1. Trade Secret Fundamentals: What You Can and Can’t Do Peter J. Toren Weisbrod, Matteis, and Copley PLLC 1900 M Street, N.W. Washington, D.C. 20036 Weisbrod Matteis & Copley 1

2. Overview Uniform Trade Secrets Act Economic Espionage Act Cases to date Computer Fraud and Abuse Act Best Practices for an internal investigation Advantages/Disadvantages of making a criminal referral in a trade secrets case Protecting a company’s trade secrets Weisbrod Matteis & Copley 2

3. It Matters MGA awarded $309 million for Mattel having infiltrated confidential competitor showrooms to get an illicit preview of the new Bratz products so that Mattel could imitate or copy them, after market for Barbie dolls had declined. Starwood awarded $150 million for Hilton stealing trade secrets relating to the W Hotels for its new luxury life style brand. Weisbrod Matteis & Copley 3

4. Uniform Trade Secrets Act Version adopted by 47/50 states (Mass. N.Y. Tex.) Misappropriation of a trade secret by improper means. Injunctive relief Actual damages/unjust enrichment Reasonable royalty on any future use of the trade secret Attorney’s fees Reasonable means to preserve the secrecy of a trade secret during litigation Presumption in favor of granting protective orders during discovery Weisbrod Matteis & Copley 4

5. Improper Means Includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means. What about an overflight of a plant under construction? Proper means: Discovery by independent invention, reverse engineering, licensing arrangement, and published literature Weisbrod Matteis & Copley 5

6. Misappropriation (i) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (ii) disclosure or use of a trade secret of another without express or implied consent by a person who (A) used improper means to acquire knowledge of the trade secret; Weisbrod Matteis & Copley 6

7. Misappropriation (B) at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was (I) derived from or through a person who had utilized improper means to acquire it; (II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or (III) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or (C) before a material change of his [or her] position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake. Weisbrod Matteis & Copley 7

8. Trade Secret To qualify as a trade secret, an asset must derive economic value from not being generally known [to who?] and be subject to reasonable degrees of protection. Weisbrod Matteis & Copley 8

9. Examples of Trade Secret Information Advertising strategies, plans and techniques; business strategies and methods; combinations of generally known elements; compilations of information for disk storage devices and data modules, construction project information; cost information; customer lists and customer information; data; database; employee lists engineering drawings and blueprints; manufacturing processes; negative research; pricing information, including price concessions, volume rebates and rebate incentives; software; strategic plans; technical know and specifications; user name and passcode for subscription-based web sites; and public high school exams. Weisbrod Matteis & Copley 9

10. What is Not a Trade Secret Business forms and procedures; client names and addresses; course materials, training materials and instruction techniques; customer identity; distributor lists; functional features of devices; information for reverse engineering products; lecture material, including seminar manuals; patented inventions and sales telemarketing scripts and pitch materials. Weisbrod Matteis & Copley 10

11. What is a Reasonable Measure? Trade secret owner does in fact consider the information to be valuable and secret and that the owner puts potential defendants on notice that the information is considered a secret. Focus is on the actions of the owner and on the economic circumstances surrounding the industry. Whether the measures are sufficient is a question of fact for the jury. Weisbrod Matteis & Copley 11

12. Reasonable Measures Security measures need not be absolute, reasonable under the circumstances. Can include advising employees of the existence of a trade secret, limiting access to the information on a “need to know basis, computer passwords, confidentiality agreements, keeping secret documents under lock, non- disclosure agreements, marking documents, Weisbrod Matteis & Copley 12

13. Other Issues Novelty: Trade secret must be minimally novel. Degree of secrecy: Not publicly known. Not generally known to, and not readily ascertainable through proper means by other persons who can obtain economic value from its disclosure or use. Whether the competitors of the trade secret owner actually know or can easily discover the secret. Identification of the trade secret. Weisbrod Matteis & Copley 13

14. Economic Espionage Act Section 1831: Economic Espionage Section 1832: Theft of Trade Secrets Common elements Misappropriation of information. Knowledge that the information is a trade secret. Information is in fact a trade secret. Depends on the value of the trade secret and the industry. Does not include general knowledge, skill or abilities. Focus is on how the defendant obtained the trade secret. Statute reaches overseas conduct. Weisbrod Matteis & Copley 14

15. Economic Espionage: Nexus to a Foreign Government Benefit foreign government, instrumentality or agent. Substantially owned, controlled, sponsored, commanded, managed, or dominated by a foreign government. Material or significant control. Reputational, strategic or tactical benefit. 80% of prosecutions allege involvement by the Chinese government. Weisbrod Matteis & Copley 15

16. Additional Section 1832 Requirements Economic benefit of anyone other than the owner. Knowing that the offense will injure the owner. “Related to or included in a product that is produced for or placed in interstate or foreign commerce.” Weisbrod Matteis & Copley 16

17. U.S. v. Aleynikov Aleynikov encrypted and uploaded thousands of lines source code from GS’ HFT system to an outsider server in Europe, attempted to erase his digital tracks, downloaded the source code to his personal computer in N.J. Convicted/Sentenced to 97 months. EEA/NSPA Imprisonment based on “$7 to $20 million loss figure.” Served over 1 year 2d Circuit overturned conviction. Weisbrod Matteis & Copley 17

18. U.S. v. Aleynikov EEA: Trade secret itself is “intended to, or actually move in interstate or foreign commerce. HFT system was neither “produced for” nor “placed in” interstate/foreign commerce. “Because the HFT system was not designed to enter or pass in commerce, or to make something that does, Aleynikov’s theft of source code relating to that system was not an offense under the EEA.” EEA only covers trade secrets that relate to products that are intended for sale in the open market. Weisbrod Matteis & Copley 18

19. U.S. v. Aleynikov What about products in the development stage? “Placed in” interstate commerce: products that are presently being sold. “Produced for” interstate commerce: Relate to products that are being developed but are not yet actually “placed in” commerce. EEA “would fall short of critical protections if it applied only to products that had already been ‘placed in’ the marketplace; left vulnerable would be the class of trade secrets inhering in products that have not yet been placed on the marketplace; such as prototypes— precisely the kind of trade secrets that are likely to attract espionage.” Weisbrod Matteis & Copley 19

20. EEA Prosecutions 9 prosecutions under §1831 113 under § 1832 Weisbrod Matteis & Copley 20 Year19969798992000010203 0404 0506070809101112Total § 1831000001101001201209 § 1832138564873611610 11 3113

21. Prosecutions Defendant is male in 93% of the prosecutions Defendant is usually well-educated. Includes former nominee for the Nobel Prize in Chemistry 30% of the prosecutions – defendant misappropriated the trade secrets to benefit the Chinese government, an existing Chinese government or to start a company in China. Weisbrod Matteis & Copley 21

22. Prosecutions 44% of the cases since 2008 have a Chinese connection. Defendants also intended to benefit government companies in India, Dominican Republic, Korea, and South Africa. Weisbrod Matteis & Copley 22

23. Prosecutions Type of misappropriated trade secrets varies greatly Examples - formula used in the manufacture of solar cells; drug formulae; design of parts for cars; semiconductor equipment; source code for financial and other products; customer lists and marketing plans Weisbrod Matteis & Copley 23

24. Prosecutions Victim is usually a large U.S. corporation, but not always. Weisbrod Matteis & Copley 24

25. Prosecutions Need to revise trade secret protection programs regularly. Defendant pleaded guilty 85% of the time. 4% of the cases the charges were dismissed without prejudice. 5 defendants fled and are still being sought. 12 cases went to trial. Defendant acquitted in 2 cases. Weisbrod Matteis & Copley 25

26. EEA Sentences Sentence§ 1831§ 1832 Probation/Supervised Release 027 Home Confinement04 0-6 months17 6-18 months013 19-36 months117 37-54 months03 55-95 months15  96 months1 (Chung – 188 months)1 (Williams – 96 months) Weisbrod Matteis & Copley 26

27. Notable Examples Former Dow scientist sentenced to 5 years for stealing trade secrets relating to Dow’s CPE process and product technology and conspiring to sell the technology to various Chinese Companies. (U.S. v. Liu, No. 3:05-CR-00085 (M.D.La. 2011). Former Boeing engineer sentenced to 188 months imprisonment for stealing trade secrets relating to the Delta IV Rocket, F-15 Fighter, and the Space Shuttle. Provided information to Chinese companies for over 15 years. (United States v. Chung, 8:08-CR- 00024 N.D.Cal. 2008). Weisbrod Matteis & Copley 27

28. Current Case The government charged a Chinese company, the Panang Group, which has Chinese government ties, was behind the attempted theft of trade secrets from DuPont relating to technology to produce titanium dioxide, a white pigment used in paints and other products. (U.S. v. Walter Lian-Heen Liew, 11-CR- 0573, N.D.Cal.). 1 st case actually charging a Chinese company owned or controlled by the state. Weisbrod Matteis & Copley 28

29. Computer Fraud and Abuse Act Basis for asserting federal jurisdiction for theft of trade secrets Primarily a criminal statute. Damage or loss in excess of $5,000. Section 1030(a)(2): Prohibits the intentional access of a protected computer without authorization or in excess of authorization for the purpose of obtaining information. Weisbrod Matteis & Copley 29

30. Without Authorization/In Excess of Authorization Does an employee access a computer without authorization or in excess of authorization when he obtains trade secret information, which is subsequently used to the detriment of his employer when he had authority to access the information at the time he did so? Weisbrod Matteis & Copley 30

31. Authorization It depends on the circuit. 1 st, 5 th, 7 th and 11 th circuits concluded that when an employee or former employee accesses an employer’s computer with the intent to misuse the information obtained as a result of such access, then such access was in excess of authorization even if the employee had the right to access the information at the time. 9 th Circuit and district courts in other districts have held to the contrary. Weisbrod Matteis & Copley 31

32. U.S. v. Nosal 9 th Circuit (en banc) found that David Nosal, who left a well-known executive search firm to start his own business, did not violate the CFAA, even though he convinced some of his former colleagues to use their login credentials to download source lists, names and contact information from a confidential database and then to provide that information to him. Weisbrod Matteis & Copley 32

33. U.S. v. Nosal Rejected expansive reading of the CFAA. Violations of an employer’s computer use policy constituted accessing a computer in excess of authorization. Intended to punish hacking, not misappropriation of trade secrets. “If Congress meant to expand the scope of criminal liability to everyone who uses a computer in violation of computer use restrictions – which may well include everyone who uses a computer – we would expect it to use language better suited to that purpose.” Weisbrod Matteis & Copley 33

34. U.S. v. Nosal “Minds have wandered since the beginning of time and the computer gives employees new ways to procrastinate, by g-chatting with friends, playing games, shopping or watching sports highlights. Such highlights are routinely prohibited by many computer- use policies, although employees are seldom disciplined for occasion sue of work computers for personal purposes. Nevertheless, under the broad interpretation of the CFAA, such minor dalliances would become federal crimes. While’s its unlikely that you’ll be prosecuted for watching Reason.TV on your work computer you could be.” Weisbrod Matteis & Copley 34

35. U.S. v. Nosal “Because Nosal’s accomplices had permission to access the company database and obtain the information contained within, the government’s charges fail to meet the element of “without authorization” or “exceeds authorized access.” Weisbrod Matteis & Copley 35

36. Dissent “Nothing to do” with minor violations of company’s computer policy Everything to do with “stealing an employer’s valuable information to set up a competing business with the purloined data, siphoned away from the victim, knowing such access and use were prohibited in the defendants employment contracts. Weisbrod Matteis & Copley 36

37. Government Response Economic Espionage Penalty Enhancement Act Increases the maximum sentence for section 1832 violations from 15 to 20 years Directs the U.S. Sentencing Commission to consider increasing the penalty range for 1831/1832 violations Office of the U.S. Intellectual Property Enforcement Coordinator created in 2008 The Department of Justice Task Force on Intellectual Property created in 2010 – monitors and coordinates enforcement Weisbrod Matteis & Copley 37

38. Federal Trade Secrets Law Bill would provide for a civil cause of action to the existing EEA provided that the plaintiff includes, along with the filing of the complaint, a sworn declaration that “the dispute involves either substantial need for nationwide service of process or misappropriation of trade secrets from the United States to another country.” Increase judicial efficiency. Harmonize dissimilar state laws. Bring U.S. into harmony with its trade agreement obligations. Impact of Aleynikov. Weisbrod Matteis & Copley 38

39. Starwood v. Hilton Worldwide NEW YORK, Jan 15 (Reuters) - Starwood Hotels & Resorts Worldwide Inc (HOT.N) accused 44 Hilton Worldwide executives of stealing trade secrets, escalating a battle of alleged mcorporate spying between the hoteliers. In an amended complaint in Manhattan federal court, Starwood said Hilton Chief Executive Christopher Nassetta knew that two Hilton employees were sifting confidential information from Starwood and using it to create a new hotel chain. The amended complaint is the latest twist in the lawsuit between Starwood and Hilton. Starwood first sued Hilton in April, saying two of the company's executives, Ross Klein and Amar Lalvani, developed a new group of hotels for Hilton called Denizen, using a confidential formula crafted by Starwood. Before shifting to Hilton, both Klein and Lalvani were employees of Starwood, where they were in charge of efforts to expand and develop Starwood's luxury brands, including its popular W hotel chain. Weisbrod Matteis & Copley 39

40. “Things don’t get much juicier” Businessweek Starwood vs. Hilton: Trade Secret Theft Claims In the annals of corporate spying, things don’t get much juicer than the current tussle between Starwood Hotels and Hilton. Today, according to the Wall Street Journal, Hilton said it has received a federal grand jury subpoena connected to allegations by Starwood that Hilton has been using purloined Starwood files to develop a new luxury hotel chain. On April 16, Starwood filed a lawsuit in federal district court in New York, claiming that two of its former executives who defected to Hilton last year made off with confidential documents. The material, Starwood alleges, details Starwood’s plans for future development of its luxury brands, including the St. Regis and W Hotels, as well as other information. All told, Starwood’s complaint says, the executives were involved in “the ransacking and theft of more than 100,000 electronic and hard copy files containing Starwood’s most competitively sensitive information.” This, the filing states, “is the clearest imaginable case of corporate espionage.” Just how clear a case it is will have to be duked out in court. But one thing is certain: This kind of stuff happens all the time. The courts are full of lawsuits in which businesses allege that former employees have made off with confidential files. Even the most sophisticated companies have alleged to be victims, as I noted in an article last fall about a case brought by Intel. If a technology leader like Intel can’t assure data security, who can? In this era of DVDs and portable flash drives, is there anything companies can really do to prevent this from happening? Weisbrod Matteis & Copley 40

41. Brother, Can You Spare $150 Million? NY Times – December 22, 2010 Hilton and Starwood Settle Dispute BY PETER LATTMAN A bitter legal dispute between two of the world’s largest hotel chains has come to an end. Hilton Worldwide and Starwood Hotels & Resorts Worldwide have settled a lawsuit that accused Hilton executives of stealing confidential documents related to Starwood’s successful W chain, according to a court filing Wednesday. As part of the settlement, Hilton has agreed to make a $75 million cash payment to Starwood, according to several people with knowledge of the pact. Starwood is also be entitled to another $75 million in hotel- management contracts. In addition, the deal subjects Hilton to an injunction, approved by a federal judge, that prohibits the hotel chain from introducing any lifestyle hotels for two years. And two court-appointed monitors — effectively corporate baby sitters — will be required to supervise Hilton’s operations and ensure it complies with the injunction. Weisbrod Matteis & Copley 41

42. Why Conduct an Internal Investigation? Identify problems with internal controls Identify and discipline employees Satisfy disclosure obligations to shareholders, governments or others Cooperate with law enforcement Weisbrod Matteis & Copley 42

43. Pros/Cons of a Criminal Referral Decision is complicated Loss of control of the matter Company is subject to government subpoenas, interviews, grand jury Risk of disclosure of the trade secret Increased resources of federal law enforcement Weisbrod Matteis & Copley 43

44. Steps to Protect Information Employment agreements Training, training, training – employees must understand their obligations Expressly authorize use of electronic information as narrowly as possible Need-to-know restrictions Computer security Log-ins and passwords Restrict levels of access on need-to-know basis “Confidential” designation, legends, and markings on all confidential information Physical security Security cameras, badges, restrictions on access Keep secret information under “lock and key” Weisbrod Matteis & Copley 44

45. Need More Information? Buy my book: Intellectual Property & Computer Crimes, (Law Journal Press) Coverage includes detailed analysis of the Economic Espionage Act based on the latest cases; how to calculate damages and the meaning of unauthorized access under the Computer Fraud and Abuse Act; recent prosecutions under the Trademark Counterfeiting Act; state prosecutions for computer hacking and theft of trade secrets; and civil cases brought under the DMCA. In addition to analysis of laws aimed specifically at intellectual property violations, you'll find discussion of how general criminal laws are used to prosecute intellectual property crimes. Weisbrod Matteis & Copley 45

46. Thank You! Questions 202-499-7900 ptoren@wmclaw.com Weisbrod Matteis & Copley 46