Litigation to Protect Trade Secrets when Former Employees Work for Competitiors<

STATE BAR OF MICHIGAN INTELLECTUAL PROPERTY LAW SECTION
LITIGATION TO PROTECT TRADE SECRETS WHEN FORMER EMPLOYEES WORK FOR COMPETITORS

Prepared by:
EUGENE DRIKER and
TODD R. MENDEL
Barris, Sott, Denn & Driker, P.L.L.C.
Detroit, Michigan
March 23, 1998

I. OVERVIEW

1. As the nation's industrial capital shifts from hard assets to intangible assets, courts are more frequently dealing with trade secret litigation, and generally are more favorably disposed to recognizing and protecting legitimate trade secrets.

[T]rade secret protection is an important part of intellectual property, a form of property that is of growing importance to the competitiveness of American industry. Patent protection is at once costly and temporary, and therefore cannot be regarded as a perfect substitute. If trade secrets are protected only if their owners take extravagant, productivity‹impairing measures to maintain their secrecy, the incentive to invest resources in discovering more efficient methods of production will be reduced, and with it the amount of invention . . . .The future of the nation depends in no small part on the efficiency of industry, and the efficiency of industry depends in no small part on the protection of intellectual property.

Rockwell Graphic Systems, Inc. v. Dev. Industries, Inc., 925 F.2d 174, 180 (7th Cir. 1991).

2. Trade secret law, which has developed through judge-made common law, in recent years has been heavily influenced by statutes, state and federal.

3. As of 1997, the Uniform Trade Secrets Act has been adopted in at least 41 states and the District of Columbia.

4. What is a trade secret?

Uniform Trade Secrets Act (See Appendix A).

"Trade secret" means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

(i) 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
(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Restatement of Torts §757, Comment b

"A trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers."

Michigan uses Restatement definition. See Hayes-Albion Corp. v. Kuberski, 421 Mich. 170, 181-182 (1984).
Current bills pending in Michigan legislature to enact the Uniform Trade Secrets Act, 1997 MI H.B. 5312, 1997 MI S.B. 15.
Under current Michigan law, a person that steals, embezzles or, without authority, copies a trade secret is guilty of a misdemeanor, punishable by a fine of up to $1,000, imprisonment for up to one year, or both. MCL 752.771 - MCL 752.773, MSA 28.643 (51) - MSA 28.643 (53). The criminal statute contains a trade secret definition as well. MCL 752.771 (3).

5. Important new federal law: The Economic Espionage Act of 1996.
(See Appendix B).

A. The Act

The Economic Espionage Act of 1996, 18 U.S.C. §§1831-1839, makes it a federal crime for a person to convert a trade secret intending or knowing that the offense will injure any owner of the trade secret.
Also a crime to receive, buy or possess the trade secret information of another knowing that such information was obtained without the owner's authorization.
The Act's definition of a trade secret generally tracks the Uniform Trade Secrets Act, but expands the definition to include the new technological methods by which trade secrets are created and stored.

"[T]he term "trade secret" means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs or codes, whether tangible or intangible, and whether or how stored, compiled or memorialized physically, electronically, graphically, photographically, or in writing if

(A) the owner thereof has taken reasonable measures to keep such information secret; and

(B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public." 18 U.S.C. §1839(3).

B. Penalties:

Individuals: imprisonment up to 10 years
and
fine up to $500,000

Organizations: fine up to $5 million

If offense committed intending or knowing it will benefit foreign government, instrumentality or agent, higher penalties are possible:

Individuals: imprisonment up to 15 years
and
fine up to $500,000

Organizations: fine up to $10 million

Act permits criminal forfeiture of property.
Attorney General may also sue for injunctive relief under the Act.
However, the Act does not provide a private cause of action.

C. DOJ Enforcement

The Department of Justice is gearing up for the Act. In Mid-1997, DOJ's Computer Crime and Intellectual Property Section sent all federal prosecutors a new manual on federal prosecution of intellectual property rights violations. A large portion of the new manual is devoted to this Act and contains a set of model jury instructions.
Assistant U.S. Attorney has been designated in each office to receive training in computer crime and intellectual property law.

D. Some Observations on the Act

The possibility now exists that what once was only a civil trade secret case will give the victim the ability to garner the government's resources (FBI, Department of Justice) against the misappropriator.
The first cases prosecuted under the Act will most likely be chosen for the blatancy of the offense and the ease of conviction. The government will look for sure-fire winners.
Companies may be reluctant to refer cases to prosecutors for fear of the negative effect on their parallel civil cases.

- Defendant in civil case may seek stay of discovery or stay of entire case if he is also being pursued criminally.

- Defendant likely to assert 5th amendment privilege.

Companies who complain to DOJ may find their conduct and files also scrutinized.
Prosecutors likely to avoid grey areas, where it is difficult to determine whether the alleged trade secret constitutes general knowledge, skills or experience of the former employee, or a valid trade secret of the former employer.
If a criminal statute fails to give fair notice that contemplated conduct is forbidden or if the statute is so indefinite that it encourages arbitrary or erratic arrests and convictions, the statute is void for vagueness. Colautti v. Franklin, 439 U.S. 379, 391; 59 L. Ed. 2d 596; 99 S. Ct. 675 (1979).
One of the first cases under the act was brought in Cleveland, Ohio. FBI agents arrested Pin Yen Yang, Chairman of Four Pillars Enterprise Co. in Taipei, and his daughter, Sally Yang, an employee, in Cleveland in September 1997. They are accused of stealing millions of dollars in trade secrets from Avery Dennison Corp., a maker of adhesive tapes. Case is pending.
Criminal prosecution increases risk of public disclosure of the trade secret.

- In U.S. v. Kai-Lo Hsu, 1997 U.S. Dist. Lexis 16736 (E.D. Pa. Oct. 27, 1997), the government was required, pursuant to a protective order, to disclose to certain representatives of defendants what it considers trade secret information concerning Taxol, an anti-cancer drug manufactured by Bristol-Myers Squibb. Because the government must prove the existence of a trade secret ‹ a fact question for the jury ‹ the defendants must be given the information and means to rebut that claim.

II. CAN A PLAINTIFF WIN A SUIT TO PROTECT A TRADE SECRET? SHOULD IT TRY?

1. While clients often are convinced that everything that an employee learned in her job is a valuable trade secret that must be protected, courts require much more.

2. Factors considered by courts in deciding whether particular information is a trade secret:

the extent to which the information is known outside of one's business;
the extent to which it is known by employees and others involved in one's business;
the extent of measures taken to guard the secrecy of the information;
the value of the information to the business and to its competitors;
the amount of effort or money expended in developing the information;
the ease or difficulty with which the information could be properly acquired or duplicated by others.

The factors to be employed, and the weight attached to each, will vary depending on the facts of a particular case.

3. Clients often obsess about the losses they will suffer if they don't sue. They overlook the potentially greater losses that can be suffered if they sue and lose ‹ especially if a court rules that an entire universe of information claimed to be a trade secret is found not to be.

4. If the plaintiff has not acted as if the information is valuable, confidential and worthy of protection, the courts won't help.

5. Employers should have employees sign confidentiality and reasonable noncompete agreements when employment begins. Everyone must sign, from the top down.

Update these forms as the law develops and have employees sign these updated versions.
Be sure that signed forms can be readily located.

6. The employer must determine what its trade secrets are without being overly inclusive.

€ If the employer contends that everything is a trade secret when it really is not, then the claim of trade secret status for "real" trade secrets is seriously diluted.

7. Label and handle trade secrets appropriately. Mark documents and data containing trade secrets "confidential."

8. Limit access to those who need to know it.

9. Periodically remind employees of their obligation to keep trade secrets confidential.

In appropriate cases, have employees periodically acknowledge in writing that they have not disclosed the secrets to third parties.

10. Educate sales and marketing employees not to disclose trade secrets to customers in their attempts to make a sale.

11. Make sure that departing employees do not remove any documents that are the employer's property.

12. Forcefully remind departing employees of their ongoing obligation to keep confidential the employer's trade secrets, and document the reminder.

Use follow-up letters.
When employees leave, find out where they are going to work and what their responsibilities will be at their new job.

13. Alert the new employer of your concerns.

14. Alert top management, operating units and staff organizations (e.g., personnel department) of what steps are needed to protect trade secrets.

Lawyers can't overcome deficiencies in line and staff functions.

15. Have procedures in place to insure that people coming to work for your client are cautioned against disclosing trade secrets of their former employers.

III. WHAT MAKES A WINNING PLAINTIFF'S CASE?

1. Speed in acting.

An employer must not sit on its rights if a trade secret has been, is being or is about to be misappropriated.

2. Can you tell a compelling story? (GM v. Lopez)

3. Reasonableness in defining the trade secret and in seeking relief. Court's don't like to prevent people from working.

4. Consider your own "clean hands". What information have others brought to your company?
5. Ability to seek and obtain temporary or preliminary relief.

6. Where to sue. Forum selection clauses.

State v. federal court.

7. Be prepared to expose your secrets, at least to some extent. Is the risk of such exposure greater than the risk of their use by defendants?

8. Can they be explained to a judge and/or jury?

9. Be sure client understands what will be required of its people and the accelerated basis on which these cases are tried.

10. Consider with line and staff organizations benefits and risks of suing v. non-suing.

11. Think like the defendant. Look first at everything it will look for.

IV. RECENT TRADE SECRET CASES IN MICHIGAN

1. Appellate and federal district court decisions:

Thermatool Corp. v. Borzym, 1998 Mich. App. Lexis 6

(January 16, 1998) (in appropriate circumstances, not present in this case, a noncompetition agreement may be extended past its original term by a court).

Buckley v. Rish, No. 196886, unpublished, Michigan Court of Appeals (December 12, 1997) (applying Indiana's version of the Uniform Trade Secrets Act, the court determined that a paintless dent removal process is entitled to trade secret status. The process was comprised by taking elements of paintless dent removal, that individually were readily ascertainable, and combining them into a unique process which could not be acquired or duplicated without a substantial investment of time, expense and effort).
Lowry Computer Products, Inc. v. Head, No. 97-40356, U.S. Dist. Ct., E.D. Mich., Judge Gadola (December 11, 1997) (preliminary injunction granted against former employee where former employer, in the business of selling computer hardware and software for bar code and related technology systems, alleged that defendant possessed information concerning customer lists, pricing schemes, supplier discounts and profit margins, which she would inevitably disclose to her new employer, a direct competitor of plaintiff).
RAM Products Co., Inc. v. Chauncey, 967 F.Supp. 1071 (N.D. Ind. 1997) (applying Michigan law, injunction granted against former employee from disseminating marketing plans, strategies, inventions, ideas, discoveries, manufacturing methods, product research, engineering data, price lists, and strategic planning of former employer, an acrylic and polycarbonate mirror and related product manufacturer. Also enjoined from soliciting any exclusive customers of former employer).
Neveux v. Webcraft Technologies, Inc., 921 F.Supp. 1568 (E.D. Mich. 1996) (court refused to enjoin former employer from enforcing noncompete agreement against former employee, where employer contended that employee would inevitably disclose its trade secrets to new employer).
Superior Consulting Co., Inc. v. Walling, 851 F.Supp. 839 (E.D. Mich. 1994), appeal dismissed as moot, and remanded for damage and counterclaim issues, 1995 U.S. App. Lexis 4583 (February 6, 1995) (preliminary and permanent injunction granted against former employee from competing with former employer in the field of healthcare information systems, and from using or disclosing trade secrets, confidential and proprietary information of employer).
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Grall, 836 F.Supp. 428 (W.D. Mich. 1993) (preliminary injunction granted against former employee from soliciting clients of former employer Merrill Lynch, and using or disclosing information from its client records).

2. Trial court verdicts and rulings:

Kolene Corp. v. Ciarlone, et al., Oakland County Circuit Court, Case No. 95-489884-CK, Judge Nanci Grant (October 27, 1997)

Damages Awarded: $1.5 million in lost profits. The case centered on plaintiff's allegations that all the defendants had misappropriated and systematically used chemical trade secrets, including sales, marketing and financial trade secrets.

Centra, Inc. v. Fewless, Ingham County Circuit Court, Case No. 93-974400-CK, Judge Peter Houk (June 27, 1996).

Defense Verdict: One of the defendants was a former sales representative of plaintiff trucking company who allegedly misappropriated trade secrets and began his own trucking agency with his wife. Defendants contended that all actions taken were legal, their company provided services not offered by plaintiff and, therefore, they were not competing with plaintiff, and any areas where they competed with plaintiff had been lost by plaintiff due to its own misconduct or misdeeds.

Omni Engineering v. Autotac, Oakland County Circuit Court, Case No. 94-470978-CZ, Judge Steven Andrews (August 1995).

Defense Verdict: Defendants left plaintiff's employ and began a competing entity that provided equipment to the auto industry for paint finishing processes. Plaintiff alleged that defendants misappropriated trade secrets. According to one of the attorneys, the jury did not believe the information at issue was a trade secret and believed that defendants used their own knowledge to start a competing business.

Special Parts, Inc. v. Mallas, Macomb County Circuit Court, Case No. 85-03807-CK, Judge George Montgomery (November 27, 1991).

Damages Awarded: $60,680 against one of the defendants for loss of business and profits. Former sales representative of plaintiff started a new pushrod business and negotiated contracts with plaintiff's customers. Plaintiff alleged that defendants wrongfully used its trade secrets.

Rehabilitation and Placement Association, Inc. v. Sewick, Oakland County Circuit Court, Case No. 89-364656-CK, Judge Rudy Nichols (July 18, 1991).

Damages Awarded: $100,000 against one of the defendants for misappropriation of confidential information and tortuous interference with business relations. Former program manager of plaintiff's closed-head injury rehabilitation program began a competing business. Plaintiff alleged that defendant misappropriated confidential information and trade secrets. Plaintiff had claimed $2 million in damages.

J&D Cook, Inc. v. Affirmed Med. Inc., Ingham County Circuit Court, Case No. 88-62360-AZ, Judge James Giddings (October 31, 1990).

Damages Awarded: $216,000 against one of the defendants for misappropriation of customer and price lists, lost profits, economic damages and increased expenses. Former salesman of plaintiff allegedly supplied his new employer, a competitor of plaintiff, with plaintiff's customer, price and route lists, and solicited its former customers. Defendants contended that they did not misappropriate plaintiff's lists and, if the lists were misappropriated, the information did not constitute a trade secret.

Micro-Aid Computer Systems, Inc. v. D.P. Management Co., Wayne County Circuit Court, Case No. 86-614735-NO, Judge Lucile Watts (July 6, 1989).

Damages Awarded: $425,000 plus interest and sanctions (over $275,000) for unlawful use of trade secrets, and intentional interference with contract and contractual opportunity. Former general manager of plaintiff, a computer programmer placement service, went to work for plaintiff's competitor, allegedly providing such competitor with confidential records concerning plaintiff's programmers, clients and contract terms. Plaintiff alleged that defendants unlawfully used its trade secrets. Defendants contended that the information was not confidential, they did not place any of plaintiff's programmers or tamper with its clients, and they had the right to freely compete with plaintiff.

V. TRADE SECRETS FOR BREAKFAST

Uncle B's Bakery, Inc. takes its bagels seriously. For an example of how an aggressive company protects its trade secrets in bagels, see:

Uncle B's Bakery, Inc. v. O'Rourke, 920 F.Supp. 1405 (N.D. Iowa 1996); and

Uncle B's Bakery, Inc. v. O'Rourke, 938 F.Supp. 1450 (N.D. Iowa 1996).

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STATE BAR OF MICHIGAN INTELLECTUAL PROPERTY LAW SECTION LITIGATION TO PROTECT TRADE SECRETS WHEN FORMER EMPLOYEES WORK FOR COMPETITORS

STATE BAR OF MICHIGAN INTELLECTUAL PROPERTY LAW SECTION
LITIGATION TO PROTECT TRADE SECRETS WHEN FORMER EMPLOYEES WORK FOR COMPETITORS