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Peter J. TorenWeisbrod, Matteis, and Copley PLLC1900 M Street, N.W.Washington, D.C. 20036

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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

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It MattersMGA awarded $309 million for Mattel having infiltrated confidential competitor showrooms to get an illicit preview of the new Bratzproducts so that Mattel could imitateor 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.

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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 discovery4

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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

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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; 6

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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. 7

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Trade SecretTo 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.

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Examples of Trade Secret InformationAdvertising 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.

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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.

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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. 11

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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,

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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.13

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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. 14

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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. 15

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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.”

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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.

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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.

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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.”

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EEA Prosecutions• 9 prosecutions under §1831• 113 under § 1832

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Year 1996 97 98 99 2000 01 02 03 04

05 06 07 08 09 10 11 12 Total

§ 1831 0 0 0 0 0 1 1 0 1 0 0 1 2 0 1 2 0 9

§ 1832 1 3 8 5 6 4 8 7 3 6 11 6 10 10 11 11 3 113

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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. 21

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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.

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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

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Prosecutions• Victim is usually a large U.S.

corporation, but not always.

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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. 25

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EEA Sentences

Sentence § 1831 § 1832

Probation/Supervised Release 0 27

Home Confinement 0 4

0-6 months 1 7

6-18 months 0 13

19-36 months 1 17

37-54 months 0 3

55-95 months 1 5

96 months 1 (Chung – 188 months) 1 (Williams – 96 months)

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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).

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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.).

• 1st case actually charging a Chinese company owned or controlled by the state.

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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.

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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?

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Authorization• It depends on the circuit.

• 1st, 5th, 7th and 11th 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.

• 9th Circuit and district courts in other districts have held to the contrary.

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U.S. v. Nosal9th 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.

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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.”

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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.” 34

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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.”

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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. 36

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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

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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.

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Starwood v. Hilton WorldwideNEW 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.

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“Things don’t get much juicier”

Businessweek Starwood vs. Hilton: Trade Secret Theft ClaimsIn 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?

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Brother, Can You Spare $150 Million?NY Times – December 22, 2010

Hilton and Starwood Settle DisputeBY 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.

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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

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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

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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”

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Need More Information? Buy my book: Intellectual Property & Computer Crimes, (Law Journal Press)

Coverage includes detailed analysis of the EconomicEspionage Act based on the latest cases; how to calculate damages and the meaning ofunauthorized 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.

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Thank You!• Questions

202-499-7900

ptoren@wmclaw.com

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