Appian Corp. was awarded more than $2 billion in damages after a Virginia jury found that its competitor, Pegasystems Inc., had stolen its trade secrets, reports Lexology.
About the report
The Appian case centers around a government contractor working as an Appian software developer with access to the back-end of the company. According to Appian’s case, Pegasystems hired the contractor essentially as a spy to share proprietary information.
Some of the information from the contractor was allegedly used to better train Pegasystems’ sales force to compete with Appian’s, and Pegasystems’ product engineering team also made changes based on what they had seen in Appian’s materials.
During the years this took place, Pegasystems reportedly used the information to improve its own product and better compete against Appian.
The verdict had a major impact on the stock of both companies:
Appian shares jumped 39% last Tuesday after the news came out, while Pegasystems’ stock plunged 21%. It’s not a surprise that the two stocks would swing that wildly. Pending appeals, Appian stands to win $2.036 billion based on Pegasystems’ enrichment from its intellectual property, a large sum for Appian, which currently has a market cap of less than $4 billion and $160 million in cash. An infusion of $2 billion, in other words, would effectively increase the company’s value by 50%.
Pegasystems, on the other hand, is valued at $4.2 billion, meaning that a $2 billion loss would put a large dent in its value. Unless Pegasystems wins on appeal, Appian will receive a lump-sum payment of more than $2 billion once all appeal options are exhausted.
The case emphasizes the importance of protecting confidential information and trade secrets – via legal and practical means, and via litigation if needed.
NDAs
Non-Disclosure Agreements (NDAs) are the backbone of any trade secret and confidential information protection program. Employees, independent contractors, and anyone else with access to trade secrets (such as vendors) needs to be aware of:
What’s confidential/proprietary
- their obligation to keep such information/material confidential – not to use or disclose it except as allowed
- the penalties (which can include prison time) for misuse of trade secrets
- A very common situation for trade secret theft is when an employee is fired and
- downloads sensitive information to a thumb drive or the cloud before leaving, or emails
- it to a personal computer, in order to take it along to his or her next position or use it to
- start a new business. HR and security personnel need to be alert to this risk and take appropriate steps to prevent it.
Companies can also require employees to sign non-competes which prohibit them from going to work for competitors for a period of time, such as one to two years. However, some states (including California) won’t enforce non-competes and the Biden administration is attempting to limit them nationwide – especially when lower-level employees who don’t actually have access to trade secrets are involved.
When dealing with Chinese companies to manufacture a product – as many American companies do – a special form of NDA called a “non-disclosure/non-use/non-circumvention agreement” (NNN) agreement is needed.
An NNN prohibits the Chinese manufacturer from:
- disclosing the client’s designs to a third party
- making use of the client’s designs to make competing products
- circumventing the client and going directly to the client’s customers
- Note that it’s important for NNN agreements to cover ALL confidential information and
- not just trade secrets, or they may not be enforceable by a Chinese court.
Need-to-Know
The best way to protect trade secrets is to not disclose them in the first place. They should be shared with only those who have a need-to-know in order to do their jobs.
If too many people know a “secret,” it can be legally deemed to be not a “secret” anymore.
Physical Security
Physical security includes things like:
- locked file drawers
- special physical keys for access to certain rooms or electronic files
- limiting building access
- security guards
- security cameras
- shredding sensitive documents
- scanning for bugs (listening devices)
- Cyber Security
Cyber Security includes various methods to prevent a company’s computer systems from being hacked. These can include:
- Firewalls
- Anti-virus software
- Enforcing good password hygiene (e.g., changing passwords on a regular basis)
- Training employees to spot and avoid phishing attacks
- Litigation
If security measures fail (or were never properly implemented), trade secrets have been stolen, and the thief refuses to admit culpability and/or stop using or disclosing the secrets, the next step is likely to be litigation in state or federal court.
The Defend Trade Secrets Act of 2016 (DTSA) is a federal law that allows a trade secret owner to sue in federal court for trade secret misappropriation.
States also have their own trade secret laws, usually based on the Uniform Trade Secrets Act (UTSA). Versions of the UTSA have been adopted by 48 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands.
The UTSA defines a trade secret as:
information, including a formula, pattern, compilation, program, device, method, technique, or process, that:
- derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and
- is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
- Those “reasonable efforts” include things like NDAs and physical security, as discussed above.
Another venue for dealing with trade secret disputes is the US International Trade Commission (“ITC”), a federal agency that oversees actions against unfair trade practices including trade secret theft.
Whereas federal and state court litigation can drag on for years, ITC actions are relatively expeditious, with discovery lasting only four to five months and the trial taking place less than 12 months after a complaint is filed.
Although ITC actions are intended to protect significant economic activities in the United States, they can also address conduct abroad.
For example, a $1.8 billion settlement – one of the largest trade secret settlements ever – arose out of an ITC action brought by LG Chem against SKI for misappropriation of EV battery trade secrets that happened in Korea.
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Source: Lexology
