Trade Secret Theft: Protecting the Crown Jewels March 25, 2015 Presented by: Dan Rubinstein
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Trade Secret Theft: Protecting the Crown Jewels
March 25, 2015
Presented by: Dan Rubinstein
Trade Secret Theft: Protecting the Crown Jewels
• Background on the Legal Terrain – Federal and State • Protecting Your Trade Secrets • Conducting a Trade Secret Theft Investigation • Working with the FBI and Law Enforcement • Remedies
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Background on the Legal Terrain
Key Federal Statutes
• Computer Fraud and Abuse Act, 18 U.S.C. § 1030 • Unauthorized Access
• Civil Remedy
• Economic Espionage Act, 18 U.S.C. §§ 1831-1839 • Theft
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Computer Fraud and Abuse Act (CFAA)
• 18 U.S.C. § 1030 • Protects information on computer systems • Applies even if data is not a trade secret or not well-protected
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CFAA – Elements and Remedies
• The defendant has: • Accessed a “protected computer”
• Virtually every business computer system with Internet access
• “Without authorization” or by “exceeding such authorization as was granted”
• Knowingly and with intent to defraud • Furthered the intended fraud and obtained anything of value
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CFAA – Penalties
• Criminal Penalties – 3 tiers: • Tier 1: Simple violations punished as misdemeanors, imprisonment for not
more than one year and fine of not more than $100,000
• Tier 2: Imprisonment not more than 5 years and/or fine of not more than $250,000 • Done for commercial advantage or private financial gain
• Offense committed in furtherance of criminal or tortious act
• Value of information exceeds $5,000
• Tier 3: For repeat offenders – imprisonment not more than 10 years and/or fine of not more than $250,000
• Possibility of forfeiture, restitution
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CFAA – Civil Suits
• There is a private cause of action for compensatory damages and injunctive relief for victims of § 1030 violations, where: • Aggregate $5,000 loss • Physical harm or threat to public health or safety
• Damage affecting 10 or more protected computers during any 1-year period
• Must be brought within two years of the offense
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Economic Espionage Act
• 18 U.S.C. §§ 1831-1839 • Purpose: to provide greater protection for proprietary and
economic information of corporate and governmental entities from foreign as well as domestic theft
• Covers “trade secrets,” which the statute defines broadly to include both tangible and intangible property
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Trade Secreted Definition
• Information • Not generally known • From which the owner derives economic value from its secrecy • Reasonable efforts have been made to protect its secrecy • Information must have a nexus with interstate or foreign
commerce
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Economic Espionage Act - Penalties
• Provides criminal and civil penalties for theft of trade secrets
• Enhanced penalties if intellectual property is taken with an intent to benefit a foreign government
• Punishable by imprisonment for not more than 10 years and/or a large fine
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Other Claims
• National Stolen Property Act (18 U.S.C. § 2314) • Transports, transmits, or transfers (in interstate commerce)
• Goods, wares, merchandise, securities or money, valued at $5,000 or more
• Knowing the same to have been stolen, converted, or taken by fraud
• Some state law claims complement federal civil claims
• Breach of confidentiality or non-disclosure agreements
• State trade secrets acts – e.g., Illinois Trade Secrets Act, 765 ILCS § 1065
• Breach of fiduciary duty • Conversion
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Protecting Your Trade Secrets
Protecting Trade Secrets
• Implement robust confidentiality agreements and IP policies • Tiered policies based on access level
• Enforce policies (and document enforcement)
• Regular training where employees re-acknowledge the restrictions
• Limit the physical/electronic access to confidential IP • Eliminate duplicates
• Compartmentalize sensitive information
• Restrict access to core group of employees
• Implement tiered access levels
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Protecting Trade Secrets
• Use restrictions • Portable devices/storage
• Private email
• Remote connectivity
• Monitoring • Network monitoring
• Filters/screens
• Employee monitoring
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Conducting a Trade Secret Theft Investigation
Goals of an Investigation
• Conduct a thorough, expeditious, and independent investigation that can withstand scrutiny
• General factual resolution, legal analysis, root cause analysis, remediation, and proportionate discipline while assessing liability and improving internal controls
• Protect the reputation of the reporters and accused employees and the integrity of the investigation
• Minimize business disruption • Manage internal communications and expectations • Recommend discipline (where necessary) with a consistent
approach
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The Benefits of Outside Counsel
• Tested protocol for ensuring relevant materials are preserved and interviews are properly conducted
• Investigation appears more independent and credible than a purely internal team
• Beneficial relationship with law enforcement • Interviewing and investigative techniques • If allegations implicate senior management, unaffiliated counsel
is preferable • Single-purpose interaction (maintains relationships)
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Components of a Successful Internal Investigation
• Teamwork
• Tailored Engagement Letters
• Evidence-gathering • Documents
• Witness interviews
• Documenting the Investigation
• Maintaining Privilege
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Teamwork • Investigations require effective communications between in-house
counsel, compliance officers, employees, and outside counsel • In-house Counsel
• Facilitates communication between outside counsel and employees and assists with the preservation and collection of documentary evidence
• Compliance Officer • Determines the veracity of an internal allegation of wrongdoing and whether a corporate
compliance policy was violated
• Outside Investigation Counsel • Takes the lead in gathering evidence, reviewing the facts, interviewing witnesses, and
preparing conclusions for the client
• Other internal resources: IT, Corporate Audit, Human Resources, Corporate Secretary, Corporate Security, Finance, Brand Integrity, and others
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Well-Tailored Engagement Letters
• Must tailor engagement to the task at hand • Describe:
• Goals and scope of the investigation
• Anticipated costs involved
• Client’s expectation from outside investigation counsel at the end of the investigation
• Key language in the engagement letter or memo to file stating that outside counsel will be conducting an investigation so that counsel “can develop the factual information necessary to render legal advice”
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Document Collection
• Before interviewing witnesses, need an understanding of relevant documentary evidence
• In-house counsel plays key role • Identifies document custodians and helps to define a targeted search
• Distributes document preservation memo
• Avoid obstruction of justice allegations
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Witness Interviews • Schedule in manner to minimize collusion
• Conduct in private area where employee feels comfortable
• Administer an UpJohn warning
• Two-person interview teams
• Request interviewee to bring relevant documents in possession
• Document the interview
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Documenting the Investigation
• All written communications re: the investigation must include the caption, “Attorney-Client Communication, Attorney Work Product”
• Write interview memos • Always document that UpJohn was given and acknowledged
• Include who was present, as well as location and time of interview
• Include the following disclaimer: • This memorandum contains attorney thoughts and mental impressions. The information provided
herein is organized by topic and is not in chronological order. The memorandum is not a verbatim transcript or witness statement and it is expected that this memorandum will be treated as privileged and confidential attorney work product. This memorandum is not for distribution
• Details, details, details
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Maintaining Privilege
• Maintaining attorney-client privilege over the investigation is paramount
• Interviews conducted, forensic audit analysis, digital forensic examinations, and respective documentation by non-attorneys must be done at the direction of counsel to keep the privilege intact
• Discuss with non-attorneys so that all team members are clear
• Helps to avoid potential disputes, and provides flexibility, about whether privileged information should be disclosed in response to requests from the government, regulators, or private litigants
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Concluding an Investigation
• Better is the enemy of good • Exhaust all reasonable measures in fact-gathering process • Closing Report
• Likely reviewed by members of the board, General Counsel, CEO, and C-suite executives, and possibly government regulators or law enforcement
• Review past precedent to ensure recommended remediation and discipline (if any) is appropriate
• Consult with in-house counsel prior to communicating findings to relevant stakeholders
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Working with the FBI and Law Enforcement
Whether to Make a Federal Criminal Referral
• Referral is “letting the lion out of the cage” • Publicity risk (USAO press release, media attention) • Potential privilege waiver by disclosing work product created
during the investigation • Lerman v. Turner, 2011 WL 62124 (N.D. Ill. 2011) (requiring an attorney who
had conducted the internal investigation to turn over a memo summarizing certain employee interviews when the attorney had already disclosed to the government an investigation report that included summaries of other employee interviews)
• SEC v. Berry, No. 07-04431, 2011 WL 825742 (N.D. Cal. Mar. 7, 2011) (ordering production of 5 witness interview memos, substance of which had ben disclosed to the government orally; though no waiver with respect to counsel’s notes on basis that waiver as to final product does not waive privilege as to drafts)
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Benefits of a Criminal Referral
• Creates an atmosphere where employees know that trade secrets are highly valued by the company
• Law enforcement bring investigative tools and resources (subpoenas, search warrants, wire-taps, arrests)
• Recent examples • Chicago-based financial firm:
• Twenty-three-count superseding indictment against two former employees, alleging scheme to defraud, theft of trade secrets, violation of the CFAA, and obstruction of justice
• Internal investigation into anomalies on an employee’s user account uncovered use of virtual machines and transferring of company files via removable storage devices
• Both employees eventually pleaded guilty – one received 3 years in prison followed by three years supervised release, and the other received 3 years’ probation
• Both defendants were ordered to pay restitution for the cost of its internal investigation - $759,649.55
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Benefits of a Criminal Referral (cont’d)
• Examples (cont’d) • CME:
• The USAO indicted a former software engineer for CME Group, Inc. for allegedly downloading and removing computer source code and other proprietary information while also pursuing business plans to improve an electronic trading exchange in China. The stolen code was estimated to cost $2.1 million
• The employee pleaded guilty to two counts of trade secrets theft and was sentenced to four years of probation
• Valspar (David Lee) • A former Valspar Corp. chemist used his access to Valspar’s secure internal computer network
to steal roughly 160 secret formulas for paints and coatings to use at his new job with a competitor. He also took raw materials information, chemical formulas and calculations, sales and cost data, product research, marketing data, internal memos, and other materials
• He pleaded guilty to stealing trade secrets worth approximately $20 million. He received 15 months in federal prison. Also ordered to pay $31,000 to reimburse Valspar for the cost of its internal investigation
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Remedies for Trade Secret Theft
Trade Secret Theft – Remedies
• Return of stolen property
• Restitution: Repayment of money spent on investigation
• Civil remedies
• Enhances perception of company’s protection of trade secrets
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Questions?
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