Vermont Bar Association

55th

Mid-Year Meeting

Seminar Materials

Intellectual Property: Trade Secrets

Faculty: Matthew B. Byrne, Esq.

Walter E. Judge, Jr.

Jane Osborne McKnight, Esq.

March 22 & 23, 2012

Hilton Burlington, Vermont

DRM\7321742.1-WEJ

HOT TOPICS IN TRADE SECRET LAW

VBA Mid-Year Meeting

March 23, 2012

1. Overview of Trade Secrets Law and Some of the Emerging Issues.

Walter Judge, Jr., Esq.

What kind of information does Trade Secret law protect? How do you keep your information “secret” and how much secrecy is required in the real world of business? What is in the “public domain”? Brief discussion of the leading Vermont cases. The use of confidentiality agreements to protect your information and special considerations involving departing employees. “Cloud” computing considerations. Are there First Amendment issues in trade secrets law?

2. The Inevitable Disclosure Doctrine – What is it and Where is it Headed?

Jane Osborne McKnight, Esq. What exactly is the “inevitable disclosure” doctrine? What factors will a court examine to determine whether disclosure by a former employee is “inevitable”? Is it fair to restrain employees who have not executed non-compete agreements? How are Vermont courts likely to rule on this controversial theory? 3. Direct and Cross-Examinations in a Trade Secrets Case/The Intersection of Trade Secret Law and Other Areas of Intellectual Property Protection

Matthew Byrne, Esq.

The presentation will include a mock trial based on the Woodchuck Hard Cider case. The trial will show how various intellectual property doctrines intersect in the presentation of actual evidence in a “real” case.

March, 2012

Trade Secrets:

Protecting Your Valuable

Commercial Information Walter E. Judge, Jr.

Downs Rachlin Martin PLLC

wjudge@drm.com

© 2012. All Rights Reserved.

What is a Trade Secret?

■ Creature of state law only (unlike patents, copyrights,

and trademarks)

■ Coca Cola: Formula for the syrup is a trade secret

■ Opposite of patents, copyrights, and trademarks in that,

instead of gaining benefit in return for public disclosure,

owner gains benefit from non-disclosure (i.e.,

maintaining secrecy).

Source of Trade Secret Law

■ Restatement of Torts, Section 757, Comment b (1939)

(old)

■ Uniform Trade Secrets Act (1979)

– First state adopted: Minnesota, Aug. 1980

– Now adopted in most jurisdictions

United States Supreme Court

■ The validity of state trade secret law was affirmed by

the U.S. Supreme Court in Kewanee Oil Co. v. Bicron

Corp., 416 U.S. 470 (1974) (trade secrets law not pre-

empted by federal patent law).

Lessons from Kewanee Oil

■ Just because information could be patented, doesn’t

mean it has to be.

■ The inventor may not know whether the invention is

patentable, so why make him or her go through the

patent process if they don’t want to spend the money

and the outcome is uncertain?

Lessons (cont’d)

■ The patent system is not harmed by offering protection

to inventions that aren’t patentable because the patent

system and trade secrets law have different policies.

– Patent: Promoting advancement of technology

– Trade Secrets: Promoting commercial morality and

encouraging invention

■ The patent policy of encouraging invention is not

disturbed by the existence of another form of incentive

to invention.

Lessons (cont’d)

■ If trade secret protection didn’t exist to protect

unpatented or unpatentable information, owners would

have to rely on “self-help” – i.e., non-legal measures to

protect their information.

■ They would be less able to commercially use the

information because they’d be afraid of theft.

■ There would be no or little licensing of information.

Modern Definition of Trade Secret

■ Uniform Trade Secrets Act (1979, with 1985 amendments)

– § 1(4):

“Trade secret” means information, including a formula,

pattern, compilation, program, device, method, technique or

process that:

• (i) derives independent economic value, actual or potential,

from not being generally known to, and not being readily

ascertainable by proper means by, other persons who can

obtain economic value from its disclosure or use, and

(ii) is the subject of efforts that are reasonable under the

circumstances to maintain its secrecy.

Modern Definition (cont’d)

■ The cases make clear that this definition can include

software, or at least the structure and/or architecture of

the software.

Key Points

1. Information encompassed is very broadly defined

– Can include material that could be copyrighted or patented,

but isn’t (e.g., computer programs)

2. Must have some economic value, but . . .

3. “Actual or Potential”

– The economic value of the trade secret can be “potential”:

• There is no requirement that the trade secret is currently

being used or making money.

• You can own a trade secret that you do not currently use or

license out.

Key Points (cont’d)

4. “Not generally known”:

– Secrecy is defined as “not being generally known to . . .”

– Absolute secrecy will probably not be required.

5. “Not readily ascertainable”:

– Absolute non-discoverability by another may not always be

required.

Each Case Will Be Extremely

Fact Specific

■ Factors leading to a finding that something is “not

generally known” in one industry/field (i.e., that the

trade secret is legitimate) might lead to a finding that it

is “generally known” in a different industry/field.

■ Factors leading to a finding that something is “not

readily ascertainable” in one industry/field (i.e., that the

trade secret is legitimate) might lead to a finding that it

is “readily ascertainable” in a different industry/field.

Questions

1. What is the nature of the information?

2. How many players are in the industry or field?

3. Within that context, how many of the players know

your “secret”?

4. How many people know the information inside your

business?

Questions (cont’d)

5. What are your measures to guard secrecy?

6. What is the value of the information?

7. How much time and effort did it take to develop the

information?

8. Within your industry or field, how “ascertainable” would

your information be?

Unknown Combinations of Known

Technologies Can Be a Trade Secret

■ Integrated Cash Management Services, Inc. v. Digital

Transactions, Inc., 920 F.2d 171 (2d Cir. 1990)

(software program)

■ Metallurgical Industries v. Fourtek (1986) (same)

■ Under the modern definition of trade secrets, “negative

know-how” can be a trade secret.

Elements of a Trade Secret

Misappropriation Claim

1. Existence of a trade secret (consult definition and apply

factors)

2. Reasonable steps to protect secrecy

3. Misappropriation

Need to Maintain Secrecy

■ What constitutes “secrecy”?

■ In the real world of business, how much “secrecy” is

required?

– Metallurgical Industries v. Fourtek (1986): fact that the

plaintiff had disclosed its secrets to two companies that it did

business with did not destroy the secret

– Rockwell Graphics (secrecy measures in place, but plaintiff

did allow many companies to have access to its technical

drawings)

Industry-Specific Analysis

■ Courts look at whether there are:

– written confidentiality agreements (not only with key

employees, but also with outsiders who may have

occasional access to the information)

– locked doors

– employee badges

– visitor sign-ins

– periodic warnings to employees (e.g., “Loose lips sink

chips”), etc.

The Issue of Whether a Trade Secret

Owner’s Efforts to Maintain Secrecy

is a Balancing Test

■ See E. I. du Pont de Nemours & Co. v. Christopher,

431 F.2d 1012 (5th Cir. 1970) (industrial espionage via

airplane “flyover”)

■ See Ziegler v. Ehren, 141 Wisc.2d 19, 414 N.W.2d 48

(1987) (“dumpster diving”)

Is a Non-Disclosure Agreement

Always Necessary?

■ Smith v. Dravo, 203 F.2d 369 (7th Cir. 1953)

– Maybe not always; a confidential relationship may be implied

by the circumstances surrounding the disclosure of the trade

secret; court decided not to reward unscrupulous behavior.

■ Idiot rule

– Of course a non-disclosure agreement is always necessary!

Misappropriation

■ Improper acquisition, disclosure or use.

■ The UTSA/VTSA definition of misappropriation lays out

all the possible scenarios giving rise to liability for

misappropriation. The definition is extremely expansive

and all-inclusive.

Misappropriation (cont’d)

■ Under the old definition, it was not illegal to steal

someone else’s trade secret, as long as you didn’t use

it or disclose it.

– There’s a certain logic to that: if you’re not using it or

disclosing it, you’re not necessarily harming the owner.

■ The modern definition also makes it illegal to even

acquire someone else’s trade secret.

– The theory is that if someone has it who shouldn’t have it,

there’s a greater risk that it will be improperly disclosed or

used.

Defenses to Misappropriation

■ Public domain

■ Owner’s lack of efforts to keep secret

■ Reverse engineering

Defenses (cont’d)

■ Independent development

– Richardson v. Suzuki

• Defendant: We’re Suzuki. We could have figured this out.

• Court: Yeah, but that’s not what you did; you stole it.

So, you lose.

– “Independent development” is not a theoretical defense.

The independent development has to be actual independent

development.

Defenses (cont’d)

– VMI v. Autodesk:

• Code was re-written by hand from beginning to end, so it

would look like independent development

• Messy code was “cleaned up,” but architecture was still the

same, and key mistakes and non-essential elements in the

original code were left in the re-write!

■ Changes, modifications, non-exact copying

– Richardson v. Suzuki:

• Defendant: We improved what we stole.

• Court: Nice try. Guilty.

The Special Problem of Departing

Employees With Technical

Knowledge

■ VMI v. Autodesk: Company’s trade secrets balanced

against employee’s pre-existing skill, knowledge, and

experience, and right to use acquired skill, knowledge,

and experience in future employment.

– The line between an employee’s pre-existing skill,

knowledge and experience and your actual trade secret may

be determined on case-by-case basis

– In some cases, the technology that the employee departs

with will be a combination of both

Departing Employees (cont’d)

■ But . . . an intake memo in the file, combined with a

copy of the employee’s resume when he began

employment, will certainly help to establish what

knowledge and skill he didn’t have before he started!

Use Confidentiality Agreements,

Non-Competition Agreements and

Invention Assignment Agreements

■ Using only a non-competition agreement may not cover

all of the bases, and vice versa.

■ At the beginning of employment, sit down with the

employee and identify precisely what the employee

knows and worked on before you hired him/her. Get it

in writing. Anything not identified by the employee at

the beginning is potentially yours to claim when the

employee departs.

Agreements (cont’d)

■ In some cases, courts have not always required the

existence of written agreements to hold employees

accountable not to use their former employer’s

business information, but only a foolish employer would

fail to use confidentiality agreements and “hope for the

best.” See Dicks and Omega.

■ California: non-competition agreements invalid

– Lots of litigation over whether the document is governed by

California law or was signed elsewhere.

Remedies

1. Injunctive relief

2. Damages:

– a. Trade secret owner’s actual loss

– b. Misappropriator’s unjust enrichment

– c. Both of the above (as long as no double counting)

– d. “Reasonable royalty”

Inevitable Disclosure Doctrine

■ See Pepsico, Inc. v. Redmond, 54 F.3d 1262 (7th Cir.

1995)

■ Contra Whyte v. Schlage Lock Co., 101 Cal.App.4th

1443 (Cal. Ct. App. 2002)

■ Don’t rely on the “inevitable disclosure” doctrine! Get

the appropriate agreements in place with your

employees.

First Amendment Considerations in

Republishing Trade Secrets

■ DVD Copy Control Association, Inc. v. Bunner, 31

Cal.4th 864 (Cal. 2003)

Emerging Issues

■ “Cloud Computing”

– What if you store you information on a “cloud”?

– No case law on whether this act would be considered to be

waiving your protection.

– Know the storage provider’s security technologies to prevent

hacking.

– Make sure they know you are storing your companies critical

information, and ask them to acknowledge that fact.

– Will they enter into a special agreement with you that you

would be able to use later as evidence that you believed the

“cloud” was consistent with reasonable security?

Lessons

1. If your client is calling a lawyer, it may be too late (but

better late than never . . .)

– Litigation is a woeful substitute for adequate protection

measures up front:

• It’s expensive

• And the outcome is uncertain

Lessons (cont’d)

2. Your client should know exactly what it has in all forms

of intellectual property (not only patents, copyrights and

trademarks, but also trade secrets).

– If you’re in the business of inventing things and then

patenting them, for example, a trade secret is a patent that

hasn’t been patented yet, so protect it!

– It never will be patented if it’s stolen first.

3. Consider conducting an IP audit:

– a. What technology do you have?

– b. Are your protection measures adequate?

Lessons (cont’d)

4. Review your documents – 4 important considerations:

– A. Are your documents up to date?

• A 5-6 year-old confidentiality agreement or non-compete

agreement may be out of date substantively and may also be

“stale”.

Lessons (cont’d)

– B. When was the last time your employees actually signed a

confidentiality agreement? Are you sure there is one on file

for every relevant employee? (“Damn. I thought sure we had

a signed agreement from that jerk.”)

• After deciding to sue ex-employee for trade secrets

misappropriation is wrong time to find out that you didn’t get

that signed agreement back from him 5 years ago.

– C. Who should sign confidentiality agreements?

• Every employee?

• Only technical employees and execs?

• Secretaries?

Lessons (cont’d)

– D. Are there different versions for different employees

based on when they joined the company?

• Don’t do that!

• When you update your documents, everyone should renew.

■ 5. Verbally remind your employees periodically of their

confidentiality obligations, and document it.

– Have witnesses.

Litigation Does Not Always Mean

You “Screwed Up.”

■ No matter how good your protection measures are,

there are some people who:

– Just don’t care

– Think they won’t get caught

– Will not understand that what is in their heads isn’t theirs.

■ Your job is to try to identify such people and try to

address the issues before harm is done.

Page 1 of 2

INEVITABLE DISCLOSURE DOCTRINE

Jane Osborne McKnight Law Office of Jane Osborne McKnight, PLC

Shelburne, VT

I. Vermont Trade Secrets Act and the Uniform Trade Secrets Act - 9 V.S.A. § 4602 provides, “Actual or threatened misappropriation may be enjoined.” II. Seminal Case - PepsiCo, Inc. v. William Redmond and Quaker Oats Co., 54 F.3d 1262, 35 U.S.P.Q. 2d 1010 (7th Cir. 1995). III. The Inevitable Discosure Doctrine Has Been Widely -- But Not Universally -- Accepted See, e.g.: - Cardinal Freight Carriers, Inc. v. J.B. Hunt Transp. Servs., Inc., 987 S.W. 2d 642, 646 (Ark. 1999); - Conley v. DSC Communications Corp., 1999 Tex. App. LEXIS 1321, No. 05- 98-01051-CV, 1999 WL 89955, *4 (Tex. App. – Dallas Feb. 24, 1999); - Novell Inc. v. Timpanogos Research Group Inc., 46 U.S.P.Q.2d (BNA) 1197, 1216 (Utah Jan. 30, 1998); - Solutec Corp., Inc. v. Agnew, 88 Wash. App. 1067 (1997), review denied, 136 Wash. 2d 1004, 972 P.2d 464 (1998); - APAC Teleservices, Inc. v. McRae, 985 F. Supp. 852, 857 n. 3 (N.D. Iowa 1997); - Southwestern Energy Co. v. Eickenhorst, 955 F. Supp. 1078, 1085, 42 U.S.P.Q.2d 1824 (W.D. Ark. 1997); - La Calhene, Inc. v. Spolyar, 938 F. Supp. 523, 531, (W.D. Wis. 1996); - Lumex, Inc. v. Highsmith, 919 F. Supp. 624, 633-34 (E.D.N.Y. 1996); - Merck & Co. Inc. v. Lyon, 941 F. Supp. 1443, 1459 (M.D.N.C 1996); - Uncle B’s Bakery, Inc. v. O’Rourke, 920 F. Supp. 1405, 1435-36 (N.D. Iowa 1996).

Page 2 of 2

IV. What Courts Have Rejected the Inevitable Disclosure Doctrine and Why? - Many states have statutory or other law formally disfavoring non- compete agreements. See, e.g., California Business and Professionas Code, Sec. 16600: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” - See Hill Medical Corp. v.. Russell R. Wycoff, 86 Cal.App. 4th 895, 103 Cal. Rptr. 2d 779 (Cal. App. 2d Dist. 2001). - Schlage Lock Co. v. Whyte, 2002 DJDAR 10594. V. What Should be Pleaded and What Evidentiary Showing Should Be Made When Advancing the Inevitable Disclosure Theory? VI. How will Vermont Courts embrace the Inevitable Disclosure doctrine? - What is the Vermont policy on restraints of trade? - See discussion of enforceability of non-compete agreements in Systems and Software, Inc. v. Barnes, 2005 VT 95, 886 A.2d 762 (Vt. 2005). - No reported decisions in Vermont - Judge Norton unpublished trial court opinion in Davison v. Caleidoscope Communication Co., No. S0436-04 (Nov. 8, 2004)(denying Rule 12(b)(6) motion).