Shhh! It’s a Trade Secret

2 A Trade Secret is Information:  that has economic value  that is not generally known  over which reasonable efforts to maintain secrecy have taken place.

3 Types of Trade Secret Information  Technical or non- technical data  Formula  Pattern  Compilation  Program  Device  Method  Technique  Drawing  Process  Financial data  List of actual or potential customers

4 Economic Value  Actual (could be development/implementation costs; lost profits, etc.)  Potential (value that would have been gained had the secret not been misappropriated).

5 Availability of Information  Not generally known by competitors

6 “Reasonable” Efforts to Maintain Secrecy  Absolute secrecy not required  Reasonable under the circumstances  Comprehensive program

7 Examples of Methods to Maintain Secrecy  Lock & Key  Passwords  Restricted access  Sign-in sheets  Confidential stamps  Non-Disclosure Agreements

8 The sum may be a trade secret, even if each part is not.

9 Advantages/Disadvantages of Trade Secrets  No time limit  No public disclosure  No governmental filing process  Depends on employee-employer relationships, and those can change.  Pandora’s box  May distract from your knitting

10 What Law Governs  Historically – Common Law  Uniform Trade Secrets Act  Illinois Trade Secrets Act  Economic Espionage Act  [the American Law Institutue’s Restatement of Torts, 1939 – and subsequent updates—have/has played an important interpretative role.

11 Historically – Common Law – Six Factor Test 1. Extent known outside company 2. Extent known by employees 3. Measures taken to guard secrecy 4. Value to company and competitors 5. Time, effort and money to develop 6. Difficulty of proper acquisition

12 Uniform Trade Secrets Act 1. Adopted by nearly 40 states

13 Illinois Trade Secrets Act 1. Effective since Adjunct to common law 3. Gives “teeth” to infringement claims

14 Illinois Trade Secrets Act Remedies  Injunction  Compensatory damages  Punitive damages  Attorney’s fees

15 Economic Espionage Act  Gives U.S. Attorney sweeping powers to prosecute any person or company involved in trade secret misappropriation  Punishes intentional stealing, copying or receiving of trade secrets  For product produced or placed in interstate commerce

16 Economic Espionage Act  Penalities  Individual fines up to $500,000  Company fines up to $5 million  Prison – up to 10 years for individuals and 15 years if theft performed for foreign government

17 Proper Methods to Obtain Trade Secrets  Legitimate Observation  Reverse Engineering  Independent Invention

“Beware” of  Agreements you are bound by under terms of employment.  Employer expectations and behavior that may be inappropriate (turning you into a spy)  Questions you ask your new employees about their former employment. 18

Confidentiality Agreements  Protects against disclosure of confidential information and trade secrets of employer.  Term: during employment and potentially forever.  May not cover stuff you already know. But, how do you prove you already knew it.  Check terms of employee handbook.

Confidentiality Agreements  Confidentiality. Employee will not disclose any Confidential Information to any person or entity for any reason, except as required to perform its obligations under this Agreement. For purposes of this Agreement, Confidential Information shall include the financial terms of this Agreement and all records, reports, documents, designs, plans, contracts, literature, data, concepts, ideas, software, computer programs, source code, object code, information, memoranda, correspondence, and other material created, developed or used by Employer or Employee pursuant to this Agreement, or delivered or transmitted to Employer by Employee pursuant to this Agreement or otherwise. Confidential Information shall also include information in Employee’s knowledge or possession concerning Employer’s business, marketing, administrative, advertising, budgeting or organizational plans, practices, policies and procedures, as well as Employer’s customer lists and scientific or technical information, Employer’s advertising rates, information about users of any Employer Web site, and any traffic patterns or usage information about Employer Web sites, regardless of whether such knowledge or information was obtained pursuant to this Agreement or otherwise. Employer shall own all rights, title and interest in all Confidential Information. Employee acknowledges that much of this information constitutes trade secrets or proprietary information unique to Employer, and that disclosure in breach of this Paragraph will result in irreparable injury to Employer for which Employer shall be entitled to injunctive relief in addition to all other remedies available at law or in equity.

Non-Competition Agreements/Restrictive Covenants  Prevent employee/independent contractor from engaging in work or projects that may compete with business of employer.  Disfavored (but enforceable) under the law.  Must be limited in scope, geography and time.  No bright line test on what’s acceptable.

Non-Competition Agreements/Restrictive Covenants  Upon termination of this Agreement and/or the date Optometrist ceases to perform services for Corporation for any reason, with the sole exceptions of termination by the Optometrist for “Cause” as defined in Section 14(b), or termination by Corporation without cause pursuant to Section 13(b), and for a period of five (5) years following termination, Optometrist will not, without written consent of Corporation, engage in the Practice of Optometry (i) at either of the ___________, or (ii) at any other facility within the Service Area. The parties agree that these covenants are necessary to protect the activities of Corporation and the professional practices of employees of Corporation. Optometrist agrees that any breach of these restrictive covenants will result in irreparable damage to Corporation for which it will have no adequate remedy at law, and hereby consents to an injunction by any court of competent jurisdiction in favor of Corporation enjoining any breach of such covenants, without prejudice to any other right or remedy to which Corporation may be entitled. If Corporation institutes a suit or takes action against Optometrist for violation of or to enforce this Section 16, Corporation shall be entitled to all of its costs and expenses, including, without limitation, reasonable attorney’s fees. In the event that these covenants shall be determined by any court of competent jurisdiction to be unenforceable by reason of their being extended to too great a period of time or too large a geographic area or over too great a range of activities, they should be interpreted to extend only over the maximum period of time, geographic area, or range of activities as to which they may be enforceable.

Non-Disclosure Agreements (“NDAs”)  Like confidentiality agreement but may be used outside of employment context.  Presenting ideas to:  Venture capital firm  Other funding source  Potential joint venturer  Potential business partner.

Coady v. Harpo, Inc., 308 Ill.App.3d 153 (1 st Dist. 1999)  Post-employment restrictive covenant  Senior Associate Producer seeks DJ of non- enforceablility.  Prohibitions in contract:  During contract and thereafter (i.e. forever)  Can’t reveal info about:  Oprah, her business or private life;  Business and dealings of Harpo;  Harpo’s employment practices and policies  Can’t give or participate in interviews about Oprah

Coady v. Harpo, Inc., 308 Ill.App.3d 153 (1 st Dist. 1999) Guess who wins?

Coady v. Harpo, Inc., 308 Ill.App.3d 153 (1 st Dist. 1999)  Court’s rationale:  No restraint on plaintiff’s future career.  No restraint on commerce.  Forever is ok.  “Whether for better or for worse, interest in a celebrity figure and his or her attendant business and personal venture somehow seems to continue endlessly, even long after death, and often, as in the present case, extends over an international domain.”

RKI, Inc. v. Grimes, 177 F. Supp. 2d 859 (N.D. Ill. 2001)  “This is a case about how an employee who signed a non-disclosure and non- compete agreement chose to join a competitor. This is a textbook case of how not to do it.”  Magistrate Judge Morton Denlow

RKI, Inc. v. Grimes, 177 F. Supp. 2d 859 (N.D. Ill. 2001)  Employee signs 2-year deal and agrees during the term and thereafter.  Won’t reveal “Proprietary Information.”  PI = “any and all information including but not limited to information concerning the design and development of tooling used in the Company’s business, not generally known or recognized as standard practices, and information which is disclosed to … [employee] concerning any and all of the technology, research,... produced by the Company.

RKI, Inc. v. Grimes, 177 F. Supp. 2d 859 (N.D. Ill. 2001)  Employee has access to:  Customer contact management system.  Account contact management software.  Reports with quote, order, cost and profit data.  Info provided with appropriate safeguards (e.g. password protection)

RKI, Inc. v. Grimes, 177 F. Supp. 2d 859 (N.D. Ill. 2001)  Employee recruited by direct competitor.  Before leaving, employee downloads customer information from databases.  Employee immediately begins to solicit former employer’s customers.  Held: Confidentiality provision of contract was enforceable, and employee breached.

Nilssen v. Motorola, Inc., 963 F. Supp. 664 (N.D. Ill. 1997)  Nilsson approaches Motorola about electronic ballasts.  Discussions ensue over several years  In midst of discussions, parties enter a confidentiality agreement.  Motorola afforded Nilsson opportunity to retroactively label material “confidential.”  Trade secret litigation erupts.  Court finds no implied duty of non-disclosure in the face of express contract.

Learning Curve Toys v. Playwood Toys, 342 F.3d 714 (7 th Cir. 2003)  LC and PT meet to discuss potential business venture regarding toy train business.  LC and PT enter into an oral confidentiality agreement.  PT discloses to LC a method of making realistic “Clickety-Clack” wooden train tracks.  LC and PT do not enter into business agreement.  LC went on to sell the Clickety-Clack track.  PT sued for misappropriation of trade secrets.  Who wins?

Learning Curve Toys v. Playwood Toys, 342 F.3d 714 (7 th Cir. 2003)  Not Thomas

So, what have we learned?  An NDA can last forever (if it does not restrain trade or employment).  When drafting, be broad but be specific in defining information covered and permitted uses.  An NDA will not protect information that is otherwise generally available.  NDAs enforceable only if reasonable efforts made to keep information confidential. (i.e. same level of care given to trade secrets).  NDA’s can cover confidential customer information.  Faced with an express NDA, courts will not find an implied duty of non-disclosure (but employee may owe duties of loyalty etc.).  Follow NDA’s provisions (e.g. proper marking on documents).  Parties may be bound by oral NDA’s.  In Illinois, courts seem to follow all-or-nothing approach (not “blue pencil”).

DVD Copy Control Assn., Inc. v. Bunner, 31 Cal. 4th 864, 889 (2003) DVD-CCA v. Bunner, Court of Appeals of the State of California, 6th Appellate District, HO21153 Santa Clara County Super. CT. No. CV786804, (Feb. 27, 2004) Trial court issued injunction, CA court reversed, CA SC remanded [perhaps compromising the free speech claim], DVD-CCA withdrew. Lessons? Free speech may not protect hacking; the internet is the ultimate Pandora’s box 35

 McRoberts Software Inc. v. Media 100 Inc., 329 F.3d 557 (7th Cir. 2003)  The 7th Circuit noted that it is possible to recover damages based on more than one legal theory in the same suit, provided the plaintiff provides sufficient evidence of his injuries. [Copyright infringement and trade secret misappropriation].  7th Circuit held that it was an error for the District Court to vacate the jury’s award of $300,000 to MSI for trade secret damages as duplicative of the copyright infringement damages 36

IDX Systems Corp. v. Epic Systems, Corp., 285 F.3d 581 (7th Cir. 2002)  It’s not good enough to just show that valuable information has been transferred.  One has to be able to specify which part(s) were protected, how they were protected, and specifically that the alleged violation involved those parts. 37

EF Cultural Travel BV v. Explorica, Inc., 274 F.3d 577 (1st Cir. 2001)  In many instances, you can’t take what you know with you and apply it in direct competition against your former employer.  Note here, though, that without the contractual agreement, it’s possible this case could have gone the other way. 38

Cenveo Corp. v. Southern Graphic, et al ( )  Court = US DC Minnesota  Plaintiff = Cenveo  Defendants = Southern Graphic and indiv.  Fight = Cenveo wants to stop SG from working with past and current Cenveo clients and using proprietary info.  Court to decide whether to enter preliminary injunction.

Cenveo Corp. v. Southern Graphic ( )  Court decides:  Grants preliminary injunction in part and denies in part.  What are alleged trade secrets:  Job history information  USB flash drive

ClearOne v. Chiang (2007)  Court = USDC Utah  Plaintiff = ClearOne = Maker of wideband code  Defendants = Biamp licenses object code from Wideband  The fight’s about whether the code is a trade secret  The posture: Biamp files a motion to dismiss

ClearOne v. Chiang (2007)  Biamp says: it can’t read the object code; only machines can read object code.  Court says: who cares. It doesn’t matter.  Biam says: object code was publicly available.  Court says: who cares. Even if object code available, the source code (human readable) may still be protectable trade secret.  Result: Motion to dismiss complaint denied.

Taco Bell v. TBWA (2009)  DWsAHE/ DWsAHE/ DWsAHE/

Taco Bell v. TBWA (2009)  Court = Ninth Circuit Court of Appeals  Plaintiff/Appellant = Taco Bell  Defendant/Appellee = TBWA  They’re fightin’ about who should pay for the use of the psycho chihuahua character.  The confidential TS is the concept of using a psycho chihuahua as a Taco Bell mascot

Taco Bell v. TBWA (2009)  Underlying case: Wrench v. Taco Bell  Jury finds that Taco Bell breached and implied confidentiality agreement.  Awards Wrench $30 million, which mounts to $42 million with interest.

Taco Bell v. TBWA (2009)  This case:  Question presented: Is Taco Bell’s ad agency, TBWA, liable for “indemnity” to Taco Bell?  Trial court granted summary judgment for TBWA.  Ninth Circuit agrees: TBWA not aware of implied contract b/t Taco Bell and Wrench.

Spring Design, Inc. v. Barnesandnoble.com (N.D. Cal. Dec. 27, 2010 ) Spring Design and B&N discuss doing a reader together; talks break off Both come out with a reader; Spring Design sues for trade secret misappropriation and Unfair competition. B&N files for summary judgment (dismissal). Gets dismissal on 1 of 4 patents (due to a public patent filing), but loses on the other claims that might set the case aside. NDA’s were signed that cause the court to be willing to examine the claims of fact. Pretty typical here: the side that loses at summary judgment will sometimes settle rather than go to trial: B&N settles with a licensing agreement.

Trade Secrets Take Away  Any information can fall within the ambit of trade secrets if its secret, you take reasonable steps to maintain secrecy and the info has economic value  (e.g. source code, customer data, pre-public ad campaign)  Non-competes should be reasonable in scope and geography.  Even if you don’t sign a contract, you owe a “duty of loyalty” to your employer and a duty to maintain confidentiality.  When you leave a company, don’t download company data onto your own computer or a flash drive.  There’s no worse way to start a new employment relationship than to invite a lawsuit against you and your new employer.

Trade Secrets Take Away  Be careful what information you get and from whom.  In the world of advertising, it ain’t over til we’ve sorted out who has to pay $40 million.  E.g Taco Bell or its Ad Agency?  Where a company (Taco Bell) supplies content to its agency but fails to disclose that it had a contract with the creator of the content not to disclose, no indemnity.  Understand what it means to indemnify another party  i.e. Assume the legal responsibility to pay if they get hit by a money judgment

Trade Secrets Take Away  Once the cat’s out of the bag, it’s tough to get it back in.  Court’s favor injunctive relief in trade secret cases.  You can’t cover your tracks on a computer so don’t try.  Computer forensic experts will get you  You may subject yourself to claims under the Computer Fraud and Abuse Act