Podcast: The Current Trade Secrets Landscape: Criminal and Civil Litigation Strategies and Tactics
In this podcast, Ropes & Gray’s Mimi Yang, Peter Brody and Tony Biagioli discuss recent criminal and civil trade secrets enforcement strategies that companies can utilize when they believe they have been victimized by trade secrets theft, or when they are accused of trade secrets theft, including the so-called “China Initiative” announced by the Department of Justice in November 2018 and the Defend Trade Secrets Act of 2016 (DTSA). Mimi, Peter and Tony discuss implications companies may consider when pursuing criminal or civil litigation, as well as how the criminal and civil components can be interrelated.
Mimi Yang: Hi everyone, and thank you for joining us on this Ropes & Gray podcast. I’m Mimi Yang, a litigation & enforcement partner based in our Hong Kong office. Today, I am joined by my colleagues Peter Brody, an IP litigation partner, and Tony Biagioli, litigation & enforcement counsel, both based in our Washington, D.C. office. In this podcast, we are going to discuss recent criminal and civil trade secrets enforcement and strategies companies utilize both when they believe they have been victimized by trade secrets theft as well as when they are accused of trade secrets theft.
Just as some background for our listeners today, I am a white collar criminal and enforcement attorney, focusing on international risk issues in the Asia region. In my practice, I have represented multiple Asian companies under criminal investigation for allegedly stealing U.S. companies’ trade secrets. Peter is a civil IP litigator who has extensively litigated trade secrets theft cases, representing both plaintiffs and defendants. Peter also represented a Korean company criminally investigated for trade secrets theft. Tony is a white collar criminal and enforcement attorney who focuses his practice on trade secrets theft. He has represented companies accused of stealing trade secrets as well as alleged victims of trade secrets theft. He has been a featured speaker on trade secrets theft in front of pharmaceutical and technology industry associations. So just to set the stage a little bit, I thought we’d begin with some basics. Peter, what, precisely, is a trade secret? Now, before you answer, I know this seems like a basic question, but I actually think it has a lot of nuances.
Peter Brody: Thanks Mimi. A trade secret is fairly broadly defined: it can be any information that is, in fact, secret – where first, the holder took reasonable steps to keep the information secret, and second, which derives value from being secret. The classic example, of course, is the recipe for Coca Cola – that recipe is a closely guarded secret. If there’s any doubt to the value of the secret, just ask anyone who won’t drink Pepsi. The key takeaway, though, is that any information can be a trade secret, if it meets the two elements that I just mentioned, and that can include manufacturing processes, research and development methods, a business plan, customer lists, financial data, on and on.
There are several important exceptions. First, if you independently discover the information without knowledge of someone else’s trade secrets, that’s acceptable. For example, if I experiment with different ingredients and I come up with a soda that happens to taste exactly like Coke, that’s not against the law if I did so through my own independent experimentation, without knowledge of or reliance on Coke’s process. Second, so called reverse engineering to arrive at a trade secret is permissible. For example, let’s say I start by pouring Coke out of the can and into a beaker, and then through chemical analysis, I break it down into its constituent ingredients, and I figure out the recipe that way – that’s also okay.
Mimi Yang: Thanks Peter. As we know, the Economic Espionage Act criminalizes theft of trade secrets, and the Defend Trade Secrets Act provides a federal civil right of action for victims of trade secrets theft. The enforcement and litigation landscape for both are critical to understand, because many thefts of trade secrets implicate both potential enforcement avenues. So let’s start with the criminal side. As we have discussed extensively in prior podcasts and articles, the U.S. government is focused heavily on alleged trade secrets theft by China. The alleged underlying misconduct spans industries and types of conduct, from traditional hacking to misappropriation by current or departing employees. So Tony, both potential victims and defendants in trade secrets investigations are increasingly trying to wrap their heads around the new enforcement landscape. So as an initial matter, can you tell us who are the key enforcement authorities within the U.S. government? Let us know where are they located and what are their respective roles?
Tony Biagioli: Thanks Mimi. As you alluded to, in November 2018, the Department of Justice announced a “China Initiative” focusing on alleged theft of U.S. companies’ trade secrets by Chinese companies. To meet the enforcers, this seems like a natural place to start. The leaders of the initiative include the Assistant Attorney General who heads the Department of Justice’s National Security Division, five U.S. Attorneys, and additional DOJ officials (including the Assistant Attorney General who heads the Criminal Division). But what’s often lost is that the U.S. government’s expertise in addressing computer crimes generally and trade secrets theft specifically has grown significantly and is currently robust and sophisticated. The FBI’s Cyber Division and Computer Crimes Task Forces employ specially trained professionals specializing in just these types of attacks. Similarly, at the Department of Justice, the Computer Crime and Intellectual Property Section as well as the Computer Hacking and Intellectual Property Network are the cornerstones of the DOJ’s response to trade secrets theft. In short, U.S. federal authorities are motivated to investigate trade secrets theft, not simply from China but from everywhere, including from within the United States – and they have constructed sophisticated enforcement units to accomplish just that. As a practical matter, this has increasingly provided victims of trade secrets theft confidence in the viability of reporting cyber intrusions and IP misappropriation to federal authorities, instead of attempting to address the issue without the government’s assistance.
Mimi Yang: Thanks Tony. So let’s stick with that theme. Clearly, when companies discover potential misappropriation – maybe they’ve been hacked, maybe they discover an employee walked out with a thumb drive full of sensitive files – they’re immediately confronted with choices and the need to respond quickly. Obviously, there is a technical component to this – ascertaining how someone accessed your systems, identifying what was stolen, plugging the holes, etc. But I want to focus on the legal response – Tony and Peter, what should a company do?
Tony Biagioli: In some cases – I think in an increasing number of cases given the origin of the alleged theft from China – there is very little that you can do civilly. Who will you sue? In a hack, at least initially, you may not know who the wrongdoer is and you may need federal assistance to ascertain it. Even if you know who did it – if it’s a Chinese company without a U.S. presence – it’s not always clear how you’d ever collect on a judgment in Chinese courts. In other words, in an increasing number of cases, the potential federal criminal remedy may in fact be the only one. There of course is no guarantee the government will proceed with an investigation or prosecution when you report, but sometimes it may be a company’s best shot.
Mimi Yang: But there are significant tradeoffs, aren’t there, Tony? If you report the matter to the authorities, what are you potentially sacrificing? Peter, you want to take this?
Peter Brody: Well, potentially a lot. This is why the decision to disclose an attack to the U.S. government is highly fact-specific and depends heavily on the company’s goals. If you aren’t interested in suing or if success in a civil suit seems remote, there may be very little downside to the criminal route. Company personnel may have to devote some time to meet with the government and they might be witnesses, but beyond that, it may not be much hassle. Outside counsel can often help to streamline company presentations and focus the government on key facts in an organized way to maximize the chances of the government proceeding with the investigation and obviously minimize the burden on the company. However, there could be significant tradeoffs if civil litigation is both a goal and has realistic possibilities of success. One significant tradeoff is that, as a company, you sacrifice control. Not only would the government not be bound by any civil settlement between the parties, but the potential for ongoing criminal enforcement may undermine a company’s ability to resolve the matter to the satisfaction of both parties.
Tony Biagioli: Just to add to that, Peter – there are also, of course, the possibilities of disruptions to civil suits. The DOJ often moves for discovery stays – often successfully – in civil cases based on conduct that is subject of an ongoing investigation. And of course, employees of the defendant might decline to respond to certain discovery requests on Fifth Amendment grounds. The real key, in my experience, is for the white collar criminal attorneys who might liaise with DOJ and the litigation attorneys who would handle the civil suits to have these discussions with the company in a coordinated way. Frankly, in the criminal space, it’s critical to involve civil attorneys, not just for civil trade secrets expertise but for patent expertise, because so often the defense in these matters is that the alleged trade secret is publicly disclosed or derivable from public information, often from a patent. So even if the company simply discloses to the government, the team advising it will need that technical expertise to make an informed and persuasive presentation.
Mimi Yang: In prior podcasts, we’ve spoken about the idiosyncrasies of the Economic Espionage Act and its implications for companies seeking to prevent or respond to allegations of trade secrets misappropriation. We’ve also spoken about the importance of developing policies and procedures not only to protect a company’s own intellectual property, but to respect third parties’ intellectual property as well. But what I’d like to discuss now is potential civil exposure – how has the enforcement landscape there changed recently? Peter, what is important for companies to know?
Peter Brody: The Defend Trade Secrets Act, or DTSA, changed the civil exposure landscape significantly – it created the first-ever federal civil cause of action for trade secret misappropriation. This was a sea change, since before the DTSA, civil trade secrets lawsuits had to proceed under state law. Based on the data we’ve seen, there has been as much as a 30% increase in trade secrets case filings since the DTSA was enacted in 2016. There are a number of reasons for this: for one, the DTSA allows litigants to leverage stronger and more consistent rules of procedure, as well as enhanced protections and remedies. In addition, owing to changes in trends in patent law, many companies today are opting for trade secret protection instead of patent protection. And finally, with greater workforce, mobility in our economy has come increasing allegations that departing employees departed with something they shouldn’t have. Some remedies under the DTSA are new and present significant risk to companies. In particular, in extraordinary circumstances, courts can order ex parte orders to seize from the defendant property allegedly containing the stolen trade secrets, without the defendant first having a chance to be heard or even be given notice. Now, the DTSA also provides for all of the traditional remedies including injunctive relief, compensatory damages and the doubling of those damages as well as attorneys’ fees in cases of willful and malicious misappropriation, but because the statute is still fairly new – just three years old – there haven’t been that many cases that have gone all the way to a judgement.
One question we always receive is, “How is that ex parte seizure remedy being applied in practice?” Given how extraordinary the relief is and its great potential for abuse, it’s not surprising that while some such orders have issued, most courts are opting to hear and decide traditional TRO and preliminary injunction motions. Courts have generally held that bare allegations that a defendant will destroy relevant property or leave the jurisdiction are not sufficient. Courts have required showings of prior acts by the defendant indicating a propensity to do one or the other of those things before the court will grant the ex parte seizure order.
Tony Biagioli: And just to show how interrelated the criminal and civil components can be in these cases, it’s critical for companies to keep in mind their potential criminal exposure when litigating civilly. Admissions in civil litigation could of course be used in a criminal case. And the flip side is true as well – when resolving criminal matters, it is critical to think about the implications in civil cases. One strategy we have used is to resolve criminal matters on attempt or conspiracy grounds, without conceding actual misappropriation – this preserved our ability to contest damages on the civil side because we hadn’t conceded that the defendant actually obtained or used any of the trade secret information.
Mimi Yang: Well, that concludes our discussion for today. Thank you very much, Peter and Tony, for joining me. For additional information, please visit our website, www.ropesgray.com. And of course, if we can help you navigate any of these developments, please don’t hesitate to get in touch. Thanks for listening everyone.