Strategies for foreign entities to reduce the risk of US trade secrets litigation
MANY OVERSEAS ORGANISATIONS FOCUS ON THE LAWS of their own countries but lack familiarity with the substance and potential reach of US trade secrets laws. They may thus risk unintentionally inviting US trade secrets litigation.
The results can be costly in terms of money, reputation, and progress of research programmes. In recent cases, overseas companies have been ordered to pay amounts in excess of US$500 million as well as tens of millions of dollars in plaintiff’s attorney’s fees. US courts have ordered worldwide injunctions prohibiting the use or exploitation of trade secrets found to have been misappropriated. Moreover, criminal liability has been found under US laws against individuals and organisations for actual and attempted misappropriation. While US law does require trade secret claims to be “plausible” and grounded in factual allegations, a trade secret plaintiff is not required to prove its case in early pleadings and, unlike many countries, barring unusual circumstances, an unsuccessful plaintiff is only rarely required to pay the defendant’s attorney’s fees. Thus, even unsuccessful trade secret litigation can be costly for the defendant.
A threshold issue in avoiding trade secrets disputes is recognising when information may be a trade secret. Many foreign businesses considering trade secrets risks and exposure focus their attention solely on technical information (such as a manufacturing process). Under US trade secrets law, including the Defend Trade Secrets Act of 2016 (DTSA), however, vast and diverse types of business and strategic information (such as marketing initiatives, customer analytics and data, and long-range product plans) and even compilations of wholly public information, can also be trade secrets under US law. Since the DTSA does not require specific acts or labeling to maintain information as a trade secret (so long as some reasonable measures exist to maintain the information as secret), some organisations coming into contact with trade secrets may not be fully aware that particular information may qualify as a trade secret. Misappropriation of any of these types of trade secrets could lead to a US lawsuit and even, ultimately, significant relief in the US and abroad.
WHAT IS “MISAPPROPRIATION” UNDER US LAW?
US law generally prohibits wrongful acquisition of trade secrets, acquiring trade secrets through improper means, or using trade secrets that were acquired through improper means.[1] “Improper means” includes acts that are independently wrongful, such as outright theft or bribery, as well as violating an agreement to maintain the secrecy of trade secrets information or persuading or influencing another to violate such an agreement. It can also include acts that are not readily foreseeable by trade secrets owners that are found to fall below accepted standards of commercial morality, a more nebulous standard.[2] Improper “use” under US law is defined broadly. Unlike the law in some countries, “use” does not require “duplication” and can include using protected information as a “springboard” for further research and development. “Threatened” misappropriation, “attempts” to misappropriate information and “conspiracies” to misappropriate information can all be actionable. Given the breadth of potentially protectable information and potential claims for misappropriation under US law, even certain common business activities, including hiring employees who know trade secrets, if not conscientiously managed from the outset, can be perceived by trade secrets owners to be violations and may carry the risk of potentially costly trade secrets litigation, if not liability.
A well-structured corporate trade secrets programme can help reduce US litigation risks. Such programmes typically include a combination of policies, procedures, employee education, and contractual agreements.
“BY HIRING MULTIPLE OF THE PLAINTIFF’S EMPLOYEES TO WORK ON SIMILAR TECHNOLOGY, THE CHINESE COMPANY CREATED THE APPEARANCE THAT IT HAD MISAPPROPRIATED THE US COMPANY’S TRADE SECRETS.” - JEFFREY PADE
THE POTENTIAL REACH OF US LAW
Some organisations may wonder why they need to consider US trade secrets law at all. As an initial matter, a US court must have personal jurisdiction over any foreign defendant to render a binding judgment. In the US, personal jurisdiction can be either “general” or “specific”. “General” personal jurisdiction requires close ties with the forum, such as having offices and operations or regular sales agents in the US that many foreign trade secrets defendants lack. “Specific” personal jurisdiction relating to a defendant’s specific activities in or directed at the US forum is the more commonly asserted jurisdictional “hook” for foreign defendants in most US trade secrets cases. For trade secret claims, a foreign defendant is generally found to have purposefully directed activities at the forum by having (1) taken an intentional action that (2) has a connection to the US forum and (3) causes harm to the plaintiff in the forum. Although personal jurisdiction generally is a highly fact-intensive inquiry, US courts have found the activities of alleged trade secrets actors sufficient to support personal jurisdiction even if most of the activities occurred abroad so long as some acts in furtherance of the misappropriation occurred in the US.
As a matter of substantive law, many US courts, at both state and federal levels, have applied US federal and some state trade secrets laws extraterritorially to actors outside of the United States. For example, to date, a number of federal trial courts have applied liability rules of the DTSA to acts of trade secrets misappropriation outside the US so long as some minimal conduct in furtherance of the offence occurs domestically (some courts have found acts including US hiring efforts, directing emails to the US, and accessing trade secrets on US servers to qualify).
US DISCOVERY
Once a US court has jurisdiction over a foreign actor, then the defendant (as well as, in many cases, third parties having relevant information) becomes subject to US pre-trial discovery standards, which are much broader in scope and reach than that of many other countries. Foreign actors generally become compelled by US law to preserve relevant evidence once litigation is threatened. Once litigation begins, trade secrets defendants may be compelled by US courts to produce paper and electronic evidence to the plaintiff as well as to give testimony under oath in depositions conducted by counsel for the plaintiff, not the court, before trial on a broad range of topics. In some circumstances, US courts will approve requests to conduct both factory and forensic inspections for evidence of misappropriation, even overseas. Foreign party defendants are also entitled to take discovery into the plaintiff’s claims and to probe discrepancies in the records and testimony of the parties.
Frequent grounds for inquiry in discovery include not only acts constituting the alleged misappropriation but acts taken, or not taken, to attempt to avoid misappropriation, including hiring protocols, safeguards to avoid misappropriation, corporate policies, and any protectionary measures. Evidence of such safeguards may help rebut a finding of liability and may mitigate some penalties for misappropriation.
“IT IS IMPORTANT TO HAVE STRONG NON-DISCLOSURE AGREEMENTS AND POLICIES IN PLACE TO PROTECT AND GOVERN THE EXCHANGE OF TRADE SECRET INFORMATION CONSISTENT WITH US LAW.”
MITIGATING RISKS WHEN HIRING EMPLOYEES WHO KNOW TRADE SECRETS
One of the most frequent ways trade secrets are alleged to have been wrongfully acquired or used is through the recruiting and hiring of employees who know them. When foreign companies recruit new employees who already have relevant knowledge and experience gained from a competitor, they risk these employees improperly using trade secrets from their former employer. Proper hiring strategies and procedures for screening and educating new employees on their duties to former employers can reduce the risk.
For example, a US competitor may employ highly skilled engineers that would make promising recruits. But hiring several engineers away from the same US competitor in a short period of time, particularly if they worked together for the competitor on the same technology, could create the appearance, or even the reality, that those engineers are being hired for their knowledge of a competitor’s trade secrets rather than for their talents alone.
In one example, a US company sued a Chinese company for allegedly misappropriating its technology trade secrets and then incorporating those secrets into its own products. The Chinese company had apparently hired many high-ranking employees to work on the same technology and shortly thereafter developed a similar product to compete with the plaintiff. By hiring multiple of the plaintiff’s employees to work on similar technology, the Chinese company created the appearance that it had misappropriated the US company’s trade secrets. Early in the litigation, the US court issued a temporary restraining order that compelled the Chinese company, among many other requirements, to stop making, offering to sell, selling, or otherwise distributing anywhere in the world any product developed based on, improved using (through testing or otherwise), or that otherwise uses any of the US company’s trade secrets. A comprehensive trade secrets programme could have reduced the risk of this outcome.
Aspects of a comprehensive trade secrets programme can include recruiting employees based on skill from a broad range of sources instead of targeting numerous employees from a single competitor who work on the same technology. A practice of extending offers without reviewing an employee’s resume or interviewing the employee can be seen as suggesting that the hiring company’s primary goal is to acquire the current employer’s information rather than gain a skilled employee. Additionally, absent an appropriate justification, avoiding substantially higher than market-rate salaries and signing bonuses can help blunt any argument that employees are being compensated for their former employers’ trade secrets. Companies may find it prudent, at least temporarily, to prohibit new employees from working on substantially similar technology to what they worked on at their former employer and require them to decline any work assignment that the employee believes could lead to use or disclosure of their prior employer’s trade secrets. In fact, in some circumstances, where a hiring company has not been proactive in limiting the risk of misappropriation, US courts have granted a former employer’s request for an order prohibiting a former employee from working in a position for a new employer where it is likely that to fulfill assignments for the new organisation the employee will necessarily use or disclose trade secrets in the course of the new job.
Hiring companies will want to evaluate what, if any, agreements exist between new employees and prior employers to avoid potential agreement violations. For example, some agreements forbid an employee from working with a competitor or require assigning ownership of intellectual property to the former employer. The enforceability of such agreements often varies globally. Organisations hiring US employees or employees whose contracts are governed by US law may find it useful to assess or to require the employees to assess with their own counsel whether and to what extent the contractual obligations will be enforceable in all relevant jurisdictions.
“MANY ORGANISATIONS FIND IT USEFUL TO REQUIRE EMPLOYEES, WHEREVER BASED, TO DOCUMENT AND LOG THEIR DEVELOPMENT PROCESS.”
Hiring employers can also, after assessing agreements for enforceability under relevant laws, request that new employees represent that they will not violate agreements with prior employers and sign agreements acknowledging that they will be reprimanded or personally liable for violating any agreements with the former employer and unlawfully using third-party trade secrets. This approach can help emphasise the importance of these issues, ensure employees take them seriously, and help distance the company from potential bad acts of a rogue employee. However, where documents do not match practice, and evidence shows that management has in fact directed or knowingly benefitted from misappropriation, courts and juries have found such paper promises to be “empty” and without legal consequence.
In addition to acknowledging that they will not bring, use, or disclose a former employer’s trade secrets, it can be helpful to ask new employees for evidence showing that information from their previous work is not a trade secret, particularly when in doubt. A hiring organisation may be inclined to conclude that information the employee will be using reflects simply ‘general’ knowledge in the industry, and that conclusion may well be justifiable. But developing evidence showing how that conclusion was reached can be helpful if a lawsuit later calls that conclusion into question. For example, an employee’s prior work may have been published in an article or a patent. Other relevant patents and published articles and presentations in the industry may exist, helping to establish that this particular information is widely known and the subject of discussion in the industry. Keeping a contemporaneous file of such articles can be helpful in navigating a path forward and in rebutting litigation claims. If the employee will be continuing a research plan that was already underway at the hiring organisation, it will be useful to be able to show that through regular business records.
For some categories of new employees posing a potentially high risk of misappropriating trade secrets, or whose work appears to be progressing at an unexpectedly fast rate, organisations may find it useful to conduct periodic audits of their work and electronic devices for possible third-party trade secrets information. However, such audits should comply with applicable foreign and domestic privacy and other regulations, which is sometimes challenging for companies with international offices governed by a myriad of diverse and sometimes conflicting laws.
If a former US employer makes accusations of misappropriation, it may be possible to avoid some US litigation by showing documentation that the employee had been forthcoming about obligations to the prior employer and that current work and devices show no evidence of the former employer’s trade secrets.
Accusations of misappropriation often come in the form of a notice or “demand” letter, identifying the new employee, their obligations to the former employer, and any suspected misappropriation of trade secrets. Having international policies in place that help appropriately respond to US notice letters is often critical. At a minimum, counsel (domestic and sometimes foreign) should analyse the realistic risk posed by that employee. In some cases, any electronic devices (phone, USB drive, email, etc) potentially used in the alleged misappropriation should also be preserved and analysed as most US courts agree that companies, wherever located, threatened with US litigation have a duty to preserve relevant information even if the litigation has not yet been filed. The US obligation to preserve evidence is often counterintuitive for foreign companies because foreign regulations and laws typically do not impose similar obligations, particularly for electronically stored information. Depending on what the evidence shows, US counsel can advise on the next steps to help avoid US litigation. If a foreign company is aware of information showing possible misappropriation and then destroys such evidence, then such acts could carry separate liability in the US and counsel should be contacted immediately for appropriate guidance.
“THE US OBLIGATION TO PRESERVE EVIDENCE IS OFTEN COUNTERINTUITIVE FOR FOREIGN COMPANIES BECAUSE FOREIGN REGULATIONS AND LAWS TYPICALLY DO NOT IMPOSE SIMILAR OBLIGATIONS, PARTICULARLY FOR ELECTRONICALLY STORED INFORMATION.”
RISKS FROM THIRD-PARTY INTERACTIONS
There are many other circumstances where foreign companies can be exposed to third-party trade secrets, ranging from receiving unsolicited ideas from customers or potential business partners to joint ventures where trade secrets are intentionally exchanged and used. Each instance of receiving a third party’s trade secrets can increase the risk of litigation, particularly if the trade secrets belong to or originated from US entities. Trade secret information is commonly shared transnationally when international companies explore the possibility of a joint venture or collaboration. It is important to have strong non-disclosure agreements and policies in place to protect and govern the exchange of trade secret information consistent with US law. Whether the international venture or collaboration goes forward or not, there is a risk that trade secrets information received under a nondisclosure or other agreement, whether business or technical, could give rise to claims that the recipient’s future products or services were derived from exchanged trade secrets.
In one recent example, a US company and a Chinese company shared proprietary information protected by a confidentiality agreement to explore the possibility of collaborating on improved cell phone technologies. After the US company shared certain trade secrets, it alleged that the Chinese company improperly used those trade secrets in patent applications. A trade secrets programme documenting the flow of alleged trade secrets within a receiving organisation (and showing where it did not go and was not used) can reduce the risk that US litigation (and complex international arbitration) will be filed at all and if filed, that it will result in a finding of misappropriation.
To help minimise risks, systems can be implemented to limit the number and roles of employees permitted to access third-party trade secrets information. Many organisations find it useful to require employees, wherever based, to document and log their development process (internally and sometimes externally), including keeping records of public information relied on to show that any inventions are independently derived or based on public information. Such logs can be used not only for routine business purposes but to rebut later allegations of trade secrets misappropriation.
Additionally, foreign businesses sometimes receive solicited and unsolicited suggestions, business ideas, inventions, or similar information from third parties that might contain trade secrets. To address such scenarios, some companies simply refuse to accept any unsolicited information because it may expose the company to trade secrets relating to technology the recipient is presently developing. If a company accepts unsolicited information, procedures in a trade secrets programme can reduce the risk of later allegations of misappropriation in connection with the unsolicited information. For example, a trade secrets programme could require notifying any party submitting unsolicited information that it is being accepted on a non-confidential basis only, and requesting that the party submitting information sign an agreement stating that the recipient owes no duty of confidentiality with respect to such information. While these procedures can help, some US courts will not enforce contractual terms that attempt to avoid liability for intentional wrongdoing, as is often alleged in US trade secrets litigation.
International entities should consider educating, and periodically reminding, employees of their obligations to keep third-party information confidential and what uses of that information are, and are not, permissible. Independent audits, to the extent permitted by local law, can confirm whether the information is being handled properly. Also, during exit interviews, employees could again be reminded of their obligations concerning third-party trade secrets. Implementing steps such as these and those discussed above in a coordinated international corporate trade secrets programme can go a long way in reducing the risk of US trade secrets litigation.
Jeffrey Pade is a partner at Paul Hastings. He can be contacted at: jeffpade@paulhastings.com
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