Tag: trade secret

Conviction Under China’s Version of the Economic Espionage Act for Theft of Trade Secrets

On April 26, 2024, the Shanghai Pudong Court released the “Typical cases of intellectual property judicial services provided by the Shanghai Pudong New Area People’s Court to ensure high-quality development of new productivity” (上海市浦东新区人民法院知识产权司法服务保障新质生产力高质量发展典型案例), which included a criminal case involving a newer provision of the Chinese Criminal Law that is somewhat analogous to the U.S. Economic Espionage Act. This is believed to be the first case in Shanghai under this provision and may be related to last year’s police raids on Bain and/or Capvision although the Court did not release information identifying the entities involved.

As explained by the Shanghai Pudong Court:

Case 12

Determination of the elements of the crime of illegally providing trade secrets to foreign countries – the first case of spying and illegally providing trade secrets to foreign countries in Shanghai

Judgment Summary

Article 219-1 of the Criminal Law states that “the crime of spying on and illegally providing commercial secrets for foreign countries” should be determined based on the following elements: first, the object of the perpetrator’s infringement is a commercial secret protected by China’s criminal law; second, the perpetrator objectively carried out the act of spying on and illegally providing commercial secrets; third, the commercial secrets were spied on and provided to foreign institutions, organizations, and personnel, and the perpetrator knew it. Among them, foreign institutions and organizations include not only institutions and organizations established in other countries or regions abroad, but also their branch (representative) institutions and branch organizations established in China, as well as institutions and organizations in Hong Kong, Macao and Taiwan. If the perpetrator is not clearly informed that the commercial secrets are spied on and provided to foreign countries, but subjectively should know and takes a laissez-faire attitude, it constitutes knowing.

Basic facts

From August 2017 to 2020, the defendant Zheng worked as a thin film equipment engineer in a storage company. He signed the “Employment Contract” and “Secrecy Commitment Letter on Resignation” and promised to keep the company’s trade secrets confidential. In August 2021, the defendant Zheng accepted the invitation of an information company and became the company’s industry expert consultant. From October 2021 to the time of the incident, the defendant Zheng violated the confidentiality agreement with the storage company where he originally worked, used the information he had mastered and spied on the employees of the storage company, and accepted the arrangement of the information company many times in the name of an expert of the storage company to provide paid consulting services to companies with similar or competitive businesses to the storage company. Among them, Zheng accepted a telephone interview with the consulting company (whose shareholders are foreign companies) in February 2022. Knowing that the actual consulting party was an overseas organization, he still illegally provided the trade secrets of the storage company that he had spied on and learned to overseas organizations and personnel through the information company, and illegally made a profit of 2,062.40 RMB. On September 17, 2022, the defendant Zheng was detained and summoned by the Shanghai National Security Bureau. After being brought to justice, he truthfully confessed the main facts of the crime and, with the help of his family, surrendered the illegal gains of 2,062.40 RMB.

Judgement

After trial, the Pudong Court held that the commercial information of the relevant products accused by the public prosecution agency was the result of a storage company’s creative labor and embodied the wisdom of many R&D personnel. The above-mentioned trade secrets have an important impact on the company’s competitiveness and future development in the international and domestic industries. The company has never publicly released it, and the defendant Zheng also confirmed that the above-mentioned information belongs to the company’s undisclosed information. Therefore, this information is not generally known and not easily accessible to relevant personnel in the field. The storage company has taken reasonable confidentiality measures for the commercial information involved by formulating the “Confidential Information Protection Policy Text” and signing the “Employment Contract” and “Resignation Confidentiality Commitment Letter” with the defendant Zheng. Therefore, the commercial information involved is the company’s trade secrets. After the defendant Zheng resigned, he violated the agreement on keeping trade secrets with the storage company and the company’s confidentiality system. Knowing that the consulting party was an overseas organization, he still provided the trade secrets involved in the case that he illegally discovered from his former colleagues, together with the trade secrets he possessed, to the consulting party. His behavior has constituted the crime of overseas espionage and illegal provision of trade secrets. Based on this, the court sentenced the defendant Zheng to two years and six months in prison and a fine of RMB 10,000 for the crime of spying and illegally providing trade secrets abroad; the illegal gains were confiscated.

After the first-instance judgment, the defendant Zheng did not appeal and the public prosecution agency did not file a protest, and the judgment is now effective.

Typical significance

This case is the first case accepted by the Shanghai court for the newly added crime of “stealing, spying, buying, and illegally providing trade secrets for foreign countries” since the implementation of the Criminal Law Amendment (XI). It involves former employees of key enterprises in China’s high-tech field, who, in the name of expert consultation, leaked important trade secrets they spied on and learned to foreign organizations through consulting companies and made profits, causing serious harm to the development and economic interests of the enterprises. The judgment in this case strictly grasps the constituent elements of the crime, severely cracks down on commercial espionage crimes of foreign organizations against key high-tech enterprises in China, protects the independent intellectual property rights of Chinese enterprises in accordance with the law, helps to enhance international competitiveness, and safeguards China’s national security and national interests.

The original text (with 14 other typical case summaries) is available here (Chinese only).

© 2024 Schwegman, Lundberg & Woessner, P.A. All Rights Reserved.
For more news on Theft of Trade Secrets in China, visit the NLR Intellectual Property section.

Amrock Lawsuit Spotlights Consequences of Litigious Gamesmanship

Trade Secret Litigation Commentary

 

On June 3, the Texas Fourth Court of Appeals reversed and remanded the dumbfounding $740 million award in Title Source v. HouseCanary – a welcome development for American innovation and business collaboration. On the back of years-long litigation, a fresh trial of the case can offer important signals for corporations on the risks and rewards of collaboration, as well as deliver much-needed guidance on best practices to navigate already murky trade secret protections.

For the uninitiated, litigation between HouseCanary and Title Source (now Amrock) was borne out of a contract the two companies entered in 2015. The arrangement obligated the delivery of an automated valuation model (AVM) and an app to Title Source at a rate of $5 million per year for HouseCanary’s efforts. Title Source intended to use the software and app as a platform to provide customers the ability to assess property values digitally alongside other services the company offers, like title insurance and closing services. After HouseCanary failed to meet its contractual obligation to deliver a working AVM app, Title Source sued for breach of contract.

HouseCanary then filed a counter claim including allegations that Title Source had misappropriated proprietary information, in this case trade secrets, in an attempt to make an app of its [Title Source’s] own. After a six-week trial that concluded in March 2018, a Texas jury decided in favor of HouseCanary and awarded nearly three-quarters of a billion dollars – one of the largest tort settlements of the year.

Should anyone be keeping score at home, that means the case’s settlement was valued at nearly 150 times the annual payout HouseCanary was to receive from its work with Title Source and dwarfed the firm’s multiple rounds of venture funding by over $600 million. For HouseCanary, litigation proved more profitable than any of its own business ventures, and the settlement certainly outstripped the going market rates on AVMs.

By the conclusion of the original trial, it seemed clear that Title Source had not misappropriated HouseCanary’s trade secrets or proprietary information in building its own app. Further, HouseCanary’s own expert witness testified that there weren’t “any fingerprints, any clues, any reference to any HouseCanary technology” in the app Title Source developed on its own.

Regrettably, the jury’s finding against Title Source was based on inaccurate and incomplete information, unsubstantiated inadmissible character attacks, and back-of-the-napkin math from a questionable damages ‘expert.’ It seemed to be more focused on sticking it to corporate America rather than the actual facts and merits of the case. Not only was the jury gravely mislead, but they also never heard critical information which came to light days after the trial concluded.

Post-trial statements by a former HouseCanary executive turned whistleblower clarified that there was never a “working version” of the app to be delivered to Title Source, and per three more former HouseCanary executives, that the company didn’t have “any IP to steal.” The cogency of HouseCanary’s allegations were further thrown into question when the company, six weeks after the trial’s closure, moved to seal a number of exhibited documents from court record.

As I wrote previously, once the sealing motion was overturned, the documents should “provide another look at the technology in question, which will provide clarity whether there were trade secrets to be stolen.” This is especially important when considered in tandem with the whistleblower testimony.

These and other erroneous inclusions and fatal procedural errors led to a Texas appellate court overturning the verdict and ordering a new trial. The ramifications of the decision in the new trial promise to be immense, especially if HouseCanary invokes Texas’ Uniform Trade Secrets Act for a second time. The Act has been adopted by 47 states total, and significantly broadens the implications of this trial for business operations in all kinds of industries by setting precedent for other lawsuits.

Trade secret litigation has increased tremendously in the past decade, with over 2,700 cases since 2009; add on the massive original settlement and the ruling may very well set the tone for the future of trade secret litigation and the standard of intellectual property protections.

Given the new evidence that has emerged since the jury delivered its decision in 2018, the cards certainly appear stacked against HouseCanary successfully duping the retrial jury. There is little doubt that businesses and innovators everywhere will be awaiting the verdict of the Texas court for clarity on trade secret protections and our court system’s tolerance for overwhelmingly apparent legal gamesmanship.

© George Nethercutt

Authored by George Nethercutt of The George Nethercutt Foundation, a guest contributor to the National Law Review.

For more on trade secrets, see the National Law Review Intellectual Property law section.

Administration Launches Strategy on Mitigating Theft of U.S. Trade Secrets

The National Law Review recently published an article, Administration Launches Strategy on Mitigating Theft of U.S. Trade Secrets, written by Lauren M. Papenhausen with McDermott Will & Emery:

McDermottLogo_2c_rgb

 

The strategy announced on February 20, 2013, should serve as both a wake-up call from the government and an offer of assistance.  Given the losses that can arise from competitors’ purposeful theft of trade secrets, entities should review the announcement and decide whether they need to be more active in protecting their trade secrets.  The strategy also offers opportunities for increased collaboration with the government.

On February 20, 2013, the White House announced an “Administration Strategy on Mitigating the Theft of U.S. Trade Secrets.”  Companies should view the announcement of this strategy as both a wake-up call from the government and an offer of assistance.  Given the losses that can arise from competitors’ purposeful theft of trade secrets, entities should review this government announcement and decide whether they need to be more active in protecting their trade secrets.

The administration strategy articulates a broad governmental commitment to addressing an “accelerating” threat to U.S. intellectual property.  The strategy encompasses five action items:

  • Focusing diplomatic efforts to protect trade secrets through diplomatic pressure, trade policy and cooperation with international entities
  • Promoting voluntary best practices by private industry to protect trade secrets
  • Enhancing domestic law enforcement, including through outreach and information-sharing with the private sector
  • Improving domestic legislation to combat trade secret theft
  • Improving public awareness and stakeholder outreach

Three main themes emerge from the administration strategy that are important for U.S. businesses.

First, the strategy and its supporting documentation highlight how frighteningly real the prospect of trade secrets theft is.  The White House report is peppered with references to household name companies that have been victimized by trade secrets theft over the past few years, often at a cost of tens of millions of dollars or more.  Mandated reports from the defense industry to the government indicate a 75 percent increase between FY2010 and FY2011 in reports of suspicious activity aimed at acquiring protected information.  Coupled with a recent New York Times article asserting Chinese government involvement in more than 100 attempted cyber attacks on U.S. companies since 2006, these reports warrant sitting up and taking notice.  According to a report by the Office of the National Counterintelligence Executive, particular targets include companies that possess the following:

  • Information and communications technologies
  • Business information that relates to supplies of scarce natural resources or that gives foreign actors an edge in negotiations with U.S. businesses or the U.S. government
  • Military technologies, particularly in connection with marine systems, unmanned aerial vehicles and other aerospace/aeronautic technologies
  • Civilian and dual-use technologies in sectors likely to experience fast growth, such as clean energy, health care and pharmaceuticals, advanced materials and manufacturing techniques, and agricultural technology

Second, the government alone cannot solve the problem.  The administration commits to making the investigation and prosecution of trade secret theft a “top priority” and states that the Federal Bureau of Investigation has increased the number of trade secret theft investigations by 29 percent since 2010.  On its face, however, a 29 percent increase in investigations cannot keep pace with a 75 percent increase in attempted trade secret thefts.  Historically, as a result of limited resources, the government has been able to address only a tiny fraction of trade secret thefts, and there is no indication that there will be the massive influx of resources necessary to change this dynamic materially.  Indeed, the administration strategy recognizes the need for public-private partnerships on this issue and asks companies and industry associations to develop and adopt voluntary best practices to protect themselves against trade secret theft.  And, of course, there are significant drawbacks to any after-the-fact solution, whether relying on government intervention or a private lawsuit.

The best solution is to prevent a trade secret theft from ever occurring.  Even if that is not possible, having taken strong measures to protect trade secrets will aid success both in any civil litigation against the perpetrator and in any criminal action the government may bring.  Entities should consider at least the following types of protective measures:

  • Research and development compartmentalization, i.e., keeping information on a “need to know” basis, particularly where outside contractors are involved in any aspect of the process
  • Information security policies, e.g., requiring multiple passwords or multi-factor authentication measures and providing for data encryption
  • Physical security policies, e.g., using controlled access cards and an alarm system
  • Human resources policies, e.g., using employee non-disclosure agreements, conducting employee training on the protection of trade secrets and performing exit interviews.

It also will be important in any future litigation that a company has clearly designated as confidential any materials it may wish to assert are trade secrets.

Third, the new administration approach to trade secrets offers some opportunities for U.S. companies.

The government interest in enhancing law enforcement operations indicates that businesses may have a better chance of encouraging the government to investigate and bring criminal charges under the Economic Espionage Act (EEA) against the perpetrators of trade secret thefts.  The possibility of seeking government involvement is a powerful tool that should be considered and discussed with counsel any time there is a significant suspected trade secret theft.  Obtaining government involvement in specific instances of trade secret theft can allow businesses to take advantage of information learned via government tactics such as undercover investigations and search warrants.  It also can significantly enhance any civil litigation—for example, a finding of criminal liability can make a civil outcome a foregone conclusion.

The administration strategy’s focus on improving domestic legislation and increasing communication with the private sector suggests that there is an opportunity for the private sector to collaborate with government actors in communicating industry needs and shaping policy.  For example, it is possible that the time is ripe for an amendment to the EEA (currently a federal criminal statute that offers no private right of action) to create a federal, private cause of action for misappropriation of trade secrets.  A bill to this effect was introduced in Congress in 2012 and did not progress, but two other amendments to strengthen the EEA that passed overwhelmingly in December 2012, plus the recently issued administration strategy, suggest there may be gathering momentum for such a change.

In an executive order signed on February 12, 2013, entitled “Improving Critical Infrastructure Cybersecurity,” President Obama outlined government plans to significantly increase the amount of information that the government shares with private sector entities about cyber threats.  Specifically, the order directs government agencies to develop procedures to create and disseminate to targeted entities unclassified reports of cyber threats that identify them as targets, to disseminate classified reports of cyber threats under certain circumstances to “critical infrastructure entities,” and to expand the Enhanced Cybersecurity Services program (previously available only to defense contractors to assist in information-sharing about cyber threats and protection of trade secrets) to “eligible critical infrastructure companies or commercial service providers that offer security services to critical infrastructure.”  The directives in the executive order are in addition to and complement various information-sharing tactics set forth in the administration strategy designed to provide warnings, threat assessments and other information to industry.  Companies, particularly those involved in the power grid or the provision of other utilities or critical systems, should be aware of the possibility of obtaining additional information from the government about threats to protected information.

© 2013 McDermott Will & Emery

Trade Secrets – Protecting Your Confidential Information

As seen recently in The National Law Review an article by Harvey Koning of Varnum LLP regarding protecting your confidential information:

Varnum LLP

 

Some of the most valuable intellectual property in the world is not protected by a patent or trademark. A famous example is the formula for Coca-Cola – it is protected as a trade secret. A more recently created trade secret is the algorithm Google uses to rank websites. Google protects it by keeping it secret. But trade secrets are not limited to blockbuster inventions by huge companies – almost every business has trade secrets worth protecting. What if your biggest competitor hired away one of your key employees? What confidential information would you not want this person to take? This article describes how to identify and protect your valuable trade secrets.

What is a “trade secret”?

“Trade secrets” can include customer lists, databases, pricing information, cost and profit margin information, computer programs, the content of contracts and much other valuable information. Basically, anything that gives you a competitive advantage over your competition can be a trade secret. A trade secret is something not generally known or easily discoverable by people outside your business.

If your information has “trade secret” status, then you can take legal action to prevent someone (such as a former employee) using the misappropriated information and, in some circumstances, you can seek a monetary recovery from someone who has misused your trade secrets. Trade secrets offer important advantages. They do not require any patent or trademark filings, fees or government approvals. Trade secret protection does not expire after a fixed amount of time.

How do you obtain trade secret protection?

To get trade secret protection, you must make a reasonable effort to protect your confidential information. A good place to start is by thinking about and listing what information you have that is not known to the public or easily discoverable that you would like to protect. After you have identified your confidential information, here are some of the steps you can take:

  • label the information “confidential” or “proprietary”
  • have employees sign a confidentiality agreement
  • limit access to those who need to know
  • keep the information in a secure location
  • remind departing employees of their obligation not to disclose confidential information

The particulars of your situation help determine the appropriate steps to take. A good place to start is a company policy about protecting confidential information.

Making an effort to protect your confidential information is a wise investment in preventing your important information from falling into the wrong hands (anyone other than you!).

© 2012 Varnum LLP