Trade secret misappropriation is a significant threat to every technology company. Battery companies are no exception.
For example, in September of 2019 Celgard sued Shenzhen Senior Technology Material Co. in California Federal Court. Celgard’s Complaint alleges one of its top scientists misappropriated Celgard’s proprietary separator technology and then transferred that information to the Defendant, SSTM Co. SSTM then used Celgard’s separator information to construct a separator manufacturing facility in China. (Case No. 5:19-cv-05784).
In November of 2019, Chinese scientist Hongjin Tan pleaded guilty to stealing, possessing and transmitting battery-related trade secrets owned by his former employer, Phillips 66.
The original Criminal Complaint alleged Phillips 66 had derived between US$1.4B and $1.8B in revenue from sales of its battery technology. Dr Tan was sentenced to two years imprisonment and ordered to pay a US$150,000 fine. (Case No. 4:19-CR-00009–1).
The effects of a trade secret dispute are devastating to all parties involved. A party found to have misappropriated, possessed, transferred or used a company’s trade secret information can be subject to both civil and criminal penalties.
The economic harm suffered by the victim of a trade secret theft is significant. Most every case includes loss of funds invested in R&D, attorney’s fees, lost opportunity as internal resources devote time to resolving the dispute and lost goodwill.
Of course, parties on the receiving side of a trade secret misappropriation claim also suffer many of the same losses.
In my experience, I’ve noticed two common issues in trade secret disputes. First, most trade secret thefts are committed by departing employees, consultants and contractors. Second, companies almost universally fail to identify and adequately protect their trade secrets. I’ll discuss these issues below.
What is a ‘trade secret’?
Trade secrets are a special category of property rights falling under the umbrella of “intellectual property.” Patents, trademarks and copyrights also fall under the intellectual property umbrella.
A trade secret is not a tangible thing. Instead, it’s a set of enforcement rights granted by the government to owners of trade secret information. However, not all information qualifies as a “trade secret.” Governments define what information qualifies as a trade secret.
Generally, governments define trade secrets as information that meets two criteria:
- The information is not public and the owner of the information has taken reasonable efforts to keep the information secret
- The information has value to the owner owing to the fact the information is not public (i.e. gives the owner a competitive advantage).
Note there is a proactive component to this definition. The information owner must take reasonable efforts to proactively prevent theft before the theft occurs (I’ll talk a bit about how to do this below).
This brings me to the first major mistake most companies make around their proprietary information: being proactive. It is this proactive component that causes the most trouble for companies seeking to assert their trade secret rights. If a company fails to proactively prevent theft, in most countries such as the U.S., the owner’s rights are lost.
Governmental rights granted to owners of a trade secret
To successfully assert a lawsuit against an accused thief, there are generally three obstacles:
- the stolen information must fall within the definition of information entitled to trade secret protection
- a theft must have occurred
- harm to the trade secret owner must be shown
In some counties, only the criminal enforcement branch within the government may bring an action against an alleged thief. When a government brings an action against an alleged trade secret thief, it will usually seek imprisonment and payment of a fine by anyone involved in the theft.
Under U.S. Federal law, if an action is brought by the government, trade secret thieves can be sentenced to up to 10 years in jail and ordered to pay a fine of not more than the greater of $5 million or three-times actual damages. The potential jail sentence jumps to 15 years if the theft was intended to benefit a foreign government. The fine jumps to $10 million if the thief was a company and stole the information for the benefit of a foreign government.
While these provisions do deter and punish trade secret theft, they are unfortunately reactive in measure as the action is brought after the theft and affords the trade secret owner little or no recovery for its loss.
In counties such as the US, the trade secret owner may also bring their own separate civil lawsuit. Under U.S. Federal law, a trade secret owner can seek several remedies against an alleged thief before and after the theft.
For example, a U.S. Federal trade secret lawsuit could potentially cost a trade secret owner hundreds of thousands of dollars (or more) in attorney’s fees. U.S. Federal trade secret law allows a trade secret owner to recover attorney’s fees from the thief. The ability to recover attorney’s fees in a trade secret lawsuit can be a significant tactical and financial advantage to the owner.
In addition, U.S. Federal trade secret law also allows trade secret owners money damages which can double if the theft was willful and malicious.
However, U.S. Federal trade secret law also has a proactive component. As I noted above, most trade secret thefts are committed by departing employees, consultants and contractors. Under U.S. Federal trade secret law, trade secret owners must provide an immunity notice to employees, contractors and consultants before the theft occurs.
If the trade secret owner fails to provide this immunity notice, then then the trade secret owner will lose some of those remedies if the theft is by an employee, contractor or consultant. One right that can be lost is the ability to recover attorney’s fees.
This brings me to the second major mistake most companies make around their proprietary information: failing to proactively comply with the immunity notice required by U.S. Federal trade secret law.
How can trade secret owners avoid these two mistakes?
As noted above, trade secret owners make two common mistakes. First, many trade secret owners fail to proactively identify and make reasonable efforts to keep certain information secret.
Here a “trade secret audit” is in order. During this exercise, a company will go through what information it possesses that is not public and has value because its competitors do not have access to the information. The audit will also look at how the information is being handled. There’s a whole process to these audits. Having your intellectual property attorney participate is critical.
- A security component that outlines how trade secret information will be stored, handled, transmitted, etc. (including who will have access)
- An education component
It’s not enough to simply have anyone who handles trade secret information sign a contract. Everyone needs to understand what can and cannot be done with the information.
A key part of the education component is the company’s onboarding as well as the offboarding process. While I could devote an entire article just to the onboarding process, I will note the end goal should be to ensure the company is not tainted by any third-party information. As part of the hiring process, many companies will perform patent searches to better understand what technology areas the candidate previously worked in. I’ve had candidate employees omit this information during the interview process.
Second, trade secret owners almost always fail to comply with the immunity notice requirements under U.S. Federal trade secret law, which removes several very important remedies from the trade secret owner’s available set of remedies.
Here a review of a company’s template agreements by counsel is in order. This may require a company to go back and make amendments to existing agreements (e.g. employment agreements). It’s amazing how many companies have failed to understand and comply with this relatively simple requirement.
Summary
Developing a new technology requires a company to expend large sums of money. Nothing is worse than investing large sums of inventor time and money to technology development, only to find the company has no enforceable trade secret rights. It’s critical to engage licensed counsel to help decide whether to seek patent protection or maintain a technology as a trade secret. If trade secret protection is the path taken, companies must then ensure it is undertaking whatever policies and procedures are needed to maintain their trade secret rights.
