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Why Companies Should Care About Increasing Criminal Enforcement of Trade Secret Theft

By Procopio Partner Mindy Morton

The importance of trade secrets continues to be front and center in high-profile legal disputes. In a 2019 Bloomberg Law Big Law Business Quick Pulse Survey, approximately 33% of companies surveyed said that they had trade secrets stolen in the last 10 years, and 75% of the surveyed companies expected the risk of trade secret theft to rise in the next five years.  The Waymo-Uber trade secret dispute is case in point. While civil litigation was settled last year, the story is alive again with the indictment by a federal grand jury of Anthony Levandowski on allegations of trade secret theft.

When it comes to trade secrets, companies should understand that the federal government is increasingly pursuing criminal prosecution. Understanding the risks and complications of both civil litigation and criminal prosecution can help companies as they seek to protect their own trade secrets.

A bit of background on this particular case first: Levandowski was a former key engineer for Waymo, Google’s self-driving car division. He left unexpectedly in 2016 to found his own company, Ottomotto, and Uber purchased the company later that year. Waymo sued Uber in February 2017, alleging trade secret theft related to 14,000 files that Levandowski allegedly downloaded prior to his departure from Waymo. The parties settled the civil case shortly after the trial began in February 2018. Uber gave Waymo shares worth approximately $245 million at its then-current valuation.

Despite the courtroom theatrics and media attention, one figure remained silent: Anthony Levandowski.  Levandowski was under criminal investigation during the civil case, and he refused to testify or cooperate pursuant to his Fifth Amendment rights. He was later fired by Uber in the course of the civil case. He now faces thirty-three counts of theft and attempted theft of trade secrets, alleging that the files he downloaded included schematics and manufacturing details for Waymo’s self-driving car technology. The criminal prosecution is no surprise—the U.S. Attorney’s investigation was referenced frequently during the civil case—but it’s unusual to see an indictment a year after a civil case is resolved.

Criminal prosecution of trade secrets is nothing new. Trade secrets plaintiffs should always consider whether to involve the state or federal authorities in their investigations. In the past, however, the conventional wisdom was that it was difficult to interest district attorneys or U.S. attorneys in business disputes involving trade secret theft. Now, however, the scope of the problem and the government’s renewed focus on stopping international intellectual property theft have made parallel criminal and civil investigations commonplace.

In the early 1990’s, in one of the earlier criminal prosecutions in Silicon Valley for trade secret theft, Cadence accused rival Avant! of trade secret theft and the state of California instituted a criminal investigation in parallel with Cadence’s civil case. The civil cases were eventually placed on hold, and in 2001 Avant! and a number of its executives were found guilty of conspiracy, trade secret theft and securities fraud.  Several Avant! executives paid criminal fines and went to prison. Cadence and Avant! later settled the civil case for $265 million.

The federal Defend Trade Secrets Act (DTSA) passed the U.S. Congress and was signed into law in 2016. In the three years since its passing, trade secret litigation has increased. Indeed, it is estimated that in 2018, trade secret case filings increased by over 30%.  In 2018, then-U.S. Attorney General Jeff Sessions announced a new “China Initiative,” created to “identify priority Chinese trade theft cases [and] ensure that we have enough resources dedicated to them.” The DOJ announced later in 2018 that over 66% of its trade secret cases were connected to China. 

This focus on China’s connection to the theft of trade secrets has resulted in well-publicized indictments. In 2018, the U.S. brought parallel civil and criminal proceedings under the Economic Espionage Act in U.S. v. United Microelectronics Corp., a case involving export of dynamic RAM to China. In January 2019, the U.S. announced criminal indictments for trade secrets theft against Huawei for allegedly stealing trade secrets from T-Mobile. And in a scene that would fit in a Hollywood blockbuster, a former Apple executive was arrested in July 2018 at the San Jose airport as he was about to board a flight to China. These recent efforts show that the DOJ is serious about international trade secret theft, and companies involved in cross-border transactions should ensure that intellectual property is protected in partnerships and manufacturing deals.

The best way to avoid involvement in a trade secret investigation is to protect your trade secrets before they leave your company, through technological means such as passwords and encrypted files and low-tech methods such as educating employees and restricting access to key employees. In particular:

  • If your company discovers that a former employee or business partner has stolen trade secrets, time is critical. It is important to preserve any digital evidence of the theft and to carefully consider whether to involve the authorities. The state and federal government may have more investigatory resources than your company, and if they take the case, the investigation will be significantly cheaper than a civil case. However, once the authorities become involved in a case, your company loses control of the investigation. Companies need to weigh the value of the trade secrets stolen and the expense of a civil case with the lack of control and the time that a criminal investigation can take. If stopping the dissemination of trade secrets is critical, a civil injunction may be the best first step.
  • If your company or one of your employees is accused of trade secret theft, even if it is initially only a civil case, it is important to discuss the risk that a parallel criminal case could be filed and to take steps to protect the company and its own intellectual property. Settling a civil case does not necessarily mean the legal risks are gone, as the recent indictments against Anthony Levandowski show.

Trade secrets are more important than ever in a global economy where innovation is the driver that keeps companies ahead of the competition. Understanding the legal risks and opportunities afforded both in civil and criminal courts is essential for corporate counsel to stay on top of in this ever-evolving legal landscape.

 

Mindy Morton is a Partner in Procopio’s Silicon Valley office and a member of its Intellectual Property Litigation team and its Privacy and Cybersecurity practice group. Her practice focuses on internet and intellectual property litigation, including trade secrets. She litigates cutting-edge cases at the intersection of technology and free speech issues. Mindy defends internet companies against defamation, copyright, trademark and related claims on First Amendment, Communications Decency Act Section 230, DMCA and US SPEECH Act grounds. She also helps clients resolve disputes involving trade secret, patent, trademark, copyright, computer fraud and non-compete agreement litigation.