Senate Bill Could Encourage More Trade Secret Litigation

Posted on April 16, 2013 by joe

A bill that would fundamentally change the nature of trade secret litigation in Texas is quietly working its way through the Texas Legislature as we speak. Senate Bill 953, by Texas Sen. John Carona (R-Dallas), would adopt the Uniform Trade Secrets Act in Texas, one of only three states that hasn’t already done so.

Right now, trade secret litigation in Texas is literally argued on a case-by-case basis.  Each case has its own facts, and appellate decisions have been written narrowly, sometimes conflicting with each other. The end result is that we live in an inexact world, trade secret-wise, and there’s probably something for everyone lurking out there in the trade secret common law. 

In that sense, having a Uniform Trade Secrets Act (UTSA) would be a boon. Of course, courts could still have conflicting interpretations of various provisions of the act, but we would all be starting from the same reference point.

The devil, of course, is always in the details.  And when it comes to the UTSA, one of the potentially problematic details is the inclusion of a “list of actual or potential customersor suppliers” in the list of what would be considered a trade secret. As one who is frequently called on to represent executives (and their new employers) who have been accused, in some form or fashion, of misusing a former employer’s trade secrets, this could be troubling.

Under our current (though admittedly flawed) system, customer identities are often not protected, particularly since it’s remarkably easy in the Internet era to learn who is whose customer. If a total stranger could obtain a list of a company’s customers through publicly available means (Google, LinkedIn, etc.), then why should an executive or her new employer be forbidden from using that same information?

If SB953 becomes law, this question will probably be addressed sooner rather than later. Right now, though, there doesn’t seem to be any organized opposition to Texas adopting the UTSA; at a March 25 Senate State Affairs Committee hearing on the bill, three people testified on behalf of the bill and nobody testified against it. So this is clearly not shaping up to be the Battle Royale of the 83rd Legislature.

If it passes—right now it’s pending in the House after being approved by the Senate—I predict it will make companies more likely to pursue trade secret litigation than they are now. In addition to it potentially expanding the amount of material protected as a trade secret, SB953, as drafted, includes a provision requiring the court to protect the alleged trade secrets by “reasonable means,” such as limiting access to the information to attorneys in the case, sealing the records, etc. That provision would probably lower the barrier for many would-be litigants who, in the current environment, have often decided not to pursue a lawsuit because doing so might mean the disclosure of the information they’re trying to keep confidential.

Knowing that the UTSA places a cone of confidentiality over their trade secrets (or, at least, what they claim are trade secrets) gives companies the peace of mind they might need to go ahead and file suit without fear that they’ll risk disclosure of the very information they’re trying to keep secret.

There are just about six weeks left in this legislative session, which ends on May 27. If passed and signed into law, the UTSA would take effect on September 1.

Executives looking to make the leap to another employer, you have been warned.

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Trade Secrets: 2 Types of Thieves, 2 Types of Victims

Posted on February 26, 2013 by joe

American businesses are spending a significant amount of their time battling trade secret theft. In general, there are two kinds of trade secret theft, the kind done by employees and former employees, and the kind done by external institutions, often foreign governments or corporations.

The most common is the first kind, e.g. an executive leaves her company and takes client lists and other confidential information with her to her new employer. Sometimes the violation is unintentional and the executive was unaware the information was even considered a trade secret. Often, though, the theft was intentional and the executive and her new employer find themselves on the wrong end of a lawsuit.

This first kind of trade secret theft obviously isn’t ideal, and it can create huge losses for the companies whose information has been stolen. But this kind of theft is at least somewhat manageable.

The far more frightening and damaging kind of trade secret theft is the intentional hacking, often done from computer terminals half a world away. This is the trade secret theft that has American businesses—as well as our government institutions and military—on full alert.

To combat this pernicious threat, the Obama administration recently unveiled its “Strategy on Mitigating the Theft of U.S. Trade Secrets.” This strategy “includes diplomatic engagement with nations where incidents of trade secret theft are high, working with industries on the best ways to protect their secrets, and stepped up prosecutions of business espionage,” according to a report in USA Today.

U.S. Attorney General Eric Holder said that there are two kinds of companies affected by trade secret theft: “Those that know they’ve been compromised and those that don’t know it yet.”

And that’s not much of an exaggeration.

What’s so alarming is that, according to a recent report by the D.C.-based cybersecurity firm Mandiant, one of the chief alleged perpetrators of trade secret theft is a unit of the Chinese military, which Mandiant accused of cyberattacking more than 140 U.S. companies. The Chinese government denies involvement.

It’s good to see the Obama administration giving this issue the attention it deserves. Now, we just have to wait and see if the situation actually improves. I would never say “it can’t get any worse” because I don’t ever want to be accused of tempting fate. But the theft of trade secrets—particularly by other countries—has become a serious and ongoing concern for far too many American businesses.

Mr. Obama knows what’s at stake: national security, economic competitiveness and jobs.

It’s time for every American company—and their executives—to take this issue seriously.

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Social Media Offers Risks, Rewards for Executives

Posted on February 11, 2013 by joe

Many U.S. companies and their executives rely on Social Media to build their brand, cultivate customer loyalty, and keep their finger on their customers’ collective pulse. Individual executives, like most people, probably also have their own Social Media presence, whether that’s on LinkedIn, Facebook, Twitter, Tumblr, Instagram, or whatever other new tool has become The Next Big Thing between the time I write this and the time it’s actually published.

Having a well-maintained Social Media presence can be a valuable career asset, but it must be meticulously tended. Indiscreet postings and photos, hackers, outdated profiles, and poorly maintained pages can mean an executive’s Social Media profile is more liability than asset.

A 2011 study by the social media monitoring service Reppler found that 91 percent of the 300 employers it surveyed reported using social networking sites to screen prospective employees, with Facebook, Twitter and LinkedIn being the sites they screened most (in that order). Almost half of those employers did the Social Media screen after receiving an application but before an interview—in other words, before the applicant had a chance to charm them in person.

This study didn’t specify what level employees were the subjects of the Social Media screening, but executives, who are the face of the company, should expect to be even more highly scrutinized than other employees. They should assume, therefore, that every single thing they put on any Social Media site will be reviewed by their employer and/or prospective employer. 

Of the 300 employers surveyed by Reppler, 69 percent said they had rejected a candidate because of what they found on a social networking site. Things like inappropriate photos and comments, content that showed the applicant drank to excess or used drugs, lied about their qualifications, or posted negative comments or confidential information about a previous employer. “Demonstrated poor communication skills” was also a chief offender.

The good news is that almost as many companies, 68 percent, said that their Social Media screening actually helped the applicant because their online profile created a positive impression of his or her organizational and communications skills, creativity, professionalism, awards, references and overall well-roundedness.

So whether you’re in the job market or not, take a close look at your Social Media profile. Regardless of what your privacy settings are, make sure that everything you post online is something that would make a recruiter or hiring committee more, not less, likely to hire you.

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Obama Signs Expansion of Trade Secret Law

Posted on January 16, 2013 by joe

Theft of trade secrets is a persistent issue in the executive suite, and the universe of possible violations recently expanded thanks to legislation signed into law by President Obama.

According to a report in Security Management, The Theft of Trade Secrets Clarification Act of 2012 amends the Economic Espionage Act of 1996 “to apply the prohibition against the theft of trade secrets intended to be used in interstate commerce even if those products or services are not directly used in commerce.”

The new law prohibits the theft of a trade secret that is ‘related to a product or service used in or intended for use in interstate or foreign commerce.’ Prior to this new law, a trade secret was more narrowly defined as ‘related to or included in a product that is produced for or placed in interstate or foreign commerce.’

The legislation was prompted by a decision handed down by the U.S. Court of Appeals for the Second Circuit in 2011. In the case, U.S. v. Aleynikov, the court ruled that the theft of proprietary source code by an employee was not trade secret theft because it was not directly used in interstate commerce, though the company did use it internally to create an advantage in the marketplace.

Clearly, trade secrets, as a potential landmine for companies and executives, aren’t going away. Companies must ensure they’re doing everything they can do protect their trade secrets and executives must remain vigilant that they don’t unknowingly put themselves in danger of trade secret-related litigation (particularly should they decide to change employers). When in doubt, consult an executive employment lawyer with ample experience in trade secret issues.

 

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Preventing Trade Secret Theft (in 20 Years)

Posted on December 11, 2012 by joe

Trade secret theft becomes a bigger concern for major companies with every passing day. Particularly when companies are doing business overseas—where intellectual property protections may not be as well-enforced—keeping trade secrets secret has become, to put it lightly, a challenge.

The recent GM trade secrets case illustrates the issue perfectly. In that case, which ended on Dec. 1 with the conviction of a former GM engineer and her husband, GM’s hybrid technology trade secrets were found on at least seven computers owned by the couple. According to press reports, the couple had planned to take the trade secrets and go into business in China.

To be sure, companies must do a better job of policing their trade secrets and creating corporate cultures infused with honesty and integrity.  They simply need to do a better job of educating their own employees about the sensitive nature of the trade secrets, and the importance of keeping those secrets under wraps. However, wouldn’t it also be smart to start incorporating IP awareness into the curriculum at those universities where the creators of tomorrow’s technology breakthroughs are being nurtured and trained?

John Villasenor, a contributor to Forbes.com and a professor at UCLA, recently surveyed his graduate engineering students on their IP awareness. More than two-thirds of them said they didn’t know enough to answer the question “what is a trade secret?” They were not quite as ill-informed on the issues of patents, trademarks and copyrights, but the results were still not encouraging.

It’s not the students’ fault, Villasenor says. They’re in school, so if the school isn’t teaching it to them, then they can’t necessarily be blamed for not knowing it.

If those students—our future engineers and inventors—don’t know what a trade secret is today, and nobody sits down to spell it out for them at some point in the future, we can’t blame them if they don’t grasp their importance. As Villasenor writes:

 An engineer who doesn’t understand trade secrets and the obligations that accompany them is far more likely to walk out the door with proprietary computer code on a USB stick when he or she moves to a new job. Ignorance, of course, is not an excuse for trade secret theft. However, it contributes to a theft rate that is drastically underreported and almost certainly at epidemic levels. When trade secrets walk out the door, everyone loses – the company that invested in their development, the engineer who took them and who stands exposed to substantial civil and/or criminal liability, and third party recipients who could become embroiled in misappropriation allegations.

Today’s engineering and science students are tomorrow’s inventors and innovators. We need to be schooling them, today, on the importance of trade secrets and intellectual property rights.

It may not be on the test, but their—and our—future may be riding on it.

 

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Former BBC Head’s Payout Adds to Network’s PR Woes

Posted on November 29, 2012 by joe

George Entwistle, the BBC’s former director general , resigned under fire recently over a two-pronged scandal involving the network’s handling of child abuse charges. The circumstances of the case are disturbing enough: the network allegedly covered up for one prolific abuser and unjustly accused another individual of abuse. But the BBC Trust, the broadcaster’s governing body, made it worse by giving Entwistle an overly generous payout when he left.

That’s a blatant violation of Ahmad’s First Rule of Resigning Under Fire: Don’t let your severance package cause more troubles for you or your former employer.

Granted, the $715,000 payout may not sound like much compared to many corporate severance packages, but Entwistle had only been at the helm for 54 days. And, according to press reports, that amount “was twice the amount to which he had been entitled under executive pay rules.”

In response to the kerfuffle, the BBC Trust justified the payout because Entwistle “will continue to help on BBC business, most specifically the two ongoing [internal] inquiries.”

From the looks of things, the payout is probably only the third or fourth biggest problem the BBC is facing right now. Nevertheless, why pile on?

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Trade Secret Theft Just As Problematic in Asia

Posted on November 5, 2012 by joe

The trade secret theft issues that plague U.S. companies are apparently just as bad in other countries, as a recently filed Japanese lawsuit illustrates.

On October 25, Nippon Steel & Sumitomo Metal Corp. sued its South Korean rival, Posco, and a former Nippon Steel engineer who retired from Nippon decades ago, alleging that Posco and the engineer stole Nippon’s technology for manufacturing specialized steel.

Nippon Steel & Sumitomo Metal is the second-largest steelmaker in the world, and Posco is ranked fifth.

According to a report in The Asahi Shimbun, “manufacturers in South Korea and China are aggressively recruiting Japanese retirees or former engineers with many years of experience in the electronics, machinery and auto industries.”

According to a 2011 survey by the Ministry of Economy, Trade and Industry, 40 percent of manufacturers with overseas operations polled said there had been confirmed or suspected cases of technology being leaked to rival companies.

Of these respondents, 17 percent said that the technology was leaked by their former employees.

In an increasingly globalized marketplace, where cross-border recruiting is commonplace, such lawsuits can only be expected to become more frequent. Executives with access to trade secrets should be aware that more and more companies are monitoring what their former executives are doing after they leave.  So executives must be constantly aware of their actions so as to avoid even the appearance of impropriety, particularly when moving from one competitor to another. 

And this is where many executives get sued even if they don’t use any confidential information against their former employer, because just looking like you have done something inappropriate can get you sued.  Most companies want to act on this very quickly and don’t have the luxury of doing a full investigation.  So “shoot first, and ask questions later” has become the norm. 

Executives pondering such a move are advised to seek legal advice before making such a move.

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Avoiding IP Theft On The Job

Posted on October 18, 2012 by joe

Most executives would never dream of stealing from their employers, but many put themselves at risk of being accused of that very thing in the course of their workday.

Most such actions—such as emailing files to their personal email address so that they can work on them from home, which many executives still do, and using their work email address for job hunting and other personal reasons—never raise an eyebrow as long as the employment relationship is stable. If the executive goes to another company or is terminated, however, even innocent actions could reflect negatively on them in retrospect.

Was that file really sent home so he could work from home, or was he providing it to a competitor in hopes of landing a job? Were those vendor and client contacts downloaded innocently or as part of the executive’s long-term plan to leave the company?

What seems—and more than likely was—innocent at the time can look much different after the executive and the company have parted ways. When that happens, many employers have a policy of scouring the executive’s computer and taking note of anything inappropriate or suspicious.

So even if an executive has no immediate plans to leave her company, she needs to ensure that company property—particularly its intellectual property—is always handled appropriately and that her behavior is above reproach.

In today’s 24-7 work world, however, it’s almost impossible for an executive worth her stock options to not work from home on occasion. A few precautionary steps can help her avoid being accused of theft or misappropriation down the road.

• Go Remote. First, rather than emailing files to a personal email address, executives should access their work email address from home. Most companies have, or should have, remote access that allows at least some employees to access their work email and files from their home computer. Such a system maintains the integrity of company property while also allowing the executive to be productive when he’s not in the office. It’s a subtle difference, of course, but one that could be crucial if the executive ever finds himself at odds with his employer.

• Heads Up. If company property must be taken home or off-site, communicate that fact in writing to a colleague or superior. A simple “I’m going to be working from home tonight, so I’m taking these files with me” should suffice.

• Go By the Book. Locate the employer’s policy regarding company property. The employee manual may actually address whether an employee can use company property at home or on the road, and if that’s the case, abide by that policy, whatever it is.

• Don’t Mix Work with Personal. Never use a work email address for personal correspondence, particularly job hunting.

• Know What Can and Can’t Go. If an executive lands a new job, I’ve already written a couple of blog posts  devoted to what she can and can’t take with her to her new employer. In general, the “take” list consists of family photos and diplomas. Pretty much everything else is on the “don’t take” list.

• Just Ask. As in most sensitive situations, a little communication can go a long way. If an executive is about to leave a company and has already given notice, it never hurts to ask the company what the executive can take and what he can’t. In most cases, even those things that are technically company property (such as notebooks from a sales conference junket the company paid for) are fine to go with the executive—as long as he asks before taking it.

The frustrating thing about many lawsuits is how easily they could be avoided by the parties, using some common sense, courtesy and good communication on the front end. When they don’t, the result is very often lawsuits, lawyer bills and ruined relationships on the back end.

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PA Trade Secret Case Highlights Perils of Job Changes

Posted on October 4, 2012 by joe

A trade secret lawsuit recently filed in federal court in Pennsylvania highlights the need for caution when executives change employers.

ACE American Insurance Company sued OneBeacon U.S. Holdings, Inc., claiming that OneBeacon poached several of its workers and stole ACE’s trade secrets in the process. The veracity of those claims, of course, is the subject of the litigation (and the judge is already threatening to sanction both sides over discovery disputes), so I can’t speak to those.

The reason this case caught my eye was because the allegations hit on so many of those actions I write frequently about, in particular, how employees act before they’re about to change jobs and what employers do after those employees leave. According to a report in Law360 (subscription required):

For example, ACE’s suit claims it investigated company-owned electronic devices and the emails of the eight employees it said defected to OneBeacon with proprietary information. ACE claimed a substantial number of emails containing the trade secrets were deleted. [emphasis added]

Executives who leave their employers must assume that their former employers will unleash the IT hounds to determine whether they took any proprietary information to their new employers. And it doesn’t take long to figure out that emails have been deleted, files were downloaded, or any other kind of technological shenanigans occurred.

Of course, the employees in the OneBeacon case may not have done anything wrong. But this lawsuit is essentially a Miranda warning to executives on the move: anything you do, say, download or take with you can be used against you in a court of law.

Executives pondering a job change are advised to seek the advice of an experienced executive employment lawyer.

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Non-Profit CEOs Deserve Competitive Pay Too

Posted on September 25, 2012 by joe

A recent survey by the Chronicle of Philanthropy points out that, although CEO pay is essentially just keeping up with inflation, some of the highest earners routinely make more than $1 million.

Nationally, the Chronicle reports, executive pay at the nation’s largest non-profits increased by a median of 3.8 percent in 2011, “and some experts say that might be the best that charity leaders can hope for in the near future.” The median compensation for top executives at the 132 charities and foundations that reported their 2011 salaries was $429,512. The top earners were:

•Roxanne Spillett, head of Boys & Girls Clubs of America, who made more than $1.8 million.

•Glenn Lowry, chief executive of the Museum of Modern Art, who earned $1.2 million.

•Edwin Feulner Jr., leader of the Heritage Foundation, who was paid nearly $1.1 million.

Given the nature of their work, executives at non-profits are even more subject to public scrutiny than executives at profit-making companies. That means when they’re negotiating for their compensation packages, they should ensure that their pay is both competitive and based on measurable outcomes.

But there’s a valid argument to be made that philanthropic organizations need the most talented individuals the market can bear, and that their compensation should reflect that. Just about any high-ranking executive at a top non-profit can probably make far more money in the “regular” business world, so they’re already taking less than they, in the strictest terms, are worth.

When it comes time to negotiate a compensation package, every executive needs a qualified executive employment lawyer by his or her side. There’s just too much at stake to do otherwise.

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