Crime Does Not Pay

You have to feel a little sorry for Yihao Pu. Pu was a finance engineer who worked for two companies with proprietary systems for executing high frequency stock trading (HFT.)  Pu illegally downloaded his employers’ software, but instead of selling it to a competitor, he decided to use it to further his own investments, and promptly managed to lose $40,000 of his own money.

Somehow this criminal mastermind got caught, and Pu faced federal indictments for wire fraud, transmission of trade secrets, unauthorized access of a protected computer and obstruction of justice. Pu pled guilty to possession and transmission of trade secrets.

Pu’s Sentencing

At sentencing, Pu argued that since he hadn’t gained anything (remember he lost $40,000) and his employers hadn’t suffered any actual loss, he should not have to pay restitution. The district court disagreed, finding that Pu’s employers had spent more than $12 million developing their respective HFT algorithms, and this represented the “intended loss amount.”  Using this intended loss amount, the trial court applied the sentencing guidelines and sentenced Pu to three years in prison, three years of probation and ordered him to pay $759,649.55 in restitution.

Pu’s Appeal

Pu appealed the restitution order, and his luck must be turning because the 7^th Circuit agreed.  The 7^th Circuit held the district court erred in finding that “it was more likely than not that Pu intended to cause a loss to the victims that equaled the cost of development [$12 million].”  The 7^th Circuit noted that there was no evidence that Pu had some grander scheme other than his own inept attempts to use the HFT system for his own trading.  The 7^th Circuit criticized the district court for failing to consider Pu’s argument that he only stole the outputs and not the source code and thus “the intended loss should be zero, or at most $2,000.”

On appeal, Pu further argued that the district court mistakenly believed that because Pu had pled guilty, it was required to find intended loss and impose restitution. The 7^th Circuit agreed that “the guidelines do not require a loss calculation greater than zero,” and left it to the district court to determine the proper restitution award on remand.

Finally, Pu objected that the district court appears to have ordered restitution based on his employers’ conclusory summary of their costs investigating Pu’s misdeeds, which (not coincidentally) totaled $759,649.55. The 7^th Circuit agreed, noting that “the district court is required to base its restitution order, the extent practicable, on a complete accounting of the loss” and that Pu’s employer’s conclusory summary was not sufficient.

This is a short update to a previous post, Zillow Case Shows Danger of Unprotected Trade Secrets During Business Negotiations, posted on May 8, 2015.

In that post, we described a trade secrets lawsuit filed against Zillow by a competing online real estate information company, Top Agent Network.  Zillow prevailed in an early skirmish in that case when the District Court issued an order dismissing Top Agent’s core trade secrets claim.  The court held that Top Agent failed to allege sufficient detail showing that its alleged trade secrets were, in fact, trade secrets instead of mere non-protectable ideas, features, and functions of design and operation.

But the dismissal order allowed Top Agent leave to amend (i.e., to try to state a proper trade secrets claim).  Top Agent amended, and now its trade secrets claim is back.  Score round 2 in this bout to Top Agent.

The amended trade secret claim

In its amended complaint, Top Agent specified its alleged trade secrets in far greater detail.

The amended complaint focuses on slides distributed at a March 12, 2014 meeting between Top Agent and Zillow executives.  Those slides, according to the complaint, included “internal metrics concerning client engagement, market penetration, members’ use of information on [Top Agent’s] private web pages, and the size of its homebuyer secondary market; the frequency with which members in different markets open their emails; the percentage of home sales made by [Top Agent] member agents in three geographic areas and member statistics from those markets; and market research survey results indicating how clients specifically use [Top Agent] in advancing their businesses.”

The amended complaint further alleged that all of the above information was kept confidential (through confidentiality provisions in employment agreements) and had economic value.

Finally, Top Agent alleged Zillow misappropriated its trade secrets by using the aforementioned metrics and market data without Top Agent’s permission, after Zillow assured Top Agent that the information would be kept confidential.

Zillow filed a motion to dismiss Top Agent’s amended complaint.

The District Court’s Order

This time around, the District Court ruled that Top Agent stated a valid claim for trade secret misappropriation.  Whereas Top Agent’s first complaint failed to specify what constituted its trade secrets (with the allegations sounding more like non-protectable ideas, features, and functions), the amended complaint provided the necessary details and focused on protectable metrics and market data.

As to misappropriation, the court acknowledged that Top Agent’s allegations remained “somewhat conclusory,” in that they fell short of “chronicling in precisely what manner such data proved integral to the development of” Zillow’s competing product offerings.  But, the court held, “to impose such a steep hurdle prior to discovery would be inappropriate.”

The court also upheld Top Agent’s claim for breach of oral contract, which alleged that Zillow broke its verbal promise to keep Top Agent’s information confidential.

The court dismissed, without leave to amend, Top Agent’s fraud and unfair competition claims on the grounds that they were superseded by the California Uniform Trade Secrets Act.

Takeaway

The main lesson from this case, as stated in our prior post, remains that companies should be acutely aware of their trade secrets, and should always obtain a written NDA before sharing those secrets.

Top Agent’s failure to properly articulate its trade secrets in its original complaint and its failure to obtain a written NDA turned out to not be fatal to its case, but it forced the case into an early defensive posture, which is never good for a plaintiff.

We’ll continue to monitor this case for developments.

NEWSFLASH-Congress may actually do something.

There is talk of a bipartisan (you read that right, BIPARTISAN) bill to provide redress for trade secret theft in federal courts. Today trade secrets are the poor relations of patent, copyright and trademark, which all enjoy federal protection, but that may soon change.

Trade Secrets Sound Cool, Do I Have One?

A trade secret is confidential/proprietary information that (1) has economic value because it is not generally known and (2) is the subject of reasonable efforts to keep confidential/proprietary. KFC’s 11 herbs and spices, Coca Cola’s formula or perhaps your customer list (assuming you took reasonable steps and the list has economic value) are prime examples of trade secrets. On the other hand, if your competitor can hire a Gen-Xer or Gen-Yer to obtain the same information on Google, it’s not a trade secret.

Current Trade Secret Protection

Trade secret law evolved from the common law, law created over time by judges’ decisions, which was then codified by a group of intellectual property lawyers into the Uniform Trade Secrets Act (the “UTSA”). The UTSA has been adopted, at least in some form, by 48 states. Apparently New York and Massachusetts are holding out for a sweeter deal. For example, in California, a state where you can’t throw a cat without hitting a trade secret, the UTSA begins at section 3426 of the Civil Code. Today, there is no federal cause of action for trade secret theft, and victims are generally required to litigate in state court.

The Proposed Federal Trade Secret Legislation

The proposed federal “Defend Trade Secrets Act” would expand the Economic Espionage Act, set forth in 18 U.S.C. § 1831, to create a federal cause of action for trade secret theft. The Defend Trade Secrets Act generally mirrors existing state law under the UTSA, but the proposed federal law is limited to trade secret theft relating to “a product or service used in, or intended for use in, interstate of foreign commerce.” As with most state trade secret statutes, a victim can seek ex parte injunctions (emergency Court orders preventing the destruction, dissemination or use of alleged trade secrets, requiring the return of such information and, in some instances, prohibiting a former employee with such information from working for a competitor). It also authorizes awards of treble damages and/or attorneys’ fees for willful or malicious misappropriation. Under the proposed Defend Trade Secrets Act, the statute of limitations (deadline for filing a lawsuit) is five years, which is longer than the three-year deadline in California and many of the states that have adopted the UTSA.

Why Should I Care?

If the 48 civilized states have adopted the UTSA and the remedies are similar, why do we need a federal Defend Trade Secrets Act? First, if your trade secrets are stolen and the thief is using them in multiple states, you’ll have any easier time litigating the entire case in one federal court compared to suing in multiple state courts, which may have different rules and standards and might well require you to deploy a platoon of lawyers. Second, federal courts apply federal rules, which in many cases are more efficient than state rules. For instance, in federal court the parties are required to voluntarily exchange key documents and information at the outset of a case. Whereas in state court, parties usually must serve discovery requesting such documents and information and actually obtaining these can be like pulling teeth. Third, in many jurisdictions, federal courts are less impacted than state courts, so litigants are likely to get more attention and get relief sooner. Finally, the Defense of Trade Secrets Act may provide a good reason to ignore the idiom “don’t make a federal case out of it.” If you’re looking to protect your trade secrets, you might prefer to drag the thief in front of a federal judge, appointed for life and approved by the Senate, whom the thief might find little more intimidating than facing a local state judge, whose reelection signs can be seen on lawns and billboards every four years.

In most cases, those looking to protect their trade secret rights will benefit from the proposed Defense of Trade Secrets Act.