[Newsletter] Managing Trade Secret Risk under the Amendment to the Trade Secret Protection Act

1.  Overview

On July 9, 2019, the amendments to the Unfair Competition Prevention and Trade Secret Protection Act (“Trade Secret Protection Act”), which further reinforce the protection of trade secrets, will become effective (the “TSPA Amendment”).  The TSPA Amendment includes significant changes such as allowing punitive damages to be awarded for intentional or willful misappropriation of trade secrets.  Once the TSPA Amendment comes into effect, it is expected to deter technology misappropriation and promote fair competition.  Set forth below are the details of the TSPA Amendment and the measures that corporations can adopt to manage trade secret risk.

2. Details of the TSPA Amendment

A. Adoption of Punitive Damages

The most significant change in the TSPA Amendment is that courts are now permitted to award punitive damages up to triple the amount of the actual damages incurred when a trade secret is found to have been intentionally or willfully misappropriated.  

Under the TSPA Amendment, the following factors will be considered when determining the amount of punitive damages: 1) whether the infringer was in a dominant position; 2) the infringer’s level of intent or awareness regarding the potential damages; 3) the magnitude of damages incurred by the trade secret owner due to trade secret misappropriation; 4) the infringer’s economic benefit derived from the misappropriation of trade secrets; 5) the period and frequency of trade secret misappropriation by the infringer; 6) the amount of monetary penalty imposed on the infringer; 7) the financial status of the infringer; and 8) the efforts made by the infringer to remedy the damages.

B. Relaxed Threshold for Trade Secret Classification

Prior to the TSPA Amendment, in order to classify a piece of information as a trade secret, the following requirements had to be satisfied: first, the information is not publicly available; second, the information has economic value; third, “reasonable efforts” are made to maintain the secrecy of the information.  In relation to the third requirement (i.e., secrecy), the TSPA Amendment dispenses with the “reasonable efforts” language and affords protection as long as the information was kept secret thereby reducing the burden of proof for the trade secret owner in litigation.

C. Expanded Scope of Misappropriation and Heavier Penalties

Under the TSPA Amendment, the scope of activities that constitute trade secret misappropriation has been expanded to include the following: 1) unauthorized removal of trade secrets from its designated location, with the intent to seek illicit gain or cause harm to the owner; 2) refusal to destroy or return trade secrets despite the owner’s request, with the intent to seek illicit gain or cause harm to the owner; 3) even if there was no such intent, acquiring trade secrets through theft, deceit, threats or other unlawful means; or 4) acquiring or using trade secrets notwithstanding the knowledge of the aforementioned acts.

Further, the TSPA Amendment has significantly increased the level of monetary penalties and term of imprisonment that can be imposed for trade secret misappropriation.  The level of monetary penalties for premeditation or conspiracy to commit misappropriation has also been increased.

3. Compliance Measures for Managing Trade Secret Risk

A. Measures to Prevent Misappropriation of Third Party Trade Secrets

In light of the increased civil and criminal liability imposed under the TSPA Amendment, companies need to exercise extra caution to prevent inadvertent misappropriation of trade secrets owned by its competitors.  In particular, when hiring experienced employees, companies should take precautions to ensure misappropriation does not occur.  Recently, a company who employed an experienced employee from a competitor became subject to criminal investigation and police search and seizure due to the competitor’s accusation of trade secret misappropriation.  Thus, in order to minimize such risk when hiring a new employee, the company should obtain a written confirmation from the employee stipulating that no trade secrets have been taken from the prior employer and that no unauthorized use of secret information or materials owned by the prior employer has occurred.

Moreover, companies need to ensure that sufficient evidence is procured so that any intent or willful misconduct on the part of the employer is precluded and does not give rise to damages or criminal liability.  In this regard, we recommend that the following measures be implemented: 1) preemptive training of employees; 2) continuous monitoring of employees; 3) preparing a manual detailing what actions should be taken when illegal activities occur; and 4) establishing compliance procedures for disciplinary actions against employees in violation.

B. Measures to Protect Company’s Own Trade Secrets

Companies also need to make continuous efforts to protect their own trade secrets.  In order to protect a company’s trade secrets from misappropriation, the following measures should be implemented: 1) assess the classification and administrative scheme of trade secrets; 2) regularly train employees to raise awareness of the importance of trade secret protection; 3) establish a viable system for protection of trade secrets; and 4) establish rules of employment on disciplinary actions for trade secret misappropriation.  It is crucial that the employee training covers practical implications related to the employees’ work rather than a mere explanation of relevant laws and internal policies.  Accordingly, before conducting employee training, it is advisable to conduct analysis of the duties of all employees to determine whether and how their workscope falls under trade secret protection.

Another important aspect in managing trade secret risk is implementing adequate procedures for resigning employees.  An increasing number of companies have started to adopt digital monitoring procedures to verify whether trade secrets have been leaked when key employees depart.  Periodical monitoring of employees designed to prevent potential leakage of trade secrets is also increasing.

LAB PARTNERS has extensive experience and know-how in advising clients on the establishment of compliance systems to protect trade secrets and in conducting internal investigations through employee interviews and digital forensic methods.  In addition, LAB PARTNERS successfully represents clients in disputes and litigation involving trade secrets.  Applying our expertise in internal investigations, we help clients find detailed facts and causes, mitigate legal and corporate risk and establish systems to prevent the recurrence of such misappropriation.  Should you need further advice on how to comply with, and respond to, the TSPA Amendment regarding trade secret protection, please feel free to contact us.

LAB PARTNERS