1 Trade Secrets in the Workplace Institute for Corporate Counsel March 2003

2 Basic IP Rights Patents Copyrights © Trademarks ™ Trade Secrets Intellectual Property Overview

3 1.What is a Trade Secret? 2.What is Misappropriation? 3.Penalties for Misappropriation 4.Steps to Protect Trade Secrets 5.Steps to Reduce Misappropriation Risk 6.Questions & Discussion Trade Secret Overview

4 What is a Trade Secret?

5 A Trade Secret is Information that: –derives independent economic value, actual or potential, from not being generally known to the public or to others who could derive economic value from its disclosure or use; and –is the subject of reasonable efforts under the circumstances to maintain its secrecy. What is a Trade Secret?

6 –formulas –patterns –compilations –programs –devices –methods –techniques –processes “Information” Can Broadly Include:

7 Specific Examples of Information That May Constitute a Trade Secret: –customer and supplier lists –recipes/formulas –computer source code –manufacturing methods –business plans and marketing strategies –pricing and costs –“negative information”/avoiding blind alleys What is a Trade Secret?

8 Specific Examples of Information that Does Not Constitute a Trade Secret –“generally known” –lacking in actual or potential “independent economic value” –“general knowledge, skills and experience” acquired on the job –not subject of reasonable efforts to maintain secrecy What is Not a Trade Secret?

9 Observable or apparent product features Scientific principles and laws of nature Standard industry practices Textbook or open literature concepts Information That Is “Generally Known”

10 Information of no real economic value or competitive significance Stale or historic information Information Lacking “Independent Economic Value”

11 If a chef quits her job to start her own restaurant, what information is she entitled to use? –knowing to oil or butter the pan before cooking? –suitable cooking temperature ranges for certain foods? –specific recipes? An Employee’s “General Knowledge, Skills & Experience”

12 A Trade Secret is Information that: –derives independent economic value, actual or potential, from not being generally known to the public or to others who could derive economic value from its disclosure or use; and –is the subject of reasonable efforts under the circumstances to maintain its secrecy. What is a Trade Secret?

13 no hard and fast rules must be reasonable under the circumstances –a reasonable effort for a major manufacturer may not be reasonable for a garage shop inventor stay tuned for some practical tips What Are “Reasonable Efforts” to Maintain Secrecy?

14 Information disclosed in patents Information disclosed in SEC filings Information disclosed in data books, websites, etc. Information observable on plant tours Information disclosed in speeches and articles Information Not Subject to Reasonable Secrecy Measures

15 What if an employee distributed the company’s trade secrets to outsiders without authorization? Potential Loss of Trade Secret Protection

16 Patent vs. Trade Secret Protection –limitations on patentability –where overlap, concepts mutually exclusive –public disclosure vs. private information –scope of protection –length of protection Comparison of Patent and Trade Secret Protection

17 Ability to sufficiently protect information from disclosure –ease of reverse engineering –risk of inadvertent public disclosure Need for disclosures to customers or others Licensing considerations Cycle Time/Duration of competitive significance Cost considerations Choosing Patent vs. Trade Secret Protection

18 What is Misappropriation?

19 Misappropriation: Disclosed or used in violation of an obligation of confidentiality Disclosed or used by one who knows or ought to know it was derived from someone who violated an obligation of confidentiality What is Misappropriation?

20 Misappropriation: Acquired by improper means Disclosed or used by one who knows or ought to know it was acquired by someone through improper means What is Misappropriation?

21 Misappropriation: Disclosed or Used Under Circumstances Where One Knows or Has Reason to Know It was Acquired by Accident or Mistake What is Misappropriation?

22 Inducement Inducing misappropriation by others Inducing breach of confidentiality obligations What is Misappropriation?

23 Penalties for Trade Secret Misappropriation

24 Penalties for Trade Secret Misappropriation Civil Liability Monetary Damages +Injunction: Pre/post-trial +“Double” Damages + Attorneys’ Fees

25 Civil Liability Overlapping Criminal Statutes Monetary Damages +Injunction: Pre/post-trial +”Double” Damages + Attorneys’ Fees State Criminal Statutes Federal Criminal Statutes Penalties for Trade Secret Misappropriation

26 Cal. Penal Code § 499c: Theft of Trade Secret Cal. Penal Code § 496: Receiving Stolen Property Cal. Penal Code § 502: Unauthorized Access to Computers, Computer Systems, and Computer Data State Criminal Statutes

27 Economic Espionage Act of U.S.C. §§ Mail and Wire Fraud 18 U.S.C. §§ 1341, 1343 R.I.C.O. 18 U.S.C. §§ National Stolen Property Act 18 U.S.C. §§ Fraud and Related Activity 18 U.S.C. § 1029 Federal Criminal Statutes

28 Business Considerations Civil Liability Overlapping Criminal Statutes Monetary Damages Unjust Enrichment +Injunction: Pre/post-trial + “Double” Damages + Attorneys’ Fees State Criminal Statutes Federal Criminal Statutes Harm to Reputation Disruption to Customer Relationships Penalties for Trade Secret Misappropriation

29 Steps to Protect One’s Trade Secrets

30 “Just because you’re paranoid Doesn’t mean they’re not after you.” Nirvana, “Territorial Pissings” from Nevermind Steps to Protect One’s Trade Secrets

31 Evolving Reasonable Efforts Workplace Controls Steps to Protect One’s Trade Secrets

32 restricted distribution off-limits areas visitor access procedures disposal of sensitive materials Workplace Controls

33 Evolving Reasonable Efforts Workplace Controls Materials-Marking Practices Steps to Protect One’s Trade Secrets

34 defined procedure employee training automatic headers guarding against overuse Materials-Marking Practices

35 Evolving Reasonable Efforts Workplace Controls Materials-Marking Practices Electronic Security Measures Steps to Protect One’s Trade Secrets

36 firewall access cards encryption of transmissions password protection digital watermarks “read-only” preserving audit trails Electronic Security Measures Today and Tomorrow

37 Evolving Reasonable Efforts Workplace Controls Materials-Marking Practices Electronic Security Measures Vigilance Steps to Protect One’s Trade Secrets

38 Assign a Gatekeeper –Attorney or Senior Business Person –Reviews Materials Before Publication or Distribution Vigilance

39 Assign a Gatekeeper –Attorney or Senior Business Person –Reviews Materials Before Publication or Distribution Website Patent Disclosures Articles Trade Shows Tours Speeches Vigilance

40 Evolving Reasonable Efforts Workplace Controls Materials-Marking Practices Electronic Security Measures Vigilance Employment Practices Steps to Protect One’s Trade Secrets

41 Confidentiality Agreements –protect company’s confidential information (whether trade secrets or not) –protect third party’s confidential information given to company –no improper use or disclosure of former employer’s confidential information Employment Practices

42 Intake Procedures Employee Handbook and Education Compliance Procedures Exit Interviews –return company documents –laptops, accounts, server access Employment Practices

43 Evolving Reasonable Efforts Workplace Controls Materials-Marking Practices Electronic Security Measures Vigilance Employee Practices Non-Disclosure Agreements Steps to Protect One’s Trade Secrets

44 Typical Non-Disclosure Agreement Terms Applies to specific information disclosed and designated as “Confidential” Limits use of the Confidential information to specific purpose Prohibits disclosure of the Confidential information to third parties Requires precautions to avoid the inadvertent disclosure of the Confidential information Requires the return or destruction of Confidential information at a particular time or when the business need for it has passed.

45 Lots of bad forms out there. Beware! Provisions to Pay Attention to: –time limits –carve-outs for information “otherwise known” –carve-outs for information “independently developed” Potential for contamination of important players. Recordkeeping. Non-Disclosure Agreements

46 Steps to Reduce Misappropriation Risk

47 As employees move, so do trade secrets. Employees are often required to make black and white distinctions in a gray world. There are no realistic safe harbors. The name of the game is minimizing and managing risk. Setting the Stage

48 Do your own work. Be open and honest in describing your conduct. If you have a problem... –take appropriate prompt action –seek Legal Department advice –don’t ignore it or procrastinate Step 1: “Do The Right Thing, and Act Like It.”

49 Hire based on your needs and the candidate’s skills Be straightforward and honest in approach Credibility and integrity count Do your homework Step 2: Use Prudent Hiring Procedures

50 Implement policies requiring respect for others’ intellectual property rights. Discuss those policies openly, and make sure your employees know you’re serious. Respect your employee’s judgment on the limits of what he can and cannot do or discuss. Step 3: Implement Prudent Employment Policies

51 Make and preserve your record. Consider taking a snapshot of work in progress. Consider hiring a respected, neutral expert. Step 4: Document Independent Development

52 In litigation, everything you do may be scrutinized. Perfectly legitimate and ordinary business conduct may be distorted and twisted. Be cognizant of how things can be mischaracterized or cast in the worst possible light. Step 5: Think Carefully!

53 Similarity of position and responsibilities Degree of supervision and controls Speed of R&D activities Deviations from normal practice Use of pre-existing company resources Time and cost to market Misrepresentations or concealment Factors Juries Tend to Find Significant

54 Mark A. Samuels Trade Secrets in the Workplace