Litigation
Jun. 22, 2002
E-Business Protection
Column by Jay Calkins - Trade secret law is a frequently overlooked and underused form of intellectual property protection. Incredibly, some companies seem to take the attitude that, if something cannot be patented, it isn't worth protecting.
By Jay Calkins
Trade secret law is a frequently overlooked and underused form of intellectual property protection. Incredibly, some companies seem to take the attitude that, if something cannot be patented, it isn't worth protecting.
But in the e-business context, where companies rely on the Internet to do business, attorneys cannot afford to neglect this important method for protecting a client's intellectual property.
The particularly fluid employment situation and intense competition that characterize the e-business industry, when combined with the critical role technology and unique information play in a company's success, make trade secret cases take on "bet the company" implications in the e-business context.
A trade secret can be virtually any piece of information that is not publicly known, that is valuable to the owner, and whose secrecy gives the owner a competitive advantage.
Many factors determine whether information qualifies as trade secret information, including whether the information is known outside the business or is in the public domain, the measures the owner has taken to maintain the information's confidentiality, and the ease or difficulty with which the information could be acquired or duplicated by others. See Restatement of Torts Section 757 comment b.
The types of information that ordinarily constitute trade secrets can include price and cost data, customer lists, prospective customer lists, business strategies and information relating to product development.
While trade secret law does not protect a company against certain popular pirating techniques, such as "reverse engineering" and other duplication efforts, trade secret law does offer certain advantages over other forms of protection, like patents.
These include the ability to protect more and different types of information, being able to keep the information secret, as opposed to requiring public disclosure to gain protection, and no time limitation on the protection.
Indeed, the classic example of a trade secret, the secret formula for Coca Cola, illustrates why trade secret protection can be effective. Had Coca Cola elected to patent its formula, that patent would have expired years ago and generic competitors would be using the patent as a blueprint from which to make clone products. But by electing to protect the formula as a trade secret, Coca Cola retained its competitive advantage.
In the e-business context, trade secret protection is critical because for certain information this is the only form of protection available.
For example, many business models and other mission documents that explain a company's market strategies, identify target customers or explain pricing structures ordinarily are not patentable, yet there is no information more important to the company's success.
Moreover, many e-business companies are especially vulnerable to losing any advantages because they are trying to establish their niche in the marketplace against fierce competition and because they are competing for remaining venture capital and for top employees.
Leaving present difficulties aside, consider whether companies like priceline.com or amazon.com would have made it very far had they not maintained confidentiality for their key strategies, business models and pricing information.
Based on the critical nature of trade secrets in the e-business context, aggressively protecting the information becomes paramount, and litigation becomes an important weapon.
The most common situations in which trade secret litigation ensues are associated with business deals that do not close and employees who leave to pursue other opportunities.
In both cases, confidential information is revealed out of necessity, and the employee or potential business partner has the opportunity to misuse the information. The fact pattern alleged in Linkco Inc. v. Nichimen Corp., 164 F. Supp.2d 203 (D. Mass. 2001), helps illustrate both circumstances in the e-business context.
The opening line of the Linkco opinion is "[t]his is a dispute over an international business deal gone bad." Plaintiff Linkco was a U.S. startup company that set out to develop an Internet-based database of Japanese business information (like the Securities and Exchange Commission's EDGAR repository) and hired a Japanese citizen, Mr. Kanda, to help implement the business plan.
Linkco approached Nichimen to secure financing and, of course, disclosed confidential information such as its business strategy, product designs and other secrets. When the investment deal fell through, Nichimen hired Kanda away from Linkco and allegedly set up a competing venture based on Linkco's business model. Thereafter, Linkco allegedly was unable to get financing, and the company failed.
When representing a client faced with a situation like Linkco's, a litigator must treat the case like the "bet the company" litigation it is.
The first steps right out of the box should be gathering evidence as quickly as possible, drafting the complaint and heading right to court for a temporary restraining order.
Fortunately, trade secret cases are prime candidates for getting immediate injunctive relief from the courts. In most jurisdictions, irreparable harm is virtually presumed in trade secret cases because, once disclosed, the trade secret is gone forever. See FMC Corp. v. Taiwan Taipan Giant Industrial Co., 730 F.2d 61 (2nd Cir. 1984) ("[a] trade secret once lost is, of course, lost forever.").
The complaint, even though drafted quickly, should be solid, supported by affidavit evidence detailing the precise nature of the trade secret information, the efforts taken to develop the information, the reasons it is valuable to its owner and would be catastrophic if found in a competitor's hands and the steps taken to maintain its confidentiality.
Perhaps even more important, however, the papers must explain the evidence demonstrating the nefarious method the defendant used to steal the secrets. It is critical to demonstrate that the secrets were misappropriated, not just appropriated.
Often this will involve telling the story of how the investor never had any intention of providing financing and just used the lure of money to gain access to the secrets.
Or perhaps the employee who was supposed to be working on company business was conspiring with others to steal secrets and set up a competing venture.
As a matter of strategy, when the attorney goes to the courthouse to file the documents (under seal, of course) and get the temporary restraining order, it also may help to have a key witness available to testify and offer the judge, or opposing counsel if present, the opportunity to question the witness.
Litigators also should be aware of electronic evidence that can be gathered quickly and used in a summary proceeding. These tools are particularly useful in cases in which a former employee is suspected of misappropriating information.
Even in high-tech environments that characterize most e-businesses, employees stealing trade secrets can be incredibly careless in failing to cover their misdeeds. Undeleted or recoverable e-mails can be explosive evidence in an injunction proceeding.
Moreover, many voice mail systems create digital files for every message that can be recovered and recorded. Attorneys also should quickly interview people who may have knowledge of improper acts the employee took before he or she left.
For example, if the person had an assistant who is with the company, he or she can be an incredible source of information for discovering a plot to steal confidential information.
Assistants typically have knowledge of correspondence, telephone calls and meetings that can be important evidence.
Special Tools
In prosecuting trade secret cases, litigators also should be aware of special tools available to protect the secrets while the litigation is pending and to resolve discovery disputes.
Standard tools like protective orders are critical; but in addition, as technology-related cases proliferate in the court system, judges are increasingly receptive to appointing special masters with relevant experience in the field to help resolve difficult trade secret issues.
With increasing frequency, these masters are receiving broad powers similar to those that magistrates employ, namely the power to decide discovery motions and to make recommendations to the court on technical matters and on dispositive motions.
Of course, the steps described above cost a lot of money, and many e-business companies are desperately seeking capital infusions. But if the information at issue has "bet the company" implications, companies must recognize that and pursue the matter accordingly.
Attorneys with e-business clients, however, cannot wait for the call from the client reporting that a key software engineer has left to start a new company or to join an existing competitor or that the company that was going to be a partner is a competitor.
The client's chances of succeeding in a trade secret litigation rest squarely on its day-to-day operations. If the company has not taken the required steps to ensure that information is treated as a trade secret, the litigation will end poorly.
Therefore, attorneys should perform intellectual property audits to ensure that, at a minimum, the client is taking precautions like the following:
• Require that all employees execute nondisclosure/confidentiality agreements prohibiting them from disclosing the organization's confidential information to third parties (and it should be clear that the obligation survives termination of employment).
• Implement and enforce policies for labeling and maintaining the secrecy of confidential information and limiting its access to those who need it and have an obligation to maintain its confidentiality.
• Find out where departing employees are going and remind them, and the new employer, of the employee's continuing confidentiality obligations.
By ensuring that clients are following these procedures, at a minimum, attorneys can enhance their ability to win the "bet the company" cases.
Jay Calkins is a partner in Sonnenschein Nath & Rosenthal's Washington, D.C., office. He is a member of Sonnenschein's litigation and business regulation and e-business groups, and he specializes in intellectual property and technology cases.
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