Source: https://www.mbhb.com/intelligence/snippets/trade-secrets-in-2018-the-law-is-still-trying-to-catch-up-to-technology
Timestamp: 2019-04-25 14:59:59+00:00

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Two cases this year have demonstrated that, although trade secret protections have become better aligned with protecting high tech trade secrets, there is still a long way to go. First, in Waymo v. Uber, the hard-fought litigation laid bare the perils of ignoring red flags when hiring employees away from competitors. But it also showed that there are difficulties in ensuring departing employees do not steal trade secrets and concerns in enforcing rights against the new employers. Second, People v. Aleynikov, in combination with its predecessor federal case, has shown that criminal laws are still not well-written in responding to misdeeds in the virtual environment. Together, the two cases make it clear that many employers and employees have yet to figure out how to incorporate the norms and protections of trade secret laws into their employment practices and conduct.
The Waymo v. Uber case started with a bang on February 23, 2017, when Waymo (formerly the self-driving car division of Google) filed a Complaint in the U.S. District Court for the Northern District of California for trade secret misappropriation under the Federal Defend Trade Secrets Act (“DTSA”), trade secret misappropriation under the California Uniform Trade Secret Act (“CUTSA”), patent infringement, and unfair competition in violation of the California Business and Professional Code § 17200. The case grew out of the actions of Anthony Levandowski, a former manager in Google and Waymo’s self-driving car project. Before his departure from Waymo, among other misdeeds, Mr. Levandowski downloaded 14,000 files related to LiDAR sensors from Waymo’s design server to his company-issued laptop, moved the files to a personal hard drive, then wiped the company-issued laptop and never used it again. He kept those confidential files for his future use. Mr. Levandowski then formed two competing self-driving vehicle companies, OttoMotto LLC and Otto Trucking LLC, that Uber bought two months later for $680 million, in large part to acquire the two companies’ LiDAR system. Uber did so because it viewed the need to develop self-driving vehicles (including a LiDAR-based sensor system) as an “existential imperative.” Uber also hired Mr. Levandowski as its vice president in charge of its self-driving car project.
Soon after Waymo filed its Complaint, the parties started fighting for the upper hand in the litigation. Waymo filed a motion for preliminary injunction on its trade secret misappropriation claims; Uber filed a motion to compel arbitration of all of Waymo’s claims as part of a previously unpublicized arbitration proceeding that Waymo had brought against Mr. Levandowski. And Mr. Levandowski intervened in the case to fight having to testify, turn over documents, or provide a privilege log, even though he was still employed by Uber. The parties vigorously disputed the motions.
After expedited discovery, Judge William Alsup issued a trio of orders on May 11, 2017 that fundamentally shifted the dynamics of the case. First, he rejected Uber’s request for arbitration because Uber was not a party to the employment agreement that compelled arbitration of the dispute between Waymo and Mr. Levandowski. Second, Judge Alsup found that the facts supported many of Waymo’s accusations of Mr. Levandowski’s misconduct and provided Waymo certain “provisional relief,” including ordering Uber to remove Mr. Levandowski from any role related to LiDAR and to use its influence over Mr. Levandowski to require him to cooperate in assembling certain evidence of his misconduct. But most shockingly, Judge Alsup also referred the case to the U.S. Attorney to consider criminal investigation of trade secret theft, based on the evidentiary record compiled to date in the case.
Criminal referrals from civil cases are quite rare, but trade secret misappropriation under the DTSA is one of the few federal civil actions that is also a potential federal crime. The DTSA was incorporated into the pre-existing Economic Espionage Act (“EEA”), a criminal statute that has been used to prosecute computer crimes (as in the case of Sergey Aleynikov, whose recent problems are discussed below). While the EEA’s first provision covers economic espionage – that is, trade secret theft for the benefit of a foreign country or foreign agent – another provision (§ 1832(a)) criminalizes trade secret theft more broadly.  Basically, any person who steals or knowingly receives trade secrets related to interstate commerce, intending to convert them to their own benefit and knowing that the conversion will harm the rightful owner of the trade secrets, is subject to both civil liability under the DTSA and criminal jeopardy under the EEA, including up to ten years in prison.
In light of the potential criminal charges, Mr. Levandowski refused to cooperate with Uber’s attempts to comply with Judge Alsup’s order on provisional relief. So fifteen days later, Uber fired him. His termination cost him a $250 million hiring bonus from Uber, showing just how desperate he was to avoid the production of certain evidence against him and Uber.
Mr. Levandowski’s gambit did not work; critical evidence of his misdeeds ended up being part of the evidentiary record. Most importantly, a due diligence report prepared by the investigative firm Stroz Friedberg for Uber’s outside counsel ultimately had to be produced in the case. Uber had requested Stroz Friedberg to undertake an investigation as part of its due diligence in relation to the purchase of OttoMotto LLC and Otto Trucking LLC. As part of that investigation, Stroz Friedberg interviewed Mr. Levandowski and he admitted to downloading and retaining Google documents, and also having had meetings prior to leaving Google with Uber executives and Google employees about moving his whole team to Uber. He also admitted that he had destroyed five disks of Google proprietary information just days before the interview, after an Uber executive instructed him not to do so. In an attempt to avoid any obligation to list the due diligence report on a privilege log or produce it, Uber made sure that it never received a copy of the report. But ultimately, after it was disclosed, the report was produced (by Uber’s counsel) just days before trial was scheduled to start in October 2017. In light of the late production of the due diligence report, the trial was delayed until December 2017 to allow Waymo further discovery and preparation.
Then, in late November, another bombshell: Uber was forced to turn over a 37-page letter that a disgruntled former Uber employee had sent to Uber’s in-house employment counsel in May 2017. The letter alleged that Uber had specific corporate groups charged with acquiring competitive intelligence in the form of competitors’ trade secrets and unauthorized data. The letter further charged that Uber had violated court orders, rules, and governing laws by destroying evidence and evading discovery requests. It spelled out what had been done, how it had been done, and who had done it, including extensive allegations related to the Waymo litigation. The trial was again delayed to allow Waymo further discovery and preparation.
The case finally went to trial in February 2018, but not before Judge Alsup entered an “Omnibus Order on Extent to Which Accusations re Uber’s Litigation Misconduct May Feature at Trial.” Judge Alsup discussed in detail facts regarding Uber and Mr. Levandowski’s spoliation of evidence, violations of prior court orders, and litigation misconduct, and explained the degree to which Waymo could (and could not) use those facts at trial to support its case. Judge Alsup also narrowed the case to only eight of the over 100 trade secrets that Waymo had initially identified. Then, one week into the trial, the parties abruptly announced they had settled the case, with Uber giving Waymo 0.34% of its stock (worth about $245 million) and committing not to use any Waymo trade secrets in its autonomous vehicles.
The Waymo v. Uber case showcased many of the difficulties in maintaining and enforcing trade secrets in a high tech company. Although employees need access to secrets during their employment in order to do their jobs, it is difficult to prevent the same employees from abusing that access (and misappropriating trade secrets) if they are intent on doing so. That is especially true if the employees lie during their exit interviews, as Mr. Levandowski did, and actively cover their tracks to avoid detection. Indeed, it appears that Google found out about Uber’s alleged misappropriation only because of a misdirected supplier e-mail. But by the same token, companies must be extremely careful about bringing on employees from competitors and must seek only their expertise, not the confidential information they learned at their former employers. If they do not – and especially if they actively seek others’ trade secrets, as Uber was alleged to have done – they may find that they are facing a jury that will be told that they are bad actors and that the only real issue is the magnitude of damages. It will take more education, and likely more litigation, before Silicon Valley companies put in place more robust protections for trade secrets in the hiring process, but doing so would help avoid future problems.
In another closely watched case, the long-running saga of Sergey Alenikov has drawn to a close with the New York Court of Appeals – the highest court in the state – affirming Mr. Aleynikov’s conviction on state charges. The questions pending before the Court of Appeals were issues of statutory interpretation, but they go to the heart of the application of criminal laws to high tech. The Court of Appeals had to choose between allowing Mr. Aleynikov to walk free for actions that would generally be considered theft of intellectual property and twisting statutory language beyond its previously recognized meanings. If nothing else, Mr. Aleynikov’s situation has shown the poor fit between criminal laws drafted decades ago and rapidly developing computer technologies.
Mr. Aleynikov drew the ire of prosecutors (first the U.S. Attorney for the Southern District of New York, then the Manhattan District Attorney) after he downloaded source code from Goldman Sachs’s high frequency trading system in the last days before he left the firm, then saved it overseas. He was first prosecuted and convicted under the Federal National Stolen Property Act (“NSPA”) and EEA, but was freed by the U.S. Court of Appeals for the Second Circuit. The Second Circuit found that the NSPA did not apply to purely intangible property like source code, so it overturned that conviction. It also found the EEA had not been violated because the EEA covered only “trade secret[s] related to or included in a product that is produced for or placed in interstate or foreign commerce,” not trade secrets used in the practice of interstate or foreign commerce. Although Congress promptly changed the language of the EEA to remedy the problem after Mr. Aleynikov’s successful appeal, it was too late for him to be prosecuted under revised Federal law.
Another example illustrates the shortcomings of current law with respect to computer data. Suppose a bank’s computer programmer develops and maintains its proprietary trading system. The bank spent several million dollars to build, improve and maintain this extremely valuable system. Eventually, a competitor lures the programmer away from the bank with the promise of riches in exchange for a copy of the trading program’s source code. The programmer has taken from his employer—any layperson would say “stole”—property worth well over $1 million, the threshold for Grand Larceny in the First Degree, a Class B felony. But because the deprivation was not permanent—the programmer, by definition, only copied the code, leaving the original on the bank’s network—he cannot be charged with Larceny…. [H]e would face only Class E felony charges of Unlawful Duplication of Computer Related Material [of which Aleynikov was acquitted] or Computer Trespass.
Now, despite the District Attorney’s statement, his office secured Mr. Aleynikov’s conviction on state charges despite his having not permanently deprived Goldman Sachs of access to its source code.
A person is guilty of unlawful use of secret scientific material when, with intent to appropriate to himself or another the use of secret scientific material, and having no right to do so and no reasonable ground to believe that he has such right, he makes a tangible reproduction or representation of such secret scientific material by means of writing, photographing, drawing, mechanically or electronically reproducing or recording such secret scientific material.
The two emphasized portions highlight the issues presented on appeal. First, is computer code that is only saved, never printed, a “tangible reproduction or representation”? Second, does the intent to “appropriate” focus on whether the defendant intends to keep the information permanently, or does it focus on whether the victim would lose use of the information? Finally, is the meaning of those provisions so clear that the rule of lenity – which dictates that a defendant should be convicted only if no reasonable interpretation of the statute would lead to an acquittal – would not apply?
First, with regard to whether source code is a “tangible reproduction or representation,” the parties’ dispute really boiled down to which of Black’s Law Dictionary’s definitions of “tangible” applies: the State urged a meaning based on the first definition (“having or possessing physical form”), whereas Mr. Aleynikov argued for the second definition (capable of being touched and seen; perceptible to the touch; capable of being possessed or realized”). The District Attorney argued that saved source code takes up space on a hard drive, meaning that it has physical form. Mr. Aleynikov responded that source code has no physical form, even when stored on a hard drive; the medium of the hard drive has physical form, the data does not. The majority of courts – including the Second Circuit in Mr. Aleynikov’s Federal prosecution – agreed with Mr. Aleynikov and construed source code to be intangible.
The parties both struggled to support their positions during oral argument. The court asked Mr. Aleynikov why source code printed so small as to be illegible without the assistance of a magnifying glass (such as in a one-point font) should be criminalized by the statute, but an electronic version of the same code should not be. As the court asserted, both forms of reproduction require assistance of a device to see and understand. On the other hand, the State was unable to identify a single example of an intangible reproduction or representation, which would suggest its proposed definition would leave the term “tangible” without meaning.
Unfortunately, neither side addressed the fundamental difference between printed source code and electronically-stored source code. The former is in a programming language that can be read and understood by at least some programmers. The latter is merely a series of electrical charges representing ones and zeros that is not readily comprehensible to even the most skilled programmer.
The Court of Appeals rejected Mr. Aleynikov’s proposed definition of “tangible reproduction or representation” in two steps. First, it asserted that, if construed that way, “the term does not apply to ink printed on paper any more readily than to source code, and provides no workable criterion.” Second, it indicated that the question was not whether source code was tangible (and, to conform with prior cases, the court was constrained to agree that source code is intangible), but whether a copy of that source code would be tangible when downloaded. Thus, the court sought to distinguish between source code generally and a copy of source code taking up physical space on a hard drive or CD.
The court’s position is curious, and appears to be based on a limited computer literacy. The court’s first statement is odd, as there is no doubt that paper with printed indicia can be touched by hand. On the other hand, virtual (that is, not printed) source code is not stored in the same format as it is printed; it is saved in binary. Therefore, it cannot be touched as compiled source code, even on a microscopic level. There is a clear distinction that, while perhaps intellectually unsatisfying, is easy to police. Second, even before it is saved, computer code takes up physical space (whether in memory or saved on media). That is, the Court of Appeals makes a distinction where there is no difference.
Notably, the court struggled to provide any meaning to the term “tangible” in the phrase “tangible reproduction or representation.” It posited the example of memorization of source code, but noted that such memorization would not fall under the statute anyway because the reproduction or representation must be “by means of writing, photographing, drawing, mechanically or electronically reproducing or recording.” It avoided that inconsistency by stating, “the word ‘tangible,’ as we interpret it, does not introduce redundancy; it adds a modest element to ‘reproduction,’ serving to emphasize that the crime consists in making a physical, not a mental, copy of secret scientific material.” But that “emphasis,” in light of the requirement of certain means for making the reproduction, is redundancy.
Second, with regard to the term “appropriate,” the larceny provisions of the New York penal code actually have a definition of the term “appropriation”; including to exercise control over property “permanently or for so extended a period or under such circumstances as to acquire the major portion of its economic value or benefit.” Traditionally, that has meant that the malefactor has deprived the victim of control of the appropriated goods or services. But the State suggested an example in which that would not be the case, when someone “steals” cable service. In that example, the subscriber continues to receive cable service undiminished by the thief’s actions but the cable company has lost revenue. It was unclear, however, if that would fall within the scope of “appropriation,” for the cable company is the real victim, not the subscriber.
The Court of Appeals dealt quickly with Mr. Aleynikov’s argument that he did not intend to appropriate the relevant source code because he did not intend to deprive Goldman Sachs of the source code. In doing so, it disaggregated the definition of “appropriate.” Under the New York Penal Law, “[t]o ‘appropriate’ property of another to oneself or a third person means (a) to exercise control over it, or to aid a third person to exercise control over it, permanently or for so extended a period or under such circumstances as to acquire the major portion of its economic value or benefit, or (b) to dispose of the property for the benefit of oneself or a third person.” Although the statute did not indicate as much the court asserted that the definition was intended to indicate that control could be exercised (i) permanently or (ii) for so extended a period or under such circumstances as to acquire the major portion of its economic value or benefit. From that, it surmised that exercising permanent control over another’s property would be sufficient, and asserted that Mr. Aleynikov intended to exercise control over the source code permanently, since he admittedly did not intend to return the copy of source code in his possession.
The court’s resolution of the appropriation issue is a bit odd, as it elided the distinction between the source code and the copy of the source code it made so carefully in relation to “tangible reproduction or representation.” That is, Mr. Aleynikov certainly intended to keep the copy of source code he had made, but had no intent to control Goldman Sachs’s use of its own copy of the source code. Further, it does not necessarily follow from inclusion of the term “use of” that the statute intended to cover simultaneous exercise of control. To the contrary, that interpretation creates a tension between the definition of “appropriate” and the unlawful use statute. But the court did not address the inconsistency between the two interpretations.
Mr. Aleynikov’s two cases have illuminated many of the weaknesses of the existing laws in relation to high tech crimes. For all of the foresight that the drafters of the criminal laws may have had in the 1960s, they could not have foreseen all of the possibilities for Internet-based misconduct. As a result, prosecutors and the courts are put in the awkward position of determining how to deal with charges for actions unforeseen at the time of enactment. The best practice would be to continually amend the laws to ensure they are up to date, but the legislative process moves very slowly. These are difficult problems that create unforeseen complications and ramifications. In any event, in amending the New York penal laws, today’s drafters would be well-served to consult and consider lessons learned from the Waymo v. Uber and Aleynikov cases.
 Civil Action No. 3:17-cv-00939-WHA (N.D. Cal.).
 For more detail on Mr. Aleynikov’s trials (through the trial court decision in the state law case), see Joshua R. Rich, New York v. Aleynikov: New York State’s Penal Code (Like Federal Criminal Law) Does Not Cover Electronic Reproduction of Source Code, snippets (Summer 2015).
 Waymo later dropped its patent infringement claims.
 Civil Action No. 3:17-cv-00939-WHA, Docket No. 1.
 Id. at ¶¶ 42-46; see also Docket No. 433, at 2-3; Docket No. 1928, Ex. 22, at 7-14.
 Civil Action No. 3:17-cv-00939-WHA, Docket No. 1 at ¶¶ 49-55.
 Id. at ¶¶ 38-40 (internal quotations omitted).
 Id. at Docket No. 24.
 Id. at Docket No. 115.
 Id. at Docket Nos. 151, 167.
 Id. at Docket No. 425.
 Id. at Docket Nos. 426, 433.
 Id. at Docket No. 428.
 See Civil Action No. 3:17-cv-00939-WHA, Docket No. 519, Ex. B.
 See Id. at Docket No. 1928, Ex. 22.
 According to the Stroz Friedberg report, however, Uber CEO Travis Kalanick told Mr. Levandowski that he wanted nothing to do with the disks and that Mr. Levandowski should “do what he needed to do” before Mr. Levandowski had the disks shredded. Id. at p. 10.
 Id. at Docket No. 2401, Ex. A.
 Id. at Docket No. 2585.
 U.S. v. Aleynikov, 676 F.3d 71 (2d Cir. 2012).
 Pub. L. 112–236, § 2, Dec. 28, 2012, 126 Stat. 1627; see U.S. Const. art. 1, § 10, clause 1 (ex post facto clause).
 See Brief for Defendant-Appellant, at 14-15, People v. Aleynikov, APL-2017-00078 (N.Y.).
 New York charged and tried Mr. Aleynikov with two counts of Unlawful Use of Secret Scientific Material and one count of Unlawful Duplication of Computer-Related Material. A jury hung on one of the counts of Unlawful Use and acquitted Mr. Aleynikov of Unlawful Duplication.
 United States v. Bottone, 365 F.2d 389 (2d Cir. 1966).
 See Brief for Defendant-Appellant, supra note 30, at 10-12.
 N.Y. Penal Law § 165.07 (emphasis added).
 See Brief for Defendant-Appellant, supra note 30, at 1.
 See Black’s Law Dictionary, at 1468 (7th ed. 1999); Oral Argument Transcript, at 4-5, People v. Aleynikov, APL-2017-00078 (N.Y).
 Brief for Respondent, at 31-34, People v. Aleynikov, APL-2017-00078 (N.Y).
 Brief for Defendant-Appellant, supra note 30, at 29-30.
 See id. at 26-30 (collecting cases); Oral Argument Transcript, supra note 36, at 5-8.
 Oral Argument Transcript, supra note 36, at 10-14.
 Id. at 18 (“In this context, it’s hard to think what an intangible reproduction would be.”).
 People v. Aleynikov, No. 47, 2018 WL 2048707, at *8 (N.Y. May 3, 2018).
 Id. (quoting N.Y. Penal Law § 165.07).
 N.Y. Penal Law § 155.00(4).
 Brief for Defendant-Appellant, supra note 31, at 46-50.
 Brief for Respondent, supra note 37, at 52-53; Oral Argument Transcript, supra note 36 at 15-16.
 See N.Y. Penal Law § 155.00(3).
 Aleynikov, 2018 WL 2048707, at *13.

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