Nondisclosure Agreements (“NDA”) are everywhere: a Silicon Valley Don Juan had an NDA ready for every date. However, NDAs are not created equal — what is good for the discloser is not good for the recipient. The “Silicon Handshake” can become a hangman’s noose for the unwary.

Questions to Ask.

Any potential signer to an NDA needs to answer several questions before signing. Those questions are:

1. Whose secrets are being protected? Is the NDA mutual — does it cover the secrets of both parties? If you are presenting an NDA to protect your trade secrets, you may not want to bind yourself to protecting the other side’s secrets. Alternatively, if someone presents you with an NDA, you may want to make sure your own secrets are protected.
2. What secrets are being protected? Is everything discussed to be considered confidential? This can be a trap for the unwary. If someone mentions something in passing, you could be foreclosing future opportunities for your company. Do documents have to be marked as confidential to receive protection under the NDA, or does it cover everything that the recipient remembers? How will the recipient know what is protected and what is not? Obviously, no NDA can specifically spell out in advance all the details of what is being disclosed. But an NDA that is too broad could restrict the recipient’s future operations. What is good for the discloser is not always good for the recipient.
3. Who is covered by the NDA? Does the NDA allow for independent derivation? If your R&D office is, without your knowledge, working on a similar project, has your signature cut off future development of that project? Is there an option for independent development? Have you bound one of your independent partners? Is the protection limited only to those actually signing the NDA?
4. How long does the NDA last? Is the NDA to last into perpetuity? Does it carry over into new companies or ventures that a party may enter into? Is there any way of removing oneself from its provisions, such as returning all documents?
5. What are the exceptions? Are documents otherwise publicly available covered? Is the recipient released from the duty to protect the documents if they later become publicly available? If the recipient receives the information independently, does the duty to protect end?
6. Whose law governs? Jurisdiction and choice of law questions are not excess verbiage designed to keep lawyers employed. They have important consequences, particularly because states often have very different protections. California tends to protect employees’ rights to pursue a livelihood more than other states. If a choice is available, an attorney should review the NDA to see what is best for you.

Advantages v. Disadvantages.

Never is the old saw “where you stand depends on where you sit” more true than when considering an NDA. The discloser’s motives are radically different from the recipient’s: thus, the discloser’s NDA should be different than the one you would be willing to sign as a recipient. An NDA covering mutual disclosures should not resemble that of a one-way disclosure. Good preparation should include having three different NDAs — one for when you disclose documents, one for when you receive documents, and one for mutual disclosure. The mantra to remember is: how does this NDA help me maximize my gains, and minimize my risks?

Strategic Considerations.

NDAs are more than just the latest fashion in attorney make-work, but an integral part of business operations. If someone could use your information to triumph over you, you need an NDA. Alternatively, if you, as the discloser, would not sue someone for using the information being disclosed, an NDA is not necessary. Indeed, by revealing distrust of the other party, it could inhibit the relationship.

A Shield Can Be a Sword. Commonly a shield, NDAs can also be a weapon. An unwary recipient can prevent itself from developing a new line of business that the discloser reveals — and it can even handcuff those in alliances with the recipient. Sometimes two-layered NDAs are appropriate. The first layer is to someone who acts as a gatekeeper, to decide if the information threatens the recipient or its alliances; the second is for a broader, operational distribution.

Keeping Track of NDAs.

Who keeps track of the NDAs your business signs? Does anyone? If your VP of marketing left tomorrow, who at your company would know what NDAs exist that she may have signed, binding the company? Is there anyone at your company who knows enough to gauge whether the NDA your R&D guy is about to sign conflicts with any other project you have? “Gee, I didn’t know . . . “ is usually the prelude to a disaster. With the prevalence of NDAs today, your company needs a firm-wide policy. One person or group should be the gatekeeper of every NDA your company signs. Do not allow your partner — or potential adversary — to dictate the progress of the relationship. Impatience in allowing your general counsel to review the NDA before signing can be a warning signal that you may have more to lose than to gain.

No one wants to repeat the well-known mistake one software company made when it refused to sign an NDA with IBM: IBM instead did business with a young company called Microsoft. However, the more common problem is finding the “silicon handshake” transformed into a noose around your neck.

Roscoe’s Chicken and Waffles used to have a restaurant near the Bay Oak Law offices in Oakland; an assistant used to visit nearly every weekend with her fiancé. Unfortunately, the Oakland branch closed a few years ago, and Roscoe’s is currently only in Southern California.

Unfortunately, Roscoe’s was in the legal news today because it lost a copyright infringement suit. The case itself is fairly standard: after years of ignoring requests to license music to be played, Roscoe’s Long Beach restaurant was caught playing eight songs for which it did not have a license – the house band played several John Coltrane selections and the CD player played several songs by the jazz fusion group Hiroshima. The “good” news is that the court awarded “only” $4,500 per song ($36,000 total) – it could have been far more. Some copyright infringement suits have up to $30,000 in damages per work. The “bad” news is that the plaintiffs were awarded $162,000 in attorneys’ fees, because the works infringed had their copyrights registered within 90 days of being published. This is one of the most important advantages to registering copyrights when they are published – the attorneys’ fee issue can (and often does) dominate the size of the case.

Which is worse – being hit by a “Trane” or having someone go all “Hiroshima” on you? It looks like Roscoe’s got a little bit of both.

Just as your body needs annual wellness checkups, your business does, too. Much of the simple matters can be done by your office, without an lawyer – but if issues turn up, it may be time to check with counsel.

Corporate Status

❏ Corporate Status. Is your business in good standing with the state? In California, corporations, limited liability companies (LLCs) and limited liability partnerships (LLPs) should check here to verify that the business is in good standing. Make sure you choose the proper entity.
Why you should care: a corporation, LLC, or LLP not in good standing in the State of California cannot bring suit or defend itself in court, according to Cal. Corp. Code § 2205 and Cal. Rev. & Tax. Code § 23301. If your business is not in good standing, even if you never get sued or sue anyone, interest and penalties are mounting up. If the business is suspended, the time to fix it is now.
❏ Statements of Information must be filed by most corporations annually, according to California Corporations Code § 1502. Previously, the state sent the form; now, it only sends a postcard.
Why you should care: The lack of a form mailed to the business can lead some businesses to forget to make the annual statement – a costly mistake, as filing it late results in a $250 penalty – ten times the cost of the form. The good news is that the form is now online, and even simpler to fill out than before; the filing fee can be paid by credit card. Put an annual reminder in your calendar system for the beginning of the month before the business incorporated – if the corporation incorporated in June, select May 1st.

Employees

❏ Wage Protection Act. When you hire new employees that are subject to the overtime rules, California now requires that employers give the new employees forms. Read here for more important information.
Why you should care: Eventually, there will be penalties associated with the failure to provide these documents to employees.
❏ Independent Contractors. Are the independent contractors the firm uses actually independent contractors, or are they employees?
Why you should care: there are new penalties for intentionally misclassifying independent contractors. Even without such penalties, paying back taxes for someone you thought was an independent contractor can devastate the business.

Employee Handbook

❏ Check your employee handbook. Does it cover important issues like:

❏ At-will employment?
❏ Getting an acknowledgment from the employee that your business handles confidential information for both itself and its customers, and the employee needs to protect that information both during and after employment with the company?
❏ Specifying that the information created by the employee belongs to the employer as part of a work-for-hire agreement, and the employee is not entitled to use that information after the employment ends?
❏ An ethics policy about dealing with customers and suppliers, that does not create conflicts of interest for your business or the employee?
❏ A policy on inspecting offices, lockers and common areas of the business for contraband?
❏ Payday and timekeeping requirements?
❏ Leave procedures, including sick leave, pregnancy leave, leaving to care for a family member, and military reserve leave?
❏ Allowable time off, such as jury duty, visiting children’s schools, and the like?
❏ Job evaluation procedures?
❏ An illness and injury prevention program?
❏ Appearance policies, including casual Fridays (if offered)?
❏ Harassment investigation procedures?
❏ Internet, email and telephone use procedures – including personal usage and ownership of email accounts, web pages, Twitter, Facebook, and other social media accounts [ http://www.bayoaklaw.com/who-gives-a-tweet-about-who-owns-a-tweet/ ]?
❏ Job termination procedures?

Why you should care: a good employee handbook protects the business by specifying procedures in advance. It reduces uncertainty and the potential for trouble down the line.

Insurance

❏ Make sure your insurance is up-to-date, including:

❏ Worker’s Compensation Insurance (required for all employees);
❏ Disability Insurance for officers not covered by worker’s compensation, and which can be broader in coverage than worker’s compensation;
❏ Health Insurance, with the great changes to the health care system occurring during the next few years, it may be a good time to shop around for a better policy;
❏ Life Insurance for Owners, so that should an owner die, his or her estate can be paid the value of the ownership interest without destroying the company’s future;
❏ General Business Liability Insurance – make sure that all locations are covered, as well as all assets in question. Is there enough coverage? Is there too much coverage? When a firm reduces size, sometimes it forgets to inform the insurer, and they end up paying for what the firm doesn’t need.
Why you should care: While many people pay lip service to insurance issues, there is an aspect of “out of sight, out of mind” to worrying about the issues insurance is designed to cover. Few can afford to over-insure these days, but under-insuring can be disastrous.

Contracts

❏ Sales Contracts. Make sure the following is in your customer contracts:

❏ Attorneys’ Fees: It is far more likely that a customer will breach their contract with you, than you fail to do the work – and if you fail to do jobs for clients, you are not going to be in business for very long, anyway. Thus, every contract or invoice that you provide your customers should have an attorneys’ fees clause, so that if the contract has to be enforced, the prevailing party will receive reasonable attorneys’ fees and costs.
❏ Jurisdiction. The contract is to be interpreted according to the law of your jurisdiction. You know, for better or for worse, your jurisdiction’s laws – you don’t always know the other jurisdiction’s laws.
❏ Integrated. The contract is “integrated” – meaning that the written contract is the complete contract. This prevents alleged oral modifications like “she said that we don’t have to pay until . . . “ from easily being incorporated into the contract (good attorneys might know how to get them in).

Assets

❏ Inventory. Has the business inventoried its physical assets? This is especially important for assets that can easily “walk away” like cell phones and laptops. All such assets should be marked with the name of your business and a landline telephone number. Programs are available to track mobile devices by GPS or other means. An inventory should be kept for insurance and tax purposes. Track, at the least, the model of the inventory, purchase date and purchase value.

Why you should care: Cell phones and laptops have confidential business information, and those who lose them are often afraid to mention it. Marking these devices improves the chance they are returned. Keeping an inventory in a safe place can be good for insurance purposes.

❏ Marking Physical Assets. All substantial physical assets – especially those that can easily walk away –should be marked with a non-removable tag with the business name and phone number. Two places among many to buy such tags is here or here. (Bay Oak Law doesn’t endorse or vouch for these companies; their presence is illustrative).

❏ Marking Intangible Assets. It is easy to understand the importance of marking physical assets like computers, but it is also vital to mark as “Confidential” intangible assets like company information. Every balance sheet, every accounts receivable list, every customer list – every document that, if it falls into the hands of your competitors, could hurt or destroy your business, should be marked as “Confidential.” It is easy to add titles and footers to the firm’s regular forms that are regularly used, so that they get copied into future documents. Send a company-wide email quarterly, reminding everyone of the importance of keeping such information secret.

❏ Software. Does the business have licenses to use all of the software on all the computers in the office? Do you have the registration numbers for all the licenses in a safe place, so that should your office burn down, you do not have to buy more software?

Why you should care: If licenses are missing, it is cheaper to handle this now than after a software developer contacts you and demands thousands of dollars.

❏ Trademarks. On a rainy day when people are sitting around, go through your promotional materials, brochures, website, business cards and the like. Have you registered trademarks for your business name, all your logos, slogans and the like? A typical trademark registration costs less than $2500 – should anything have a trademark registration? Even if you decide not to, run a search on an internet search engine using any word mark that you are using – make sure that your firm is not infringing someone else’s mark – and make sure someone isn’t infringing yours. For each trademark, use the proper marking: “®” for registered marks, and “™” for unregistered marks. Tivo has a good webpage on how to use trademarks properly (hint: you can never “tivo” “Desperate Housewives” – or anything else.)

❏ Copyright. If you produce copyrighted works like books, films, video games or the like, you need to register your copyright. It is easy to do, and takes only a few minutes. Even if you do not, every brochure, white paper, or website you have should have “© 2012, [Name of Company]” on it. While the owner of a copyrighted work has rights as soon as it is published, it doesn’t hurt to remind people of that. Also, make sure that you always have the right to use the works of others on your works, like photographs.

Due Process and Trade Secret Misappropriation
Cal. Civ. Proc. Code § 2019.210

by: Andrew K Jacobson
The Fifth Amendment to the US Constitution guarantees due process of law. One type of due process is knowing the details of the accusations in a court of law against you. But in trade secret misappropriation cases, the trade secret owner has a good reason not to put the details of the trade secret in the complaint: as a public document, anyone can see it. Some trade secret owners use this secrecy as a way of bashing former employees, by preventing the trade secret defendants from knowing what they are alleged to have stolen. How do courts balance the interests of the trade secret owner in preventing the trade secret from being generally known, and the interest of the defendants in knowing what they are being accused of taking?

In California, Cal. Civ. Proc. Code § 2019.210

“was enacted to curb unsupported trade secret lawsuits routinely commenced to harass competitors and former employees. The California legislature understood that plaintiffs in trade secret cases are often unable to identify any trade secrets, even after months of extensive discovery. Trade secret claims are especially prone to discovery abuse since neither the court nor the defendant can delineate the scope of permissible discovery without an identification of plaintiff’s alleged trade secrets. By restricting a plaintiff’s ability to engage in discovery until it identifies its trade secrets “with reasonable particularity,”[Cal. Civ. Proc. Code § 2019.210] strikes a balance between a plaintiff’s right to protect its trade secrets and a defendant’s right to be free from the burdens associated with unsupported trade secrets claims.”

Computer Economics, Inc. v. Gartner Group, Inc., 50 F. Supp. 2d 980, 992 (S.D. Cal. 1999). (Cal. Civ. Proc. Code § 2019.210 was known as Cal. Civ. Proc. Code § 2019(d) before it was renumbered effective January 2005. 33 Cal.L.Rev.Comm. Reports 825 (2004).)

“Reasonable Particularity.” Cal. Civ. Proc. Code § 2019.210 requires that plaintiffs disclose with “reasonable particularity” the trade secrets defendants are alleged to have misappropriated. Until this occurs, plaintiffs cannot start discovery – including written interrogatories, requests for documents, and depositions. Defendants can use this Cal. Civ. Proc. Code § 2019.210 as a shield to slow down the blitzkrieg that trade secret cases often start with.

Background. The roots of what is now Cal. Civ. Proc. Code § 2019.210 date back almost 50 years. In Diodes, Inc. v. Franzen, 260 Cal. App. 2d 244, 253 (1968), the appellate court recognized the due process rights of the defendant, and held that a plaintiff must “describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge of those persons who are skilled in the trade, and to permit the defendant to ascertain the boundaries within which the secret lies.”

The trend in California is far greater particularity than ever before. It is not enough to claim general categories: a Cal. Civ. Proc. Code § 2019.210 designation requires identifying the exact trade secret misappropriated. The case of Perlan Therapeutics, Inc. v. Superior Court, 178 Cal. App. 4th 1333 (2009) squarely rejects the typical trade secret plaintiff move of making a tremendously overbroad attempt to designate everything a trade secret. In Perlan, plaintiff provided four pages of “trade secrets,” but “[m]uch of the text simply repeats the narrative available in the publicly filed second amended complaint and provides additional technical detail that is nonetheless publicly available. . . . Despite the highly technical language used, it is apparent that this description does not provide specific identifications of the peptides or reagents used in the process.” Id. at 1338-1339. The Perlan appellate court upheld requiring the plaintiff to identify the alleged trade secrets misappropriated with far more particularity.

While Cal. Civ. Proc. Code § 2019.210 is a California state discovery statute, federal district courts have substantively applied the statue in federal actions dealing with misappropriation of trade secrets. See, e.g., Advante Int’l Corp v. Mintel Learning Tech., No. C-05-01022, 2006 WL 3371576, at * 3 n. 4 (N.D. Cal. Nov. 21, 2006) (Cal. Civ. Proc. Code § 2019.210 “provides an appropriate guide in the absence of specific provisions in the federal rules governing trade secret discovery.”)

In Computer Economics, above, the Southern District of California held that federal courts cannot carve Cal. Civ. Proc. Code § 2019.210 out of the California Uniform Trade Secrets Act (“CUTSA”) “without frustrating the legislature’s legitimate goals and disregarding the purposes of [Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938)].” Computer Economics, 50 F. Supp. 2d at 992. Failing to apply Cal. Civ. Proc. Code § 2019.210 “would entitle a plaintiff to virtually unlimited discovery, enhancing its settlement leverage and allowing it to conform misappropriation claims to the evidence produced by the defendant in discovery.” Prohibiting these tactical abuses is the precise reason that Cal. Civ. Proc. Code § 2019.210 requires identification of the alleged trade secrets with particularity before discovery of the alleged misappropriator can commence. The Computer Economics court noted that Cal. Civ. Proc. Code § 2019.210 serves several purposes: “(1) it promotes investigation of claims prior to suit and discourages the filing of meritless trade secret complaints; (2) it prevents plaintiff from using the discovery process as a means to obtain the defendant’s trade secrets; (3) it frames the appropriate scope of discovery; and (4) it enables the defendant to form complete and well-reasoned defenses.” Computer Economics, 50 F. Supp. 2d at 985.

The Ninth Circuit’s opinion in Imax Corp. v. Cinema Technologies, 152 F.3d 1161 (9th Cir. 1998) illustrates how Cal. Civ. Proc. Code § 2019.210 transforms into a tool of substantive law. In discovery, the plaintiff identified the trade secrets as, among other things, “the design of the cam unit, including every dimension and tolerance that defines or reflects that design.” Id. at 1166. The defendant moved for summary judgment on the grounds that the plaintiff had failed to specifically identify the trade secrets at issue and, therefore, had not demonstrated that such information constituted trade secrets. Id. The court agreed, holding that plaintiff’s failure to identify the precise numerical dimensions and tolerances of the purported trade secret rendered its claim fatally defective. Id. at 1166-68; see also Universal Analytics. Inc. v. MacNeal-Schwendler Corp., 707 F.Supp. 1170, 1177-78 (C.D.Cal. 1989).

This concern is particularly important where a plaintiff is unfairly trying to claim ownership not of a trade secret, but of former employees’ skill, experience, and general knowledge. See Diodes, 260 Cal. App. 2d at 250. “The concept of a trade secret does not include a man’s aptitude, his skill, his dexterity, his manual and mental ability, and such other subjective knowledge he obtains while in the course of his employment … the right to use and expand these powers remains his property.” SI Handling Systems, Inc. v. Heisley, 753 F.2d 1244, 1255 (3rd Cir. 1985).

Lessons for Defendants: As soon as a defendant is served in a trade secret action, it should serve a demand for identification of trade secrets under Cal. Civ. Proc. Code § 2019.210. Until plaintiff complies, plaintiff cannot proceed with any discovery. Crafty defendants take advantage of the initial delay of discovery by plaintiffs to serve plaintiffs with discovery, for which they are often unprepared.

Lessons for Plaintiffs: Trade secret plaintiffs must avoid being lulled into complacency. While the trade secrets at issue cannot be inserted into the complaint itself in any detail, the plaintiff should prepare a designation of trade secrets under Cal. Civ. Proc. Code § 2019.210 in as much detail as possible, and be prepared to serve it once a protective order is in place.

Trade secret misappropriation cases are usually sprints, not marathons. Plaintiffs hope to catch defendants off-balance, while defendants seek to wear down plaintiffs. Cal. Civ. Proc. Code § 2019.210 levels the playing field.

By:  Andrew K Jacobson

You’re a business owner, not a Kardashian. You’ve never tweeted in your life, even if that is all your teenager does. But now the resident young wise@$$ in your office has started tweeting about your business – and shockingly (to you), new clients are contacting you because of it. You don’t care – you’re just happy that the goofball is finally productive. But you may lose your good luck if your business doesn’t protect it.

The New York Times reports that this is just what is happening in the Northern California District Court, as a company seeks to recover the 17,000 followers of a twitter account originally called “@phonedog_noah.” PhoneDog “ is a highly interactive mobile news and reviews resource that attracts a community of more than 2.5 million unique visitors each month. . . . [I]t offers up serious editorial content and video reviews that users rely on to make important decisions about their next mobile purchases.” The South Carolina company features up-to-the-minute news about almost all mobile platforms in the US. PhoneDog hired current Oakland resident Noah Kravitz to be a freelancer in the mobile industry; he soon began appearing on behalf of PhoneDog in various media outlets discussing mobile phones, and operated a free Twitter account called “@PhoneDog_Noah.” The Twitter account soon had 17,000 followers. Kravitz left in October 2010, and soon demanded back pay and a percentage of PhoneDog’s revenue. He renamed the Twitter account “@noahkravitz” and excluded PhoneDog from possession of the account.

[Phone]Dog Bites Man. PhoneDog has attacked with a federal court complaint, claiming that Kravitz took PhoneDog’s secrets – apparently, the Twitter followers – and interfered with PhoneDog’s prospective economic advantage. PhoneDog alleges that there “are many details of PhoneDog’s relationships with . . . its Twitter followers . . . that are not generally known or readily accessible to the public or PhoneDog’s competitors.” (First Amended Complaint, ¶ 13). Kravitz has yet to present his side of the story in court, but one likely avenue of attack regarding the Twitter followers is that they are publicly known; as of the writing of this sentence, 24,382 people follow “@noahkravitz,” along with 969 lists.

If the identity of the followers is not a secret, can PhoneDog lay claim to the list itself, when the “list” is in the possession of Twitter and viewable by anyone? The simplest way of resolving this question is by including in the employee handbook a clear statement that all media created during the employment belongs to the employer – and that includes information like lists, followers, statements, videos, and any other media presentation. The First Amended Complaint, above, does not allege any such statement. PhoneDog can still allege that Kravitz “converted,” i.e., stole, the followers, because they were enticed to follow “@PhoneDog_Noah” with content that PhoneDog paid Kravitz to create, and such intellectual property is a work-for-hire that belongs to the company that paid for it.

How Much Are You Worth, Tweetee? PhoneDog’s complaint (¶ 19) values each Twitter follower at $2.50 a month – for 17,000 followers, that means they are worth $42,500 a month, more than $500,000 a year. PhoneDog cites “industry standards” for the valuation, but does not provide any further details of the value of the followers of a free service. A critical look at how to value social media can be found here. The media revolution of the last 20 years will continue well into the future, and new issues will arise that few will think about in advance. Small businesses can save themselves huge expenses in protecting their media outlets by updating their employee manuals so that it is clear from the outset of employment that these new media channels belong to the employer, not to the employee.

The litigation is still only in the earliest pleading stage, but PhoneDog must realize by now that by not closing the door (with explicit statements in a contract or in its employee manual), PhoneDog cost itself a lot of money. This case is likely one hound that won’t hunt.

Yes, they do go to jail. The law has very sharp claws.

Law regarding trade secrets has long been seen as the ugly step-sister of intellectual property. Patents, trademarks, and copyrights have traditionally been held to be federal concerns, while trade secrets have been seen as principally protected by state laws. Now, two senators want to allow the trade secret Cinderella into federal court by introducing a federal cause of action for trade secret misappropriation. The question is whether this is necessary.

The Economic Espionage Act (“EEA”), 18 U.S.C. § 1831-1837, criminalizes the theft of trade secrets used in interstate or international commerce, with prison terms of up to 10 years, and fines up to $5,000,000. While most of the public focus on the EEA has been on its provisions on foreign (including commercial) espionage, 18 U.S.C. § 1832 allows criminal prosecution of those who misappropriate trade secrets in interstate commerce, without a foreign actor or entity. While currently there is no private right of action under 18 U.S.C. § 1832, on October 5, 2011, Senators Herb Kohl (D-WI) and Chris Coons (D-DE) introduced an amendment to a bill that would introduce a private right of action in federal court in trade secret misappropriation cases when there is “either substantial need for nationwide service of process or misappropriation of trade secrets from the United States to another country.” The senators claim that the amendment would allow for a uniform, nationwide cause of action. The press release of Senator Kohl (who sponsored the EEA back in 1996) claims that “[t]his amendment will help fill a gap in federal intellectual property law by providing legal protections for non-patentable, non-copyrightable innovations.” However, a Federal Circuit case decided just six days after the amendment was introduced indicates that the amendment may be redundant.

The International Trade Commission. The Federal Circuit Court of Appeals recently acknowledged that the International Trade Commission (“ITC”) has the authority to bar importing foreign products that used an American company’s trade secrets.

The intervenor in TianRui Group Co. Ltd. v. Int’l Trade Commission, — F.3d —, (Fed. Cir. Oct. 11, 2011), Amsted Industries, Inc., licensed one of its secret processes for making railway wheels to foundries in China. Appellants TianRui Group Co., Ltd. and TianRui Group Foundry Co. Ltd. (jointly, “TianRui”) make the same type of wheels, and sought to license Amsted’s secret process. The negotiations failed, and TianRui retaliated by hiring away nine employees from one of Amsted’s Chinese licensees. These employees had been trained in the secret process, and had been admonished about the importance of not disclosing the process to outsiders; all but one had signed confidentiality agreements. Amsted then filed a complaint with the International Trade Commission to prevent the import of TianRui’s products.

TianRui sought to end the proceedings, arguing that because the misappropriation occurred outside the United States, the ITC did not have jurisdiction. The administrative law judge disagreed, as the law authorizing the barring the import of products that infringe upon intellectual property rights, 19 U.S.C. § 1337 focuses on the injury to the industry in the United States, not where the wrong occurred. The judge eventually found TianRui to have stolen 128 trade secrets that Amsted had licensed, and barred the import of TianRui’s steel railway wheels.

The Federal Circuit largely upheld the trial court, with one exception. Instead of using trade secret misappropriation law of Amsted’s home state of Illinois, it used federal common law regarding trade secret misappropriation, which is largely identical across many states. In fact, on January 9, 2011, New Jersey became the 46th state (along with the District of Columbia, Puerto Rico, and the US Virgin Islands) to use substantially the same law: the Uniform Trade Secrets Act. Only Texas, North Dakota, New York, and Massachusetts.

Federal courts already have diversity jurisdiction in cases where the plaintiff and defendants reside in different states, and TianRui shows that where there might be damage from the importation of products using trade secrets stolen from the United States, the products can be barred from landing in the US. When the vast majority of the American population and industry reside in states that use a uniform set of laws about trade secret misappropriation, the need for a federalized code of law about trade secrets seems redundant.

Computer-Related Trade Secret Misappropriation. While trade secret misappropriation law as a whole has yet to be federalized, when the misappropriation involves computers or electronic data, there are already both federal criminal and civil claims available under 18 U.S.C. § 1030, which protects any data from a “protected” computer – which includes just about any computer around. Even those, like employees, who have some access to the computer but exceed their authorized access are liable under 18 U.S.C. § 1030(a)(4). For criminal violations, the Secret Service has primary authority to investigate, although the Federal Bureau of Investigation also has the right to investigate when the subject matter involves the FBI’s general authority. A private right of action, allowing a plaintiff to sue under 18 U.S.C. § 1030, does require proof of damages of at least $5000. In 2010, Oracle relied on 18 U.S.C. § 1030 to get a federal judgment against SAP for what, in essence, was the misappropriation of trade secrets (although earlier this year Judge Phyllis Hamilton ordered a new trial unless Oracle accepted “just” $272 million in damages).

As TianRui, 18 U.S.C. § 1030, and Oracle v. SAP show, trade secret misappropriation is no longer hidden from federal view: this Cinderella of Intellectual Property has already been allowed to attend the ball to find its Judge Charming.

When I was a kid, on days when we couldn’t play outside, my friend Mike and I would play Pong on our TV sets. Growing up in the Los Angeles area, many of our friends wanted to be in Hollywood. Now, the video game industry has earned more than Hollywood movies for years.

The San Diego Union Tribune has a great story on the opportunities and risks of the mobile app community. Appy Entertainment (motto: “deadly serious about stupid fun”) is based in Carlsbad, CA, and one of its founders is Chris Ulm, a friend of mine from Sutter Junior High School. One of Chris’ Appy co-founders said that

“One of the reasons we did this start-up is we saw this as the opportunity of the century . . . . The way mobile has grown since the iPhone was launched, it’s historic. But also, we want to create new things. And the video game business became so risk adverse because the budgets were so high.”

Mobile gaming apps, an industry that didn’t really exist four years ago, has now moved on to its second incarnation, in which the products are free, but in-game purchases for the apps cost money. This creates its own set of problems, especially when it is just an Apple App Store account that is charged: never mind kids ordering things without their parents’ approval, certain middle-aged attorneys have had problems mistakenly ordering more puzzles while helping his son on a kids’ app. Not only does the game now have to be entertaining, it has to have in-game items worth buying. But for addictive games, the revenue stream can continue long after the last game is downloaded. Legal headaches await, though, for in-game purchases that are not clearly marked as to price or purchasability. Already one child paid $1400 for “Smurfberries” (a Smurfs app “currency”), and an attorney in Philadelphia has filed a class action suit because his daughter racked up $200 in in-game purchases.

The rapid evolution of the mobile gaming industry echos the Internet boom of the late 1990s, when websites raced to fill the empty niches of the Internet. Good ideas like Google and Amazon flourished, while pets.com and webvan.com couldn’t deliver the goods efficiently to customers. Eventually in mobile gaming a few mega-winners will arise, while smaller successes will fill the niches in between.

Plenty of legal questions will arise. I can’t sell an all-new Gucci handbag from my office – but can I sell its doppelgänger in my lifestyle game, if I don’t use the Gucci name on it? If I (legally) reverse engineer the code to someone else’s game, can I sell in-game items for that game? If I have a valuable in-game item like a special sword, can I sell it? Should the video game company get a share of the proceeds? And what is going to happen when someone counterfeits “smurfberries” or other currency in the game? Intellectual property attorneys look forward to making a living off such momentous questions.

Wikileaks is back in the news, as it has released another large cache of documents from the US Government. Wilileaks believes that government and corporate actions should be completely transparent, so that everyone can view and judge actions. That is a process argument – everyone needs to see how the sausage gets made.  But if the point is to let justice prevail, Wikileaks needs to recognize the right to private counsel.

Most of an attorney’s function is behind the throne, out of the view of the public. We do so not because we are hiding things, but because we need to offer options, play devil’s advocate, be yelled at. We need to give our principals – our clients – candid information and room to figure things out. We have a strong attorney-client privilege because that private space is needed to look at options. Many ideas are frequently awful, but we – clients and attorneys alike – cannot be sure until we have the space to play out the options and consequences. We don’t get to the right answer until we check a lot of wrong ones. However, if our opposition learns of our thought processes, they can take countermeasures, thereby disturbing the objective of getting to the best solution.

Transparency is great in the abstract: people collaborate together, with everyone having tools to contribute to the best solution. That model falls apart, though, when there is a force hostile to the best interests of the group.

There is also the problem of the parasites, sucking up the resources and knowledge without contributing to the whole. Secrecy is important to many businesses, from formulas to manufacturing processes, or just the identity of its customers. Competitors that could lift that information freely without contributing to their own means that it sucks the life out of the harder-working, more successful enterprise. Why tinker to improve a process when you can just take that which someone else has done? Why struggle finding the right market for your product, if someone else has done it, and you can just suck the benefit out of them? The long-term trend would be to reward the parasites and discourage the harder workers. Why innovate when you can just copy? For Wikileaks, it has rewarded the governments that have strong secrecy protections, by allowing them access to private communications of the United States, and punished those governments, like that of the United States, that have been a force for transparency, however awkward that march has been.

The true import of Wikileaks so far seems to be the banality of most of the secrets to most world citizens. Why, for example, keep secret that Australia was being scrutinized because its air safety standards was lacking? The secrecy isn’t a matter of evil, but a matter of respect: rather than humiliate a friend, you draw the friend aside and mention that there is an issue that needs to be fixed. The friend appreciates – and expects – the opportunity to fix things before it becomes a public humiliation. Even with seven billion humans and 150+ countries on this planet, “burning” someone is public is still as negative as if we were to do so in front of the tribes of our ancestors. Wikileaks is based on the assumption that we are all in a game in which we meet everyone just once, so we can avoid the consequences that would happen the next time if we burn them this time. Karma – or however you term it – guarantees that what goes around comes around.

A Federal Express envelope arrives addressed to you as the head of your business. However, it is from a law firm that you have never heard of. You already have counsel – you spoke to them just last month. As tempting as it is to throw the entire envelope, unopened, into the recycling bin, you open it and find a letter addressed to you. You have received a cease-and-desist letter, also known as a “C&D letter.”

You learn that the law firm is telling you to cease and desist from doing something that infringes upon the intellectual property rights of that law firm’s client. It might be a patent issue, or perhaps it has to do with their client’s trade secrets. The C&D letter may claim that your firm is infringing upon their client’s copyright, or their trademark. You are sure your firm hasn’t done anything wrong – you know your business. As tempting as it might be to resume the pitching of the envelope into the recycling bin, this C&D letter means you have to start doing some things right now.

Quickly Acknowledge the Letter. One of the chief causes of increased damages is willfully ignoring claims to stop. A mistake about using someone else’s intellectual property can elevate a minor problem into a serious disaster. Even if you are sure that you are doing nothing wrong, make sure a response is promptly sent, saying that you are beginning an investigation. Give yourself a generous end date for a comprehensive response of two weeks to a month. Don’t wait on sending the initial response letter until the conclusion of the investigation, and do not make any representations that may come back to haunt you later. The response can be from yourself or be from your counsel. Counsel’s response shields you from directly communicating with your adversary, and decreases the possibility of something being used against you. Counsel is usually better placed to investigate the overall reputation of the party and counsel claiming intellectual property infringement, and can smooth the way for you.

Begin a Low-Key, Objective Investigation of the Facts. If someone in your organization messed up, that person will not want to reveal his mistake, but your company’s survival may depend on learning that right away. Be low-key but objective in the investigation. Eeven if those employees used the intellectual property your adversary claims, there may be many reasons why your firm could do so. Again, counsel can be of great assistance, because counsel can frame the issues early on that maximize your advantage.

Consult Your Insurance Policy. Depending on what happened and how your business liability policy is written, your firm may qualify for insurance coverage for the legal costs associated with the dispute. Some business liability policies cover allegations of “advertising injury,” and might thus cover claims like trademark infringement, copyright infringement and trade secret misappropriation. Notify your insurer right away – that is what the insurance is there for. Informing your insurer about an event is not an admission that your firm did anything wrong, and the insurer cannot begin bearing part of the cost until the insurer learns of the claim. Have your counsel review the policy as well – some insurance companies like to avoid the need to pay on claims until they are called on their bluff by counsel.

Can Your Firm Seek Indemnification? Someone else may be liable for your alleged wrongdoing. If a product (including things like software) that your company purchased is alleged to contain infringing elements, your firm may have a claim against the seller. The Uniform Commercial Code (codified in California as 2312(3) of the California Commercial Code) imposes a warranty that products are free of claims by third parties. Like insurance, the sooner the seller learns of the claim, the sooner the seller can begin assuming financial responsibility.

Begin Protecting Documents, Both Paper & Electronic. As your firm now knows of an alleged infringement, you need to take whatever steps are necessary to preserve documents. That includes electronic documents like invoices, emails, and electronic receipts. Besides being the law, it is common sense: those documents may clear you as much as they may hurt you. Electronic deleting of emails or shredding of files could both prevent you from recovering information that could help you, and could create a claim for spoliation of evidence. That leads to an assumption that whatever was destroyed was helpful to the other side your case could be over with before it starts.

Respond Fully. Once your firm has looked at all the facts by the deadline you previously gave, have your counsel fully respond to the original C&D letter in the time frame that you originally mentioned.

Confronting such claims head-on will be cheaper in the long-run than burying your head in the sand. A cease-and-desist letter is a code for starting things right away.