Is Facebook Buying a Massive Trade-Secrets-Theft Liability?

Big trade-secret news last week. Oculus VR, Inc., the virtual-reality company Facebook is acquiring for $2 billion. was sued by Zenimax Media Inc. for trade-secrets misappropriation. Zenimax owns popular video-game titles such as Doom and Wolfenstein. A copy of the complaint is linked below.

Facebook’s acquisition of Oculus received widespread media coverage. This lawsuit, which will likely seek billions in damages, should draw extensive media interest.

According to the complaint, when Oculus’s founder (Palmer Luckey, named as a defendant) was developing Oculus’s VR headset called “Rift,” Zenimax provided Luckey with Zenimax’s proprietary information. This information allowed Oculus to transform Rift from a primitive, non-functional prototype into a viable platform justifying Facebook’s billions. After that, the Zenimax employees involved left to work for Oculus.

There are always two sides to every story, and so far we’ve only heard from Zenimax. But the complaint paints a pretty egregious picture of trade-secret theft. One example: After leaving Zenimax, where he had signed an agreement providing that any intellectual property he created for Zenimax belonged to Zenimax, to join Oculus, John Carmack tweeted: “When you are in a hurry, and you know you wrote the exact needed code (well!) at a previous job, reimplementation grates.”

While Zenimax appears to have a strong case, I see some potential issues. Most importantly, Zenimax did not have Oculus sign a nondisclosure agreement until after Zenimax had provided Oculus with at least some of its proprietary information. Oculus will likely argue that Zenimax did not reasonably protect this information, since it shared it with a third-party without requiring a confidentiality agreement.

This leads to the biggest takeaway thus far for companies looking to protect their proprietary information: Never share this information with anyone, for any purpose, unless that person/entity executes a nondisclosure agreement.

It’s also interesting that a company as sophisticated as Zenimax would allow its employees to provide significant proprietary information to a third party without first working out, and documenting, how it would be compensated. Later on, the two companies tried to negotiate a compensation agreement, to no avail.

Finally, any company that doubts the risks employees present to its proprietary information should look at the responses to the Carmack tweet I discussed above, which has 95 “favorites.” Sample response: “that’s what USB sticks are for…”

I will monitor this case and write about its developments.

Zenimax Complaint

 

In Defense of the Defend Trade Secrets Act

In my last post, I discussed the recently proposed, bipartisan Defend Trade Secrets Act that would create a federal cause of action for trade-secret misappropriation. I wrote favorably about the statute’s mechanism allowing a judge to enter an ex parte order to preserve evidence. Since then, I’ve discussed this provision with several people who have concerns about it. This post responds to these criticisms.

To start, I want to explain why this provision is so important. Trade-secret theft is overwhelmingly accomplished by electronic means, such as through email, downloading to portable media, or via remote access to IT systems. Companies suspecting trade-secret theft can often determine where and how the information was stolen. For example, forensic techniques can identify that certain documents were saved to a flash drive on a specific date.

The Defend Trade Secrets Act permits the company, armed with this information, to seek an order requiring seizure or preservation of the media/computer/etc to which the information was downloaded. As a result, critical evidence that could otherwise easily be destroyed would be preserved. Without a statutory provision specifically authorizing this remedy, most litigants find it very difficult to convince a judge to enter this type of order.

I’ve heard concerns about the risk that judges will improvidently grant ex parte seizure orders brought in bad faith by unscrupulous litigants, potentially causing significant unjustified damage to defendants. This risk, while real, is present any time a judge hears an ex parte motion for temporary restraining order. The overwhelming majority of judges are reluctant to enter an ex parte injunction unless absolutely necessary. And this statute contains requirements that make it materially more difficult to get a seizure order as compared to a TRO.

In particular, the Defend Trade Secrets Act borrows from the Trademark Act’s procedure for seizing goods containing counterfeit trademarks. These requirements go beyond the typical TRO prerequisites. For example, the movant must show evidence that the item to be seized will be in a certain location. The court must also take measures to protect the defendant from publicity regarding the seizure. Further, the order directing seizure remains sealed until the defendant has an opportunity to contest it at a hearing that must occur within 15 days of entering the ex parte order. And as a final example, the statute provides for damages, including punitive damages, if the defendant is damaged by the wrongful entry of a seizure order.

These protections go a long way to minimize the likelihood that orders are improperly entered. In the end, the benefit of avoiding destruction of evidence—which happens all too frequently—outweighs the risk of unwarranted orders, particularly given the statute’s protections.

Thoughts About the Defend Trade Secrets Act

Last week, Senators Hatch and Coons introduced bipartisan legislation, called the Defend Trade Secrets Act, that would create a federal private right of action for trade-secrets theft. This act adds to the Economic Espionage Act, which was passed in 1996 and made trade-secret theft a crime. Copies of the Defend Trade Secrets Act and the Economic Espionage Act are linked below.

While I’m still thinking through some of these issues, my first reaction to this law is a strongly positive one. Companies would benefit from having a national standard for trade-secret misappropriation. Today, while most states have adopted the Uniform Trade Secret Act (UTSA), there are state-by-state variations in the statutory text and interpretation. Also, this law would allow companies to litigate in federal court, where cases often proceed more quickly than in state court.

The act also acknowledges the e-discovery issues that frequently arise in trade-secret litigation by allowing for the ex parte entry of an order to preserve evidence, specifically allowing an order compelling “a copy of an electronic storage medium that contains the trade secret.” Today, it can be difficult to obtain such an order, with plaintiffs forced to resort to conventional injunction proceedings in front of state-court judges, who may not be as familiar with e-discovery issues.

The Defend Trade Secrets Act has a five-year statute of limitations, as opposed to the three years in the UTSA. Given that misappropriation is commonly done through surreptitious means, five years is more reasonable.

This proposed law is not perfect—for example, I would like to see a broader definition of “improper means” instead of just adopting the UTSA’s definition—but overall, this law would be a step forward for companies trying to protect their trade secrets. Hopefully, this bipartisan effort will have more success than other recent attempts to create a federal civil action for trade-secrets misappropriation.

Economic Espionage Act

Defend Trade Secrets Act

What Can the Donald Sterling Episode Teach Us About Protecting Trade Secrets?

Even if you hate sports, you have surely heard about the NBA banning LA Clippers owner Donald Sterling for life for his racist comments. The comments came to light after a recording of a telephone conversation between Sterling and his “girlfriend” was made public. We can all agree that Sterling’s comments were reprehensible. But for our purposes, what does this episode teach us about protecting trade secrets?

We’ve reached a point where virtually every person is walking around with technology in their pocket that allows them to record, photograph, videotape, or otherwise document everything around them at any given moment. The widespread use of iPhones and other smartphones has profound implications on many aspects of society. For Sterling, this led to the disclosure of what he thought was a private conversation. For companies trying to protect their proprietary information, they need to be even more vigilant about keeping this information secret.

As I’ve discussed before, only share proprietary information with those who need it to do their jobs. Don’t allow visitors access to areas where proprietary information is stored. Use IT solutions to restrict and password-protect critical proprietary information. And make sure (through training and contractual obligations) that employees know not to discuss this information with any third parties. After all, you never know when the other person may be recording the conversation.

 

 

%d bloggers like this: