Trade Secret Theft: Explained
Information today has become an influential mechanism – almost equivalent to money or power. Its extravagance and distribution have led to knowledge (including the ability to create it) becoming an incredibly crucial economic input. With the development of information and accessibility to it, the necessity to protect such information, which may often contain pieces sensitive to the survival and growth of an enterprise, has become far-reaching. Such information is known as a trade secret.
Trade secret may consist of commercial or technical know-how that is used in a business and offers precedence over competitors who do not know such information. For example, a trade secret may be a formula for a chemical compound, an apparatus for manufacturing a product, a manufacturing process, computer software, or valuable business information (e.g., marketing information or, under certain circumstances, a list of customers). Therefore, trade secret protection is of utmost importance in today’s era.
Trade Secret US Laws
The U.S. Economic Espionage Act (EEA) of 1996, which became effective on January 1, 1997, makes theft or embezzlement of trade secrets a federal crime. Prior to this law, both civil and criminal actions for such trade-secret misconduct were governed by state laws. While federal authorities had previously made efforts to prosecute those who stole trade secrets by employing interstate auto theft, mail fraud, or wire fraud allegations, such actions were not ideally suited to accomplishing the main objective of punishing those who engaged in the theft of trade secrets.
The act defines trade secrets as all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing. The act defines the owner as "the person or entity in whom or in which rightful legal or equitable title to, or license in, the trade secret is reposed."
The judgment of the theft of trade secrets under the EEA can result in a fine of up to $250,000 for an individual (up to $5 million for corporations), imprisonment of up to ten years, or both. If the crime is committed for the benefit of any foreign government, instrumentality, or agent, the penance increases to fines of $500,000 (up to $10 million for an organization), imprisonment up to 15 years, or both.
Under economic surveillance, "Whoever, intending or knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent, knowingly
steals or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains a trade secret;
without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys a trade secret;
receives, buys, or possesses a trade secret, knowing the same to have been stolen or appropriated, obtained, or converted without authorization;
attempts to commit any offense described in any of paragraphs (1) through (3); or
conspires with one or more other persons to commit any offense described in any paragraphs (1) through (3), and one or more of such persons do any act to effect the object of the conspiracy shall be liable for the recited penalties."
The section on the theft of trade secrets begins with the preamble "Whoever, with intent to convert a trade secret, that is related to or included in a product that is produced for or placed interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will, injure any owner of that trade secret, knowingly . . . performs any of the acts set forth in numbered (1)(5) recited hereinabove shall be liable for the recited penalties."
The Economic Espionage Act provides another weapon in the arsenal available to prosecute those who have been involved in the theft of trade secrets. The act also permits those who cannot afford to initiate civil litigation against the one plighted in the theft of trade secrets to attempt to have the government bring a criminal action that, although not providing any direct financial relief to the trade-secret owner, may result in criminal conviction and punishment of the jailbird.
The DSTA defines the term “trade secret,” to mean almost any kind of information for which the owner has taken reasonable measures to keep such information. For example, a medical marijuana company in Arizona sued its departed CEO under the DTSA for the alleged theft of trade secrets from a cloud storage account. AZ DP Holdings LLC, et al. v. Gullickson, (D.Ar. – DATE). In another “weed” case, a state court in Pennsylvania found that news organizations should not receive uncensored copies of applications for state licenses to grow and process medical marijuana because the applications include applicants’ sole information on things like fertilizer, pesticides and cannabis processing, all of which are included in the “trade secrets” exemption to Pennsylvania’s Right-to-Know law. Pennsylvania Dept. of Health v. McKelvey et al., 189 CD 2018, Commonwealth Ct of Pa. In a case from November 2018, a New England craft beer brewer sued another brewer for theft of trade secrets, among other claims, under the DTSA and Massachusetts trade secret law for publicly posting secret beer formulas on a public job recruitment forum.
Trade Secret Theft in ITC
The International Trade Commission (ITC) is a way out for victims to file suit where the acts of misappropriation occurred outside the United States and an infringing product is imported into the US as seen from two investigations that the ITC opened during 2019. Under Section 337(a)(1)(A), a trade secret claim provides ITC jurisdiction for “unfair methods of competition and unfair acts in the importation of articles,” commonly referred to as “non-statutory claims”. Resolvement includes restricting the entry of the offending products into the US or preventing their commercialization to the extent already imported. The Federal Circuit in TianRui Group. Co. v. Int’l Trade Comm’n, 661 F.3d 1322, 1332 (Fed. Cir. 2011) held that the ITC has jurisdiction even where the acts constituting the alleged misappropriation occurred entirely outside the United States. On February 28, 2019, the ITC instituted an investigation into the botulinum toxin products manufactured by Korean Daewoong Pharmaceuticals Company Limited (Daewoong) and its California licensee, Evolus, Inc. (Evolus), after two courts in the United States dismissed theft of trade secrets cases filed by Medytox Inc. and Allergan entities. The complaint alleges violations of section 337 for the importation into the US and sale of certain botulinum toxin products, processes for manufacturing or relating to the same and certain products containing the same misappropriate trade secrets used by the plaintiff. Medytox pursued its trade secrets claims at the ITC after the claims in its actions filed in Indiana and California were dismissed on forum non conveniens grounds and stayed pending the outcomes of litigation pending in South Korea. Moreover, the Indiana court found that because certain conduct related to the theft occurred in Korea, the court was without jurisdiction.
Establishing Trade Secret Claims
Due to the complexity of trade secret law, it is wise to seek the advice of an experienced and knowledgeable intellectual property and business law attorney to draft non-disclosure agreements for your business and put proper safeguards and systems in place.
Generally, there are three criteria to establish a trade secret claim:
The ‘secret’ must qualify for trade secret protection;
Precautions were made to protect the ‘secret’; and
The information was misappropriated, either through breach of confidence or improper means.
It is important to note that the law allows replication if reverse engineering was used, the information was discovered for oneself, or if the originator of the secret does not take reasonable precautions for trade secret protection.
Unlike criminal law, the legal burden of proof in a civil trade secret claim requires that the plaintiff prove each element of the claim by a preponderance of the evidence. While this protects those in possession of trade secrets, it requires sound legal advice to really ensure proper protection and enforcement.
Trade Secret Theft Cases
Tesla Motors v. Anderson et al. (April 2017) - In January 2017, Tesla Motors, Inc. filed an infringement of contract lawsuit against former employee Sterling Anderson, former chief of the company’s Autopilot Program, and Chris Urmson, former CTO of Alphabet Inc.’s self-driving technology. Tesla alleged that Anderson and Urmson attempted to enroll multiple Tesla engineers to their new company, Aurora, and allegedly stole “hundreds of gigabytes” of confidential Tesla information. Anderson’s and Urmsons’s goal for Aurora is to develop driverless cars and improve safety for self-driving technology. Tesla claimed in the suit that Anderson violated his employment contract and ruptured a duty of loyalty to Tesla by recruiting Tesla engineers and using company information to form Aurora. On April 19, 2017, the parties settled the lawsuit when Tesla agreed to withdraw its suit without damages, attorneys’ fees, or any finding of wrongdoing. Aurora agreed to compensate Tesla for future ongoing audits conducted to establish that Aurora did not in fact misappropriate Tesla’s trade secrets.
Qualcomm Inc. v. Apple Inc. (December 2018) - Recently, Apple was the disputed subject as it was alleged to have stolen trade secrets from Qualcomm and shared them with Intel Corporation after Qualcomm allowed Apple access to its source code and tools for LTE modem chipsets. Qualcomm claimed Apple misappropriated their trade secrets in an attempt to preserve the quality of the chips Apple purchases but changed the supplier of the chips from Qualcomm to Intel Corporation for their new iPhones. A complaint was initially filed in November by Qualcomm claiming that Apple ruptured a software-licensing contract by sharing confidential details regarding Qualcomm’s chips with engineers at Intel Corporation. A motion to amend the complaint accuses Apple of stealing trade secrets “for the purpose of improving lower-quality modem chipsets, including those manufactured by Intel, a competitor of Qualcomm, to render such chipsets usable in Apple devices with the ultimate goal of diverting Qualcomm’s Apple-based business.”
The Engineer behind Google, Uber trade secret theft case sentenced (April 2020) - Anthony Levandowski, the former Google engineer, was sentenced on August 4, 2020, four months after he pleaded guilty to stealing Google's trade secrets. He was also ordered to pay a $95,000 fine and $756,499.22 in restitution to Waymo, Google’s self-driving car program he stole from. The case started from an incident in 2016 in which Levandowski downloaded and copied files from Google onto his laptop and resigned. He then used that data to form a self-driving truck company, Otto, that eventually went on to be acquired by Uber. Waymo filed a lawsuit against Uber, alleging that by acquiring Otto, it was able to extract sensitive information that Levandowski took with him on the way out of Google. Waymo and Uber settled the trial after 4 days of argument and testimony in San Francisco in February 2018 but it wasn't immediately clear that a criminal case was being pursued against Levandowski until 2019, when a federal grand jury summoned the engineer. The engineer was ultimately charged with 33 counts of theft and attempted theft of trade secrets for absconding with 14,000 files belonging to Waymo. The files reportedly cost the company millions of dollars to produce and contained highly technical information. Levandowski pleaded guilty to one of those charges as part of a plea deal in March in exchange for federal prosecutors dropping the other 32 charges. According to the U.S. The Attorney's Office of the Northern District of California, when Judge William Alsup called the case "the biggest trade secret crime I have ever seen," adding "this was not small. This was massive in scale."
Trade Secret Protection
Trade secrets are often what makes a business unique and can effectively set a business up for sustainable and long-term success. While trade secret theft may seem uncommon, several current cases suggest otherwise. “Tappy”—the automated robot used to test iPhones at T-Mobile—is at the center of trade secret theft charges against Huawei Device Co. and Huawei Device USA Inc. Huawei was originally contracted in 2010 by T-Mobile to supply phone handsets, but used the relationship to gain access to and photograph the testing robot and allegedly copy the robot’s design.
Huawei is scheduled to appear before the U.S. federal court on March 2 and is looking at paying up to $5.5 million for all combined charges brought against the company including trade secret theft, wire fraud, and obstruction of justice.
The current case pending against Huawei is an example of a trade secret breach of confidence and illustrates the necessity to protect against trade secret theft. Unlike patent, trademark, and copyright law, there is no way to register a trade secret with U.S. federal or state governments, so protecting this type of proprietary information requires a different strategy.
When seeking to protect a trade secret, it’s important to think about all the ways trade secrets can be exposed in a worst-case scenario.
Non-disclosure agreements: Potentially the most important component to legal protection of trade secrets is the creation of a non-disclosure agreement (NDAs) with the help of a trusted attorney. These legally binding documents must articulate that employees are not allowed to share the employer’s confidential information during or after employment. An NDA will typically be enforced by a court in the event of a trade secret theft claim and will help to ensure your business is protected.
Managerial precautions: Conceptually, the goal is to clearly identify what is considered a trade secret and to minimize human involvement and contact with those elements of your business to only those employees whose work requires the information. First, make it clear what is confidential. Both electronic documents and files, as well as tangible files and documents, must be labeled as confidential. Locking up documents in cabinet files or storing trade secrets in secured rooms with minimal access is also essential to minimizing access to sensitive information. Other forms of trade secret protection include creating passwords for computer files or restricted access to certain rooms. It is also important to monitor sensitive information so that you and your business are aware of who has access to trade secrets and when. Another strategy is to only allow access to certain pieces of confidential information only to certain parties on a need-to-know basis.
Employee training: Another key role in establishing the protection of trade secrets is informing employees of company policies and the treatment of confidential information. As an employer, this is important to ensure reasonable protection efforts of trade secrets and will ensure streamlined dissemination of protocol for confidential information.
Based on trade secret misappropriation cases filed over the last 10 years, 40% of cases dealt with former employees taking trade secrets with them over to their new employers while 25% of cases dealt with suppliers, consultants, and vendors misusing trade secrets disclosed to them in due course of business. Interestingly, cyber-criminals and hackers constituted only 15% of trade secret theft, while the remaining 20% were attributable to actions by current employees at companies where the theft occurred. These numbers highlight the need for not just technical solutions (effective most against cyber-criminals and hackers) but also (and even more so) legal and procedural solutions to protecting trade secrets before, during, and after the secrets are willingly disclosed to employees and vendors.
Copperpod’s proprietary DM2 (Define, Mark, Disseminate, Monitor) model for trade secret management and enforcement helps companies protect their competitive advantage through trade secrets and their trade secrets through technology. We have also leveraged our source code review capabilities to help clients achieve success in several high-tech trade secret cases covering enterprise software, embedded systems, power management, web browsers and applications, cryptography, data compression, content management systems, video surveillance systems, image processing, and semiconductor memory management.