As part of IPM’s webinar series, a panel of top US trade secrets experts talked mergers, money, and misappropriation in Silicon Valley.
On 27 April IPM brought together a trio of US lawyers to discuss some of the most fought over secrets in the world.
During a webinar broadcast live online, the panel discussed litigation between ZeniMax and Facebook, the highly-public lawsuit between Waymo and Uber, and what makes trade secrets law such a popular tool for rightsholders – especially for tech companies based out of Silicon Valley, California.
Jay Silver, partner at Womble Carlyle; David Prange, partner at Robins Kaplan; and Jessica Mendelson, an associate in the employee mobility practice at Paul Hastings, provided the insight with IPM’s deputy editor Tom Phillips as host.
History repeating itself?
Both cases involve accusations of ex-employees stealing trade secrets, IP infringements, the breaking of non-disclosure agreements (NDAs), and the spectre of injunctions that could seriously impact who wins the spoils and market share of these, potentially, world-changing technologies.
ZeniMax’s dispute, whose recent jury trial saw the company awarded $500m in damages, involved virtual reality start-up Oculus.
Parent company Facebook (via Oculus’ senior management team) was found guilty of trademark infringement, breaking non-disclosure agreements and ‘false designation’. Facebook was found not to have stolen any trade secrets.
At the time of writing, Waymo v Uber was mid-trial and Google-owned driverless car company Waymo was pursuing allegations that a former employee stole thousands of documents before leaving to set up a rival company, which was later acquired by Uber.
Whether it proves that aspect of the case could be moot, because Uber claims it hasn’t used any of the documents in its own self-driving cars project.
“What strikes me is that both of these cases involve software, source code – materials that are incredibly portable and provide companies that own these types of assets a significant challenge: how to protect those assets,” said Prange, a trade secrets litigator.
“It shows a need to address on the front end, before you run into this type of problem, where you have an employee departing, who may be disgruntled, or may be confused or just may simply not be aware of what assets are company assets and what potentially are not.”
Silver was unconvinced the cases were a repeat of, for example, the smartphone wars, because in part, virtual reality and driverless cars are far from being established technologies. Instead, he said, they are about the mobility of trade secrets.
“It’s only similar in that you’ve got lots of money at issue and lots of teams of lawyers thrashing around,” said Silver, litigator with over 25 years’ experience.
“It’s really about the people and talent you’ve got. And the trade secrets that go with them. How to what extent you can borrow, buy, or steal that talent into your own company and commercialise on that.”
You can’t keep a secret in Silicon Valley
Employee mobility specialist Mendelson, whose Palo Alto office is in the heart of the world’s most vibrant start-up scene, described why trade secrets are so often disputed among the area’s success stories.
“Trade secrets have become the lifeblood of the economy in Silicon Valley, especially given how rapidly technology has been developing there. It means patents, which confirm protection but take a long time to achieve, have become less practical, especially given how quickly products come to the market,” said Mendelson.
Trade secrets are increasingly stored across state lines and national borders she added, and because they are stored electronically, the risk of misappropriation is increased.
But we must remember the role people play in these cases, she added. More employees are working remotely and more have access to technology enabling them to store or transfer copied data.
“Increased employee mobility often plays a key role in trade secrets misappropriation,” she explained.
“It used to be that people stayed at companies for a much longer period of time. Now, they’re moving around a lot and competitors are frequently trying to gain a competitive advantage by hiring employees to make an immediate impact, which makes these new employees feel the pressure to achieve rapid results, which often leads to trade secrets misappropriation.
“This is something especially true in Silicon Valley because the constant innovation that’s going on there.”
Young, free, anti-IP?
Many of the actors involved in the two cases are, in business terms, very young. Most obvious is Oculus co-founder Palmer Luckey (see picture), now 24 years old, who left the company in March this year. Luckey was cited for $50m in the ZeniMax litigation, for breaking an NDA.
Does age make a difference here? “I think it definitely does. The younger generation [is] very attuned to using computers and they’re frequently sending documents around. In some sense, they don’t always realise they are doing something wrong,” said Mendelson.
And is there is deeper problem, a tension between IP as a concept and the fast-moving, sharing culture of tech’s brightest stars.
The free exchange of ideas that permeates the Facebook and Googles of the world is surely anathema to IP protection. Prange described a “generational viewpoint difference” at play.
“Potentially, younger employees don’t have the same grasp as people who are more seasoned in business, about either valuation of information that they have, or what may, or may not be, a trade secret.” he said, adding that companies need to educate their employees.
Silver added the importance of money and opportunity in the equation, “They are thinking about what is my pathway to success here, to be recognised in the marketplace as having created something of significant value.
"Employees may think am I better off committing to my present employer; should I give them my best or do I need to split off?”
He added, “Sometimes we find in litigation, the way we got into court is someone tried to hedge their bets. They do it in a way that really puts them at risk.”
Trade secrets law is a patchwork
The law varies from state-to-state and California has some specific nuances that favour employee mobility to encourage innovation.
Prange said, “In some states there is a doctrine related to inevitable disclosure…which says that, if an employee has trade secrets and they’re potentially going to a competitor, the former employer can try to stop that employee from going, based on the fact they may have trade secrets.
“California doesn’t recognise that at all, as part of their policy to not prevent employee mobility. And there’s different interpretations of that across the US.”
As an east coast lawyer, Silver spends time dealing with the fact that in California, non-compete clauses, under which an employee agrees not to enter or start a similar or competing profession– are generally non-enforceable.
Parties considering to develop their work outside California may have other legal avenues to protect their information, the panel added.
Diligence where it’s due
The trio agreed that these cases highlighted the importance of ensuing there are clear company policies and contractual agreements regarding the use of confidential information.
Mendelson stressed the need for companies to have off-boarding policies, like reminding leavers of their confidentially obligations and cut off their access to emails and shared drives, something she describes as “prophylactic measures”.
These can also be applied when hiring from a competitor, “If you want to expand a certain business, rather than targeting a key competitor, you should embark on a broader search for employees. You also want to minimise any data transfer, so inquire if any new employees have received any data from their previous employer,” Mendelson said.
Companies should also closely monitor a new employee’s activity and even, for a limited time, prevent them from working on anything directly related to their last job.
Facebook’s CEO Mark Zuckerberg revealed in court that his company only had one weekend to perform due diligence before acquiring Oculus, for which it paid an initial $2bn. This may seem incredible to most investors, but said Silver, there are several “legitimate reasons” why that can be.
“What the cases really do underline is the idea that many of these deals [aren’t about] a revenue stream – they have to do with acquiring IP and technology, whether in the form of existing trade secrets, patent portfolio, or an array of other information as well as human talent,” he added.
If due diligence is truncated, a buyer should get indemnities that push risk back to the seller, Silver suggested. “You also want to be sure the talent you are acquiring is incentivised and their interests are aligned with yours. We see that all the time, not just for billion-dollar companies but also for much smaller companies.”
Patents v trade secrets
A mixture of key court decisions on software patentability and costs associated with patents have made a trade secrets a more attractive avenue, said the panel.
“These days, patents have become less practical as a way of locking in IP. And it’s not just the upfront investment that patents require, the Patent and Trademark Office is taking a more rigorous view and exercising more scrutiny over what’s patentable,” Silver explained.
However, a company can’t enforce a trade secret unless it can prove that it has been traded and protected. And trading means sharing, with customers and supply chains.
Silver added, “The challenge is two-fold: to really commercialise trade secrets, oftentimes you really need to disclose them. Employees know the trade secrets, but sometimes you also want to enter into a joint venture, or share with customers or licensees – there are more and more entities who may touch your trade secrets and therefore there’s a higher risk of disclosure.”
Then there’s enforcement – proving someone stole a secret can be hard. Silver pointed to Waymo’s case, which appears to benefit from tangible evidence, like emails and the actions of a former employee (now at Uber).
That employee – Anthony Lewandowsky (see image 2) – has taken the Fifth Amendment, which means he refuses to answer questions on the grounds that, upon doing so, he may acknowledge he has committed a crime.
“When that happens in a civil context, it means any inferences that can be drawn… are going to be construed in favour of the party asking the question,” said Silver.
Which is all a boon for Waymo, but highlights the difficulty for others trying to litigate, because if you don’t have an email chain, a Lewandowsky of your own, or a trove of emails, then how do you prove your trade secret is in the market?
Prange described how the market has widened, from considering patents as the backbone of IP protection to now include trade secrets. But they are not a panacea and registered patents have their advantages.
“The difficulty is, if you get to a point where you either have to spell it out to a third party or identify it in a court paper, you can be challenged,” said Prange.
“Many times in trade secrets litigation the challenge becomes specifically identifying what that trade secret is. In comparison, when you are in a patent case, that work has already been done for you.”
Patents v NDAs
Increasingly, companies are choosing carefully-crafted NDAs to protect their IP, rather than relying on, for instance, the patent courts to deal with an infringement later down the line. Why is this?
“An NDA would be really important in a trade secret context because it’s a way to show you’ve maintained the secrecy of your trade secret information and that you’re trying to protect it from getting out there,” explained Mendelson.
“It becomes important to use an NDA, especially in a context where you have rapidly developing technology that might be obsolete in a short period.”
Defend Trade Secrets Act
Passed in April this year to much fanfare in the legal press, the Defend Trade Secrets Act (DTSA) was welcomed by US lawyers, including those on our panel.
Silver, described the act, which allows a Federal Circuit route for trades secrets misappropriation, as a “huge step forward”.
“Ten years from now, I expect we’ll look back and see that the DTSA was the trade secret legislation that [helped] parties understand what the risks and remedies are.”
You no longer have to bring a claim under state law – as long as you have personal jurisdiction over the party you are trying to sue, you have, in effect, the ability to be in federal court.
And makes life easier for a plaintiff, including discovery across state lines and enforcement of any orders and judgments.
In most instances, Silver added, the judges have more time and can give more attention to the claims you’re asserting, another bonus.
“Over time, you would expect to see an organic and unifying body of law about trade secrets. That will help inform litigants across the country as to what are the contours of a trade secrets claim. It’ll help inform other state court judges as they apply their own state’s laws.”
Under President Trump, the US pulled out of the Trans Pacific Partnership Agreement (TPP). Cross-border trade secrets obligations went with it, so what are the liabilities overseas for companies litigating in the US?
Explained Silver, “Ideally, you want to have a nexus with the US, because the courts here are more likely to find a remedy that will solve your client’s problem. Outside of the US, enforcement tends to be more lax and uncertain.
“Even in the EU, which has a very sophisticated legal framework, a study by the European Commission said that, with respect to trade secret enforcement, it’s an uncertain and uneven legal regime."
The trick, said Silver, is to have personal jurisdiction over a defendant, said the panel, which gives a plaintiff the DTSA, state laws, and also some remedies before the International Trade Commission, under Section 337.
To the extent there might be some foreign agent or government action, then there’s the Economic Espionage Act, which may help too.
The aim is to figure out how to reach across the US border and prove a claim under one of these statues.