Trade Secrets

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Earlier this week, we posted an update on House Bill H4434, which had passed unanimously in the House and was being reviewed by the Senate Rules Committee. The bill, now S.2418, which would adopt the Uniform Trade Secrets Act (UTSA) and enact the Massachusetts Noncompetition Agreement Act, has been placed on the Senate’s calendar for Thursday, July 14, 2016. The Rules Committee recommended that the bill ought to pass in the Senate after adding an emergency preamble as required by the state constitution.

            We are covering the bill as part of a two-part series, starting with Noncompetition Act. Now, an overview of the Uniform Trade Secrets Act, the other half of the bill.

 

Why have a uniform act?

            For context, some history: the Uniform Trade Secrets Act is a model act first developed in the 1970s by the National Conference of Commissioners on Uniform State Laws. Uniform laws are designed to create consistency and predictability at the state level around areas of law that are constitutionally within the control of the states but have wider-reaching effects. The UTSA seeks to create consistent state law, so that businesses operating in multiple states may take full advantage of state trade secret protections with some confidence that their innovations will be protected to the same extent in one state in which they do business as in another. The Conference recognized that businesses may protect their innovations in two ways: through the patent system, which is national, or through trade secret protections, which are mainly controlled by the states — though a limited federal trade secret law was ratified in May 2016, creating a federal cause of action for misappropriation of trade secrets. Regardless, these two types of protections are very different, and as such, certain innovations may be better protected by one system than another. The patent process, for example, makes information public, then applies certain protections to it, while the trade secret protections, as the name implies, allow innovations to be kept secret instead.

            The Uniform Law Commission advocates adoption of the UTSA to support business growth and innovation in a variety of ways:

–    Better protections and modernization of the law to protect businesses making fast-paced technological advances

–    Precise definition of a “trade secret” will make clear what innovations are eligible for protection

–    Obtaining legal representation will be easier and less expensive, because the law will be easier for general practitioners to interpret accurately and efficiently

–    Reduction or elimination of the problem of “forum shopping” between litigants from various states who are seeking state law most favorable to their litigation interests

            The UTSA has been adopted in some form by a vast majority of states: as of this publishing, the UTSA has been enacted in 47 states, as well as the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. However, that does not mean that trade secret protections are exactly uniform between all of these states. Although a main goal of the UTSA is consistency, because states are free to modify the model act before ratifying it, there is still some variation in the statutory trade secret protections adopted in each state.

 

The UTSA in Massachusetts

            Currently, Massachusetts state law on trade secrets is governed by two brief statutory sections, one which creates a cause of action in tort for misappropriation, and the other which allows for injunctive relief. The rest of trade secret law in Massachusetts is contained in the state common law, decided by the courts and not governed by a statutory scheme. The new bill would repeal both statutory sections — Chapter 93, Section 42 and 42a — and replace them with the UTSA’s comprehensive statutory scheme.

            Massachusetts’ last attempt to adopt the UTSA failed, but ratification is looking more likely this time around. If this bill does pass, the new law will take effect on October 1, 2016. Once in place, the new law would only apply to misappropriation beginning after October 1, not to conduct that occurred (or continuing conduct that began) prior to the effective date of the statute.

 

As originally discussed on this blog back in February, a lawsuit brought by Advanced Micro Devices (AMD) against former employees accused of taking AMD trade secrets with them to competitor Nvidia has been ongoing and a recent opinion in the case highlights the uncertainty surrounding the Computer Fraud and Abuse Act (CFAA).

A recent opinion issued by Judge Timothy S. Hillman narrowly interpreted the CFAA in this case. Judge Hillman declined a broad interpretation of the CFAA and held that AMD’s allegations in its complaint are insufficient to sustain a CFAA claim.

The relevant portion of the CFAA provides that it is a violation of the CFAA to:

Knowingly and with intent to defraud, [access] a protected computer without authorization or [exceed] authorized access, and by means of such conduct [further]the intended fraud and [obtain] anything of value, unless the object of the fraud and the thing obtained consists only of the use of the computer and the value of such use is not more than $5,000 in any 1-year period.

There exists a circuit split on the interpretation of this clause. As Judge Hillman noted, the 1st Circuit has not clearly articulated its position on the issue. The broad interpretation defines access in terms of agency or use. That is, whenever an employee breaches a duty of loyalty or a contractual obligation and acquires an interest adverse to their employer, then all subsequent access exceeds the scope of authorized access. Proponents of the narrower interpretation argue that the intent of the CFAA was to deter computer hacking and not to supplement common law trade secret misappropriation remedies and therefore fraudulent means must be used to obtain the information initially.

 Judge Hillman utilized a narrow interpretation of the CFAA and held that AMD had not pleaded sufficient facts to maintain a cause of action under the CFAA. AMD had pleaded that the defendants used their authorized access to computer systems to download and retain confidential AMD information which they retained when they left to go work at Nvida. The complaint, while alleging the defendants had the intent to defraud AMD, provided no facts which support the allegation that the defendants obtained the information through fraudulent or deceptive methods.

Judge Hillman did not outright dismiss the claim given the truncated evidentiary record and has allowed AMD the opportunity to plead specific details indicating that some or all of the defendants used fraudulent or deceptive means to obtain the confidential information and that they intentionally defeated or circumvented technologically implemented restrictions to obtain the confidential information. If other judges in the 1st Circuit follow Judge Hillman’s approach, plaintiffs will need to ensure that they plead with sufficient detail that the defendants obtained the information through a fraudulent or deceptive method as opposed to simply obtaining the information through permissible access. 

A scientific or technological advantage is something to be protected. A case in the Business Litigation Session of Suffolk Superior Court demonstrates how cutthroat competition can be in the medical device industry and how the law deals with companies that disregard fair trade practices to gain an unfair advantage.

In 2007, Lightlab Imaging, a company that provides OCT medical imaging for human coronary arteries, had developed the most powerful laser in the industry. Lightlab had a cooperative relationship with Axsun to convert Axsun’s basic laser into one that could be used by Lightlab. Volcano, a competitor of Lightlab, desired a foothold in OCT technology and was well behind in the research and development of a laser with similar capabilities.

 In 2008, Volcano acquired Axsun and viewed the acquisition as a means to both advance its entry into the OCT market and impede the growth of Lightlab. However, the contract between Lightlab and Axsun contained a confidentiality and exclusivity provision which prevented Axsun from selling high performance lasers to Volcano. In connection with Volcano’s indemnification of Axsun as part of the acquisition, Axsun breached its duty of confidentiality and provided Volcano with the specifications for the high performance laser.

In 2009, Lightlab filed suit in Suffolk Superior Court and its application for a preliminary injunction was granted. A subsequent jury trial on liability returned a verdict in favor of Lightlab finding that Axsun had violated the confidentiality provision of the contract with Lightlab. The jury also found that Volcano had misappropriated Lightlab’s trade secrets and interfered with Lightlab’s contract with Axsun.

Instead of trial on damages, the parties stipulated to damages of $200,000. Subsequently, after two jury waived trials, the Court granted Defendant’s summary judgment motion finding that Lightlab had not shown “use” of the trade secrets by Axsun and Volcano other than the due diligence use evidenced during the jury trial and therefore Lightlab had not proven misappropriation of those trade secrets.

On the 93A count, the court found that Lightlab was entitled to $200,000 in damages and because the defendant’s conduct was found to be knowing and willful, Lightlab received another $200,000 in punitive damages plus attorney fees which totaled $4,500,000.

The Supreme Judicial Court recently granted direct appellate review on whether the trial judge correctly excluded expert testimony on future lost profits on the grounds that the methodology used by the expert failed Daubert and was speculative and whether the trial judge correctly ruled that permanent injunctions may protect only specific trade secrets a defendant has already used.  The SJC is soliciting amicus briefs with argument scheduled for Fall of 2013. 

While companies are often focused on outsider risks such as breach of their systems through a stolen laptop or hacking, often the biggest risk is from insiders themselves. Such problems of access management with existing employees, independent contractors and other persons are as much a threat to proprietary information as threats from outside sources.

In any industry dominated by two main players there will be intense competition for an advantage. Advanced Micro Devices and Nvida dominate the graphics card market. They put out competing models of graphics cards at similar price points. When played by the rules, such competition is beneficial for both the industry and consumers.

AMD has sued four former employees for allegedly taking “sensitive” documents when they left to work for Nvidia. In its complaint, filed in the 1st Circuit District Court of Massachusetts, AMD claims this is “an extraordinary case of trade secret transfer/misappropriation and strategic employee solicitation.” Allegedly, forensically recovered data show that when the AMD employees left in July of 2012 they transferred thousands of files to external hard drives that they then took with them. Advanced Micro Devices, Inc. v. Feldstein et al, No. 4:2013cv40007 (1st Cir. 2013).

On January 14, 2013 the District Court of Massachusetts granted AMD’s ex-parte temporary restraining order finding AMD would suffer immediate and irreparable injury if the Court did not issue the TRO. The TRO required the AMD employees to immediately provide their computers and storage devices for forensic evaluation and to refrain from using or disclosing any AMD confidential information.

The employees did not have a non-compete contract. Instead the complaint is centered on an allegation of misappropriation of trade secrets. While both AMD and Nvidia are extremely competitive in the consumer discrete gpu market involving PC gaming enthusiasts, there are rumors that AMD managed to secure their hardware to be placed in both forthcoming next-generation consoles, Sony PlayStation 4 and Microsoft Xbox 720. AMD’s TRO and ultimate goal of the suit may therefore be to preclude any of their proprietary technology from being used by its former employees to assist Nvidia in the future.

The law does protect companies and individuals such as AMD from having their trade secrets misappropriated. The AMD case has only recently been filed and therefore it is unclear what the response from the employees will be. What is clear is how fast AMD was able to move to deal with such a potential insider threat. Companies need to be aware of who has access to what data and for how long. Therefore, in the event of a breach, whether internal or external, companies can move quickly to isolate and identify the breach and take steps such as litigation to ensure their proprietary information is protected.

An issue that often arises is an employee, upon terminating his or her employment, attempting to solicit his former employer’s customers. An employee can plan to go into competition with his employer and may even take active steps to do so while still employed. However, an employee may not use his employer’s confidential information to do so.

A recent decision highlights the perils and remedies of trade secret misappropriation. Under Massachusetts law, trade secrets can include anything tangible or intangible or electronically kept or stored which evidences or records a secret scientific, technical, merchandising, production or management information, design, process, procedure, formula, invention or improvement. While the recent decision by the 1st Circuit Court of Appeals highlights the perils of misappropriating a trade secret in the context of a physical product, trade secret protections extend far beyond physical products to proprietary business information such as customer lists. Confidential information such as customer lists, which companies invest time and money in developing, are protected under Massachusetts law.

The key factor in determining the existence of a trade secret is confidentiality. Factors in determining the confidential nature of business information include:

–          The extent to which the information is known outside the business

–          The extent to which it is known by employees and others involved in the business

–          The extent of measures taken by an employer to guard the secrecy of the information

–          The value of the information to the employer and to his or her competitors

–          The amount of effort or money expended by the employer in developing the information

–          The ease or difficulty with which the information could be properly acquired or duplicated by others

A list of customers is a trade secret and if a former employee utilizes such a list they can be found liable for misappropriation of trade secrets. If you or your company has been the victim of a former employee utilizing your confidential and proprietary information to strike out on their own, an attorney can help you protect your trade secrets and recover damages including lost profits.