In yet another employee misappropriation case, the FBI got involved in the alleged theft of trade secret information for intumescent fire-proofing coating (I don’t know what it is either) from a worldwide paint company with a subsidiary in Houston, Texas. Jensen Zeng was arrested on January 29, 2008, and detained pending further criminal proceedings after being indicted on two counts of trade secrets theft and one count of computer fraud. Although the press release from the FBI doesn’t say it, the charges likely stem from violations of the Economic Espionage Act. Furthermore, there is no indication of a civil suit by the company, I am sure we can expect one.
Based on the brief allegations detailed in the FBI press release, we can begin to pciture the strong case the paint company has made for itself because, if the allegations are proven true, they implemented and sustained an effective trade secrets protection plan (something this blog highly recommends doing if you have any trade secret information which provides value to your company). In the following paragraph from the press release I will highlight the items which are directly related to a trade secrets protection plan.
According to the indictment, Zeng allegedly signed a confidentiality agreement with his employer and was aware of his responsibility to keep and maintain the confidentiality of his employer’s proprietary interest in trade secrets. Between Nov. 1, 2005 and Jan. 29, 2008, Zeng is accused of accessing without authorization his employer’s protected computer system and obtaining the trade secret formula for the intumescent fire-proofing product with the intent to defraud his employer. Zeng is accused of downloading the trade secret formula from the company’s database with the intent to convert the trade secret to the benefit of a person other than his employer on or about Nov. 1, 2005, and again on Jan. 29, 2008, and concealing the formula in a box under the insulation in the attic of his residence. The indictment also alleges Zeng formed his own business in October 2007 for the purpose of marketing intumescent fire-proofing coating.
A trade secrets protection plan is critical to any action for trade secrets whether brought in civil court or pursuant to Federal Laws such as the Economic Espionage Act.
I wrote earlier about the potential legal ramifications of Spygate (the New England Patriots taping of defensive signals) and what is now commonly referred to as Spygate II (the New England Patriots taping of a Rams walk-through practice prior to Super Bowl XXXVI) here.
This article over at ESPN indicates that Sen. Arlen Specter’s investigation of the controversy is being stonewalled. According to Specter, the NFL owners are putting up a united front regarding the controversy in order to put it behind them and move on, and that the NFL is putting so many preconditions on the testimony of Matt Walsh (who apparently knows quite a bit about this whole Spygate issue) that Specter believes that he may never testify.
It seems the NFL might be flexing their muscles in the face of ever increasing scrutiny from Congress. We’ll see how it turns out…
Two rival Hispanic bakeries in Portland are caught up in a trade secrets skirmish over recipes that two former employees took to another bakery. Notice the emphasis on former employees.
“These recipes and baking methods constituted valuable trade secrets not publicly known and … the cakes and pastries made from them were and are in great demand by the Hispanic community in the greater Portland-Vancouver metropolitan area.”
There may be hope for the Plaintiff in this case as it appears that his trade secrets protection plan was in place because the complaint attaches confidentiality agreements signed by the former employees. Bravo.
For those interested in the News Corp/NDS industrial espionage ruckus, there’s a great write-up over at afr.com. It will get you up to speed pretty quickly.
For those who don’t know, NDS has been accused by several pay TV companies of hiring hackers to break other companies’ satellite encryption schemes and then posting the trade secrets on the internet allowing opportunists to manufacture counterfeit smart cards that give free access to programming which would typically require payment (like DirecTV and Echostar).
We’ll pay closer attention to this because Echostar’s case against NDS, set to go to trial in April of this year in California District Court, is considered one of the largest industrial espionage cases ever heard in the U.S.
“The Supreme Court of Ohio today ruled that use of protected trade secret information by a former employee who had memorized it during his employment violated the state’s trade secrets law.”
“…protected trade secret information does not lose its character as a trade secret under the Uniform Trade Secrets Act (UTSA), R.C. 1333.61(D), merely because a former employee memorized it rather than writing it down or copying it in some other tangible medium.”
“…the determination of whether a client list constitutes a trade secret pursuant to R.C. 1333.61(D) does not depend on whether it has been memorized by a former employee. … It is the information that is protected by the UTSA, regardless of the manner, mode, or form in which it is stored – whether on paper, in a computer, in one’s memory, or in any other medium.”
The facts are as follows:
“The case involved a dispute between Al Minor & Associates, a company providing third-party pension administration services to client companies, and a former employee, Robert Martin of Columbus. Martin, who worked for Minor as a pension analyst, was an at-will employee and was not bound by any formal non-competition or trade secrets agreement. Martin resigned in 2003 and opened his own pension analyst business. He began soliciting clients including a number of companies that he recalled from memory as being current or former clients of Minor. ”
It will be interesting to see how many jurisdictions follow this unanimous ruling of the Ohio Supreme Court.
I can see arguments on both sides. On one hand, it can be argued that an employee who has cultivated relationships with clients should have the right to contact those clients, if he can do so from memory, when he has left for another employer. On the other hand, there needs to be some reasonable protection for businesses when a former employee can contact a customer and have a competitive advantage because of the employee’s knowledge of the prices and terms the customer has with the former employer, even if derived from memory. Incidentally, California’s Uniform Trade Secrets Act reads similarly to the Ohio Act. I will have more to say on this subject later.
By the way, notice that this was yet another case of a former employee’s misappropriation of the trade secrets of his former employer. Food for thought.
Someone must really be mad that the Patriots lost, because there are now rumblings that coach Bill Belichick and the NFL will come under fire relating to alleged tapes that the Patriots secretly made of a St. Louis Rams walkthrough prior to Super Bowl XXXVI. Read the story by Mike Florio of the Sporting News here.
Many of you will remember that the Patriots were huge underdogs to the Rams (nicknamed “The Greatest Show on Turf” for their explosive offense) in Super Bowl XXXVI, and pulled off the upset to begin the first of their three Super Bowl wins this decade.
What does this have to do with trade secrets, you ask? Good question.
Apparently, there is a chance that the Patriots could be liable under the 1996 Economic Espionage Act which makes theft of trade secrets a federal offense. According to ESPN, Sen. Arlen Spector of Pennsylvania has been sniffing around and has requested a meeting with NFL Commissioner Roger Goodell regarding the destruction of tapes relating to accusations by the New York Jets earlier this year that the Patriots taped their signals from the sideline during a game–a big no-no according to NFL rules. Here’s Sen. Spector’s letters to Commissioner Goodell. I’m sure they will probably discuss the Super Bowl XXXVI controversy, as well, which has exploded in the media in recent days.
So, how does something called the Economic Espionage Act potentially apply to NFL football games. Glad you asked. The Act makes it a crime punishable by fines and imprisonment to steal, take, carry away or obtain by fraud or deception any “trade secret.” It also makes the receipt or possession of trade secrets a federal crime if you know that the information has been stolen.
A “trade secret” is defined by the act as follows:
all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if –
(A) the owner thereof has taken reasonable measures to keep such information secret; and
(B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public.
A pretty broad definition–perhaps broad enough to include a secret taping of another team’s walkthrough prior to a Super Bowl. After all, a secret tape of an opponents’ walkthrough could be construed as business information such as a pattern, plan, design, method, technique, process or procedure. And such information definitely derives a benefit from not being known to the opponent (that’s the whole point, right?). And if the Rams took precautions to protect their practices from the public, then it can be construed that the walkthrough is not readily ascertainable through proper means. And if Belichick and/or the Patriots received the tape and knew that it was secretly taped and against NFL rules, then potential punishment under the Act is possible.
The resolution could hinge on the testimony of an individual named Matt Walsh who is the man who apparently taped the Rams walkthrough. His testimony could be enough to land the Patriots, Belichick and the NFL in hot water, depending on who knew what and when. Sen. Spector has already reached out to Walsh.
Keep in mind that this is mainly conjecture and any prosecution depends upon whether a U.S. Attorney believes that a crime may have been committed but, in any event, it will be fascinating to watch as it unfolds, both for prurient interest and to see exactly how far the Economic Espionage Act may stretch. My only question is how a jail stint for Belichick would affect these standings. Stay tuned.
TradingMarkets.com is reporting that Agilent Technologies, Inc. is suing Advanced Materials Technology Inc. in Delaware for breach of confidentiality agreements, misappropriation of trade secrets, and breach of fiduciary duties relating to its high-performance liquid chromatography or HPLC technology, whatever that is. Agilent alleges that three employees of Advanced, formerly of Agilent, took Agilent trade secrets and confidential information and used it for the benefit of Advanced in developing its Halo HPLC. The story is here.
Do you notice a trend with these cases? Bonus points if you said that most of them relate to former employees leaving for another company and using their former company’s trade secrets and confidential information to compete unfairly.
These cases all have one thing in common–they will turn on the strength of the plaintiff’s trade secrets protection plan. A strong plan that is effectively implemented will generally allow recovery, while on the other hand, companies with no plans, or companies who don’t effectively implement their protection plans will generally be denied recovery.
We will follow this case as it develops to analyze the strength of Agilent’s trade secrets protection plan and its implementation.