Huawei Indictment and Motorola Win

by Eve Chowdhury '20

On February 12, 2020, a superseding indictment was returned yesterday in the U.S. Eastern District Court of New York, charging defendants Huawei Technologies (Huawei), the world’s largest telecommunications equipment manufacturer, Futurewei Technologies and Skycom Tech, two of Huawei's U.S. subsidiaries, and Wanzhou Meng (Meng), a board director, with conspiracy to violate the Racketeer Influenced and Corrupt Organizations Act (RICO).

The 16-count superseding indictment also adds a charge of conspiracy to steal trade secrets stemming from Huawei’s alleged long-running practice of using fraud and deception to misappropriate sophisticated technology from six U.S. technology companies, in an effort to grow and operate Huawei’s business. The misappropriated intellectual property included trade secret information and copyrighted works, such as source code and user manuals for internet routers, antenna technology and robot testing technology.

The alleged misappropriation included, among others: (1) the defendants entering into confidentiality agreements with the owners of the intellectual property and then violating the terms of the agreements by misappropriating the intellectual property for the defendants’ own commercial use, (2) recruiting employees of other companies and directing them to misappropriate their former employers’ intellectual property, and (3) using proxies such as professors of research institutions to obtain and provide the technology to the defendants. Further, Huawei allegedly launched a company-wide bonus program that rewarded employees with monetary gain when the employees obtained confidential information from Huawai's competitors.

The Department of Justice deems Huawei’s efforts to steal trade secrets and other sophisticated U.S. technology to be successful. Through the above methods, the defendants obtained private intellectual property relating to internet router source code, cellular antenna technology, and robotics, and were able to drastically cut its research and development costs and associated delays, giving the company a significant and unfair competitive advantage.

This investigation is ongoing. The charges in the superseding indictment are allegations. The defendants are presumed innocent unless and until proven guilty beyond a reasonable doubt in a court of law. This above information was primarily based upon the Press Release the Department of Justice published on February 13, 2020.

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Of note, this is not the first time in recent years of a U.S.-based entity charging a China-based telecommunications entity of misusing proprietary information.

U.S.-giant Motorola Solutions, a communications and telecommunications equipment company, has been suing Chinese giant Hytera Communications, a manufacturer of radio transceivers and radio systems, in multiple suits across U.S. federal courts and worldwide for multiple counts of intellectual property theft since 2017.

On March 14, 2017, Motorola sued Hytera in Chicago federal court in two separate suits, one for patent infringement (1:17-cv-01972) and one for trade secret misappropriation (1:17-cv-01973).

In the trade secret suit, Motorola accused Hytera of misappropriating Motorola's two-way radio technology systems trade secrets under the DTSA and Illinois state law. Hytera responded that, among other defenses, Motorola does not have a trade secret or such was abandoned. After being awarded a $764 million jury verdict against Hytera, Motorola is currently in the process of obtaining a global temporary restraining order against Hytera. Going forward, this means that the Defend Trade Secrets Act may apply to acts of trade secret misappropriation that occur outside the U.S.

Roundup of Seven States That Have Passed Statutes in 2019 Limiting Enforceability of Non-Compete Agreements – And a Note on the Proposed Federal “Workforce Mobility Act”

by Amanda Hartman '20

Over the course of 2019, states have enacted legislation limiting the enforceability of non-compete agreements in order to keep employers in check from overreaching and to avoid a chilling effect on employee movement. Notably, states such as Washington have focused on discouraging employers from bringing lawsuits merely to control the movement and activity of employees and not for the purposes of protecting legitimate trade secrets and business interests. Read on for a roundup of 2019 state legislative activity in the realm of non-competition law.

Maine (Act to Promote Keeping Workers in Maine [the “Act”]): The Act prohibits no-poach clauses in agreements between employers and renders unenforceable non-compete agreements with low-wage employees; the Act authorizes the Department of Labor to assess civil fines of “not less than $5,000” against employers who violate either of these provisions. The Act provides that non-compete agreements are enforceable only if they are reasonable and necessary to protect an employer’s trade secrets, confidential information, or goodwill, and that an employer must demonstrate that these interests cannot be protected through the use of a non-solicitation or non-disclosure agreement. Further, employers must make certain disclosures to interviewees that acceptance of a non-compete agreement will be required prior to making an offer of employment, and employees or interviewees must have at least three business days to review a copy of the non-compete agreement before they are required to sign it. Both of these requirements are punishable by civil fines subject to the minimum threshold of $5,000 if violated. Importantly, the Act only governs non-compete agreements entered into or renewed after September 18, 2019.

Maryland (Senate Bill 328 [the “Bill”]): The Bill renders non-compete restrictions unenforceable against low-wage employees who earn less than or equal to $15 per hour or $31,200 per year, and invalidates contracts signed before October 1, 2019.

New Hampshire (Act Relative to Noncompete Agreements for Low-Wage Employees [the “Act”]): Effective September 8, 2019, the Act renders non-compete restrictions unenforceable against low-wage employees who earn less than 200% of the federal minimum wage ($14.50 per hour as of 2019). Non-compete restrictions are defined as any limitation on an employee to work for another employer for (a) a specific period of time, (b) in a specific geographic area, or (c) in a specific industry.

Oregon (House Bill 2992 [the “Bill”]): The Bill, which applies only to non-compete agreements entered into on or after January 1, 2020, requires employers to provide departing employees with a signed copy of their non-compete agreement within thirty days after the employees’ date of termination.

Rhode Island (Rhode Island Noncompetition Act [the “Act”]): The Act renders non-compete restrictions unenforceable against low-wage employees who earn up to $31,225 per year excluding overtime, nonexempt employees (as classified under the Fair Labor Standards Act), undergraduate or graduate student interns and workers (whether paid or unpaid), and minors. Significantly, the Act does not govern client and vendor solicitation restrictions and non-disclosure or confidentiality agreements, as well as other types of agreements such as forfeiture agreements and invention assignment agreements. The Act applies to all non-compete agreements, even if signed before January 15, 2020, with the exception of judicially imposed noncompetition restrictions.

Utah (Amended version of Utah Code Annotated 34-51-101 et seq. [the “Bill”]): Utah’s 2016 legislation limited non-compete agreements entered into on or after May 10, 2016 to a term of one year from the employee’s date of termination. In 2018, Utah further amended this legislation to limit the enforceability of non-compete agreements against employees in the broadcasting industry. Most recently, the legislature modified the statute such that a broadcasting industry non-compete agreement may be enforced as “part of a written contract of reasonable duration, based on industry standards, the position, the broadcasting employee’s experience, geography, and the parties’ unique circumstances.”

Washington (Act Relating to Restraints, Including Noncompetition Covenants, on Persons Engaging in Lawful Professions, Trades or Businesses [the “Act”]): Effective January 1, 2020, the Act renders non-compete restrictions unenforceable against employees earning less than $100,000 and independent contractors earning less than $250,000 per year. Non-competition agreement terms are limited to 18 months and agreements must be disclosed to workers prior to their acceptance of an offer of employment. Employers must provide independent consideration to existing employees in order for any new non-compete agreement to be enforceable. For laid-off employees, employers must pay full base salary throughout the term of the non-compete agreement, minus compensation earned by the employee through other employment. The statute renders unenforceable out-of-state forum selection clauses in non-compete agreements with Washington-based workers, regardless of where the employer is based. The Act applies to all non-compete agreements, even if signed before January 1, 2020, but does not govern client and coworker solicitation restrictions and non-disclosure or confidentiality agreements. Stringent damage provisions provide that violative employers seeking to enforce non-compliant non-compete agreements may be sued by the employee or the Attorney General, and may be ordered to pay the greater of “actual damages or a statutory penalty of five thousand dollars, plus reasonable attorneys’ fees, expenses, and costs incurred in the proceeding.”

Meanwhile, on October 16th, 2019, Senators Chris Murphy (D-Conn.) and Todd Young (R-Ind.) reintroduced the Workforce Mobility Act (the “WMA”), which, if passed, would render all non-compete agreements unenforceable except in the context of the sale of a business or dissolution of a partnership. As Trade Secrets Watch describes it, “the WMA would effectively apply California-like non-competition law across the entire nation and would make most states’ non-competition laws largely superfluous.” Regardless of whether this bill passes, it is clear that state and federal governments are concerned with limiting the reach of non-compete agreements and wary of the effects of leaving such agreements unchecked.

Employer Granted Injunctive Relief After Accessing Former Employee's Facebook

At issue here is whether a former employer that suspects trade secrets theft has taken place can log in to the former employee’s personal social media account to search for the potentially incriminating evidence. While the initial reaction for many would be a resounding “no”, in Scherer Design Group v. Ahead Engineering LLC, the Third Circuit held that the unclean hands doctrine did not bar an employer’s claims against its former employee for trade secret misappropriation even though the employer had previously installed and used software that allowed for the monitoring prior to the termination of employment.
It must be decided how far an employer can go to protect their potentially misappropriated trade secret and where the line may be drawn. Here, Chad Schwartz, a senior direction of engineering at Scherer Design Group, left the company following a failed plan to obtain partial ownership. Schwartz made it clear that if he was not made an owner, he would start his own competing company. Scherer requested that Schwartz sign a noncompete agreement to which Schwartz declined and left to begin his own companies – Ahead Engineering LLC and Far Field Telecom LLC – and hired others from Scherer to join him.
After his, and his co-workers including David Hernandez, departure from Scherer, a network administrator from his former employer inspected Hernandez’s company laptop where he was able to gain access to Hernandez’s Facebook account that had allegedly been left signed-in. While this allegation is debated, it is undisputed that Scherer installed a monitoring device on Hernandez’s company-issued laptop and was able to uncover alleged plans to steal client information and intellectual property to bring to their next company.
Scherer brought suit against the former employees claiming trade secret misappropriation under state and federal law. Defendants argued that injunctive relief was inappropriate because of the doctrine of unclean hands and was a violation of Hernandez’s privacy.
The U.S. District Court for the District of New Jersey granted the preliminary injunction against the defendants which prevented them from contacting Scherer’s clients and the Third Circuit agreed. In order to invoke the unclean hands doctrine, the party must establish that the opposing party committed an “unconscionable act”, and the act is related to the claim in which equitable relief is sought. The unclean hands doctrine was one of many factors that the court must consider when deciding on injunctive relief. The Third Circuit decided “on balance” that they would not be allowing for the continued misappropriation.
In Judge Ambro’s dissent, he wrote that this was a clear violation of New Jersey’s privacy law, arguing that the company “went on an external fishing expedition rather than merely conducting a review of activity on its own physical assets.” This strong dissent further called into question the completeness of the analysis by the majority of the unclean hands doctrine.

Qualcomm Quarrels with Apple Over Trade Secret Allegations

Apple is no stranger to legal disputes involving their innovative products. Recently, Apple was the subject of controversy as it was alleged to have stolen trade secrets from Qualcomm and shared them with Intel Corporation after Qualcomm allowed Apple access to its source code and tools for LTE modem chipsets. Qualcomm is claiming Apple misappropriated their trade secrets in an attempt to preserve the quality of the chips Apple purchases, but change the supplier of the chips from Qualcomm to Intel Corporation for their new iPhones.

A complaint was initially filed in November by Qualcomm claiming that Apple breached a software-licensing contract by sharing confidential details regarding Qualcomm’s chips with engineers at Intel Corporation. A motion to amend the complaint filed on Monday accuses Apple of stealing trade secrets “for the purpose of improving lower-quality modem chipsets, including those manufactured by Intel, a competitor of Qualcomm, to render such chipsets useable in Apple devices with the ultimate goal of diverting Qualcomm’s Apple-based business.”

While the lawsuit is scheduled to be heard in April 2019, the proposal of an amended complaint might push back the anticipated date.

See link to Qualcomm complaint filed yesterday in California Superior Court below.
Qualcomm Complaint

TSI-Symposim-FEB15-2017

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Watch the Trade Secrets Institute Symposium – Working Knowledge: Managing Employee Trade Secrets

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Aleynikov Conviction Tossed, Again

On Monday July 6, 2015 Judge Conviser of the New York State Supreme Court acquitted Sergey Aleynikov. This marks the second acquittal Aleynikov has received since his initial arrest in July 2009. It was then that Aleynikov was accused of stealing software code that could be used to unfairly manipulate stock prices. Aleynikov was convicted of, and sentenced to eight years in prison for, violating the National Stolen Property Act and the Economic Espionage Act. Aleynikov had only spent one year in a federal prison at the time that the Second Circuit Court of Appeals overturned his conviction.

The appellate court ruled that federal prosecutors misapplied the corporate espionage laws. In their opinion, the court highlighted that the Economic Espionage Act contained two operative provisions. The first, 18 U.S.C. §1831(a), which broadly expresses that “[w]hoever, intending or knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent, knowingly … without authorization … downloads, uploads, … transmits, …. or conveys a trade secret” is guilty of a federal offense, and may be imprisoned for up to 15 years. See 18 U.S.C. §1831(a).

However, Aleynikov was charged with violating a second provision, 18 U.S.C. §1832(a) which imposes a limitation that “[w]hoever, with intent to convert a trade secret, that is related to or included in a product that is placed in interstate or foreign commerce, to the economic benefit of anyone other than the owner…” 18 U.S.C. §1832(a) (emphasis added). The court held that Goldman’s HFT system was neither ‘produced for’ nor ‘placed in’ interstate or foreign commerce. Goldman had no intention of selling its HFT system of licensing it to anyone. U.S. v. Aleynikov 676 F.3d 71, 81 (2d. Cir. 2012)(citing United States v. Aleynikov, 737 F.Supp. 2d 173, 175 (S.D.N.Y 2010)). The court further stated that Goldman went to great lengths to maintain the secrecy of the system and that it was not decided to enter or pass in commerce. Therefore, the theft of the source code relating to the system was not an offense under the Economic Espionage Act. Aleynikov 676 F.3d at 81.

Shortly after his release from federal prison, Aleynikov was arrested again and charged in New York State court. In May 2015, a jury convicted Aleynikov. However in his opinion, Judge Conviser stated that in order to find Aleynikov guilty under the charges the prosecution needed to establish that Aleynikov made a “tangible reproduction” of Goldman’s source code for its high-frequency trading business, and that he intended to claim most of the code’s economic value for himself. The prosecution failed to prove either and the jury verdict had to be overturned.

This case has highlighted just how far the legislature is behind technology. Laws have not been updated to keep up with advances in technology. After Aleynikov’s initial acquittal Congress amended the Economic Espionage Act of 1996. Judge Conviser implored that District Attorney Vance make a similar appeal to New York legislators in regard to the state law under which Aleynikov was charged.

On the flip side, it has been raised that this trial from the beginning has been a “civil dispute masquerading as a criminal case,” and that regardless of the antiquated statutes under which Aleynikov was charged this case should simply not be criminal. However, Goldman Sachs may not like their position on a civil claim for trade secrets misappropriation. It is not clear that the source code was even a trade secret. Goldman admitted that part of the code was based on open source code, and therefore was a conglomeration of code based on open source information, some proprietary information, and other sources in the public domain.

The case is People v. Aleynikov, New York State Supreme Court, New York County, No. 60353/2012

Additional information on United States v. Aleynikov can be found here

Vanity Fair's 2013 story profiling Aleynikov can be found here

Surviving A Motion to Dismiss in Trade Secret Cases

The Federal Circuit held that the dismissal of a trade secrets complaint for failure to state a justiciable claim was not warranted solely because the misconduct allegedly involved a number of wrongdoers and began many years before the complaint was filed. Remanded for further proceedings, ABB Turbo Systems, AG v. TurboUSA, Inc., Case No. 2014-1356 (Fed. Cir., Dec. 17, 2014) ABB’s pleading alleged various actions the company took to protect its trade secrets.

The trial court inferred that ABB’s efforts to protect secrecy probably would be deemed insufficient but the federal circuit held that only “reasonable” care is required, and “the complaint stage is not well-suited to determining what precautions are reasonable in a given context.”

Seeking the best chance for surviving a Rule 12(b)(6) motion, a complaint which alleges the relevant facts as the pleader understands them, and which aligns those factual allegations with the operative legal principles as ABB seemingly did in this case, is recommended. On appeal, ABB’s pleading was found to satisfy those minimum standards. Going forward, the parties will have an opportunity to perform some discovery before the trial court decides whether further litigation would be futile. Stay tuned for developments.

Rethinking Patents vs. Secrecy

by Paul Fraulo

Recently there have been many articles discussing the choice between protecting technology as a trade secret as opposed to seeking a patent. While patent law arguably provides stronger protection for an invention, one of the major advantages of protecting technology as a Trade Secret is that it does not have to meet the strict requirements of patentability that companies face in the patent process, such as novelty and non-obviousness. Recently though, the patent process has become even more tricky, and the advantages of safekeeping information as a trade secret have grown. The legal industry has devoted a great deal of attention to three things in particular as they pertain to the relationship between patents and trade secrets, 1) the America Invents Act (AIA), 2) the ruling in CLS v. Alice, and 3) the increased likelihood of a federal cause of action for trade secret misappropriation. Gradually, as lawyers and businesses begin rethinking their approach to protecting their technology, trade secrets are being recognized as a more viable option in many situations.

The once rote calculus of deciding whether to file a patent or protect technology as a trade secret first started to evolve with the America Invents Act (AIA) coming into effect in late 2012. Before the AIA, protecting your tech as a trade secret meant you ran the risk of somebody else obtaining a patent that covers your technology. While there was always a defense of prior use, the AIA expanded the defense to cover even secret prior use, making secrecy a somewhat more attractive option. The impact of AIA and Alice are both discussed in this article by law firm Robins, Kaplan, Miller, and Ciresi (RKMC).

The Federal Circuit's decision in Alice made it substantially more difficult to obtain a software patent. RKMC explains that although software patents may still be obtainable, Alice made it clear that an inventive concept beyond the computer implementation of an otherwise abstract idea is not enough to avoid a 101 rejection. Just how much more is needed, is as yet difficult to say, and thus this increased uncertainty has scared off would-be patent applicants who are instead opting to protect their software as a trade secret. At the symposium TSI hosted last month in October 2014, this concern was solidified as an important consideration by one of the panelists, Jeffrey Schwab, who explained that his advice to software companies is far more pro-secrecy now than ever before in the wake of Alice.

Most recently, there has been a stronger push to create a federal cause of action in Trade Secret misappropriation. While the impact is somewhat uncertain, it is clear that a congressional act with no pre-emption creating a federal cause of action can only increase a company's options, and therefore strengthen the protection of trade secrets. Dennis Crouch explains how this shift in the law may impact not just how companies choose to protect their intellectual property, but also how companies opting out of patent protection means less disclosure of technology to the public. Crouch's article reviewed a study by three economists which purports to show that this decrease in disclosure, also decreases the liquidity of companies that are now opting to keep their technology secret. The link between disclosure and liquidity here results from asymmetric information between the company and the public. To put it simply, a person is less likely to want to trade stock in companies that are not disclosing their technology to the public, because they cannot assess the value of the company without knowing what technology they have.

Interestingly, Professor Christopher Seaman also recognized the potential impact decreased disclosure may have in a more pro-secrecy environment. In his article in PatentlyO assessing the impact of federalizing trade secrecy, Professor Seaman explains that decreased disclosure can hurt innovation, because in a patent-friendly regime disclosure is "used by others to improve upon the invention and to practice it after the patent’s expiration." Professor Seaman discussed this issue along with various other aspects of the debate over federalizing trade secret law at TSI's symposium last month, reviewed here by Alexander Goldman.

Ongoing Trade Secret Litigation - Mattel and MGA

Months ago, we reported on the ongoing saga between Mattel and MGA. Now, a California state court judge tentatively rejected Mattel Inc.'s bid to toss MGA Entertainment Inc.'s $1 billion suit alleging Mattel stole Bratz doll trade secrets, claiming the 2011 dismissal of MGA's racketeering claims in federal court does not preclude the current suit at issue. We will keep an eye on this developing matter.

Brooklyn Law School Trade Secrets Symposium

Part 1: Proposed Federal Trade Secrets Law
by Alexander Goldman '14

Congress is considering a Federal trade secrets law to solve a very specific problem: the possibility that an employee of a U.S. company will be at an airport with a thumb drive full of trade secrets before the company can act. This first session of the Trade Secrets Symposium at Brooklyn Law School was moderated by Trade Secrets Fellow Paul Fraulo '15.

Ted Schroeder, Chief Counselor to U.S. Senator Coons (D-DE), told the symposium to take a close look at the case of Gore, Inc., the company that makes Gore-Tex. Kwang Seoung Jeon did not have one thumb drive full of company documents — he had three of them when he was arrested — and a one-way ticket to his native South Korea.

But Professor Christopher Seaman of the Washington and Lee University School of Law said that federalizing trade secret law will not necessarily simplify trade secrets litigation because the federal law, as currently written, explicitly does not preempt state law. Seaman said that the provision is vital in order to avoid the creation of a body of federal common law separate from the states, a situation that existed before the famous 1938 Supreme Court case Erie Railroad Co. v. Tompkins. Seaman added that experimentation at the state level is a strength of the U.S. legal system, not a weakness.

Schroeder replied that antitrust and consumer protection are both under a system of interlocking state and federal legal systems.

Ira Levy '88, partner at Goodwin Procter LLP, suggested that preemption might have been sacrificed in order to ensure the bill passed. He added that practitioners need courts to act quickly because "the value of a trade secret is lost the moment that it is no longer a secret." He suggested that a federal court might act faster because of a provision in the proposed federal law that provides an ex parte process for the seizure of trade secrets.

Seaman asked why the federal law needs the ex parte process. Schroeder replied that, for the most valuable trade secrets, the ex parte process is critical.

During the question and answer period, Professor David S. Levine of Elon University School of Law (currently visiting researcher at Princeton), warned that the ex parte process would have substantial chilling effects. "Google can defend itself, but can a startup," he asked. "What about the cloud? Can you seize a Drop Box or a Google Drive?"

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