Last week a court poured out * Storage Technology’s corporate-raiding lawsuit against Cisco. One of the nails in the coffin was the way that Storage Tech had protected — or more accurately, failed to protect — the alleged trade secrets that Cisco had supposedly misappropriated. While that alone didn’t lose the case for Storage Tech, it didn’t help, and it likely has triggered some internal recriminations at Storage Tech.
* When a lawsuit is “poured out,” it generally means the lawsuit was dismissed, in this case, by the granting of summary judgment. UPDATE: The court’s summary judgment was subsequently affirmed by a federal appeals court – see Storage Technology Corp. v. Cisco Systems, Inc., 395 F.3d 921 (8th Cir. 2005).
Here’s the story:
The Lawsuit
The parties to the lawsuit are well-known players in the tech sector. Storage Technology makes various disk- and tape storage devices, as well as equipment for storage networking and management. Cisco is “the worldwide leader in networking for the Internet,” according to its Web site. In late 1999 and into 2000, several of Storage Tech’s employees left to join NuSpeed, Inc., a start-up company that opened in January 2000. In September 2000, Cisco bought out NuSpeed for some $450 million in Cisco stock.
(Wait a minute — in September 2000, long after the tech bubble had burst, the NuSpeed guys got $450 million in stock for their nine-month old company? Wow. Don’t be too envious, though. As this chart shows, Cisco’s stock price joined the plunge in the months following the acquisition. Depending on how long the lock-up was for — I couldn’t seem to find the acquisition agreement in Cisco’s SEC filings — the NuSpeed people probably didn’t net nearly as much as they had hoped.)
Anyway, Storage Tech sued Cisco shortly after the acquisition closed. The gravamen of the lawsuit was that Cisco allegedly had interfered with the noncompete, nonsolicitation, and nondisclosure provisions in the employment contracts of the former Storage employees who had gone to NuSpeed. Three years later (viz., last week), the judge granted summary judgment for Cisco on all counts, largely because Storage Tech had failed to come forward with evidence of actual damages.
Storage Tech’s Secrecy Problems
At one point, the judge zeroed in on Storage Tech’s supposedly-cavalier treatment of what it was claiming to be trade-secret information:
As to the requirement of reasonable efforts to maintain the secrecy of the information, the [Minnesota Uniform Trade Secrets Act] requires neither the maintenance of absolute confidentiality nor the implementation of specific measures to maintain the secrecy of a trade secret. A plaintiff asserting a misappropriation claim must demonstrate that it undertook some effort to keep the information secret.
Here, Storage used general employee-confidentiality agreements, but such agreements are insufficient to satisfy the statutory requirement. [Editorial comment: That doesn’t seem like a correct statement of the law, but maybe the judge was making a specific statement about these particular circumstances.]
Given its rejection early in the product development process, very little information about the SAN Appliance exists. What little information does exist was not the subject of reasonable efforts to maintain its secrecy. For example,
- the author of the slide presentation did not mark it as confidential because he did not believe the design of the SAN Appliance was confidential, proprietary, or a trade secret. None of the limited documentation of the SAN Appliance was marked confidential.
- Nor did Storage secure the documentation related to the SAN Appliance. Storage admits that it found the documentation on back-up disks left behind by departing employees. [Editorial comment: It’s hard to see how this one example weighs against secrecy.]
- Moreover, upon the resignation of the slide presentation’s author, Storage did not inform him of the secrecy of the SAN Appliance. [Editorial comment: This doesn’t sound right at all. It doesn’t seem reasonable to expect that an employer, in every exit interview, must go through and list every trade secret that the departing employee is expected to keep secret. But again, maybe the judge was referring to the specific facts and circumstances of this case.]
In short, viewed in the light most favorable to Storage, the record reveals that Storage did not subject information about the SAN Appliance to reasonable efforts to maintain its secrecy.
(Emphasis, paragraphing, and bullets added, citations omitted.)
As you can tell from the editorial comments above, I think the judge probably goofed here. It could be that the judge didn’t have sufficient evidence presented about Storage Tech’s security system. From the discussion in the judge’s opinion, it seems to me that if Storage Tech had the usual corporate security systems in place — locks on the doors, passwords to access the network, etc. — the judge should have let the secrecy claim go to the jury. But then I have yet to be appointed and confirmed as a federal judge, so my opinion counts for exactly zero.
The overall tone of the opinion suggests that the judge didn’t think much of Storage Tech’s trade-secret claim concerning a product proposal that it apparently had never even tried to develop. In all likelihood, he was going to pour out Storage Tech in any case.
Possible Lessons
There are several lessons to be had in this case, but here’s a big one: Make an effort to label your confidential documents as “Confidential” or “Proprietary.” If you don’t, a judge might later use that as an excuse to deny your claim that the documents contain trade secrets — if you didn’t treat the documents like trade secrets, why should the court?
(On the other hand, don’t go overboard with your confidentiality stamp — the credibility of your secrecy assertions may well be diluted if you unthinkingly label the menu in the company cafeteria as confidential.)
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Signing a business contract:
>>It doesn’t seem reasonable to expect that
>>an employer, in every exit interview, must
>>go through and list every trade secret that
>>the departing employee is expected to keep
>>secret.
Perhaps not, but when a business believes it possesses confidential or trade secret information, that business should have in place a set of uniform “exiting” procedures calculated to reinforce the departing employee’s awareness that the company does believe that its information is protectible, that the company is diligently doing what it can to protect that information and that the company has emphasized to the departing employee that s/he should not misuse the company’s confidential or trade secret information.
I haven’t read this court opinion, so it may well be that there was an “exit” procedure in some form and the court found it lacking in some regard. But the impression your summary leaves is that nothing of the sort occurred, in which event I think the court’s decision makes sense.
An employer certainly cannot just allow an employee to leave without being able to later establish that it did SOMETHING to protect its property.
For example, there should be an exit interview with each departing employee that includes at least a general discussion about the nature of, and the importance to the company of protecting, the company’s confidential and trade secret information. This should at least include covering that the employer expects the departing employee will not use or disclose to others any information about the company’s business processes, its plans, its methods of operation, its ideas for future products or services, etc. And the employer should expressly request that, if for any reason the departing employee might want to disclose any of the company’s information (even if the departing employee does not think it might be confidential), the departing employee please first contact [a specifically named individual at the company] to confirm that the company would have no objection to using or disclosing that information. Of course, you can’t make a “bad guy” actually make such a contact, just as you can’t stop him from misuing the information, but it can help the company look much better than if it didn’t offer to discuss it first.
Anyway, at the conclusion of the exit interview, the departing employee should be asked to sign an acknowledgement that each of the foregoing items has been discussed and that he has been afforded the opportunity to ask any questions or seek any clarifications he may desire.
At this point in the relationship, it’s unlikely that the employer can get an agreement that anything in particular actually is a trade secret, extract a promise not to improperly use company information, or even a promise to “call first,” but the important thing here really is just to have the employee acknowledge that s/he has been given all this information and to therafter maintain documentary evidence of that acknowledgement. This can help prevent the employee from later saying “Nobvody ever told me . . . .”
Then, if the issue comes up later, the employer has something to prove that the ex-employee participated in that discussion about those specific concepts.
I do agree that it’s impractical to expect the employer to specifically identifiy every item of confidential or trade secret information in an exit interview, but I also am very confident that the employer must be able to show that it did SOMETHING to impress upon the departing employee that the company takes protection of its information very seriously.
“Power Point Slides the Smoking Gun in Trade Secret Case”
From IP Memes: “Noted IP authority D.C. Toedt has a new blog called “By No Other.” In it, he discusses