In some cases, a trade secrets misappropriation plaintiff will file a motion seeking a preliminary injunction order that bars the defendant from using the trade secrets. The trade secrets misappropriation plaintiff better come to court locked and loaded because the outcome of this hearing can dictate the final outcome of the case. If the trade secrets misappropriation plaintiff wins at the preliminary injunction hearing stage, it will signal to the defendant that its defense of the case will likely not be successful. On the other hand, if the trade secrets misappropriation plaintiff loses at the preliminary injunction hearing stage, it will signal to the plaintiff that it will have to try the case, which will be expensive and time consuming that the plaintiff may not have expected. In many cases, the result of the preliminary injunction hearing will set the table for settlement discussions, with the prevailing party from the preliminary injunction hearing holding the stronger bargaining position.
2016 Copyright | Mark D. Walters
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Some advantages of trade secrets include:
2016 Copyright | Mark D. Walters
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Chemical Engineer Must Pay Approximately $4 Million in Restitution for Unlawfully Possessing Trade Secrets
A Ph.D. chemical engineer from Sunnyvale, Texas, Dr. Mattias Tezock, 53, who admitted unlawfully possessing trade secrets from his former employer, Voltaix LLC, has been ordered by Chief U.S. District Judge Barbara M. G. Lynn to pay approximately $4 million in restitution to this former employer as part of the five-year term of probation that resulted from his pleas of guilty in this case. The trade secrets at issue concerned the manufacture, synthesis, and purification of germane gas, a specialty chemical used in the semiconductor and solar energy industries.
In August 2015, Tezock pleaded guilty to four counts of unlawful possession of a trade secret. The facts supporting the guilty pleas established that from mid-April 2004 through September 2005, Tezock was employed as a chemical engineer at Voltaix, LLC, a multinational corporation headquartered in North Branch, New Jersey. Over approximately 25 years and at great expense, Voltaix developed a specific, industry-leading and exacting secret and confidential scientific method to make and purify germane gas to specifications required by its customers. Tezock further admitted that Voltaix took reasonable measure to keep this information secret and confidential and that Voltaix derived economic value from it not being known to, or readily ascertainable through proper means, by the public. As part of his employment at Voltaix, Tezock agreed to and signed non-compete and employee confidentiality forms that prohibited him from improper disclosures of Voltaix’s confidential, proprietary, and trade secret information.
Voltaix terminated Tezock’s employment in September 2005. Thereafter, Tezock moved to Texas where he established Metaloid Precursors, Inc., a company based in Terrell, Texas, that manufactured, produced, purified, and sold the specialty gas, germane. Almost immediately upon his termination from Voltaix, Tezock began taking steps to misappropriate Voltaix’s confidential, proprietary, and trade secret recipe and process for manufacturing and purifying germane gas and later attempting to steal business from Voltaix by actively soliciting at least one of Voltaix’s customers.
During subsequent civil litigation brought by Voltaix, Tezock took steps to hide his possession of trade secret information by deleting files or manipulating computer evidence in order to prevent Voltaix from learning the scope and magnitude of his breach. Tezock also provided false testimony under oath in a deposition during the civil litigation.
As part of the plea agreement resolving the criminal charges, Tezock agreed to take steps to terminate his business and destroy the germane processing plant. Among other things, immediately upon entering the guilty plea, Tezock immediately was required to cease and desist accepting, soliciting, receiving, or entering into new orders, soliciting business, or engaging in any manufacturing or refining work at Metaloid Precursors. Tezock further surrendered the keys to the Metaloid Precursors building and later worked to dismantle, destroy, and remove all hardware, chemicals, and equipment used in the manufacturing and synthesis of germane and related gases.
As part of his punishment, Chief Judge Lynn accepted the parties’ plea agreement which included a five-year term of probation with a prohibition that during the term of probation, Tezock was not permitted to work in any capacity with germane gas or other specialty chemicals. Tezock was further prohibited from disclosing to any person or entity in any manner any proprietary, confidential, or trade secret information of Voltaix.
Source: Dept. of Justice
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Trade secrets are often the most the most valuable assets of a business, and business owners and executives entrust their employees to protect and preserve the trade secret status of the company’s trade secret crown jewels. Under Washington’s Trade Secrets statutes, this requires the business to adopt and employ efforts that are reasonable under the circumstances to maintain the secrecy of the trade secrets.
In addition to actually protecting the secrecy of the company's trade secrets, the company also needs to be able to “prove in a court of law” that its trade secrets are subject to efforts that are reasonable under the circumstances to maintain their secrecy. To do this the company needs to ensure that it has records and employees that can testify on behalf of the company that the company has a plan and process for protecting the secrecy of its trade secrets.
We suggest that the company’s trade secret protection policy include adding the subject of trade secret protection to the pre-hiring interview topics and pre-hiring documentation. Emphasize even before the company makes an offer to a prospective employee that employees of the company are expected and required to maintain the secrecy of certain business information. Get the prospective employee's buy in on this before making an offer. Then, when sending the pre-hire package that includes (at a minimum) a confidentiality provision, be sure to add language to the cover letter that emphasizes the mission critical requirement to protect the company’s trade secret crown jewels.
While there is more to a trade secret protection strategy than these pre-hiring tips, these tips can help set the table for a strong, and provable "in a court of law", trade secrets protection policy for your business.
2016 | Copyright | Mark D. Walters
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The Constitution of the United States and all state Constitutions allow the government to take private property for pubic use. Common examples are when the government forces a property owner to sell land for a highway, bridge or light rail system. It's easy to see how tangible property like privately owned land can be subject to the Takings Clause.
Trade secrets are privately owned intangible property. Trade secrets can constitute private property under the Takings Clause and the owner of the trade secrets can obtain an injunction against the government to prohibit the government from allowing competitors to use the trade secrets.
This was the result of a 1983 case that made its way to the U.S. Supreme Court.
Here are the facts:
A federal statute required pesticide manufacturers to "register their products" with the Environmental Protection Agency (EPA). Part of the disclosure requirement was the submission of test data to the EPA that revealed the effectiveness and dangerousness of the pesticides. Competitors of the registering and disclosing manufacture could use this test data to create and then register with the EPA competitive products.
The test data constituted trade secrets under state law, and the lower court entered an injunction that prohibited the EPA from registering new products that were based on previously submitted test data.
At issue in the case was should the injunction be lifted.
Justice Blackburn allowed the injunction to remain in place: "If the District Court's injunction were lifted, the EPA would be free to use Monsanto's trade secrets for the benefit of its competitors and could disclose them to members of the public. Monsanto's trade secrets would become public knowledge, and could not be made secret again if the judgment below ultimately is affirmed."
Ruckelshaus v. Monsanto Co., 463 U.S. 1315 (1983).
Copyright 2016 | Mark D. Walters
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The phrase trade secret is a legal term of art defined by statute. Under Washington law, a trade secret is information that is valuable because it it not generally known to, and not readily ascertainable, by others who can gain economic value from its disclosure, and that is subject to reasonable efforts to maintain its secrecy.
For example in some cases, a customer list can qualify as a trade secret if it meets the statutory tests. But, if you list your customers on your website, your customer list cannot qualify as a trade secret because the customer list is not subject to any secrecy steps; it is readily ascertainable on your website. The law of trade secrets does not protect information disclosed without establishing a basis for its confidentiality.
In a famous Washington trade secrets case, the court gave some useful examples of what is meant by readily ascertainable in the context of a customer list. The court explained, that "trade secret protection will not generally attach to customer lists where the information is readily ascertainable. If information is readily ascertainable from public sources such as trade directories or phone books, then customer lists will not be considered a trade secret and a prior employee, not subject to a non-competition agreement, would be free to solicit business after leaving employment."
As you evaluate your trade secrets protection plan, and any planned trade secrets litigation, care should be taken up front to carefully vet the "readily ascertainable" issue. Are you, and have you, taken adequate steps to maintain the secrecy of the information you convey trade secret status upon or is it readily ascertainable?
2016 Copyright | Mark D. Walters
On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act (DTSA) giving companies greater access to federal courts and allowing for the civil seizure of property to prevent dissemination of trade secrets.
For employers and HR Departments, the DTSA creates an immediate action item.
The DTSA requires employers to provide a written notice-of-immunity to employees and contractors “in any contract or agreement with an employee [or independent contractor] that governs the use of a trade secret or other confidential information.” The statute indicates that this requirement may be satisfied via a reference to a policy document rather than restating the entire immunity provisions in each agreement. After May 12, 2016, all employee and contractor confidentiality agreements should include the notice. There is no small-business exception to the notice requirement.
This paragraph is intended to adopt the immunity language from the statute:
Defend Trade Secrets Act Notice of Immunity: An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that is made in confidence to a Federal, State, or local government official or to an attorney solely for the purpose of reporting or investigating a suspected violation of law. An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret under seal; and does not disclose the trade secret, except pursuant to court order.
Employers who fail to comply with the notice requirement and later sue an employee or contractor for trade secret misappropriation under the DTSA, the employer will not be able to collect exemplary double-damages or attorney fees.
What is a trade secret?
In Plain English, a trade secret is secret business information that gives your company a competitive advantage by remaining a secret.
A trade secret is statutorily defined in Washington state as: "information, including a formula, pattern, compilation, program, device, method, technique, or process that: (a) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy."
Perhaps the most famous trade secret is the secret recipe for Coca-Cola. Other examples of the type of information that could be a trade secret include source code, business methods, vendor pricing, customer lists, profit margins, overhead margins, business plans, marketing strategy, information about personnel.
How long can trade secret protection last?
As we see with the recipe for Coca-Cola, a trade secret can qualify for trade secret protection forever. Meaning, as long as the trade secret is kept a secret.
What causes a business to lose a trade secret protection?
In general, when the cat's out of the bag, trade secret protection is lost.
Can a business disclose its trade secrets to a third party and still claim trade secret status?
Provided the business first has the third party sign an appropriate Non-Disclosure Agreement, yes. Non-Disclosure Agreements are viewed as providing sufficient protection over trade secrets. But, the third party can cause the business to lose trade secrets protection if it discloses the trade secret.
What steps should a company take to protect its trade secrets?
Protecting trade secret status requires the company to take "reasonable steps under the circumstances" to maintain secrecy over its trade secrets. Use of Non-Disclosure Agreements with third parties with access to trade secrets is critical. While not 100% necessary in all cases, other steps to employ may include keeping the trade secrets in a locked cabinet, in a restricted access file on your server, behind closed locked doors with a sign that says RESTRICTED ACCESS.
Most companies seeking to maintain trade secrets would greatly benefit from working with a intellectual property lawyer to develop a Trade Secrets Protection Policy and Strategy, and then train employees on the policy and strategy.
What does it mean to "misappropriate" a trade secret?
In Washington state, misappropriation of a trade secret is statutorily defined as "(a) 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 (b) Disclosure or use of a trade secret of another without express or implied consent by a person who: (i) Used improper means to acquire knowledge of the trade secret; or (ii) At the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade secret was (A) derived from or through a person who had utilized improper means to acquire it, (B) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use, or (C) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or (iii) 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."
What does it mean to "improperly obtain" a trade secret?
The term "improper" is defined by Washington's legislature to include theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.
What can a company do if someone "misappropriates" or "improperly" obtains its trade secret?
First, the company whose trade secret is misappropriated or improperly obtained should quickly first evaluate whether or not the information it believes qualifies for trade secret protection actually meets the definition of a "trade secret." This is a time where is a good idea to promptly seek legal advice. In some cases, the trade secret will no longer qualify because the information has been let out of the bag.
Assuming the information qualifies for trade secret protection, the company can sue the offending party for an injunction, or damages for the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation. If the case involves a willful and malicious misappropriation, the court could also award exemplary damages in an amount not exceeding twice any actual damages and unjust enrichment award.
When can the company seek an injunction and what can an injunction do?
A company can seek an injunction for actual or threatened misappropriation of its trade secrets. The court can order the offending party to not use or disclose the trade secret for an additional reasonable period of time in order to eliminate commercial advantage that otherwise would be derived from the misappropriation. In addition, if the court determines that it would be unreasonable to prohibit future use, an injunction may condition future use upon payment of a reasonable royalty for no longer than the period of time the use could have been prohibited. Finally, the court has broad discretion in some cases to order the offending party to take steps to protect the trade secret.