A game of secrets
Trade secrets: the ‘alternative IP’
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In today’s data-driven world where intangible assets are paramount, major players are now looking to trade secrets for IP protection. Baron Armah-Kwantreng explores the reasons for this shift and outlines the high-profile cases with billions at stake.
Trade secrets are taking centre stage as a means for global companies to protect their intangible assets and as an increasingly expensive jeopardy for unwary companies.
A slew of billion-dollar trade secrets cases, many with geopolitical implications and record damages awards in the US and China herald this new reality. Trade secrets lawyers across the globe say many of their most prestigious clients are yet to be up to speed with these increasing opportunities, and potential liabilities.
The game changer was the near simultaneous transatlantic enactment of the May 11, 2016, Defense Against Trade Secrets Act (DTSA) in the US and the June 8, 2016, EU Trade Secrets Directive. The DTSA brought a single federal trade secret legislation to what had been separate state-by-state laws. Similarly, the EU Directive, later enacted into member states’ laws including the Brexiting United Kingdom, has harmonised member states’ approach to trade secrets regulation.
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Other major countries have also tightened their laws related to trade secrets. In 2016 Japan amended its Unfair Competition Prevention Act (UCPA) to expand liability “to (include) bad actors beyond immediate misappropriators and to countries beyond Japan’s borders”.
China revised its Anti-Unfair Competition Law in 2019, alongside changes to civil code, labour law, and criminal code regulations affecting trade secrets. Trade secrets are included in pending multilateral trade agreement negotiations. The 2018 United States-Mexico-Canada Agreement (USMCA) revision of the North Atlantic Free Trade Agreement (NAFTA) includes provisions for the expansion of trade secrets protection and the criminalisation of trade secrets misappropriation.
Taking reasonable steps to keep secrets, secret
The January 1, 1995 TRIPS Agreement was the first international convention with express provisions relating to the protection of trade secrets. To ensure effective protection against unfair competition, as provided in Article 10bis of the 1883 Paris Convention for the Protection of Intellectual Property, “persons shall be able to prevent trade secrets (undisclosed information), from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices (Article 39(2)).”
The protection of trade secrets does not entail protection in the form of rights, as with patents and copyright, but protection against unfair competitive practices, consisting of specific acts such as unlawful acquisition and unlawful use.
For this reason, a significant number of countries protect trade secrets through laws prohibiting unfair competition. As set out in TRIPS—common to DTSA, the EU Directive and most related anti-competition, labour and other laws—to benefit from protection a trade secret must be information that:
“WITH THE ESTABLISHMENT OF THE DIRECTIVE, TRADE SECRETS IS NOW EVOLVING AS A SEPARATE PRACTICE.” - REMBERT NIEBEL, BAKER MCKENZIE
The requirement to take “reasonable steps” to protect their confidential information continues to fox companies seeking redress in court. Like a householder who can prove their television was stolen but left the front door open so their insurance claim was invalidated.
Rembert Niebel is head of Baker McKenzie’s German Intellectual Property group. He believes the impact of the EU Trade Secrets Directive in Germany and elsewhere in Europe, is a growing, if evolving dynamic. “Trade secrets on the continent are an increasing focus. Before the Directive, there were smaller cases of trade secrets theft of some kind. There were cases of employees stealing things but they were dealt with in the employment courts. With the establishment of the Directive, trade secrets is now evolving as a separate practice.
“There is a growing number of local clients on trade secrets litigation and advisory work. The advisory work is a new area. Twenty five years ago clients would never have thought to seek advice from outside counsel on trade secrets advisory matters.
"Management are now asking their in-house counsel and therefore outside lawyers how they are set up on safety measures etc on trade secrets. Companies are asking for advice as the area has changed and often with a global focus, driven by US companies and by our US offices, and now we are getting a lot of enquiries on trade secrets from our Asian offices.”
An example of complex cross-border trade secrets litigation is the alleged theft of Heraeus Medical’s bone cement recipe by rival Zimmer Biomet. Bone cements are used in hip, knee and other joint replacement surgery. Zimmer Biomet forced Heraeus to litigate the case on a country-by-country basis, with both sides seeking to maximise the strategic opportunities that presented.
Heraeus Medical brought proceedings in the Frankfurt Court of Appeals in Germany, France, Belgium, the US in ITC trade secrets litigation, the Court of Milan in Italy, Bærum District Court and Borgarting Court of Appeal in Norway, the Netherlands, the Finnish Market Court and Austria between 2008 and 2022. The case involved whether the trade secrets were ascertainable from public materials and/or obtainable by reverse-engineering of Heraeus’s products, questions of applicable law and the doctrines of issue estoppel and res judicata.
Such was the fame, or infamy, of the proceedings they spawned a YouTube musical “Heraeus v Zimmer” about the saga.
In August 2022, Heraeus announced a mutual settlement with Zimmer Biomet agreeing to pay Heraeus an undisclosed “substantial amount”. Nicole Petermann, president of Heraeus Medical, said: “We are pleased to come to a successful end of this long running series of disputes with Zimmer Biomet, and look forward to a healthy, competitive relationship in the future.”
“IN THE DIGITAL AGE, TRADE SECRETS ARE BECOMING THE DE FACTO FORM OF PROTECTION FOR DATA AND AI, OFTEN SUPPLANTING PATENT PROTECTION.” - MATT HERVEY, GOWLING WLGCoca-Cola's secret formula
Arguably, most people on the planet have drunk a trade secret without realising it. The recipe for Coca Cola Classic is the go-to example cited by lawyers to WIPR Insights of a trade secret. Founded in the late 19th century, Coca Cola’s success in keeping its recipe secret is celebrated as the basis for the company becoming the largest beverage manufacturer and distributor in the world.
Inevitably, Coca Cola has been the subject of attempts to steal its secret formulas. In May 2007, Joya Williams, an executive assistant at Coca Cola, was convicted in a jury trial in the Atlanta division of the Northern District Court of Georgia for attempting to sell Coca Cola’s “highly classified information” to rival Pepsico for US$1.5 million.
Williams reported to Javier Sánchez-Lamelas, global brand director of Coca-Cola, giving her access, as she wrote in a sales letter on Coca Cola letterhead to Pepsico executives, to: “...information that’s all classified and extremely confidential, that only a handful of the top execs at my company have seen. I can even provide actual products and packaging of certain products that no eye has seen, outside of maybe five top execs.”
Notwithstanding the “cola wars” rivalry between the two companies, Pepsico sent the letter to Coca-Cola, who informed the FBI. Williams was covertly filmed rifling through a Coca-Cola filing cabinet, taking classified documents and putting a vial of a new formula drink in her brown Armani handbag.
Williams was sentenced to eight years in federal prison. Commenting on the sentence, US District Judge J Owen Forrester said: “This is the kind of offence that cannot be tolerated in our society.”
In a statement to employees after the arrests, Edward Neville Isdell, chief executive of Coca-Cola, promised the company would tighten its security. “I have directed a thorough review of our information-protection policies, procedures and practices to ensure we continue to rigorously safeguard our intellectual capital.”
David Nahmias, US attorney for the Northern District of Georgia, praised Pepsico for doing the right thing: “They did so because trade secrets are important to everybody in the business community. They realise that if their trade secrets are violated, they all suffer, the market suffers and the community suffers.”
Nahmias said PepsiCo had acted as a “good corporate citizen”, but that it could have been legally liable if it had tried to buy the trade secrets.
“A TRADE SECRETS SPAT BETWEEN RIVAL KOREAN MANUFACTURERS LG CHEM AND SK INNOVATION THREATENED TO STALL EFFORTS BY THE US AND EUROPE TO PLAY CATCH UP IN THE (EV BATTERY) MARKET.”
Trade secrets: History and geopolitics
In an article in this supplement, “Geopolitics: USA inc v Made in China 2025”, WIPR Insights publisher Peter Scott sets out how China and its nationals have become the controversial subject of multiple trade secrets proceedings in the US and in other countries.
“Made in China 2025” is a 2015 national strategic plan aimed at developing the People’s Republic of China from the “world’s factory” to the leading global powerhouse in high-tech industries such as robotics, aviation, and new energy vehicles. Some international observers have interpreted this policy as giving a green light for China to aggressively acquire global IP.
A June 2018, White House Office of Trade and Manufacturing Policy report on “How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World”, documented “the two major strategies and various acts, policies, and practices Chinese industrial policy uses in seeking to acquire the intellectual property and technologies of the world and to capture the emerging high-technology industries that will drive future economic growth”.
A 2021 Department of Justice update on the US government’s China Initiative reported, “about 80% of all economic espionage prosecutions brought by the US Department of Justice (DOJ) allege conduct that would benefit the Chinese state, and there is at least some nexus to China in around 60% of all trade secret theft cases”.
Rising economic and political powers have always “acquired” industrial secrets to help them on their way. In the late 18th century, the newly independent US offered bounties for textile workers to smuggle loom designs from the great British cotton mills. Boston merchant Francis Cabot Lowell, an importer of British cloth, toured British cotton mills in 1811.
Cabot Lowell used his memory of the British designs to form his own power textile weaving machine, improving the designs and patenting his version. The British mills had been built in part to specifications once pilfered from Italian silk spinners. That industry, in turn, would not have existed without silkworm eggs spirited out centuries before from China. Plus ça change!
If patent filing is an informative measure then the Made in China policy is bearing fruit. In 2021 China was the world’s leading filer of patents at 1,585,663—up 5.9% on 2020. The US was a distant second at 591,473 trending downwards by 1% compared to 2020.
“TRADE SECRETS ARE IMPORTANT TO EVERYBODY IN THE BUSINESS COMMUNITY. THEY REALISE THAT IF THEIR TRADE SECRETS ARE VIOLATED, THEY ALL SUFFER, THE MARKET SUFFERS AND THE COMMUNITY SUFFERS.” - DAVID NAHMIAS, UNITED STATES ATTORNEY FOR THE NORTHERN DISTRICT OF GEORGIA
Protecting trade secrets in an era of algorithms
Matt Hervey is head of artificial intelligence law at Gowling WLG, based in London. He says the impact of technology has changed how companies protect their intellectual property.
“As the nature of business has moved from traditional manufacturing to data driven and, more recently, AI, the protection of data, algorithms and the outputs of AI has become more pressing. In this new world, trade secrets are becoming the de facto form of protection for these key business assets, often supplanting patent protection.”
“Open secrets? Guarding value in the intangible economy”, a report commissioned by CMS and written by The Economist Intelligence Unit, elaborates on this theme: “Half a century ago a company’s value was overwhelmingly derived from its physical capital—the assembly lines and buildings it owned, and the products it made. Today’s firms are built on intangible capital, with assets in the form of software algorithms, brand, customer data, business plans, engineering specifications, product formulas and organisational capital accounting for as much as 90% of the S&P 500’s total assets—up from just 17% in 1975.”
The report continues: “Privileged access and secrecy are inherent to the value of many of these assets, making them by definition “trade secrets”. Whether or not firms identify them as such, these assets are vulnerable to employee leaks, competitor theft and cyberattacks—risks that continue to grow as more business is conducted online and across borders, and as more employees work remotely. Yearly, the cost of trade secret theft reaches up to US$1.7 trillion.”
Hervey and his partner, IP litigator Huw Evans, have long dealt with the enforcement of trade secrets in the arena of algorithmic trading. Hervey describes the classic scenario: “When a quant leaves a hedge fund their knowledge of the trading strategy, algorithms and software platform could have a lot of value to a competitor. The hedge fund would assert confidential information, trade secrets, restrictive covenants and any other arguable ancillary complaints, such as the theft of a memory stick."
Now the firm’s clients across all sectors are increasingly looking for ways to protect data, algorithms and strategies. As Hervey explains: "Massive investments in autonomous driving have already produced at least one massive dispute centred on trade secrets. We also have clients in life sciences retooling their IP strategies to protect data, AI and AI insights via trade secrets, contractual and practical measures.
"This requires a change in mindset at board level and the implementation of training, policies, new agreements, registers of secrets and security measures. Some in-house IP teams still have a struggle to convince boards of the urgency and importance of investing in protecting trade secrets."
Sarah Speight writes on artificial intelligence and trade secrets in an article in this supplement. Muireann Bolger writes on the trade secrets litigation game and Sarah Speight also writes on the closed world of trade secrets arbitration.
Notable global cases
Trade secrets have stepped out of the shadows in recent years, taking centre stage in billion-dollar cases with strategic significance at the heart of global commerce and politics.
US manufacturer Micron Technology ranks third behind South Korea’s Samsung and SK Hynix in the global smartphone memory card market (DRAM and NAND). Jones Day is spearheading worldwide litigation on behalf of Micron against an alleged conspiracy between Taiwan-based United Microelectronics (NYSE: UMC) and Chinese state-owned enterprise Jinhua to misappropriate Micron’s DRAM technology used in 5G devices, expediting China’s DRAM market entry as part of China’s “Made in China 2025” plan.
A May 2, 2019 district court decision held that Micron sufficiently proved the defendants subjected themselves to US jurisdiction based on the downloading of Micron trade secrets from US servers and filing patent applications at the USPTO based on Micron’s trade secrets. Global news publications reported the lawsuit as the poster child for the US trade war with China.
Micron’s lawsuit inspired the Commerce Department’s October 2018 restriction of American exports to Jinhua on national security grounds, and the US’s November 2018 criminal indictment and civil injunction complaint against UMC and Jinhua.
As the world moves to electric vehicles, “the global electric vehicle (EV) battery market is expected to grow from $17 billion to more than $95 billion between 2019 and 2028”. Market leader CATL and other Chinese companies account for over half of the global supply of EV batteries, followed by Korean and Japanese manufacturers. A trade secrets spat between rival Korean manufacturers LG Chem and SK Innovation threatened to stall efforts by the US and Europe to play catch up in the market.
In 2021, the US International Trade Commission ruled that SK stole LG Chem’s intellectual property. The court barred SK from importing batteries to the US for 10 years jeopardising SK’s planned US$1.7 billion plant in Georgia and 2,500 high-tech jobs. Denton’s partner Song Jung played a leading role in a US$1.8 billion settlement between the two companies. SK’s plant that makes batteries for Ford and Volkswagen began operating in 2021 with a second plant making batteries for Ford projected for operation in 2022.
If size matters then the May 2022 Fairfax County Circuit Court, Virginia, £2.036 billion jury award for damages to app developer Appian from rival Pegasystems for trade secret misappropriation is significant for heralding a new level of risk for global companies. The court also ordered Pegasystems to pay Appian $23.6 million in attorneys’ fees and statutory post-judgment interest on the judgment at an annual rate of 6%, or approximately $122 million per year. Pegasystems has filed a notice of appeal.
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A game of secrets
Trade secrets: the ‘alternative IP’