The One Question All Trade-Secret Owners Must Ask In 2015

Happy_New_Year_2015

It seems like threats to trade secrets and proprietary information are increasing exponentially. News reports of large-scale data thefts have become an almost daily occurrence. And employees are more likely to switch jobs, taking your proprietary information with them. Meanwhile, technology has increased the risk of inadvertent disclosure, since most employees are walking around with critical business information on their smartphones.

This leads to the question all trade-secrets owners must ask: What am I doing to create a culture of protection at my company?

Company culture comes up in a lot of settings, but not often enough in the context of protecting trade secrets. Since your employees are on the front lines, working with your trade secrets, they need to have protection at the front of their minds.

It is not easy to create a culture of protection. It takes a clear strategy, implemented consistently over time. It must start when employees are hired, with trade-secrets training included in the onboarding process. But training is nowhere near enough.

Trade-secret protection needs to be a part of every employee’s daily routine. The goal is to build habits that decrease the risk of disclosure. For example, employees need to lock their computers every time they leave. They need to be aware of and on the lookout for spear phishing scams. And they need to know exactly how to handle documents containing trade secrets or other critical proprietary information.

At the risk of sounding like a speaker at a corporate retreat, culture starts at the top. Employees need to hear from your company’s most senior executives that trade-secret protection is one of everyone’s core job responsibilities.

The new year provides an excellent opportunity to consider your company’s culture of protection. This culture has never been more important. If your company falls short, now is the time to make changes. If you do not have a formal trade-secrets policy, speak to an attorney to implement one.

Happy new year, everyone.

Guest Post: Proving Damages in Trade-Secrets Cases

By Solomon Genet

Proving damages can be difficult in a wide range of cases, often especially so in a trade-secrets case. In a recent Federal appellate decision, the 5th Circuit (painfully for the plaintiffs) identified some of the risks involved. A link to the decision, In re Mandel, 2014 WL 3973479 (5th Cir. Aug. 15, 2014), is below.

Here, two individuals, an IP lawyer and a database expert, came together through a joint-venture entity to develop what they conceived to be a new type of search-engine. This JV hired personnel, retained a development team, and searched for investors.  The relationship then went sour, with misrepresentations made, one partner forming a competing company without disclosing it to the other partner, and that new company raising investor funds.  Suits, counter-suits, and a bankruptcy petition followed.

Later, the bankruptcy court presided over a trial as to whether the chapter 11 debtor (before filing for bankruptcy) misappropriated trade secrets under Texas law.  While finding that the debtor-defendant was liable, the court rejected each of the plaintiffs’ damages theories (they proposed a number of them).  But then, the bankruptcy court awarded damages—$1 Million to one plaintiff and $400k to another—“without explaining the damages theory on which it relied or identifying the evidence that supported these awards.”

Although the Fifth Circuit stated that in trade-secret misappropriation cases: (1) damages need not be proved with great specificity; (2) a flexible damages approach is appropriate; (3) uncertainty as to damages does not preclude recovery; and (4) only an approximation is needed, as long as there is a just and reasonable inference in support; it held that since the trial / bankruptcy court neither identified the theory of damages nor explained the evidentiary support for the amounts awarded, even this relaxed standard was not satisfied. The Fifth Circuit remanded back to the bankruptcy court to clarify the damages issue.

Accordingly, as a practice pointer, a plaintiff harmed by trade-secret misappropriation should ensure that the court identifies how it arrived to the amount of damage suffered, and not just identify the amount of monetary damage.

Note: this decision applied Texas common law, which has since been superseded by Texas’ adoption of the Uniform Trade Secrets Act.

Solomon Genet is a partner at Meland Russin & Budwick, P.A. in Miami, FL. He specializes in complex commercial litigation, business insolvency, and financial-fraud-related matters in the State and Federal courts.

In re: Mandel

“Shark Tank” Shouldn’t Forget About Trade Secrets

I recently started watching Shark Tank on CNBC. For those who haven’t seen it, the concept is simple: entrepreneurs pitch “sharks”—prominent wealthy investors like Mark Cuban—in an effort to win funding, usually in exchange for equity in the company.

In the episodes I’ve seen thus far, many of the entrepreneurs are pitching companies that sell a single product. Inevitably, the sharks ask whether the company holds a patent. For those products that can be reverse engineered, that’s obviously a critical question. But I’ve noticed that the sharks don’t ask about trade secrets.

For example, I watched one episode where the entrepreneurs sold a disposable, single-use wipe that was designed to clean heavy grease. It was similar to the wet naps you get at a BBQ restaurant. They pitched it as a product to keep in your car. One of the sharks, “Mr. Wonderful,” wanted to know if they had a patent. When they said they did not, Mr. Wonderful decided not to invest.

Even without a patent, this company could have valuable trade secrets. For example, the wipes used concentrated citrus oil. It’s entirely possible that the company’s oil formula could be protected as a trade secret.

Companies need to be aware whether their proprietary information can qualify as a trade secret. That way, the company can take the actions necessary to protect that information. And when trying to raise funding, those trade secrets can be featured, alongside (or in lieu of) the company’s patents. Of course, make sure that the potential investors sign a nondisclosure agreement before providing them with nonpublic details about the trade secrets.

%d bloggers like this: