Trading Secrets : Trade Secrets Lawyers & Attorneys : Seyfarth Shaw Law Firm : Computer Fraud, Confidentiality Agreements, Corporate Espionage

By Robert Milligan, David Monachino, and Jeffrey Oh

With Governor Chris Christie’s signature on January 9, 2012, New Jersey became the 47th state to adopt a form of the Uniform Trade Secrets Act (UTSA). Previously governed by common law, trade secrets of persons or entities in New Jersey will now have statutory protection under the New Jersey Trade Secrets Act (S-2456/A921). The new statute went into effect immediately after its signing, and applies to all new claims which arise on or after January 9, 2012.

To read the full text of the law, please visit this website.

Effects of the Act on Trade Secret Protection in New Jersey

The New Jersey Trade Secrets Act (NJTSA) sets forth clear statuatory language for trade secret protection for the first time in the state, including defining what a trade secret is as well as what acts constitute misappropriation of a trade secret. Prior to the Act, trade secret analysis relied on the Restatement of Torts, pursuant to New Jersey cases such as Sun Dial Corp. v. Rideout (1954), making protection somewhat inconsistent as varying interpretations of the common law were applied.

Protections afforded to persons and entities with valid trade secret claims under the NJTSA include injunctive relief for “actual or threatened misappropriation,…a reasonable royalty” for misappropriation, and monetary damages (compensating for both actual losses as well as “unjust enrichment caused by the misappropriation”). In addition, for cases of “willful and malicious misappropriation,” attorney fees may be recovered and punitive damages may be awarded for up to two times the damages otherwise awarded. There is also no statutory requirement to identify trade secrets prior to commencing discovery unlike some jurisdictions.

Variations between the UTSA and NJTSA

Despite being based on the UTSA, the New Jersey legislature did make certain adjustments in drafting its state’s trade secret statute. One such adjustment was the exclusion of a clause present in the UTSA which directs courts to take trade secret rulings in other states into account when handing down decisions. Another key difference between the UTSA and NJTSA is the NJTSA’s explicit mention that the provisions of the act are “in addition to and cumulative of any other right, remedy or prohibition provided under the common law or statutory law of this State.” In practice, this allows confidential and proprietary information that does not satisfy the trade secret requirements set forth by the act, but was previously protected under the state’s common law, to remain protected.  This in contrast to some states who have adopted adapted versions of the UTSA, many of which take the stance of preemption of common law claims. Finally, the NJTSA contains more robust protections for the preservation of trade secrets in the court system than in the standard UTSA. Courts are directed to use “reasonable means” to ensure the protection of trade secrets during litigation, including sealing court records when necessary, limiting disclosure of trade secrets to attorneys’ eyes only, and granting protective orders during discovery. This is particularly significant because some jurisdictions are reluctant to seal court records even in trade secrets cases.

Advice for Employers

The NJTSA offers companies statutory protections for trade secrets, though it is their responsibility to ensure this protection by making “efforts that are reasonable under the circumstances to maintain its secrecy.” To accomplish this, companies should have explicit policies preventing disclosure of their trade secrets while also being vigilant in educating employees of their responsibilities. Any suspicion of trade secret misappropriation by an employee or competitor should be investigated immediately in order to prevent the loss of rights in trade secret protection. Under the NJTSA, the statute of limitations for bringing a misappropriation claim has been reduced from six years, to three years from discovery of the misappropriation. An attorney with knowledge and experience in litigating trade secret claims is best suited to guide companies through this process.

Questions for the Future

With New Jersey joining the other 46 states who have passed some form of trade secret protection legislation, just three states, Texas, New York and Massachusetts, have yet to adopt a variation of the UTSA. It will be interesting to se how the New Jersey courts construe the new law, including "threatened misappropriation" and preemption of common law claims. How long these hold-outs will remain reliant on common law protections is an important discussion moving forward. Part of the UTSA’s goal when drafted in 1979 was to address the disparity in trade secret protection across state lines, and to that end there has been some interest in Congress in instituting federal civil trade secret protections, but the scope and preemptive effect of such legislation is entirely uncertain

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By Justin Beyer

On January 17, 2012, Yuan Li, a former research scientist with Sanofi Aventis, pled guilty to one count of violating 18 U.S.C. § 1832 (the section of the Economic Espionage Act dealing with commercial economic espionage). Li, a Chinese national, was residing in Somerset, New Jersey at the time of her incarceration. 

Sanofi Aventis is a global healthcare company, headquartered in Bridgewater, New Jersey. Sanofi owns and manufactures prescription drugs such as Allegra, Plavix, Copaxone, and Ambien. In addition to these well-known pharmaceutical labels, Sanofi also develops, manufactures, and sells other prescription and over-the-counter pharmaceuticals. 

According to the criminal complaint, to protect its trade secrets and prevent competitors from improperly receiving or accessing such information, Sanofi requires its employees to sign confidentiality agreements and invention assignment agreements, repeatedly informs and reminds its employees of the confidential nature of Sanofi’s business, restricts access to its facilities, requires researchers to log in lab notebooks and maintain them under lock and key, maintains an encrypted document management system, and restricts access to its computer systems through advanced computer security measures. 

To those ends, in August 2006, when Sanofi hired Li as a medicinal chemist (later promoting her to a research scientist), it required Li to sign a “Conflict of Interest” statement, a certificate acknowledging her receipt of Sanofi’s corporate ethics and code of business conduct, an Inventions Agreement, and a document entitled “Trade Secrets and Confidential Information.” Additionally, Li confirmed to Sanofi that she “never materially participated in any illegal act relating to the development and approval of drug products, including, but not limited to, submitting false data to governmental authorities and falsifying records that are maintained by pharmaceutical and consumer health companies.” 

Despite these protections and Li’s promises, according to the government, starting sometime in or about October 2008, Li improperly accessed Sanofi’s internal database and began downloading Sanofi’s proprietary chemical structures. During that same time frame, Li was a 50 percent partner of Abby Pharmatech, LLC, a Delaware limited liability corporation, which purportedly served as a United States subsidiary to Chinese chemical producer, Xiamon KAK Science & Technology Co. Ltd. 

Over a nearly three-year period, according to the government, Li engaged in an elaborate scheme in which she improperly accessed, downloaded, transferred the downloaded information to her personal home computer by either emailing the information to her personal e-mail address or by using a USB thumb drive, and attempted to pass off Sanofi’s proprietary chemical compounds as those of Abby Pharmatech. According to the criminal complaint, Sanofi became aware in May 2011 that, on Abby Pharmatech’s website, Abby Pharmatech was advertising chemical compounds that belonged to Sanofi, including a number which Sanofi had not yet publically disclosed. 

During the course of the FBI’s investigation into Li’s illegal activities, Sanofi representatives verified that Abby Pharmatech registered over 6000 Sanofi proprietary chemical structures as Abby Pharmatech property. Moreover, in forensically examining the laptop computer Sanofi issued to Li, it was discovered that Li possessed copies of Abby Pharmatech’s 2010 tax return. Most incriminating, however, Li possessed on her laptop a document entitled “AbbyPharmatech,” which contained a list of 144,000 compounds, including compounds that were categorized with Sanofi internal control numbers. Those internal control numbers could not have been discovered but for unauthorized access to Sanofi’s internal databases. 

As a condition of her guilty plea, the United States Attorney, District of New Jersey, agreed not to prosecute Li for her theft of chemical compounds occurring between January 1, 2010 and July 27, 2011. Despite her plea and the U.S. Attorney’s agreement not to charge and prosecute her for certain thefts, Li still can be sentenced for a maximum of 10 years imprisonment and up to a $250,000 fine. Also, contingent with her plea, Li agreed to pay Sanofi a total of $131,000 in restitution damages. Judge Joel A. Pisano received and accepted the guilty plea. Pursuant to the Sentencing Reform Act, 18 U.S.C. §§3551-3742, Li’s sentence is within the sole discretion of Judge Pisano. Any immigration proceedings and potential removal from the United States will be handled through a separate proceeding. 

This case highlights that, even when a company has sophisticated practices in place to protect its trade secrets, it must remain constantly vigilant in its efforts to prohibit misappropriation of those secrets. In instances like this and where a company’s trade secret is essentially its lifeblood, a company should consider using additional preventive means to prohibit employees from stealing trade secrets, such as configuring the operating system to restrict access to external devices, thus, restricting the ability to download information to an external device; blocking a user from uploading information to a web-based site; and/or utilizing software that blocks employees from sending emails to certain domain names. 

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Legislation intended to help protect the trade secrets of New Jersey businesses has been signed into law by Gov. Christie. The New Jersey Trade Secrets Act (S-2456/A-921) establishes by law specific remedies available to businesses in the event that a trade secret – such as a formula, design, a prototype or invention – is misappropriated. New Jersey was one of the four remaining states that have not adopted some or all of the provisions of the Uniform Trade Secrets Act (Massachusetts, New York and Texas are the others), but instead NJ courts have relied wide range of common law decisions in order to establish a trade secret misappropriation claim.

The New Jersey Senate approved the bill 39-0; the Assembly approved the measure 79-0. The law takes effect immediately, except it does not apply to misappropriation that occurred prior to the effective date or to a continuing misappropriation that began prior to the effective date of the law and continued after the effective date of the law.

The new law provides for damages for both actual loss suffered by a plaintiff and for any unjust enrichment of the defendant caused by the misappropriation of trade secrets. Damages also may include a reasonable royalty for unauthorized disclosure or use of the trade secrets. In cases of willful misappropriation, punitive damages and attorneys’ fees may be awarded. In addition, if a claim for misappropriation is brought in bad faith, attorneys’ fees may be awarded.

The New Jersey Act also has a couple of unique and helpful provisions, including a requirement that a court "preserve the secrecy of an alleged trade secret by reasonable means consistent with" court rules. There is also "a presumption in favor of granting protective orders in connection with discovery proceedings" as well as provisions limiting access to confidential information to only the attorneys for the parties and their experts, holding in-camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.

It remains to be seen if New York will now follow New Jersey’s lead and adopt similar legislation.

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By David Monachino

New Jersey is one of the four remaining states that have not adopted some or all of the provisions of the Uniform Trade Secrets Act (Massachusetts, New York and Texas are the others), but instead NJ courts have relied wide range of common law decisions in order to establish a trade secret misappropriation claim. On September 26, 2011, the New Jersey Senate approved a bill known as the "New Jersey Trade Secrets Act" (A - 921), which provides statutory remedies and procedural guidance for the misappropriation of trade secrets. This proposed bill provides for damages for both actual loss suffered by a plaintiff and for any unjust enrichment of the defendant caused by the misappropriation of trade secrets. Damages also may include a reasonable royalty for unauthorized disclosure or use of the trade secrets. In cases of willful misappropriation, punitive damages and attorneys’ fees may be awarded. In addition, if a claim for misappropriation is brought in bad faith, attorneys’ fees may be awarded.

The New Jersey Act also has a couple of unique and helpful provisions, including a requirement that a court "preserve the secrecy of an alleged trade secret by reasonable means consistent with" court rules. There is also "a presumption in favor of granting protective orders in connection with discovery proceedings" as well as "provisions limiting access to confidential information to only the attorneys for the parties and their experts, holding in-camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval."

The NJ Assembly has to vote on the Senate’s amended version of the bill before it is presented to Governor Chris Christie for his signature. The bill is expected to be voted upon after the November recess and Governor Christie then has 45 days to sign the bill into law. If the bill is singed, it will become effective immediately, but will not be retroactive. Assuming the law eventually passes, it is still important for companies doing business in NJ to define what may constitute proprietary information, especially if that definition is broader than the "trade secret" definition found in the statute. Either way -- whether the bill passes or not -- it remains important for a business to continue to take reasonable efforts to maintain the secrecy of any information that it deems confidential or risk losing trade secret protection.

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A growing number of courts across the country have required  plaintiffs to specify with particularity the trade secret that they are accusing a defendant of stealing, and that plaintiffs’ refusal to do so could result in dismissal of the claim.  See, e.g., Dura Global, Tech, Inc. v. Magna Donnelly Corp., 2008 WL 2064516 (E.D.Mich. May 14, 2008) (staying discovery until the plaintiffs provided the defendants with a list identifying the trade secrets alleged to have been misappropriated "with reasonable particularity").  Similarly, California has enacted a statutory requirement that requires a plaintiff in a trade secrets case "to identify the trade secret with reasonable particularity . . . before commencing discovery relating to the trade secret." Cal.Code of Civil Proc. Section 2019.210.

A federal district court in New Jersey has failed to follow that trend.  In Reckitt Benckiser Inc. v. Tris Pharma, Inc., 2011 U.S. Dist. LEXIS 19713 (D.N.J.  June 21, 2011) (unpublished), the underlying action arose out of, inter alia, the alleged infringement of several drug patents.  Defendants moved to dismiss several of  the non-patent counts, including a trade secret misappropriation claim.  Defendants argued that plaintiffs' claim for misappropriation of trade secrets must be dismissed as a matter of law, because defendants contended that plaintiffs should have identified the alleged trade secrets in its complaint with particularity since they were "uniquely known to plaintiffs.”

The district court disagreed and denied the motion to dismiss holding that under New Jersey law, a claim of misappropriation of trade secret "does not require specific pleading of the precise information that constitutes the trade secret in order to survive a motion to dismiss. Indeed, 'unless there are heightened pleading requirements as to a particular cause of action, the Federal Rules of Civil Procedure do not require a plaintiff to plead all the relevant facts in detail . . .  and generally do not require a plaintiff to provide specific information about trade secrets at this stage of the litigation.’” 

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ING Life Ins. and Annuity Co. v. Gitterman, Slip Copy, 2010 WL 3283526 (DNJ August 18, 2010)

Plaintiffs ING Life Insurance and Annuity Company (“ILIAC”) and ING Financial Advisors (“IFA”) (collectively, “Plaintiffs” or “ING”), sought to enjoin defendants, all of whom were former employees of ING, from soliciting clients to withdraw certain accounts from ING, pending the resolution of a FINRA Dispute Resolution Proceeding. The Court initially granted a preliminary TRO enjoining defendants from: (1) “soliciting, inducing or attempting to induce any customers of Plaintiffs (or their affiliated companies) to sell or transfer assets from any ING Life Insurance and Annuity Company (“ILIAC”) account, product or security” and (2) “taking any action designed to effectuate the sale or transfer of assets from any ILIAC account, product or security, including, but not limited to submitting or assisting others in submitting account withdrawal forms to ILIAC.”  The District Court further ordered Plaintiffs to post a surety bond to pay the costs and damages sustained by any party found to have been wrongly enjoined or restrained.

After a full hearing, the District Court found as follows.

Prior to April 2010, each Defendant was employed by ING either as an investment advisor, a career agent, a registered representative, or was employed in more than one of these capacities. That During the period of defendants' affiliation with ING, defendants serviced ILIAC's account in New Jersey's Alternative Benefit Program (“ABP”), a defined contribution retirement program available to eligible employees of New Jersey's public institutions on higher education.  Until Defendants' affiliation with ING terminated in May 2010, defendants were responsible for servicing the accounts of more than 2,000 ILIAC customers with assets invested in the ABP. In February 2010, with ING's knowledge, several of the defendants set up their own Registered Investment Advisory firm (“GAWM”) and affiliated with an independent broker-dealer as registered representatives. As a result, many of the clients now in issue established investment advisory and/or brokerage accounts with Defendants off of the ING platform.

In May 2010, the affiliation between the defendants  and ING was terminated, with an arrangement that would allow ING to maintain relationships with the defendants' clients with respect to these clients' investment in ING's New Jersey ABP. With respect to every other aspect of the clients' portfolios, ING agreed to, and assisted in, facilitating their transfer from ING to the new group's new broker dealer and to GAWM.

Although defendants did not initially sign a restrictive covenant when they first became affiliated with ING, they did sign contracts with ILIAC and/or IFA that contained a non-solicitation clause. The contracts contained a provision providing that defendants “shall not for a period of [one or] two years thereafter, directly or indirectly by or through any partner, associate, agent, employer, employee or firm action on the Agent's behalf: (i) advise, induce or attempt to induce any contract-holder of the Company [ILIAC] to cancel, replace or allow to lapse any annuity contract or security issued by the Company or its affiliates ...” All of the defendants signed covenants substantially similar to this provision.

Upon these facts, the District Court denied the motion, finding that Plaintiffs could not sufficiently demonstrate that there is a likelihood of success on the merits of their claims, specifically holding that “[m]erely being in contact with former clients does not constitute solicitation,”citing Mona Elec. Group, Inc. v. Truland Service Corp., 56 Fed.Appx. 108, 110 (4th Cir.2003); Prudential Securities, Inc. v. Plunkett, 8 F.Supp.2d 514, 520 (E.D.Va.1998); Bayly, Martin & Fay, Inc. v. Pickard, 780 P.2d 1168, 1175 (Okl.1989); and Aetna Bldg. Maintenance Co. v. West, 39 Cal.2d 198, 246 P.2d 11 (1952).  The Court further found that there was no question that defendants needed to be in contact with Plaintiffs' clients, as they provide financial advice to these clients on many non-ABP investments unrelated to ING's business interests.

Most notably, the Court rejected Plaintiff’s assertion that defendants were, in fact, soliciting clients related to ING’s business interests, finding that “[the] … only evidence of solicitation Plaintiffs have provided is a single affidavit from an ING employee indicating that, through her communications with clients, it appears that Defendants' have recommended that Plaintiffs' clients switch to a different, competing ABP product. Plaintiffs' declaration summarily refers to client communications, without indicating the number of such communications or providing documentation of such communications.” The District Court also rejected as only “circumstantial” that several client accounts withdrew from ING in a short time frame from defendants’ departure. The Court expressly found that such departures do no “necessarily indicate[] that [the clients] were solicited or encouraged to leave.” To punctuate the finding, the Court provided the hypothetical example that “…these clients may have determined, upon learning of the termination of the [defendant-ING] relationship, that they no longer wanted to remain with ING. A non-soliciting statement from the defendants or ING, then, could have triggered clients to defect, and they are entitled to do so.”

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