirm employee has returned all company equipment and
property
– any company information on any external media/pcs etc..
– Provide copy of agreements/ policies re: confidential
information
– Remind of legal duty not to use or disclose any trade secrets
– Record time and place of interview.
• Have the employee sign an exit interview acknowledgement
form.
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7- Watch Out for Social Media Pitfalls
• Employees may disclose confidential information on
social media
• Under most circumstances, an employer can fire an
employee
• But National Labor Relations Act, e.g. leaking trade
secrets on FB page in a group discussion about working
conditions
• Advise that disclosure could result in termination
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8 – Enforce Your Rights
• Prompt action is critical
• Analyze risk to determine course of action
– involve IT/forensic vendor early to preserve
evidence and investigate
– Initiate a litigation hold
– Involve outside counsel
– Involve business decision makers
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8 - Enforce Your Rights
• Cease-and-desist letter
• Notice to new employer
• Preservation letter
• Lawsuit
• TRO/Injunctive Relief
• Criminal prosecution
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8 - Enforce Your Rights: Criminal Prosecution
• Federal Bureau of Investigation (FBI)
• Homeland Security: US Imm. and Customs Enforcement (ICE)
• Dept. of Comm.: Bureau of Industry and Security (BIS)
• Pentagon’s Defense Criminal Investigative Service (DCIS)
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8 – Enforce Your Rights - Criminal Prosecution
ADVANTAGES
• Evidence gathering: e.g., search warrants; wiretapping
• Defendant risks perjury or obstruction charges if fails
to cooperate;
• Seizure of property early
• Victim restitution includes cost of investigations
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8. Enforce Your Rights: Criminal Prosecution
DISADVANTAGES
• Long time frame
• No control over process
• Government may investigate you!
• Burden of proof is beyond reasonable doubt
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8 - Enforce your rights: TRO?
• USE FORENSIC EXPERT TO SHOW BAD ACTS
– Metadata analysis
– File deletion activity
– Chronology of electronic documents movement across
different storage media
 Timing of Attachment of USB storage drives
– Analysis of authors/editors of key electronic documents
– Timing of opening or printing specific documents
– Use of wiping of any media
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9 - Managing Inbound Risks
• Defense wins championships.
– Make clear in interview and offer letter/employment
agreement the prohibition against possession or use of
confidential information from prior employers.
– Ask if candidate is bound by any restrictive agreements.
– Have legal counsel review restrictive agreements.
– Confirm candidate has complied with any restrictions on
use of confidential information and the return of company
property.
– Do not ask the candidate about specific proprietary
information.
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9 - Managing Inbound Risks
• Document Prophylactic Measures
– Make clear candidate can be fired for using another
company’s confidential information.
– Have new employee acknowledge in writing he/she
will not use and has not retained another company’s
confidential information
– Monitor to ensure no use of a competitor’s
information.
– Have IT verify whether new employee has imported
any questionable information on to the company’s
system
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10 – Conduct audits
• Publicly traded cos. must identify and value its ip
• Audit should cover entire business
• Audit team should be inclusive
• Conduct periodic review audits
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Federalizing Trade Secret Law
• Trade Secrets = only IP governed by state law
• Perceived shortfalls in state law
• Lack of uniformity
• Inadequate remedies for int’l espionage
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Federalizing Trade Secret Law
• Defend Trade Secrets Act of 2015
– Tracks the UTSA
– Provides ex parte applications for seizure of
property (including electronic data) used to
facilitate trade secret misappropriation
– Five year SOL period
– No preemption of state laws
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Federalizing Trade Secret Law
Problems
• Negative trade secrets – jurisdiction
under the Commerce Clause?
• No preemption of common law claims
• Federalization of state law issues, e.g.,
contract interpretation and breach of
fiduciary duty
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European Trade Secrets Directive
• Council of the EU draft legislation (May 2014) to create
uniform trade secret laws in Europe
• Unlawful = “any … conduct under the circumstances..
Considered contrary to honest commercial practices”
• Criticized for overly broad protections that would
interfere with the public interest
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