IP Law Alert : Intellectual Property Lawyers & Attorneys : Gibbons Law Firm : Copyrights, Patent Infringement, Unfair Competition

Kolon USA, Inc., the U.S. subsidiary of South Korea-based Kolon Industries Inc. (“Kolon”), recently was ordered by New Jersey District Court Judge Esther Salas to turn over its property to DuPont as part of DuPont’s efforts to enforce the $920 million damages award that DuPont won against Kolon during a 2011 trade secrets litigation in the Eastern District of Virginia.

This case, E.I. du Pont De Nemours & Co. v. Kolon Indus., Inc. a/ka/ Kolon Corp., has an interesting history: in 2009, DuPont sued Kolon in EDVA, including five of its executives, for allegedly stealing confidential information related to making Kevlar, an anti-ballistic fiber commonly used in body armor, military helmets, ropes, cables and tires. DuPont has been selling this fiber since 1965 and has spent more than $500 million in its marketing and production. Kevlar and Nomex, a fiber used in firefighting gear, together accounted for $1.5 billion of DuPont’s $38 billion in sales for 2011. Kolon began making the Heracrone line of fibers, its own version of DuPont’s Kevlar, in 2005.

In 2006, Kolon hired Michael Mitchell as a consultant to improve Kolon’s Heracrone products. Mitchell previously worked at DuPont for twenty-five (25) years as an engineer and as a marketing executive for DuPont’s Kevlar. Mitchell later was charged and pled guilty to trade secrets theft and obstruction of justice relating to his work while at Kolon, and stemming from his DuPont background. In March of 2010, he was sentenced to eighteen (18) months in prison. Although Mitchell pled guilty to stealing DuPont’s trade secrets, that did not release Kolon from liability. In September 2011, a federal jury in Virginia found Kolon and its U.S. subsidiary guilty for wrongfully obtaining DuPont’s proprietary information about Kevlar and granted a $920 million judgment against Kolon. The five individual executives at Kolon who were originally sued in 2009 still worked for Kolon in South Korea. Unfortunately for DuPont, the ruling from the Court in Virginia cannot itself prevent Kolon from selling its Heracrone fibers.

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The Obama Administration recently released a report outlining a new strategy to combat the theft of U.S. trade secrets, by ramping up business, diplomatic, law enforcement and legislative efforts to protect this vital category of intellectual property. The “Administration Strategy on Mitigating the Theft of U.S. Trade Secrets” included inputs from the Departments of Commerce, Defense, Homeland Security, Justice, State, Treasury, the Office of the Director of National Intelligence and the Office of the United States Trade Representative.

As has been previously reported on Gibbons IP Law Alert, trade secrets protection is increasingly receiving the attention of state and federal legislators intent on stemming the tide of trade secrets misappropriation. It now appears that the Obama Administration is making trade secrets a focal point of its intellectual property enforcement strategy, recognizing that “[o]ur single greatest asset is the innovation and the ingenuity and creativity of the American people.”

The White House report identified a five-point plan, which includes focused diplomatic efforts to protect trade secrets overseas, e.g., through international engagement, especially with countries where theft of U.S. trade secrets is rampant, such as China; reaching out to businesses in the private sector and encouraging companies to share their “best practices” for deterring trade secret theft; enhancing domestic law enforcement operations; improving relevant domestic laws, including commissioning a study to determine whether new legislation was needed; and public awareness outreach. The report also cited several high profile examples of trade secret theft, whose victims included General Motors, Ford, DuPont, Cargill Inc. and Dow Chemical.

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Is your company’s hard-earned, valuable, confidential data at risk? Are you taking all the steps you should to safeguard this information?

In a recent global report by Symantec, 50% of employees who lost or left their jobs in the past 12 months indicated they kept confidential company data. Of these, 40% indicated they planned to use the proprietary information in their new jobs. Exacerbating the situation is the perception on the part of employees that it is acceptable to take confidential corporate information, and that their companies do not care.

Obviously, companies should care. Trade secrets, which broadly comprise valuable information that is kept secret to afford an economic advantage, take on many forms: a formula, a recipe, a customer list, patterns, projections, etc. Companies need to strictly enforce policies relating to these data and proactively secure them -- they cannot rely upon government enforcement actions to protect them, as we recently reported.

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The federal government continues to take aim at those who violate trade secrets rights. On December 28, 2012, the Theft of Trade Secrets Clarification Act of 2012 (S. 3642) became law, expanding the definition of trade secrets under the Economic Espionage Act (EEA). In addition, as previously reported in a Gibbons IP Law Alert blog, the President is expected to sign legislation recently passed by Congress that triples the damages for a violation of trade secrets protection laws and provides technical changes to patent applications and protections. Also worthy of note is an 82-page report from the U.S. Department of Justice issued last month detailing federal enforcement efforts concerning trade secrets theft.

Theft of Trade Secrets Clarification Act of 2012

The broadened definition of trade secrets as defined by the Theft of Trade Secrets Clarification Act of 2012 (“TTSCA”) makes clear that trade secrets protected by the EEA may be those merely “related to” a product or service used in or intended for use in interstate or foreign commerce, even if the trade secret itself is not used directly in such a product or service. In other words, protected trade secrets now encompass technical know-how that need not become part of a product or service. The TTSCA is Congress’ answer to a Second Circuit decision in United States v. Aleynikov on February 16, 2012, as previously reported in a Gibbons IP Law Alert blog. There, in reversing a jury verdict for the United States, the Court held that, although the defendant, a computer programmer, breached his confidentiality agreement with his employer, Goldman Sachs, when he misappropriated a proprietary computer code for the employer’s high-frequency trading system, he should have never faced criminal charges for his conduct under either the EEA or the National Stolen Property Act (“NSPA”). Specifically with regard to the EEA, the Court ruled that the defendant had not stolen trade secrets related to “a product made for the purposes of interstate or foreign commerce.” The Court similarly found that the defendant had not stolen a “good,” i.e.  tangible property, as defined by the NSPA. Critical to the Court’s ruling was that Goldman Sachs’ trading system supported by the stolen computer code was used internally and not in a product or service sold commercially. That the computer code was used by Goldman Sachs to generate trades in interstate and foreign commerce did not afford it protection under the EEA. As a result of the TTSCA, however, a theft such as the one that occurred in Aleynikov would violate the EEA. .

Justice Department’s Summary of the Major U.S. Export Enforcement, Economic Espionage, Trade Secret and Embargo-Related Criminal Cases

The above-noted Justice Department report details the more significant and recent enforcement actions by Federal Government agencies against private individuals and companies. The report, called the “Summary of the Major U.S. Export Enforcement, Economic Espionage, Trade Secret and Embargo-Related Criminal Cases,” summarizes “cases resulted from investigations by the Department of Homeland Security’s U.S. Immigration and Customs Enforcement, the Federal Bureau of Investigation, the Department of Commerce’s Bureau of Industry and Security, the Pentagon’s Defense Criminal Investigative Service and other law enforcement agencies.” Many of these cases resulted in criminal penalties, probation and/or monetary fees. More of these cases are likely in light of the recent litigation.

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In an opinion dated December 7, 2012, a New Jersey Superior Court judge in Bergen County considered an issue of first impression relating to the recently-enacted New Jersey Trade Secrets Act (“NJTSA”). In SCS Healthcare Marketing LLC v. Allergan USA Inc. et al., defendant Allergan sought to dismiss numerous common law claims brought by plaintiff SCS, arguing that SCS’s statutory claim for misappropriation of trade secrets under the NJTSA preempted its common law claims. SCS filed suit alleging that Allergan misappropriated marketing contractors’ trade secrets relating to a proprietary technology portal. Specifically, SCS alleges that Allergan revealed its proprietary and confidential information to a rival health care marketing company, thereby violating state laws relating to unfair competition, disclosure and trade secrets.

In addition to its NJTSA claim, SCS’s suit involves common law claims for, inter alia, misappropriation of confidential information, trespass to chattels, tortious interference, unfair competition and civil conspiracy. Allergan argued that these claims should be dismissed as they are based on the same common set of facts and occurrences on which SCS bases its claim for misappropriation under the NJTSA, and therefore specifically preempted by N.J.S.A. 56:15-9(b), which provides that, “This act shall supersede conflicting tort, restitutionary, and other law of this State providing civil remedies for misappropriation of a trade secret."

Judge Harry G. Carroll considered and rejected Allergan’s preemption argument, ruling that the New Jersey State Legislature had specifically modified the language of the Uniform Trade Secrets Act relating to preemption when it adopted the NJTSA. More specifically, the judge determined that the legislature altered the proposed statutory language to ensure that preemption would not occur. In particular, subsection (a) of N.J.S.A. 56:15-9 which expressly provides that the rights, remedies and prohibitions of the NJTSA are “in addition to and cumulative of” any other right, remedy or prohibition provided under the common law or statutory law of this state and that “nothing within its provisions shall be construed to deny, abrogate or impair such a right, remedy or prohibition…” While the judge noted that subsections (a) and (b) were not the “model of clarity,” he rejected the defendant’s attempt to read subsection (b) in isolation, and concluded the statutory scheme reflects the New Jersey legislature’s intent that the rights and remedies afforded under the Trade Secrets Act be cumulative, rather than restrictive, of the rights and remedies provided under the common law. Accordingly, the Court denied the Allergan’s motion to dismiss SCS’s common law claims, rejecting the argument that the claims are preempted by the NJTSA.

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This past spring, we reported the Second Circuit’s reversal in U.S. v. Aleynikov, where the Court considered violations of the Economic Espionage Act of 1996 (“EEA”), 18 U.S.C. § 1832, and the National Stolen Property Act (“NSPA”), 18 U.S.C. § 2314. In short, the Second Circuit ruled that the EEA pertains to trade secrets “placed in” commerce, and that Aleynikov’s alleged misappropriation of the source code of Goldman Sachs & Co.’s trading system, which was for internal use, therefore was not violative of the EEA or the NSPA.

In response, enter the Theft of Trade Secrets Clarification Act of 2012, S. 3642, a bill introduced last week by Senator Patrick Leahy (D, VT). Specifically, the bill broadens the statute's scope to cover trade secrets that are "related to a product or service used in or intended for use in interstate or foreign commerce." The previous language limited application of the EEA to trade secrets "related to or included in a product that is produced for or placed in interstate commerce," language which the Court in Aleynikov had narrowly construed to mean an actual product that was either placed in interstate commerce or intended ultimately to be placed in interstate commerce. As such, there would be no distinction between a trade secret used internally, versus something sold commercially.

The new legislation closes a loophole on the important front of protecting against theft or other misappropriation of proprietary information, and seemingly broaden the reach of the EEA.

Owen J. McKeon is a Director in the Gibbons Intellectual Property Department. Jillian A. Centanni, an Associate in the Gibbons Intellectual Property Department, co-authored this post.

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Just as trade secrets cases continue to proliferate in the news, the U.S. Senate introduced legislation last week aimed at streamlining the ability of American companies to combat trade secret theft.

Under the proposed legislation S.3389, “Protecting American Trade Secrets and Innovation Act of 2012”(“PATSIA”), a single federal statute would be created under which companies could sue in Federal Court, as an alternative to the existing structure of state or common law statutes. To be eligible, plaintiffs are required under a heightened pleading standard to: “(A) describe with specificity the reasonable measures taken to protect the secrecy of the alleged trade secrets in dispute; and (B) include a sworn representation by the party asserting the claim that the dispute involves either substantial need for nationwide service of process or misappropriation of trade secrets from the United States to another country.” Plaintiffs also are subject to a three-year statute of limitations.

PATSIA provides federal courts with jurisdiction, on ex parte application, to issue an order to seize property used in connection with the alleged misappropriation of trade secrets and/or to preserve evidence relating to the alleged theft. A defendant injured by such a seizure can in turn file a civil action for damages. In the event that a misappropriation of trade secrets is found by the Court, plaintiffs may obtain injunctive relief, damages (including exemplary damages and attorney’s fees), and/or a court order requiring defendant’s affirmative action to protect the trade secrets. If the Court determines that it would be unreasonable to prohibit further use of the trade secrets, it may alternatively award plaintiffs with a reasonable royalty.

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Following a jury trial in the United States District Court for the Southern District of New York, Sergey Aleynikov was convicted of stealing and transferring a proprietary computer source code used in his former employer’s high-frequency trading system, in violation of the Economic Espionage Act of 1996 (“EEA”), 18 U.S.C. § 1832, and the National Stolen Property Act (“NSPA”), 18 U.S.C. § 2314. On appeal, Aleynikov argued that his conduct did not constitute an offense under either statute because 1) the source code was not a “stolen” “good” within the meaning of the NSPA and 2) the source code was not “related to or included in a product that is produced for or placed in interstate or foreign commerce” within the meaning of the EEA. The United States Court of Appeals for the Second Circuit agreed with Aleynikov and reversed the District Court’s ruling.

Aleynikov worked at Goldman Sachs & Co. (“Goldman”) from 2007 to 2009 as a computer programmer, developing source code for Goldman’s proprietary high-frequency trading system. Goldman does not license this system to anyone, and closely guards its secrecy . The company’s confidentiality policies required Aleynikov to keep all of Goldman’s proprietary information confidential, including any intellectual property created by Aleynikov. These policies also forbid Aleynikov from taking Goldman’s proprietary information with him upon leaving the company.

In April of 2009, Aleynikov joined Teza Technologies LLC as an Executive Vice President to develop Teza’s high-frequency trading system. While it might normally be expected to take years to develop such a system, Teza’s founder conveyed to Aleynikov that he wanted the system completed within six months. On his last day at Goldman in June of 2009, Aleynikov encrypted and uploaded to a server in Germany more than 500,000 lines of source code from Goldman’s trading system, including code for the infrastructure, algorithms, and market data connectivity programs. After the uploading, Aleynikov deleted the encryption program and other artifacts of the uploading. At his home in New Jersey, Aleynikov downloaded the source code from the server in Germany to his home computer and copied some of the files to his other computers. Two months later, Aleynikov flew from New Jersey to Chicago to attend meetings at Teza. He brought a flash drive and a laptop, which contained some of Goldman’s source code. The next day, the FBI arrested Aleynikov upon his return to Newark Airport.

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Yesterday, Governor Chris Christie signed into law the New Jersey Trade Secrets Act, A-921/S-2456 providing state law protection against trade secret misappropriation. Prior to enactment, New Jersey was one of only four states (including New York, Massachusetts and Texas) that had not adopted some form of the Uniform Trade Secrets Act.

We previously reported on this important New Jersey law development, which takes immediate effect. In sum, trade secrets can be used to protect a company’s know-how and other proprietary information. Companies should be guided by the NJTSA and ensure they have policies and practices in place to identify and safeguard such trade secrets. In addition, companies should continuously and actively monitor for evidence of possible trade secret misappropriation.

Todd M. Nosher is an Associate in the Gibbons Intellectual Property Department. Thomas J. Bean and Ralph A. Dengler, Counsel to the Gibbons Intellectual Property Department, co-authored this post.

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