FBI Nabs Apple Trade Secrets Thief

FBI Nabs Apple Trade Secrets Thief

You may have read about Xiaolang Zhang recently. He’s the Apple engineer who was about to board a plane to China before being arrested by FBI agents and charged with theft of trade secrets under Title 18, United States Code, Section 1832. His new employer, Xpeng Motors, denied any knowledge of trade secret theft.

Rather than recount the details reported by the press, this week on Five Minute Law we’re traveling into the future to hear opening statements in the civil lawsuit to be filed in federal court under the Defend Trade Secrets Act.

SCENE: Courtroom, Robert F. Peckham Federal Building & United States Courthouse, San Jose, California, USA.

THE COURT: Ok, we’re on the record on July 14, 2020, in Case No. 18-CV-78745, Apple, Inc. v. Xpeng Motors. Ladies and gentlemen of the jury, we are now going to hear opening statements from the lawyers. Ms. Cunningham, are you ready to proceed?

MS. CUNNINGHAM: Yes, Your Honor.

Ladies and gentlemen, this is a case about cheating. Not cheating at sports or cheating on your spouse, but cheating at business. Specifically, the business of self-driving car technology. You all know my client, Apple. It’s the best-known technology company in the world. It got there through hard work and innovation.

But some companies want to take shortcuts. Rather than doing the hard work to develop their own technology, they want to cheat and ride the coattails of others. The evidence will show that the defendant, Xpeng Motors, is one of those companies.

Xpeng was founded in 2014 in Guangzhou, China to develop electric self-driving vehicles. It is backed by some of the biggest Chinese companies in the world. It has a lot of smart people working for it, but in 2016 Xpeng decided that wasn’t enough. They needed a boost.

Now you all know about the iPhone and the MacBook, but that’s not all that Apple does. Apple also has a division working round the clock to develop software and hardware for autonomous vehicles. That means self-driving cars.

Back in 2016, Apple had made general statements to the press about self-driving car technology, but the details were a closely guarded secret. The code name was Project Golden Delicious.

This project involved thousands of engineers. One of those engineers was Mr. Xiaolang Zhang. Apple hired Mr. Zhang in December 2015 as a hardware engineer on the Compute Team, where he designed and tested circuit boards to analyze sensor data for the project.

Apple is very serious about making sure people like Mr. Zhang don’t publicize Apple’s secret technology and future product plans. The evidence will show that Apple takes extensive efforts to protect its trade secrets.

Before starting, corporate employees must sign an Intellectual Property Agreement that prohibits any unauthorized use or transmission of Apple’s intellectual property. Apple provides employees annual training on the importance of protecting its confidential information. Mr. Zhang signed one of these agreements and attended the annual training, so he was fully aware of his obligations to protect Apple’s intellectual property.

Apple was especially serious about protecting the secret technology it was developing in Project Golden Delicious.

Apple had several layers of access control for project information. First, Mr. Zhang had to log in to the company’s virtual private network, which they call the “VPN.” Next, another employee had to grant him disclosure rights for the project.

Then, Apple used an internal software tool to manage requests for project disclosure and maintain a record of all disclosures. For Mr. Zhang to get access to the project, another employee had to “sponsor” him and give a business justification. A manager had to review and approve that request. So, access was strictly on a “need to know” basis.

After granting Mr. Zhang general access to the project, Apple then gave him even higher access to the secret project database. He worked on the project for about a year and a half, learning about Apple’s secret autonomous vehicle technology the whole time.

This was a huge privilege for Mr. Zhang. Just imagine having the keys to the vault where you could find top-secret technology for the most cutting-edge industry in the world.

But what did Mr. Zhang do with this privilege? The evidence will show that he betrayed Apple. And he did not act alone.

Sometime prior to April 2018, Mr. Zhang got in touch with Xpeng Motors. We don’t know exactly when or where, because Mr. Zhang pled the Fifth.

MR. CROCKETT: Objection! Your Honor, may we approach? [bench conference ensues with animated body language]

MS. CUNNINGHAM: As I was saying, we know Mr. Zhang got in touch with Xpeng Motors at some time before April 2018. You see, Mr. Zhang took advantage of Apple’s generous paternity leave policy from April 1 to April 28, 2018. While on paternity leave, he traveled to China. Funny thing is, that’s where Xpeng Motors has its headquarters.

Then on April 30, 2018, shortly after returning from China, Mr. Zhang suddenly announced—these announcements are always “sudden”—that he was moving back to China to be with his mother who was in poor health. Oh, and one more thing. He told his immediate supervisor at Apple he was going to work for Xpeng Motors.

You can imagine the alarm bells this set off at Apple. Mr. Zhang’s supervisor called in Apple’s New Product Security Division, who met with Mr. Zhang and took custody of his two iPhones and his MacBook laptop. Apple then immediately disabled his access to Apple’s network and offices.

Apple did a forensic analysis of Mr. Zhang’s devices, and guess what they found? Just days before Mr. Zhang announced he was leaving, his Apple network activity increased exponentially. It included both bulk searches of the secret project database and targeted downloading of specific files.

These files included technical documents on Apple prototypes and prototype requirements, such as power requirements, low voltage requirements, battery system, and drivetrain suspension mounts. You will hear Apple’s expert witness testify that these secret technical documents would have great independent economic value for a competitor in the self-driving car field.

But that’s not all. You will see security camera video showing Mr. Zhang on Apple’s campus at 9:14 p.m. on the evening of Saturday, April 28, 2018. You’ll see him enter Apple’s autonomous vehicle software and hardware labs and leave the building less than an hour later carrying a computer keyboard, some cables, and a large box.

Was he just working late, burning the midnight oil? Keep in mind he was on paternity leave at this time, and he announced his resignation just two days later. The evidence will make it pretty obvious what he was doing.

But don’t take my word for it. You will hear testimony that Mr. Zhang was interviewed both by Apple security and the FBI. And he admitted it. He admitted pursuing employment with Xpeng Motors while still employed by Apple. After initially denying it, he admitted he was on the Apple campus on April 28. He admitted taking online data from the secret project database while on paternity leave.

It gets worse. Mr. Zhang admitted “air-dropping” the data he took from Apple’s system on to his wife’s laptop computer. When Apple examined that computer, it found that a folder titled “RECENT” contained 40 Gigabytes worth of data, and the laptop’s system event logs reflected “Air Drop” activity on April 29 and 30. And 60 percent of the data on the computer came from Apple.

One of the files Mr. Zhang put on his wife’s laptop was especially important. We call it the “X-File.” The X-File contained top-secret electrical schematics for one of the circuit boards Apple was developing for the project.

Now, why do you think Mr. Zhang was doing all this? Was he going to use all this secret technology by himself? That doesn’t make any sense.

The evidence will show that immediately after leaving Apple, Mr. Zhang went to work for Xpeng Motors at its headquarters in Palo Alto. Then on July 7, he bought a last-minute round-trip ticket to China. And he might have gotten away with it too, if FBI agents hadn’t arrested him just after he got through the security checkpoint at Terminal B.

After you hear all the evidence, the inescapable conclusion will be that Mr. Zhang was working with Xpeng Motors to take Apple’s secret technology.

And that’s cheating. Thank you.

THE COURT: Thank you, Mr. Cunningham. Mr. Crockett, are you ready to proceed? . . . Mr. Crockett?

MR. CROCKETT: Oh, sorry. Yes, Your Honor.

Ladies and gentlemen of the jury, I’m impressed. That was quite an opening by Ms. Cunningham. I don’t know if I can compete with that. I mean, I didn’t go to Harvard like she did. I’m just an old trial lawyer.

But I tell you what. These old hearing aids still work pretty good, and I was using them while Ms. Cunningham was talkin’. And it’s not what I heard that’s important, it’s what I didn’t hear.

Let me give y’all an example. I didn’t hear her say anything about having any evidence that Xpeng Motors was in cahoots with Mr. Zhang when he did all that sneaky stuff during his paternity leave. Did you hear her say anything about any evidence that anybody at Xpeng Motors put Mr. Zhang up to it? I didn’t.

You know what else I didn’t hear? I didn’t hear anything about any evidence that Mr. Zhang ever—ever—gave any of those top-secret Apple documents to anyone at Xpeng Motors.

Now, when we get to the end of this trial, you’re going to get some papers from the judge that we call a charge. And that charge is going to have a lot of complicated instructions about stuff like “misappropriation.”

Now, back when I was flying helicopters in Vietnam, we didn’t use a lot of fancy words like “misappropriation,” but I know what stealing is. And that’s basically what misappropriation means: stealing. And I’ll make you a bet. I bet during this whole trial you won’t hear any evidence that my client, Xpeng Motors, stole anything from Apple.

You know what else you’re not going to hear? I’ll bet you dollars to donuts you won’t hear any evidence that Apple lost any money because of anything Xpeng Motors did. Now they’ve got this man with a Ph.D who’s going to come in and say there’s no way Xpeng could have developed its self-driving car technology without Apple’s schematics. So when they don’t have any real evidence, they’re going to rely on some professor getting paid $750 an hour. Well, we have a saying back in Texas where I grew up: that dog won’t hunt.

Now, I’ll level with you on something. You’re going to see some internal emails from Xpeng Motors talking about how they’re going to make their self-driving car technology more like Apple’s and beat Apple at its own game. But that’s not stealing, that’s competition. That’s the American way. If you can build a better mouse trap, you get the cheese.

Or the apple. [wink]

THE COURT: Thank you, Mr. Crockett. Ms. Cunningham, call your first witness.

_________________________________________________________________

IMG_4571

Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC.  

He made up the names “Project Golden Delicious” and “X-File,” and the stuff about what Xpeng Motors did. The rest of the facts are taken from press reports and the FBI agent affidavit attached to the Criminal Complaint in U.S. v. Xiaolang Zhang, No. CR-18-70919, U.S. District Court for the Northern District of California.

 

The Price Undercutting Theory in Trade Secrets Litigation

The Price Undercutting Theory in Trade Secrets Litigation

You can’t take him anywhere: Five Minute Law goes to a cocktail party

Hi, I’m Zach Wolfe.

Good to meet you Zach, I’m Travis Austin. So what do you do?

I’m a lawyer. I do business litigation.

Oh, my cousin’s a lawyer. I think he does corporate law. What kind of litigation do you do?

Mostly non-compete and trade secrets cases.

Trade secrets? That sounds interesting. Like patents?

Not really. [Wolfe pauses to think about whether he can explain without sounding pedantic.] Actually, a patent is kind of the opposite of a trade secret.

Oh, I didn’t know that.

Yeah, like if you file a patent on some new technology you invented, the patent filing makes it public to the world. 

Ok, I see. So if you keep the technology inside the company, it can be a trade secret?

Exactly.

So is that the kind of trade secret litigation you do?

Well, not that much. [Wolfe pauses again to decide whether to explain or change the subject to something less boring.] Most of my trade secret cases involve things like customer lists and prices.

Really? I didn’t think prices were trade secrets.

[Wolfe smiles, sensing an opportunity] They can be. I actually just wrote a blog post about that.

Oh, you have a blog? . . . [now all is lost]

A typical price undercutting scenario

So what’s the answer? Are prices really trade secrets?

It depends. Let’s consider a hypothetical.

Paula Payne Windows orders windows from manufacturers and sells them to residential and commercial builders. The profit is the spread between the cost of buying and shipping the windows and the price charged to the customer.

Dawn Davis is the most experienced sales person at Paula Payne Windows. One day Dawn meets the owner of Real Cheap Windows for margaritas. A month later, Dawn suddenly announces to Paula Payne—these announcements are always “sudden”—that she’s leaving the company to go to work for Real Cheap.

And here’s the hard part for Paula Payne: Dawn never signed any non-compete. In fact, she never even signed a routine confidentiality agreement. “When Dawn started, our whole company was just a little office with three phones and some computers,” the founder of Paula Payne Windows explains. “The last thing I was thinking about was legal documents.”

A few weeks later, it becomes obvious that Dawn’s customers have stopped placing orders with Paula Payne. And that’s not all. Paula Payne discovers that the day before leaving, Dawn emailed herself an Excel spreadsheet containing all of her sales for the previous 90 days, including (1) the name of the customer contact, (2) the window model numbers, (3) the price paid to the manufacturer, (4) the shipping cost, and (5) the price charged to the customer.

Paula Payne Windows sues Dawn Davis and Real Cheap, claiming misappropriation of Paula Payne’s trade secrets under the federal Defend Trade Secrets Act and the state Uniform Trade Secrets Act.

Specifically, Paula Payne claims that after joining Real Cheap, Dawn started selling to her previous customers at prices slightly lower than what customers were paying Paula Payne. “Dawn Davis is using the confidential pricing information in the spreadsheet to undercut Plaintiff and steal its customers,” Paula Payne alleges.

This is the common “price undercutting” theory in trade secrets litigation. It is common because while not every company has secret technology or a “secret sauce,” every business has customers and prices.

So, even if a company doesn’t require its employees to sign non-competes, the company can use trade secret law to try to stop a departing employee from competing, as long as it has customers and prices that are arguably confidential.

When are prices trade secrets?

Returning to the initial question, is that kind of information actually a trade secret?

Like any kind of information, prices charged to customers can be trade secrets, if:

(1) the price information has “independent economic value”

(2) the prices are not “readily ascertainable” by competitors

(3) the company took “reasonable measures” to keep the prices secret

These are the three essential elements of a “trade secret” under both the Texas and federal statutes. Like any type of information, price information that meets these elements can be a trade secret.[1]

carrots-cooking-food-40790
Lower prices. They cut like a knife.

But prices are not just any kind of information. Price competition is at the core of the free competition the law should encourage. We want businesses to “undercut” their competitors on price. We just don’t want them to use another company’s trade secrets to do it.

So it’s important for judges to hold companies to their burden of proving their price information meets the three elements needed for trade secret protection.

Let’s apply this to the Paula Payne Windows case. Paula Payne would argue that the detailed price information in the spreadsheet has “independent economic value” because Dawn can use it to undercut Paula Payne.

But Paula Payne Windows also has to prove the price information is “not readily ascertainable.” In this case, the spreadsheet contains prices charged to Paula Payne and prices charge by Paula Payne. Is it really that hard for a competitor to find out those prices?

To show the information is not a trade secret, Dawn’s lawyer will want to establish that:

– Paula Payne Windows has no agreements with the window manufacturers requiring the manufacturer prices to be kept confidential

– Prices charged by the manufacturers are available in industry publications, on the Internet, or simply by asking the manufacturer

– Paula Payne Windows has no agreements with its own customers requiring its prices to be kept confidential

– Paula Payne’s customers are willing to tell other window companies how much Paula Payne is charging them

These questions go to the heart of the elements of a trade secret. If Paula Payne doesn’t require its customers to sign confidentiality agreements, has it really taken “reasonable measures” to keep the prices secret? If manufacturers and customers are willing to disclose their prices, isn’t the information “readily ascertainable”?

Companies always want to say their prices are highly confidential and valuable, but that claim often doesn’t hold up to scrutiny.

And that’s not the only problem with the price undercutting theory.

Causation rears its ugly head

Let’s say Paula Payne Windows persuades a judge or a jury that the pricing information is a trade secret. That’s not the end of the story. Paula Payne also needs to prove that Dawn Davis used the information to make the sales to the customers. In other words, Paula Payne still has to prove causation.

Ah, causation. The bane of plaintiff’s lawyers everywhere.

You see, it’s not enough to prove the price information was a trade secret and that Dawn Davis sold windows to Paula Payne’s customers. Paula Payne must prove it was Davis’s use of the information—and not something else—that caused Paula Payne to lose the sales.

This requires a counterfactual: imagine that Dawn Davis never took the spreadsheet with the prices. Would she have still made the sales?

To prove Dawn would have made the sales anyway, her lawyer will want to show:

– Dawn has longstanding personal relationships with her customers

– Dawn could have undercut Paula Payne Windows simply by asking the customers what Paula Payne Windows was charging them

– Price is not the only factor for the customers, or even the most important factor

– The customers ordered from Dawn because of their personal relationships

– Prices change daily or weekly, making the numbers in the spreadsheet quickly obsolete

– Dawn didn’t even look at the spreadsheet in making the sales

– In short, Dawn would have made the sales even if she hadn’t taken the spreadsheet.

Proving these points could negate the causation element of Paula Payne’s trade secrets claim.

Wait a minute, you might say. This isn’t fair. Dawn Davis developed goodwill with her customers on Paula Payne’s dime. That goodwill belongs to Paula Payne. Dawn shouldn’t be allowed to exploit it for the benefit of a competitor.

You would have a point. But goodwill is not a trade secret. And there is really only one legal mechanism to protect goodwill: an enforceable non-compete.

But if there isn’t a non-compete, and the employee takes confidential information about the company’s prices, how do you sort out whether the employee made the sales because she had the price information, or because she had relationships with the customers?

Ask me next time you see me at a party.

___________________________________________________________________

IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] See Fox v. Tropical Warehouses, Inc., 121 S.W.3d 853, 859 (Tex. App.—Fort Worth 2003, no pet.) (a pre-TUTSA case citing price lists and customer lists as information entitled to trade secret protection until trial); T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 18, 24 (Tex. App.—Houston [1st Dist.] 1998, pet dism’d) (same). See also SP Midtown, Ltd. v. Urban Storage, L.P., No. 14-07-00717-CV, 2008 WL 1991747, at *6 (Tex. App.—Houston [14th Dist.] May 8, 2008, pet. denied) (mem. op.) (evidence that customer and price information would allow competitors to slightly undercut plaintiff’s prices and take its business raised a fact issue on whether the information was a trade secret); In re Desa Heating, L.L.C., No. 2-06-088-CV, 2006 WL 1713489, at *2 (Tex. App.—Fort Worth June 22, 2006, orig. proceeding) (mem. op.) (affidavit testimony that competitors could use financial information to undercut company’s pricing to obtain its customers, while “somewhat conclusory and lacking in detail,” was sufficient to establish that information was entitled to trade secret protection in discovery).

A Series of Unfortunate Trade Secrets

A Series of Unfortunate Trade Secrets

Prologue: Look Away

If you are interested in stories with happy endings, then you would be better off somewhere else. My name is Zach Wolfe, and it is my solemn duty to bring you the sordid tale of the Flaubert orphans, three children who inherited the old Real Cheap Windows factory when their parents died in a mysterious mansion fire.

As minors, the children had to rely on Mr. Edgar, the company’s lawyer, to guide them. “I have bad news for you,” Mr. Edgar said in his first meeting with the children. “Just before your parents perished, Real Cheap Windows hired Dawn Davis, the star salesperson for our most ruthless competitor, Paula Payne Windows.”

“Did Dawn have a non-compete?” young Rose Flaubert asked. “Oh, it’s worse than that,” Mr. Edgar replied as he coughed into his handkerchief. “Much, much worse.”

“You see, before leaving Paula Payne Windows, Dawn downloaded ­7,500 confidential company documents to a portable hard drive,” Mr. Edgar said. “Paula Payne has now sued us,” he explained, “claiming those files contained its most closely guarded trade secrets.”

“A trade secret,” he continued, “is information that derives independent economic value from not being known or . . .”

“We know what a trade secret is,” Karl Flaubert interrupted. “But I’ve spent hours reading an award-winning legal blog by a very handsome young lawyer,” Karl said, “and it says that companies often claim that things like ordinary lists of customers are trade secrets, even when that information is readily ascertainable.”

Karl continued. “If we think the trade secrets claim is contrived, can’t we just make Paula Payne Windows specifically identify what the alleged trade secrets are?” he asked. “Otherwise, we’re just flying blind.”

Here, “flying blind” is an expression that means engaging in some action with little or no knowledge of the facts of the situation, such that you are likely to crash or collide with a metaphorical obstacle because you lack knowledge of certain crucial information.

Karl was right. If you had to defend a trade secrets claim without knowing specifically what the alleged trade secrets are, you would be flying blind. But I am sorry to say the rest of this story is rife with misfortune and despair. You should probably stop reading now.

Chapter One: The Pleadings

That night, Rose and Karl read the pleadings. Paula Payne Windows had filed a Complaint in federal court claiming that Dawn Davis violated the federal Defend Trade Secrets Act by transferring the files to the portable hard drive.

But the Complaint was quite vague about what the alleged trade secrets were: “confidential company information, including without limitation customer lists, vendor information, prices, information about business plans, and methods of doing business.”

Here, “vague” is a word used to refer to allegations that are “fuzzy,” or not sufficiently definite. Vague should not be confused with “ambiguous,” which means a statement that can be reasonably interpreted to have two or more distinctly different meanings.

Karl also reviewed the Federal Rules of Civil Procedure, which provide that a defendant can file a “Motion for More Definite Statement” when the plaintiff’s pleading is “so vague or ambiguous that the party cannot reasonably prepare a response.” Fed. R. Civ. P. 12(e). “That’s it,” Rose said, “we’ll tell Mr. Edgar to file a motion for more definite statement.”

But Mr. Edgar laughed when the children came to him with the idea. “Flauberts, nobody really files a motion for more definite statement,” he said. “Now, children, if we were in state court we could file ‘special exceptions,’ which are kind of the same thing, and still popular with some older lawyers.”

“But even then,” Mr. Edgar said after another fit of coughing, “the judge would probably just say ‘serve some interrogatories instead—that’s what discovery is for.'”

Sweety Flaubert, the youngest of the children, responded with baby talk that was incomprehensible to Mr. Edgar. But her siblings understood: “Shouldn’t a litigant be required to state sufficiently specific allegations to give the opposing party fair notice, before the powerful engine of discovery is invoked?”

Interrogatories are written questions that can be served in the discovery process in civil litigation. The party receiving the interrogatories must serve signed answers within 30 days, but the responding party also has the right to make objections. I can assure you that the Flaubert children were about to discover just how frustrating the responding party’s interrogatory answers can be.

Chapter Two: Interrogatories

At the urging of the Flaubert children, Mr. Edgar sent an interrogatory to the lawyer for Paula Payne Windows, asking him to “identify each alleged trade secret with reasonable particularity.” After 30 days, Paula Payne Windows responded by objecting and saying: “Subject to the objections, see the 7,500 files Dawn Davis downloaded to a portable hard drive on or about September 1, 2017.”

“Those documents are 170,000 pages long,” Rose fumed. Tying her hair back, she banged out a “Motion to Compel” on an old typewriter she found. She then presented the Motion to Compel to Mr. Edgar.

“Flauberts, I’m sorry,” Mr. Edgar said, “but we can’t just haul off and file a Motion to Compel.” He explained that under Rule 26 of the Federal Rules of Civil Procedure, first he would have to “confer” with opposing counsel about the Motion. “So confer,” Karl said. “But it’s not that simple,” Mr. Edgar responded, “and I don’t like confrontation.”

Mr. Edgar went on to explain that there were also Local Rules and “Standing Orders” designed to discourage motions to compel. “The judge’s standing order says the lead lawyers must confer in person, [cough] so first we have to confer about the location of the conference.”

I know what you’re thinking. “Confer about where to confer? What a sorry state of affairs.” But I can assure you I have seen this very thing happen. Literally.

Sixty days later, Mr. Edgar filed the Motion to Compel, which the judge denied at a hearing five months later. “There must be something we can do to make them tell us what the trade secrets are,” Rose protested. “I mean, they’re the ones trying to get our fortune by claiming our company stole trade secrets.”

Chapter Three: Mandamus

“Well, there is one thing,” Mr. Edgar said, his voice trailing off. “But it will never work,” he said. “We could try filing a petition for writ of mandamus in the Court of Appeals.”

“Mandamus” is a Latin word that means “throw a Hail Mary.” The term “Hail Mary” refers to a prayer traditionally recited in the Roman Catholic church, or a football play where the quarterback throws the ball as hard as he can into the end zone in a last-second effort to win the game. The phrase now figuratively refers to any last-ditch strategy for victory that has a low chance of success.

“We understand the risk,” Karl said, “but we’re willing to try it.” Karl spent that night in the library researching case law on identification of trade secrets. “Rose, I think I’ve found something!” “It’s a Petition for Mandamus to the Texas Supreme Court in a similar case called In re Terra Energy Partners, LLC.”

The Terra Energy petition was a goldmine of helpful case law. Here, “goldmine” is used figuratively. A literal goldmine is an underground cavern where underpaid workers dig up a precious metal used in wedding bands. A figurative goldmine is a source of abundant helpful information.

“It turns out that many federal district courts across the nation have required plaintiffs to disclose the alleged trade secrets with specificity even before discovery starts,” Karl told Rose. He rattled off several examples cited in the Terra Energy Petition:

  • United Serv. Auto. Ass’n v. Mitek Sys., Inc., 289 F.R.D. 244, 248 (W.D. Tex. 2013)
  • StoneEagle Servs., Inc. v. Valentine, No. 12-1687, 2013 WL 9554563, at *5 (N.D. Tex. June 5, 2013)
  • Big Vision Private, Ltd. v. E.I. duPont de Nemours & Co., 1 F. Supp. 3d 224, 258-59 (S.D.N.Y. 2014)
  • Zenimax Media, Inc. v. Oculus Vr, Inc., No. 3:14-CV-1849-P (BF), 2015 WL 11120582, at *3 (N.D. Tex. Feb. 13, 2015)

“If we can just cite these cases, the judge will have to order Paula Payne Windows to identify the trade secrets,” Karl said.

If this were an ordinary children’s story with a happy ending, I would report to you that Karl provided these cases to Mr. Edgar, who triumphantly cited them to the judge and obtained an order requiring specific identification of the trade secrets. But this story has no happy ending. You may want to avert your eyes as the rest of the tale unfolds.

The Flaubert children soon learned that the Petition for Writ of Mandamus in the Terra Energy case was denied, not once, but twice. First by the Houston Court of Appeals, second by the Texas Supreme Court.

“You see, Flauberts,” Mr. Edgar explained, “the very reasoning of the cases you found shows why mandamus won’t work.” “These cases reason that the trial court judge has broad discretion to order the plaintiff to identify the alleged trade secrets,” he said. “But obtaining a writ of mandamus requires showing the judge abused her discretion. It’s not enough to say the judge made the wrong decision.”

Chapter Four: The Corporate Rep Deposition

Now Rose was really angry. “Can’t we turn this around on Paula Payne Windows?” she asked. “If they’re going to claim that there are 170,000 pages of trade secrets, haven’t they opened the door to extensive discovery on all of those pages?” “You’re right,” Karl said. “And while I was researching mandamus, I saw something about Federal Rule of Civil Procedure 30(b)(6).”

“Yes, we call that a ‘corporate rep’ deposition,” Mr. Edgar said. He reluctantly agreed to serve a Rule 30(b)(6) notice of deposition requiring a representative of Paula Payne Windows to testify regarding all 170,000 pages of documents containing the alleged trade secrets.

A “corporate rep” deposition is a common discovery procedure used when one of the parties is a business such as a corporation or LLC. The party taking the deposition identifies the topics, and the responding company must prepare a representative to testify. The procedure is designed to prevent a company from hiding the ball about relevant information and who knows it. Here, “hiding the ball” is an expression that means . . . well, you get the idea.

Paula Payne Windows designated Mr. Sir as its representative. Through my investigation I have obtained this portion of the deposition transcript:

Screen Shot 2018-04-15 at 9.40.49 PM

“A lot of good that deposition did us for $37,000 in legal fees,” Rose said later. “I guess we’ll never find out what the trade secrets are. We’re doomed to be surprised at trial.”

Chapter Five: Motion for Summary Judgment

Sweety Flaubert then gurgled something Mr. Edgar could not understand, but Rose and Karl could: “Just force the issue by filing a motion for summary judgment on the ground that there is no evidence that the information is a trade secret.”

A motion for summary judgment asks the judge to rule on an issue as a matter of law. In this context, it would say that the trade secrets claim should be dismissed because there is no evidence that the information is actually a trade secret, and therefore no factual dispute for the jury to decide. In Texas state court procedure, the technical term for this kind of motion is a “no evidence” motion.

The Flaubert children asked Mr. Edgar about filing a motion for summary judgment to force the issue. “In theory, that could work,” he said. “Sometimes a no evidence motion for summary judgment is useful to force the opposing party to put his cards on the table.”

“Put his cards on the table” is an expression that . . . Ok, I know. You’re getting sick of this.

“The problem with that kind of motion,” Mr. Edgar continued, “is that you’re not supposed to file it until the plaintiff has had an adequate time for discovery.” “If we file it now, Paula Payne Windows will just say it needs more time for discovery.”

The Flauberts were crestfallen. “Litigation really is a conundrum of esoterica,” Karl said.

___________________________________________________________________

IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. He really doesn’t watch that much TV.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

 

The Matrix: Making Sense of the Patchwork of Employee Confidentiality Duties

The Matrix: Making Sense of the Patchwork of Employee Confidentiality Duties

What if I told you that to understand an employee’s confidentiality duties, you need to understand there are three kinds of confidential information covered by at least four different areas of law?

You see, employers have three kinds of confidential information:

  1. Trade secrets
  2. Confidential information that is not a trade secret
  3. “Confidential” information that is not actually confidential

A trade secret is confidential information that has “independent economic value” and is “not readily ascertainable” by competitors. Secret technology, secret business plans, the literal secret sauce—these are obvious trade secrets. Less obvious things like customer lists and company prices can be trade secrets if they have independent economic value and are not readily ascertainable. In other words, you can tell that information is a trade secret if obtaining the information gives a company a competitive advantage.[1]

A typical employer is going to have a lot of confidential information that is not a trade secret. For example, a social security number or other personal identifying information of an employee is highly confidential. Same for an employee’s personal healthcare history. But information like that is typically not going to give the company any competitive advantage.

Of course, employees learn all kinds of information about the company that is not confidential at all. People outside the company may not know how to get to the company cafeteria, but that information isn’t really confidential. (Think Tom Cruise pointing out that the location of the mess hall is not in the Marine manual in A Few Good Men.)

So why do I include non-confidential information in the list of types of confidential information? Because many companies define virtually all company information as “confidential” in their employment agreements or employee policies. I’ve seen a lot of employment agreements like this, and you’ve probably seen the same thing.

So what does the law say about an employee using these three types of confidential information after leaving the company? There are four key areas of law that govern an employee’s duties concerning confidential information.[2]

Four areas of law. Three types of information. I feel a matrix coming.

And here it is. This chart shows which areas of law cover which types of information:

Screen Shot 2018-03-25 at 9.11.57 PM

Don’t worry, I’ll explain.

Trade Secrets Law

Most states, like Texas where I practice, have some version of the Uniform Trade Secrets Act, affectionately known as UTSA. Then there is a federal statutory overlay called the Defend Trade Secrets Act (DTSA). These statutes provide civil remedies for “misappropriation” of trade secrets, including injunctions, actual damages, and, in some cases, punitive damages and attorneys’ fees. See Trade Secrets 101.

But the trade secrets statutes do not apply to misappropriation of confidential information that is not a trade secret. And whether the information at issue is actually a trade secret is often a major point of contention. So employers don’t want to limit themselves to protecting trade secrets.

Confidentiality Agreements

Enter the confidentiality agreement. Almost every employment agreement is going to have some kind of confidentiality clause. And while the definitions of confidential information vary, the tendency is to define confidential information very broadly. As a result, most confidentiality agreements are not limited to trade secrets.

Heck, most confidentiality agreements are not even limited to confidential information. And thus the question mark in the “Non-Confidential Information” column above. Is it really a breach if the employee uses or discloses information that is not actually confidential?

To make this less abstract, let’s say while working for Paula Payne Windows, Dawn Davis learns the name and phone number of the right person to contact at a window manufacturer to check prices and place orders. Dawn quits and goes to work for Real Cheap Windows. Does she violate her agreement if she uses her knowledge to place a call to the guy she knows at the window manufacturer?

This may be a technical breach, but it is unlikely to give Paula Payne a solid claim for damages, for at least two reasons.

First, it would be hard for Paula Payne to prove that the breach caused damages, especially if Dawn Davis could have found the same person simply by calling up the manufacturer and asking who to talk to. (It would become more complicated if the agreement also has a liquidated damages clause, which to the delight of Contracts professors has been in the news lately.)

Second, defining confidential information to include virtually everything is arguably an illegal restraint of trade or commerce. It is a restraint of trade because, if applied literally, it would effectively prevent an employee from doing anything in the same industry after leaving the company.

So, disclosure of non-confidential information probably isn’t an actionable breach of a confidentiality agreement. But it’s still a question mark.

Fiduciary Duty Lite

Fiduciary Duty Lite is the term I use for the limited kind of “fiduciary” duty that employees owe employers. An employee’s Fiduciary Duty Lite includes a duty not to use the employer’s confidential information or trade secrets in competition with the employer.

So why no check mark for Fiduciary Duty Lite under the Trade Secrets column? In a word: preemption. The Texas Uniform Trade Secrets Act expressly states that it displaces any conflicting law providing civil remedies for misappropriation of a trade secret.[3] Texas courts have interpreted this to mean that TUTSA preempts a breach of fiduciary duty claim that is based on alleged misappropriation of a trade secret.[4] Thus, no check mark.

But what about a breach of fiduciary duty claim that is based on an employee’s use of confidential information that is not a trade secret? Does the trade secrets statute displace that claim?

Courts are split on this question. The “majority” rule seems to be that the trade secrets statute preempts this type of claim, even though the claim does not require proof of a trade secret.[5]

This rule should bother advocates of textualism. The plain language of the trade secrets statute says it displaces “conflicting” law providing civil remedies for misappropriation of a trade secret. A claim for breach of Fiduciary Duty Lite that is based on information that is not a trade secret does not conflict with the statute.

But I get it. The rationale is that allowing an employer to characterize what is really a trade secrets claim as a claim for breach of fiduciary duty would conflict with the preemptive purpose of the trade secrets statute.

Anti-Hacking Statutes

The relevant statutes are not limited to trade secrets. Consider also the federal anti-hacking statute, the Computer Fraud and Abuse Act (CFAA).[6] The Texas version is the Breach of Computer Security and Harmful Access by Computer Act (BCS).[7]

College football fans know that BCS also stands for Bowl Championship Series, but that is probably just a coincidence.

I would summarize these statutes, but I really can’t improve on the article here by Texas lawyer and cybersecurity expert Shawn Tuma. Bottom line: these statutes prohibit “unauthorized access” to computers and provide civil remedies for knowing and intentional violations.

I will use the BCS as an example. If a company hacks into a competitor’s server and steals confidential information, that is an obvious violation. But the BCS is not limited to hacking by outsiders. An insider who accesses the company computer system for an improper purpose or exceeds the scope of his authorized access can also violate the statute, because the statute prohibits access without the company’s “effective consent.”

The picture gets fuzzier when an employee’s access was authorized at the time. Let’s take the typical departing employee scenario where an employee legitimately obtains confidential information from the employer’s computer system in the course of employment for a legitimate purpose, but the employee later misuses the information for the improper purpose of competing with the employer. Whether that conduct violates the statute is a more difficult question.

Another tricky question is whether the employer could have a claim under the anti-hacking statute for an employee obtaining non-confidential information from the company’s computer system. The BCS is not limited to confidential information, but it does require proof of “damages as a result” of the unauthorized access, i.e. causation. As with confidentiality agreements, it may be difficult to prove a violation caused damages if the accessed information was not really confidential.

Oh, one more thing just to add another layer of complexity. As with fiduciary duty, a claim under the anti-hacking statute that is based on misappropriation of trade secrets is preempted by the trade secrets statute.[8]

Are we clear?

___________________________________________________________________

IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. He has watched A Few Good Men multiple times but has actually never seen The Matrix.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] The words “competitive advantage” don’t appear in the statutes that now define trade secrets in most states and under federal law, but you see the phrase in the common-law case law, e.g. In re Bass, 113 S.W.3d 735, 739 (Tex. 2003), and it is useful for understanding what is and is not a trade secret.

[2] I can’t wait for one of my Fivers to point out I have left out some crucial additional source of employee confidentiality duties, like HIPPA.

[3] Tex. Civ. Prac. & Rem. Code § 134A.007(a). But note the statute does not preempt a breach of contract claim.

[4] E.g. Super Starr Int’l, LLC v. Fresh Tex Produce, LLC, 531 S.W.3d 829, 843 (Tex. App.—Corpus Christi 2017, no pet.).

[5] See discussion in Embarcadero Technologies, Inc. v. Redgate Software, Inc., No. 1:17-cv-444-RP, 2018 WL 315753, at *2-4 (W.D. Tex. Jan. 5, 2018).

[6] 18 U.S.C. § 1030. USC also stands for University of Southern California, a traditional college football power. Noticing a pattern here?

[7] Tex. Penal Code § 33.02; Tex. Civ. Prac. & Rem. Code § 143.001.

[8] Embarcadero, 2018 WL 315753 at *5.

“You Like-a-the-Juice, Eh?” Lessons from the Greek Yogurt Wars

“You Like-a-the-Juice, Eh?” Lessons from the Greek Yogurt Wars

I have to admit it. When I saw the headline Dannon Defector to Chobani Ignites Yogurt Trade Secrets Battle, I laughed. Trade secrets? In the Greek yogurt business?

But trade secrets lawsuits are no laughing matter, whether you’re the employer trying to protect your business, the employee trying to start a new job, or the competitor who just hired the new employee. And thanks to the 2016 Defend Trade Secrets Act, the company claiming theft of trade secrets can now make a federal case out of it.

So I’m sure Federico Muyshondt, a former Senior Sales VP at Dannon and current Senior VP at Chobani, is not laughing about getting sued by Dannon in the U.S. District Court for the Southern District of New York.

And once you dig into the allegations in Dannon’s complaint, you can see that the claim is not as silly as it may sound. If the evidence backs up Dannon’s assertions, Dannon has a real case for trade secrets misappropriation.

In fact, the Dannon complaint reads like an all-too-typical script for how these departing employee scenarios usually go down.

1. Employer adopts ordinary “reasonable measures” to protect confidential info

Both federal and state trade secrets law require an employer to take reasonable measures to protect the secrecy of its alleged trade secrets. Fortunately for employers, most courts set the bar pretty low for “reasonable measures.” It is usually enough for an employer to do the basics: have employees sign confidentiality agreements, require protection of confidential information in the employee manual, and have password-protected computers. The Dannon complaint alleged each of these basics. (¶¶ 18, 22)

2. Employer adopts additional measures to protect confidential info

There are additional measures employers can—but are not required—to take to protect trade secrets. Imagination is the only limit to how far you can go to protect confidential company information. According to the Dannon complaint:

  • Dannon requires outside agencies, consultants, and brokers to sign non-disclosure agreements (¶ 21)
  • The confidentiality policy requires employees to take various precautions including:
    • using privacy screens for laptops
    • not viewing highly sensitive company information in public places
    • keeping mobile devices secure and password protected
    • never using Dannon’s name when speaking about Dannon in public places
    • reporting lost or stolen devices to IT immediately
    • using only encrypted USB devices (¶ 24)
  • Employees must follow a “Clean Desk Policy” of locking confidential documents in a desk drawer and only printing documents using a “secure print” option requiring an employee PIN (¶ 26)
  • The company conducts random, periodic sweeps of work areas to verify adherence to the “Clean Desk Policy” (¶ 27)
  • Dannon does company-wide compliance training on protecting company information (¶ 28), including a training course that required test-taker to certify compliance with the company’s information security policies (¶ 29)

You’d expect this kind of thing from, say, a defense contractor working on a next-generation fighter jet. It’s pretty strong stuff for a yogurt company.

Of course, it’s possible that a company could adopt a written policy that requires jumping through all kinds of hoops to protect company information and then not actually follow the policy. But any company that makes a good faith effort to follow policies like this probably won’t have much trouble clearing the “reasonable measures” hurdle for trade secret protection.

3. Employee signs non-compete and confidentiality agreement

Trade secret issues often intersect with non-compete issues. Like many employees, Muyshondt signed a non-competition and confidentiality agreement with Dannon

4. Employee meets with competitor

According the Dannon complaint, Muyshondt attended a seminar on August 2, 2017 where Chobani’s COO was speaking. Less than two weeks later, Muyshondt forwarded his resume to his personal email account.

So far, this doesn’t allege anything unlawful. Generally employees are allowed to make plans to leave to work for a competitor. But employees often go wrong by doing more than this.

5. Employee forwards company documents to his personal email account

Employees planning to leave a company—and competitors looking to hire them—should use common sense to avoid becoming an episode of Employees Behaving Badly.

On my YouTube channel That Non-Compete Lawyer, I recently posted a video on the Top 5 Dumb Things Employees Do Before Leaving, like forwarding company documents to your personal email account. These things are pretty obvious, but apparently Muyshondt doesn’t watch my videos.

After attending the seminar, Muyshondt allegedly forwarded several confidential Dannon documents to his personal email account, including his non-compete, the non-competes of members of his sales team, contact information for his sales team, confidential information about Dannon’s advertising and promotional spending, and an email laying out Dannon’s strengths and weaknesses, potential strategies, and plans for certain products. (¶¶ 31, 34, 36)

Ok, but at least he didn’t download thousands of company files right before leaving, like the key employee in the Waymo v. Uber case, right?

Well, actually . . .

6. Employee downloads thousands of company files right before leaving

Dannon claims that Muyshondt downloaded thousands of Dannon files to a USB device, including confidential salary information and “merch calendars” containing confidential plans for pricing promotions and other sales strategies. He also allegedly removed the SIM card from his company-issued mobile phone and substituting a new SIM card without telling Dannon. (¶ 31)

Downloading company files was no. 4 on my Top 5.

7. Employee deletes documents from his computer and resigns

Finally, Dannon also alleges Made a “massive effort” to delete documents from his work computer. (¶ 31) That was no. 2 on my list.

8. Employer conducts exit interview, employee isn’t completely honest

Dannon alleges that it held an exit interview with Muyshondt. This is generally a good practice for employers. It’s an opportunity to ask the employee what he plans to do and to remind the employee of his confidentiality and, if applicable, non-competition or non-solicitation obligations.

It’s also an opportunity for the employee to dig a deeper hole by not being completely honest, which is what Dannon claims Muyshondt did.

9. Employer conducts forensic examination, finds bad stuff

If the employer suspects something fishy, a forensic examination of the employee’s computer and phone is usually the next logical step. Dannon claims that it did just that, uncovering the evidence of email forwarding, file downloading, and file deleting described above.

10. Employer alleges misappropriation of soft trade secrets

Even when the employer discovers an employee behaving badly, stating a trade secrets claim still requires showing that the information at issue is a trade secret.

“Hard” trade secrets—like the literal or figurative “secret sauce”—are the easiest to understand.

To obtain trade secret status, confidential information must have “independent economic value” and be “not readily ascertainable” to competitors. It’s easy to see how hard trade secrets meet these requirements. For example, if Dannon has a secret recipe or ingredient that makes its Greek yogurt tastier and creamier than Chobani’s, that’s a trade secret. Similarly, if Dannon has a secret technology for making Greek yogurt better than everyone else’s, that’s a trade secret.

But the Dannon complaint—like most—focuses on a different kind of information.

Most trade secrets lawsuits do not involve secret sauce or secret technology. Instead, the typical trade secrets lawsuit alleges misappropriation of the kind of customer information almost every company has.

The Dannon complaint, for example, alleges misappropriation of:

  • research and development information
  • strategic growth plans
  • customer pricing information
  • long term and short-term business strategies
  • future product plans and launches, innovations, sales strategies, market trends
  • customer lists
  • customer and other third-party contacts
  • an email laying out Dannon’s strengths and weaknesses, potential strategies, and plans for certain products
  • confidential salary information
  • “merch calendars” containing confidential plans for pricing promotions and other sales strategies

These “soft” trade secrets are more common. Whether they are actually trade secrets is usually a fact-intensive question.

11. Employer takes advantage of the Defend Trade Secrets Act and picks federal court

Now, if you’re in Dannon’s position and you want to sue, where are you going to do it?

Before the DTSA, many trade secrets lawsuits had to be filed in state court. The federal Defend Trade Secrets Act effectively gives employers the option to file trade secrets lawsuits in state court or federal court. Federal district court judges are still looking for a way to punish Congress for this.

But note that the DTSA does not preempt state trade secrets law. There was a lot of talk about the DTSA encouraging “uniformity” in U.S. trade secrets law, but that was just talk. The DTSA does not replace state trade secrets laws, so rather than establishing uniformity, it adds a federal overlay to the trade secrets laws of the 50 states.

This is apparent in the Dannon complaint, which states both a federal trade secrets claim under the DTSA and a claim under New York common law (New York being one of the few states that has not adopted the Uniform Trade Secrets Act). While federal and state trade secrets laws are fairly consistent, there are differences. See “inevitable disclosure” below.

12. Employer doesn’t ask for ex parte seizure order

The DTSA’s ex parte seizure remedy received a lot of attention when the statute was passed, but use of this procedure has been—and will continue to be—very rare. Like most trade secrets lawsuits, the Dannon complaint asks for an injunction but does not request an ex parte seizure order.

13. Employer asserts “price undercutting” theory

Dannon claims the information in the merch calendars is highly sensitive because a competitor, such as Chobani, “could use the information to time its own promotions and other sales activity to go into effect just before Dannon’s planned dates.” (¶ 39)

This is a version of the “price undercutting” theory commonly asserted in trade secrets cases. Whether the prices are actually trade secrets is another fact-intensive issue. It depends on multiple factors, including whether prices are widely publicized and how often prices change.

14. Employer asserts “inevitable disclosure” doctrine

The first thing an employer wants in a trade secrets suit is an injunction. But the employer has to show “imminent harm” to get an injunction against a former employee using the employer’s trade secrets. Often the problem for the employer is that it has evidence the employee took the information but no evidence that the employee has used—or is about to use—the information.

The “inevitable disclosure” doctrine fills this gap by allowing a court to enjoin an employee from working for a competitor, even without such evidence, on the theory that the employee will inevitably use or disclose the trade secrets learned from the prior employer. But the status of the doctrine is unclear in Texas, and the DTSA curbs the use of the doctrine by providing that the court cannot “prevent a person from entering into an employment relationship.”

One thing you sometimes see in a trade secrets lawsuit that is lacking in the Dannon complaint is a litany of “bad” emails, like emails between Muyshondt and Chobani talking about their plans for Muyshondt to jump ship and compete with Dannon. Emails like that can help prove the employee’s intent to cause imminent harm to the employer. Without that kind of evidence, the employer usually has to argue inevitable disclosure.

Lessons from the Greek Yogurt Wars

The lessons for an employer: take basic precautions to protect company information, consider taking additional security measures, do an exit interview, and promptly do a forensic exam if you smell a rat.

The lesson for an employee: use common sense (and subscribe to my YouTube channel). Assume that everything you do electronically will leave a trail (because it will). Don’t forward company documents to your personal email account. Don’t download thousands of company files shortly before leaving. Don’t try to cover up the trail by deleting documents; that will leave a trail of its own.

The lesson for a competitor planning to hire away a key employees: tell the employee early and often not to do the things he shouldn’t do.

Because if the employee you hire behaves badly, the joke may be on you.

*Update: Dannon and Muyshondt settled quickly. On May 29, 2018, the court entered this Permanent Consent Injunction, in which Muyshondt represented he diligently searched for and turned over all documents potentially containing Dannon’s confidential information and trade secrets.

___________________________________________________________________

IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

 

Witness Preparation Lessons from the Waymo v. Uber Trial

Witness Preparation Lessons from the Waymo v. Uber Trial

On February 5, 2018, the day after the real Super Bowl, the Super Bowl of trade secrets trials started in federal court in San Francisco. You might have heard of some of the parties. The defendant was Uber—perhaps the most controversial startup of the last decade. You may not have heard of the plaintiff, Waymo, but you probably know Waymo’s owner, a little company called Google.

The issue in a nutshell: did Google engineer Anthony Levandowski steal Google’s confidential self-driving car technology—they call it “LiDAR”—and take it to Uber?

This is the type of “departing employee” case I like to handle (usually on a slightly smaller scale), so it would have been fun to take the week off just to follow the trial, but alas, I had work to do for my own clients.

Fortunately, I was able to get the flavor of the trial by periodically checking my Twitter feed. Sarah Jeong, Senior Writer at The Verge, live-tweeted the trial and, after the case suddenly settled in the middle of trial, wrote this helpful wrap-up Who blinked first in Waymo v. Uber?

I bet the trial transcript—or even the tweet-stream—is a goldmine of lessons for lawyers who handle departing employee cases, and trial lawyers in general. But for now I’ll just share a little nugget about how to prepare witnesses to answer argumentative questions.

Laser is the Sauce

But first, in case you don’t know the back story, Fortune has a good timeline here. I’ll give you the simplified version:

  • The amount of money to be made from self-driving car technology is roughly equivalent to the GDP of France
  • Google spun out Waymo to develop this technology
  • Levandowski left Google/Waymo to start “Otto” (which apparently rhymes with “Auto” – get it?)
  • Uber CEO Travis Kalanick decided it would be cool to back his bro Levandowski and acquire Otto
  • Waymo sued Otto and Uber for patent infringement and misappropriation of trade secrets

The case was unusual for several reasons: the net worth and public stature of the household-name parties, the high profile of the executives involved, the amount of alleged damages (close to $2 billion), the importance of the technology involved, and the Silicon Valley culture from which all of this emerged, to name a few.

But at its root, Waymo v. Uber was a fairly typical departing employee case: key employee does suspicious things, leaves first company, and goes to second company. First company sues second company for trade secrets misappropriation.

I haven’t studied the allegations in detail, but the picture that emerges from press coverage is bad “liability facts” for Uber—like some bad text messages and Levandowski downloading 14,000 proprietary Google documents shortly before leaving—but a weak damages case for Waymo. Apparently Waymo’s problem was that it couldn’t prove Uber actually received or did anything with the stolen files.

This is common. There are many trade secrets cases where the key employee is caught doing sneaky underhanded things he shouldn’t have done, but where it’s not clear whether those bad things actually caused damage to the employer.

My Witness Preparation Jam Sesh

That leads to my little lesson on witness preparation. Uber’s key trial theme was that it never received and used the alleged trade secrets. Specifically, Uber argued that the 14,000 files never got transferred to Uber. So, when Uber’s lawyer had Waymo’s expert witness on the stand, he zeroed in on that gap in Waymo’s evidence:

Screen Shot 2018-02-10 at 2.58.03 PM

This is a good example of using cross-examination to make your argument. Uber’s lawyer is effectively standing before the jury and saying “ladies and gentlemen, there is no evidence the 14,000 files taken by Mr. Levandowski were ever transferred to Uber.” He’s just doing it in the form of a question to Waymo’s witness.

You can bet that Uber’s lawyer already knew the answer was no (probably from taking the witness’s deposition). So it was a good way to emphasize Uber’s key theme.

But of course, the question was a little misleading. This witness never examined Uber’s computers (assuming he was being truthful). That wasn’t his role. The fact that this witness didn’t find any evidence that the files got to Uber’s computers didn’t really mean a lot.

Still, I like the question. Part of the point of cross examination is to emphasize the points the witness has to concede that help your client’s case.

I also like the answer (at least on paper—it’s harder to say how it came off in person). Crain admitted the answer was no but got his little counter-jabs in at the same time. And that’s usually a good way to answer this kind of question, if you don’t take it too far.

Three Ways to Answer Argumentative Questions

There are basically three ways to answer this kind of argumentative question:

(1) The Just Answer the Question approach

(2) The Dog With a Bone approach

(3) The You Get to Argue Once approach

The first two approaches have some merit, but overall I like the third. Let’s break these down.

Just Answer the Question

The Just Answer the Question approach is just like it sounds. Let’s say the question is “did you take your employer’s customer list when you left?” If the answer is yes, then the witness just answers, “Yes.”

There are two main advantages to this approach. First, it is simple and easy to remember. As I explained in my post What the Ken Starr Interview Can Teach Lawyers About Witness Preparation—and Golf, a lot of witness preparation advice, even from professionals, is too complicated. It’s like telling a golfer to think about a dozen different things when swinging the club. Most witnesses are just not skilled enough to follow so many tips, especially under stress. So, there is some advantage to the simplicity of Just Answer the Question.

The second advantage of just answering the question is that the witness avoids looking evasive, arrogant, or overly defensive. That’s obvious. To avoid this risk, lawyers will sometimes coach the witness just to answer the question and not to throw in their counter-argument. “Save that point,” the lawyer will tell the witness, “and I’ll bring it up on re-direct.”

But there is a disadvantage to this approach. It makes it too easy for the questioning lawyer to get on a roll. Remember, what the cross-examining lawyer is really doing is making her argument in the form of questions to an adverse witness. If all the witness does is play along, he’s making it too easy. Maybe the witness will get a chance to bring up the point on re-direct, but the moment has passed. The damage has been done.

So there is something to be said for taking a more argumentative approach. When asked “did you take the customer list,” you can say “yes, but I never used it or gave it my new employer.”

Just don’t take this too far.

Dog With a Bone

For example, I worked on a case involving a real estate deal gone bad. Our client was seeking millions in lost profits damages resulting from another real estate developer effectively “stealing” the deal. The defense lawyer’s key theme was that his client couldn’t steal any deal because the deal hadn’t been finalized.

That led to the defense lawyer asking the plaintiff a series of questions that looked kind of like this:

Screen Shot 2018-02-10 at 5.55.59 PM

You can see the problem here. While the witness does a good job of making his point, he takes it too far. This makes him look stubborn and defensive. The jury may start thinking, “this guy seems really difficult, maybe he never would have gotten approval from the City.”

That leads me to the You Get to Argue Once approach.

You Get to Argue Once

This is a middle ground. When the opposing lawyer asks an argumentative question that could give the jury a misleading impression, the witness makes the point he wants to make—but only once. If pressed after that, he just answers the question.

In the real estate case, it would go something like this in the courtroom:

Screen Shot 2018-02-10 at 6.30.16 PM

Point made, but not overdone. And this is pretty similar to what Waymo’s witness did when asked if he found any evidence the 14,000 files were transferred to Uber’s computers.

Different Strokes for Different Folks

In general, I think the You Get to Argue Once approach is superior to the Just Answer the Question approach, and it is certainly better than the overly stubborn approach.

But of course, like everything in the law, it depends.

It depends in part on the personality of the witness. You tend to get two types: Nervous Ned and Alpha Dog.

Everybody gets a little nervous about testifying under oath, but Nervous Ned gets really nervous. This type just wants it all to be over as soon as possible. If just answering the question will end the ordeal faster, then this type is fine with just answering the question.

Alpha Dog is almost the opposite. This kind of witness relishes going toe-to-toe with the opposing lawyer. The witness can’t wait to unleash the counter-arguments when asked the tough questions. You know the type. Often this kind of witness is a CEO, executive, or self-made entrepreneur. And—let’s just be real about it—this type tends to be a certain gender.

If you’re the lawyer, you’ve got to coach Nervous Ned to stick up for himself a little more, and coach Alpha Dog to dial it down a notch or two. For the first type, the You Get to Argue Once approach means arguing a little more (unless that’s just too difficult, and then you may have to stick with baby steps and Just Answer the Question). For the second type, it means arguing less. In either case, you have to adjust for the personality.

And in both cases, the cardinal rules remain the same: listen carefully to the question, and always tell the truth.

Even if that means admitting you took the 14,000 files.

___________________________________________________________________

IMG_4571
Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. He has never used Uber, but he has Googled stuff before.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

 

Trade Secrets 101 – What Texas Businesses and Lawyers Need to Know

Trade Secrets 101 – What Texas Businesses and Lawyers Need to Know

I was listening to Huey Lewis in my garage recently and started singing to myself, I Want a New Goal.

See, I often write about issues of trade secrets law that come up in new cases or that I find interesting, but I got to thinking that people who don’t regularly deal with trade secrets litigation might just want to know the basics. So, I made an ambitious goal for myself: write a memo that talks, right down to earth, in language everyone can easily understand, about the basics of trade secrets law.

Easy, right? But here’s the catch: it has to be 5,000 words or less.[1]

After accomplishing this goal, I wondered if anyone would really care about my memo. But then the drumbeat started. I kept seeing tweets about “Release the Memo,” and then even the President weighed in.

After careful consideration, I have decided to de-classify and release my memo: “Trade Secrets 101” – Texas Trade Secrets Law in 5,000 Words or Less.

Please let me know what you think of it. Did I leave out something important? If so, what would you delete to make room for what I left out? Is it too technical for non-lawyers? Too superficial for practicing lawyers? I want to know.

And here is a little background to the memo, to give you some context.

Is trade secrets law hard to understand? 

Let’s back up and look at trade secrets law in general. Is it hard to understand?

Not especially. The good news is that trade secrets law is fairly intuitive, at least compared to other areas of intellectual property law.

For example, take the question “can a plaintiff claim trade secret protection for information that it did not keep secret?” If a company publicizes information, you wouldn’t think it can claim the information is a trade secret. On the other hand, you wouldn’t think the mere fact that confidential information escaped from the company would be sufficient to destroy the information’s trade secret status.

Your intuitions on this issue would be correct. The company is required to show that it took “reasonable measures”—not perfect measures—to maintain the confidentiality of the alleged trade secrets. That’s just common sense.

The “bad” news—at least for business people who want certainty—is that trade secrets issues tend to be fact-intensive, making it difficult to give categorical answers to client questions.

Where do the statutes define “hard” and “soft” trade secrets?

They don’t.  This is terminology I made up (although I’m sure I wasn’t the first) to help make sense of a basic factual distinction in trade secret cases.

“Hard” trade secrets are the kinds of things you traditionally think of as trade secrets.  The paradigm of hard trade secrets is the “secret sauce,” e.g. the formula for Coke, the Colonel’s secret herbs and spices, the recipe for the creamy jalapeño dip at Chuy’s, etc.

Secret technology is another obvious type of hard trade secret.  If you come up with a new secret technology that allows you to drill an oil well sideways, for example, that’s obviously a trade secret. If competitors can’t readily figure out your technology, it gives you a competitive advantage.

Secret business plans—when truly valuable to know—are the third thing I think of as a “hard” trade secret.  Let’s say you’re buying up land in the middle of nowhere in Florida because you’re secretly planning to build a massive theme park.  That would obviously be an extremely valuable thing for a real estate speculator to know.

“Soft” trade secrets, on the other hand, are the kind of confidential information that almost every business has: things like customer lists, vendor lists, pricing information, and financial information about the company.

I don’t mean to suggest that soft trade secrets aren’t really trade secrets.  If the information meets the statutory definition (discussed in the memo), it’s a trade secret, regardless of whether it is hard or soft.

But from both a practitioner’s and a public policy perspective, we should be a little more skeptical about soft trade secrets.  The company is almost always going to claim that its customer lists and prices are trade secrets.  Whether you’re the plaintiff’s lawyer, the defense lawyer, or the judge, you should always ask “why?”

More than a feeling, that’s the Power of Law.

___________________________________________________________________

IMG_4571
Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] I realize that “5,000 words or fewer” might be more grammatically correct, but it just doesn’t have the right ring to it.