HP Down, Everybody Getting in a Kick

More follow-up of the Hewlett-Packard scandal, ITWorld.com posts a story that Verizon, one of the phone companies whose information may have been illegally accessed in the HP investigation, is suing HP.

In a case filed Thursday in U.S. District Court in New Jersey, Verizon asked a judge to award it damages and to block the defendants from gaining any more records through the practice known as "pretexting." aka lying to get someone's personal information.

According to the story, court papers, describe how a woman called Verizon customer service on May 17, 2005, asking to see phone records for an HP director. She called back three days later, arranging to block text messages to that phone and logging on to the person's online account. Then, on Feb. 1, 2006, someone called Verizon customer service again, asking for the number of a second phone on that account. Later that day, the person logged into the account again and changed the password, this time from a computer with a different IP (Internet Protocol) address.
Verizon says it's looking to re-instill customer confidence in its confidentiality procedures.

Surreptitious Tape Recording -- Think Long and Hard

On the heels of the Hewlett-Packard mess, with resignations from the General Counsel and much pleading of the Fifth Amendment, comes a revelation that Jeanine Pirro, Republican candidate for New York Attorney General is being investigated for taping (or maybe considering taping) her own husband. The New York Times (subscription req'd) report is here.

This area is fraught enough -- and confusing enough -- that everyone needs to take a deep breath before doing anything.

Surreptitious tape recording of telephone conversations is a particularly tricky area. As a matter of federal law, the subject is governed -- at least for now -- by the federal wiretap law, 18 U.S.C. § 2510, et seq., Ch. 119 - Wire Interception and Interception of Oral Communications. Section 2511(d) of the law provides that

It shall not be unlawful under this chapter for a person not acting under color of law to intercept a wire, oral or electronic communication where such person is a party to the communication or where one of the parties to the communication has given prior consent to such interception unless such communication is intercepted for the purpose of committing any criminal or tortious act in violation of the Constitution or laws of the United States or of any State.

Thus, so long as one party to the telephone conversation - here, presumably, the person recording - consents to the recording, it does not violate federal law.

Legality under federal law, though, won't get you all the way home. It's important to consider state law as well. At our last count, 37 states as well as the District of Columbia permitted single-party consensual tape recording of telephone conversations consistent with federal law. Thirteen states (listed below) forbid such recording. The less stringent federal law, however, will not preempt stricter state laws. See Roberts v. Americable International, Inc., 893 F. Supp. 499 (E.D. Cal. 1995). A state may also be permitted to enforce its more strict law even though the federal law and the state law of the state in which the recording is done permit the recording. See, e.g., Krauss v. Globe International, Inc., No. 18008-92 (N.Y. Sup. Ct. Sept. 11, 1995) (holding that New York law applies to interstate telephone calls where the injury occurred in New York). Therefore, it is necessary to be mindful of where the non-consenting party is located.

States with laws prohibiting recording: California, Delaware, Florida, Illinois, Maryland (remember Linda Tripp?), Massachusetts, Michigan, Montana, Nevada, New Hampshire, Oregon, Pennsylvania and Washington.

Chinese Economic Espionage in Silicon Valley -- Coming to a Town Near You?

From the San Jose Mercury News, a story describing Silicon Valley as a "hotbed" of economic espionage. The article describes a number of economic espionage cases involving Chinese nationals, including one concerning chip maker NetLogic Microsystems, reported by us earlier here, in which the government is seeking to step up the charges to allege that China was involved.

The article reports that the Valley is home to many of the estimated 3,000 Chinese front companies nationwide set up to steal secrets and acquire technology, according to the FBI. The FBI recently added a San Jose economic espionage and counterintelligence unit to one already operating in Palo Alto. That office is currently investigating approximately a dozen economic espionage cases with suspected ties to China.

Trade Secrets Primer

From the Richmond Times Dispatch, a good basic article on protecting trade secrets from Virginia practicioner, John Farmer with the Leading Edge Law Group, PLC.

Among his good reminders: having a policy tailored to protect your most important trade secrets and the need for education of your workforce regarding trade secrets.

Mediware sues McKesson over Trade Secrets

From the Kansas City Star, the story of a lawsuit filed last week in Kansas City, Kansas in which Mediware Information Systems Inc. alleges that the information technology unit of McKesson Corp., now known as McKesson Provider Technologies, misappropriated Mediware's trade secrets.

Mediware provides specialized clinical software to hospitals and other facilities that manage surgical suites and blood banks and for the ordering and administration of medicine.

According to the Star, the complaint doesn't provide much information such as the nature of the trade secrets, the time frame of the alleged misappropriation or the identities of the people who allegedly passed the secrets to McKesson.

Judge Posner on Trade Secrets, Again

A new opinion from the Seventh Circuit in BondPro Corp. v. Siemens Power Generation, Inc., 2006 WL 2597860 (7th Cir. Sept. 12, 2006) provides Judge Posner with another chance to range widely on the subject of trade secrets. (See our earlier posting here.)

The factual background sounds familiar: after entering into a confidentiality agreement, BondPro demonstrated its secret molding process to Siemens. Siemens, rather than licensing the technology from BondPro (as BondPro hoped it would), filed a patent application for a quite similar molding process. That application was denied. The patent filing, though, disclosed any trade secrets BondPro had thus placing the technology in the public domain.

At trial, BondPro obtained a liability verdict against Siemens in the Western District of Wisconsin. Before damages could be tried, though, the trial judge granted judgment as a matter of law to Siemens. The parties then went down the road to the Court of Appeals in Chicago.

The Seventh Circuit affirmed. The principal problem with BondPro's case was the question of whether its process was really a secret with any value. As Judge Posner noted, "there is no evidence of the value of any use that others may have made of BondPro's process who may have learned of it directly or indirectly from Siemens." In addition, "neither BondPro nor Siemens . . . used the process commercially." Thus, "the inference is compelling that the process neither had when disclosed to the public, nor has, measurable commercial value."

Judge Posner went on to hold that the process disclosed was principally already in the public domain and that the information disclosed simply did not rise to the level of a trade secret.

More on Hedge Funds and Trade Secrets

From the Financial Post of Canada, more on the dispute between hedge fund manager Phillip Goldstein and the SEC concerning Goldstein's attempts to forgo disclosure of his funds' holdings as trade secrets (earlier reported here).

More great quotes from Goldstein: "I'm not a crank. I think I'm like Toto in the Wizard of Oz, I've pulled away the curtain." And "there's nothing here, there's absolutely no reason for this rule."

Also his rationale: "Involuntary compliance ... by requiring the Applicants to publicly disclose their trade secrets, [would] constitute a 'taking' of their property without just compensation in violation of the Fifth Amendment to the Constitution." Thus, "[a]n exemption from the filing requirement . ..is necessary to avoid such a violation."

The article also contains some interesting information about the different rules governing such disclosure in Canada where all public funds (and only public funds) -- irrespective of size -- have to disclose their top 25 stock holdings every quarter. Private funds disclose twice a year, but only to their investors without putting their information on the Internet.

HP Mess Keeps Getting Messier

From the New York Times, a report, under the headline "Hewlett Review is Said to Detail Deeper Spying," which fleshes out more of the story we've been following here. In short, it just keeps getting worse.

The Times reports that the company's investigation of boardroom leaks was initially supervised by HP's Chairwoman, its general counsel, and another company lawyer who was also, ironically, HP's chief ethics officer. Soon though, an outside investigative firm and its subcontractors took over.

Among the new problems reported are an attempt to place spyware on the computer of a reporter for CNET -- a likely violation of the Computer Fraud & Abuse Act, if true -- and tailing of other reporters. That surveillance, while not illegal, is not exactly going to endear HP to the press.

The Times also reports that a legal opinion purportedly blessing the investigation was not obtained from HP's regular lawyers but instead from a Boston law firm which shared office space with the firm of investigators. That firm, in turn, is reported to have had ties with HP's Boston-based manager of global investigators.

In addition to state and federal prosecutors, a House subcommittee is apparently getting into the act with a subpoena of its own.

Again, the case is becoming a textbook example of how to turn an annoyance into a legal and public relations disaster.

Target is Targeting Blogger Who Allegedly Stole and Posted Target's Anti-Theft "Trade Secrets"

In a blog about trade secrets it is akin to facing two mirrors at each other when we post a blog posting about a blog poster who posted Target's alleged anti-theft "trade secrets" on his blog. The theft of something designed to prevent theft is also an irony rarely seen in law - kind of like stealing a lock. Well - that's what apparently happened to some special procedures Target uses to combat theft in its stores. Now Target is going the well-tread "John Doe" lawsuit route and trying to figure out who it was. We'll keep an eye on this one for you.

Coke Update -- Defense Counsel Wants to Quash Wiretaps and Identify Trade Secrets

An AP report from the San Diego Union-Tribune reports that a lawyer for one of three defendants accused of stealing Coke's trade secrets -- Ibrahim Dimson -- has asked the judge to throw out evidence from wiretapped phone calls involving her client. The lawyer, Anna Blitz, contends in court papers filed in federal court in Atlanta that the government illegally monitored her client's calls.

In a separate filing, Blitz said a judge should order prosecutors to identify the trade secrets they believe Dimson conspired to steal. This is always a tricky issue in such cases since Coke will want the filing to be as far under seal as possible and preferably otherwise vague.

Earlier reports say the prosecutors have a box containing two undisclosed Coca-Cola product samples and other confidential company documents. Coke, though, has declined to say what product or products the samples relate to.

Alleged Coca-Cola Trade Secrets Thief Wants Wiretap Evidence Suppressed

You could see this coming - the attorney for one of the alleged conspirators in the attempt to steal some of Coca-Cola's trade secrets has asked the judge to suppress the evidence obtained via wiretap. This criminal matter is going to be hard fought.

Hedge Funds and Trade Secrets

A report from Business Week concerning a challenge percolating through the SEC from New Jersey hedge fund manager, Phillip Goldstein, who is seeking to exempt his funds at Bulldog Investors from the SEC's Rule 13F which requires disclosure of hedge fund holdings when the funds cross the $100 million mark. Goldstein's rationale? The holdings are trade secrets and requiring their disclosure is a "taking" without compensation in violation of the Fifth Amendment to the Constitution. Before dismissing his chances, remember that Goldstein challenged an SEC hedge fund registration rule and got a federal appeals court to throw it out earlier this summer.

Currently, the SEC permits a fund to claim Freedom of Information Act confidentiality after filing but rarely, if ever, grants that relief.

In an interview, Goldstein offered some serious arguments in favor of his position which will be familiar to those who know and understand trade secrets law:

He referred to "services that say something like, why pay Carl Icahn or Warren Buffett their fees-why not just take their ideas and steal them and use them for yourself? To me, it's the same as somebody illegally downloading something from the Internet."

Also "where does the government have this authority to make people disclose what basically are trade secrets-the source of their earnings power-without paying for it?"

A fair question. We'll watch this one.

Georgia Judge Awards $11 Million to Earthlink in Computer Fraud & Abuse Act Case

From the Atlanta Business Chronicle, a story on a big federal judgment against spammer KSTM LLC in favor of internet service provider Earthlink. EarthLink sued KSTM claiming it violated the federal Computer Fraud and Abuse Act, the Georgia Computer Systems Protection Act and state and federal racketeering laws. According to the lawsuit, KSTM sent e-mails promoting the Web site "lmlgdnhk.info" trying to sell mortgages.

EarthLink claimed the company used false and misleading header information in its e-mails, which also violates the federal CAN-SPAM Act.

According to the ABC, since 1996, EarthLink has sued hundreds of spammers and won more than $200 million in judgments, including two criminal convictions against spammers who received prison sentences for their offenses.

Trying to collect on those judgments, I suspect, is another matter.

HP Boardroom Spying Takes Down Chairman

From the New York Times (subscription required), the full details of the fallout at Hewlett-Packard from the illegal investigation of leaks on the company's board. The chairman, Patricia Dunn, is stepping down and the California Attorney General is indicating that criminal charges against company insiders are on the horizon. The US Attorney for the Northern District of California is also conducting an inquiry.

This story follows up our earlier postings here and here. (And, in case you're not subscribed to the New York Times, you can read the report from the San Jose Mercury News here.)

We now know the name of the private investigation firm, Security Outsourcing Solutions, that engaged in the improper and possibly illegal tactics. (A great name, but they're probably going to have to change it now.)

There are still a lot of unanswered questions here and most relate to the standards to which companies that hire private investigators will be held. Let's posit three different pre-investigation scenarios at HP. Someone on the board is leaking internal company information to the press and the company wants to find out who it is. The obvious course is to hire a private investigator. In scenario 1, the private investigator tells the company executives "I'll be using "pretexting," i.e. lying about my identity in order to obtain private information about the possible leakers. In scenario 2, the company and the investigator engage in a "don't ask me how I'm going to do it" dance. In scenario 3, the subject of the methods of the private investigator isn't discussed at all.

The question is "what's illegal"?

In scenario 1, the company has explicit knowledge and criminal liability appears fairly clear. In scenario 3, it would seem difficult to prove knowing intent to break the law on the part of the company. Scenario 2 is the toughest call (and, I'm guessing, probably what happened at HP). Can you hire a private investigator and then do a "see no evil" to escape criminal culpability? I suspect we're going to find out.

Now, there may be a big difference between what's criminally culpable and what's moral and ethical for a Board member in the era of Sarbanes-Oxley. We'll leave that to others to sort out.

Another interesting issue concerns scenario 4. What happens if the company knows nothing about how the investigation is conducted, but then the investigator comes forward with a report that indicates that laws were broken during the course of the investigation?

Again, the lesson is that companies need to be careful when hiring private investigators and board members should expect to be held to a high standard.

The NFL and Trade Secrets

In a sign of the season, AOL Sports is reporting that the New England Patriots signed a Buffalo Bills practice squad wide receiver only to pump him for his Buffalo Bills team trade secrets for a week and then release him.

The New England Patriots signed Jonathan Smith away from the Bills a week ago, then cut him before Sunday's game between the two teams. Some of Smith's former Bills teammates are saying the Patriots never really wanted Smith, and that they simply brought him along to pump him for information about the Bills' playbook.

According to author, Michael David Smith (no relation to Jonathan, I'm betting), the "league's eight-man practice squads exist to enhance player development, but they'll quickly turn into little more than espionage units if everyone is allowed to join another roster just long enough to give information about an opponent."

Does the NFL's collective bargaining agreement allows for separate confidentiality agreements with players? (It doesn't, I'm guessing.)

For Trade Secrets, For Heaven's Sake, Get it in Writing (Pacer Req'd)

A new case from the Eastern District of New York, Scientific Components Corp. v. Sirenza Microdevices, Inc., 2006 WL 2524187 (E.D.N.Y. Aug. 30, 2006), beautifully illustrates this important trade secrets principle.

The case concerned two companies that entered into a contract in 1995 whereby defendant would manufacture amplifiers used in wireless communications according to plaintiff's performance specifications to be resold to the public under plaintiff's trade name. After the relationship deteriorated, plaintiff accused defendant of failing to meet the specifications in the contract and then started selling its own products. As usual, claims and counterclaims ensued.

The one of most interest to us here is defendant's counterclaim that plaintiff manufactured the product using defendant's trade secrets.

On summary judgment, plaintiff argued that defendant's trade secrets claim should fail on a number of counts, including that defendant failed to specify the trade secrets, that all of the alleged trade secrets were readily ascertainable and well-known in the industry, and that plaintiff had not used any of defendant's trade secrets in any event.

The memorandum and recommendation of the magistrate-judge, adopted by the trial judge in granting summary judgment on this claim, looked at each of those arguments, but ultimately settled on one reason for summary judgment: the parties failed to embody any confidentiality obligation in any contract between them.

In fact, the information at issue was freely disclosed by defendant to plaintiff in order to validate the product and enourage the parties' supply relationship. There was no written contractual duty on the part of plaintiff to keep the information secret and no oral agreement either. Defendant even produced the bulk of the information without a confidentiality stamp.

Ultimately, the court ruled, there was no duty of fidelity or confidentiality created as required to support a trade secrets claim.

We can't stress it enough. Before you share your trade secrets with anyone under any circumstances, get a confidentiality agreement in writing.

Trade Secret Concerns in Canada and Anton Piller Orders

Okay, trade secrets fans, you heard it here first - the Canadian legal system occasionally authorizes holders of trade secrets in that country an "Anton Piller Order" and it is essentially a search warrant.

"If fraud does occur, there is an extremely powerful legal tool available to small businesses known as an Anton Piller Order (known as an APO). These civil search warrants allow one party to launch a surprise raid on the business premises or homes of people deemed to be infringing on civil rights, such as copyright.
Ira Nishisato, a Toronto-based commercial litigation lawyer with Borden Ladner Gervais, said the prevalence of information-based businesses, especially, has triggered a rise in court cases over information ownership.
While the first line of defence is usually drafted into work agreements, he said an Anton Piller Order can often turn into the last line of battle.
Described as the "nuclear weapon of civil defence," APOs are granted only in exceptional circumstances when a court agrees that civil rights are being infringed and that incriminating evidence could be destroyed if usual legal practices are followed.
"APOs are becoming increasingly common due to electronic elements," Mr. Nishisato said, noting: "So many businesses are Web-based, it's very easy for e-mails to be destroyed."
Though APOs are powerful, they're a two-edged sword. If a business files for an APO but the raid does not produce the expected evidence, the accused can argue the case in court and be granted damages."

HP Spying on Leakers -- "Crime was Committed"

Following up on yesterday's story about Hewlett-Packard spying on possible leakers on its Board, the New York Times reports that the monitoring effort included spying on journalists, including one from the Times itself, reporter John Markoff.

California's Attorney General, Bill Lockyer, is reported as stating that "a crime was committed," but that it's "unclear how strong the case is." Search warrants are on the way.

Meanwhile, the lawyer for the Board member who was tagged as the leaker, George Keyworth, is quoted as saying that this matter will "reach much higher to persons responsible at H.P."

Our betting is that other shoes will drop. From the start, this was the kind of big story that newspapers love to compete on. Now that it looks like they too were targeted, expect an even bigger feeding frenzy.

We'll keep you posted.

HP Mess: Set a Thief to Catch a Thief?

Nothing is more galling to a company's executives than a breach of a fiduciary duty (real or perceived). Well, the one thing more galling may be knowing that a fiduciary duty is being breached, but not knowing who's doing the breaching.

That was the situation Hewlett-Packard found itself in 2005 when inside company news was leaking like a sieve from the company's Board of Directors. The solution: hire a private invesitigative firm to find the leaker. Here's where it gets dicey, though. According to Red Herring (based on earlier reporting from the Wall Street Journal), the investigators used some tactics that may have crossed the line.

Specifically, the investigators used "pre-texting" (known in non-legal circles as "lying about your identity") in order to obtain directors' phone records. Now, the California Attorney General and the SEC are breathing down HP's neck about the manner in which the investigation was conducted.

Red Herring reports quotes Chris Hoofnagle, a staff attorney with the Samuelson Technology Law and Public Policy Clinic at UC Berkeley's Boalt Hall law school, who opines that the legal status of the snooping would hinge on what - if any - consent HP had obtained from its directors prior to the investigation, and whether HP knew that its investigators intended to obtain phone records.

"There are civil and criminal penalties for pre-texting phone records, both state hacking laws and the federal Computer Fraud and Abuse Act," Mr. Hoofnagle said. "The directors could sue the investigator and HP for invasion of privacy, for theft, and for violation of the Computer Fraud and Abuse Act."

HP has somehow managed to multiply its problems.

The lessons for other companies out there: make sure the fix isn't worse than the breach itself and be careful to hire investigators who won't cross the line.

The Trade Secrets of Scotch Whiskey at Risk?

The EU places some stringent labeling demands on manufacturers. Seems their latest idea is to require winemakers, whiskey distillers, and beer makers to disclose their secret ingredients on their labels. Watching the Scots deal with this one could be interesting - stay tuned.

Trade Secrets and Fiduciary Duties (Pacer Req'd)

Two opinions in one case, Navigant Consulting, Inc. v. Wilkinson, 2006 WL 2422868 & -69 (N.D. Tex. Aug. 22, 2006), illustrate the connection between fiduciary duty and trade secrets claims in the context of departing employees. The background is fairly standard, two employees of plaintiff left and went on to compete with their former employer. This resulted in the usual host of claims including misappropriation of trade secrets, breach of fiduciary duty, and breach of contract. After a $4 million jury verdict against defendants, the court, the United States District Court for the Northern District of Texas, considered post-trial motions.

The court ruled first that the damages arising from the trade secrets claim were duplicative of those under the fiduciary duty claim and could not be awarded twice. The court, though, rejected defendants' contention that they shouldn't be punished for simply preparing to leave their employer. The breach of fiduciary duty, the court ruled, occurred before they left and included revealing confidential information of their employer -- the trade secrets -- to a third party.

In a separate opinion, the court dealt with the jury instruction on breach of fiduciary duty. The defendants objected to a charge that stated that an employee may, "but not always," secretly join with other employees in preparing to leave.

The court held that instruction was proper because employees, at least in Texas, may not solicit other employees to leave their employer nor conspire with other employees to misappropriate trade secrets.