Trade Secret Protection in Taiwan

Ch

Protecting Trade Secrets

in Taiwan

November 30, 2012 German Trade Office, Taipei

Chris Neumeyer

Managing Partner

www.asialaw.biz

Jessica Chiang

Senior Counsel

Delta Electronics, Inc.

Copyright © 2012

Business Investment in Intangibles

2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1950's 1960's 1970's 1980's 1990's 2000's

Billions of USD Annually

Corp. investment in the U.S. in R&D, IT, IP, branding, etc.

Source: U of Maryland, 2009

Value of Tangible v. Intangible Assets

3

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1975 1985 1995 2005 2010

TangibleAssets

IntangibleAssets

U.S. S&P 500 Market Value

32%

68%

32% 20% 20%

Source: Ocean Tomo

17%

80% 80%

83%

68%

Types of Intellectual Property

4

Trademark

Distinctive signs to

identify a product.

Trade Secret

Valuable information

kept secret, such as

business strategies,

manufacturing

processes, chemical

formulas, customer

lists, etc.

Copyright

Expressions of ideas

in manuals, software,

apps, icons, etc.

Patent

Inventions relating

to design, camera,

battery, scrolling,

touch screen,

bounce-back,

pinch zoom, etc.

The iPhone has

over 200 patents.

What is a Trade Secret?

5

General Definition

● Information, such as a formula, pattern, compilation,

program, device, method, or process, that

● Has economic value because not generally known or

readily ascertainable by proper means, and

● Reasonable efforts are used to keep it secret.

- - - - - - - - - - - - - - - - - - - - - - - - - -

The exact definition depends on the jurisdiction, but. . .

Most jurisdictions use similar definitions.

What is Forbidden?

6

Violations (generally)

● Misappropriate: Acquire trade secret by improper means,

such as theft, bribery, or espionage, or . . .

● Receive/possess misappropriated trade secret, or . . .

● Use trade secret knowing it was misappropriated.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Exact details depend on the jurisdiction, but. . .

Reverse engineering or independent development of the

secret is allowed (unlike a patent).

Examples of Trade Secrets

7

Formula invented in 1886. In a safe ever since.

In safe in NY from 1919-1925, as loan collateral.

• In safe in Atlanta from 1925-present.

KFC original recipe since 1940.

Original handwritten recipe locked in safe.

Only 2 executives have full access.

Examples of Trade Secrets

8

Spray lubricant invented 1953. Never patented. Formula locked in bank safe. Concentrate mixed at 3 locations, then distributed worldwide to aerosol makers.

PageRank algorithm determines search results. Protected by patent/trademark, but the details (over 500M variables) protected as trade secrets.

Civil Trade Secret Lawsuits in the U.S.

9 Source: www.faircompetitionlaw.com

0

500

1000

1500

2000

2500

2000 01 02 03 04 05 06 07 08 09 2010

Number of civil lawsuits filed

Criminal Trade Secret Lawsuits in U.S.

10 Source: www.faircompetitionlaw.com

0

2

4

6

8

10

12

14

1996 07 08 09 2000 01 02 03 04 05 06 07 08 09 2010 11

Criminal Cases Filed (Economic Espionage Act)

Who Steals Trade Secrets?

11 Source: O’Melveny & Myers (2010).

Business

Partner

31%

Unrelated

3d Party

6%

Unknown

4%

Employee (past/present)

59%

Found guilty in

US trade secret

lawsuits from

1950-2008

What Secrets are Stolen?


0

5

10

15

20

25

30

35

40

45

Percent of lawsuits

involving different types

of secrets 1950-2008

Increasing China connection?


30% of all cases from 1996-2010

40% of all cases from 2008-2010

6 of the 7 cases filed in 2010

Percent of US criminal prosecutions

for theft of trade secrets where the

defendant is a PRC citizen or was

born in China.

In most cases, the secrets

were sold to a PRC company

or PRC government.

Recent US cases w China connection

14

Year Victim Accused Type of Secrets Sentence

2011 Apple Paul Shin Devine Info to suppliers for $1M bribes Guilty

2009 Boeing Greg Chung Jets, rockets, space shuttle 15 yrs prison

2012 CME Chunlai Yang Stock trading source code 6 yrs prison

2011 Dow Kexue Huang Pesticides, food products 7 yrs prison

2012 Dow Wen Chyu Liu Chemical for vinyl products 5 yrs prison

2012 Dupont Walter Liew Pigments for paints/plastics Pending

2010 Dupont Hong Meng LEDs for displays 14 mos prison

2011 EnfoTech Yan Zhu Hazardous waste disposal 3 yrs probation

2009 Ford Xiang Dong Yu Automotive designs & specs 6 yrs prison

2012 GM Shanshan Du Hybrid car technology Pending

2012 L-3 Sixing Liu Military navigation data Guilty

2012 Motorola Hanjuan Jin Mobile phone tech data 4 yrs prison

2007 P. Paragon Chi Mak Nuclear submarines, etc. 24 yrs prison

2012 Sanofi Yuan Li Pharmaceuticals 18 mos prison

15

Representative

Lawsuits

Avery-Denison v. Four Pillars (1997-2003)

16

First trial under Economic Espionage Act.

Avery-Denison makes tape/stickers.

Four Pillars is a Taiwan competitor.

Four Pillars President & daughter (Yang/Yang)

paid $160,000 over 8 years for formulas from

Avery-Denison employee (Lee).

Four Pillars/Yang/Yang/Lee were all found guilty.

Four Pillars:$5 million fine. Lee: 6 mos prison.

Yang/Yang: 51 mos/24 mos prison. Too late, they fled to TWN.

Dupont v. Kolon (2012)

17

DuPont makes super-strong Kevlar fiber.

Korean competitor (Kolon) hired Dupont

workers, paid for specs, designs, test results,

pricing info, manufacturing info, etc.

Kolon began selling its version of Kevlar.

Dupont won civil case:

● $920M damages, and

● Kolon sales of related products in U.S. banned for 20 years.

2012: Prosecutor filed criminal case seeking $225M.

US v. Jin (2012)

18

1998: American citizen born in China joins

Motorola as software engineer.

2006: Takes leave; joins PRC competitor.

Returns to Motorola to steal sensitive info.

Arrested at U.S. airport with one-way ticket to

China and over 1,000 electronic and paper files.

2008: Criminal charges filed.

2012: Convicted/Sentenced to 4 years prison.

U.S. v. Greg Chung

19

American engineer born in China, worked for

Boeing and Rockwell more than 30 yrs.

Sold info to PRC govt since 1970’s for over $3M,

concerning many technologies, including:

• F-15 fighter

• B-52 bomber

• Delta IV rocket

• Chinook helicopter

• Space shuttle

Over 300k pages of confidential Boeing technical

documents in his house when arrested.

2010: Age 74, found guilty, sentenced to 15 yrs.

TSMC v. SMIC

20

Taiwan Semiconductor (TSMC) is world’s

largest dedicated semiconductor foundry.

PRC chipmaker, SMIC, was poaching engineers

and management from TSMC and others.

TSMC sued in TWN/China for unfair competition

and theft of trade secrets. Settled for $175M.

TSMC also sued in US, learned SMIC had 15k TSMC docs,

with 500k pages of manufacturing information.

2d Settlement: SMIC paid $200M plus 8% of its stock.

21

Practical Means

of Protection

REASONABLE PRECAUTIONS ARE ESSENTIAL!

22

If reasonable efforts not taken to keep secret:

► Information may be stolen, and . . .

► Trade secret remedies may be unavailable.

Don’t forget, the definition of trade secret includes

“reasonable efforts to maintain secrecy.”

Without such efforts, it will not qualify as a trade secret.

Perform IP Audit

23

Interview personnel from R&D, sales, legal, finance, etc.

Compile list of sensitive information, including:

● Type of information

● Means of protection

● Persons with access (internal/external)

● Approximate value

● Cost to develop it

● Ease of unauthorized duplication/development

Use Audit results to develop plan of protection.

Should you Patent it instead?

24

Factors favoring patents:

● Value of the information > cost of patenting

● Satisfies patent requirements (e.g., novelty, etc.)

● Easily reverse engineered

● Easily independently developed

In other cases, trade secret protection is preferable.

Often both can be used at the same time.

For more on this subject, visit www.asialaw.biz/blog

Physical Security

25

● Fences and locked doors

● Security guards/badges/cameras

● Cameras prohibited (including cell-phone cameras)

● Sensitive materials in locked rooms/cabinets

● Sign log-book to access sensitive materials

● User ID for photocopiers

● Passwords for computers – changed regularly

● Paper shredders (or shredding service)

Security Procedures

26

● Mark “Confidential” “Do not Copy” etc.

● Distribute on need-to-know basis

● Don’t cc to broad mailing list

● Even greater care when sharing externally

● Require signed NDA before disclosing

● Password protect electronic documents

● Require signed acknowledgement of receipt of info

● Regular trainings of employees

Careful when Hiring

27

References & background checks

New hires sign agreement/s containing:

● Confidentiality Agreement

● Assignment of IP developed during employment

● Non-competition (during/after employment)

● Prohibition against using stolen trade secrets

Comparable language in Employee Handbook.

Careful when Employee Leaves

28

Upon Notice of resignation/termination:

● Restrict access to sensitive materials

● Monitor emails, downloading, copying

Exit interview:

● Checklist -- return badge, computer, company property

● Remind employee of confidentiality obligations

● Require signed acknowledgement of obligations

After departure:

● Inspect computer, work area, files, etc.

● Preserve emails and hard-drive temporarily.

Non-Competition Agreements

29

● Unenforceable if unreasonable.

● Only for senior staff and those accessing secrets.

● Restrict by time, geography, position, products, etc.

(e.g., Employee may not work on LCD monitors for

competitor in TWN for 2 years following termination…)

● Specify additional compensation paid for the restriction.

● Specify injunction & attorney fees allowed if breach.

● Remind employee of Non-Compete at departure.

● Consider sending registered warning letter to new employer.

Sharing with Partners, Suppliers, etc.

30

Avoid JVs, or obtain majority share if possible.

Investigate other party beforehand. Get references.

Build commodity pieces in China, brains in Taiwan.

Strong Contracts:

● Identify trade secrets

● Supplier must restrict access/implement security

● Right to audit for compliance

● Disputes resolved in mediation/arbitration

Work closely with their management to help train them.

Mark docs “confidential,” encrypt, password protect.

31

Legal Remedies

In Taiwan

Taiwan Criminal Action

32

Currently, Taiwan’s Trade Secret Act does NOT

provide criminal remedies.

However, an action may be possible under the

Taiwan Criminal Act if the below elements are

satisfied –

(Taiwan Criminal Act protects “all secrets” that

certain people have access to)

1. Certain professionals (e.g., doctors, pharmacists, lawyers,

accountants, clergymen, or notaries) may be sentenced

up to 1 year prison or NTD$50,000 fine for intentionally

disclosing secrets learned from their clients/patients.

(More severe than violation of attorney/client or

doctor/patient privilege under U.S. law)


33

2. Intentional disclosure of secret learned during employment,

in violation of confidentiality obligation required by law,

court order or contract is punishable by up to 1 year prison

or NTD$1,000 fine (Taiwan Criminal Act).

3. Enhanced penalties –

Public officer who intentionally discloses

secret learned during his public service

may be sentenced up to 2 years prison or

NTD$2,000 fine.

Person who intentionally discloses secret

learned through the use of computer or electronic devices

may be sentenced up to 2 years prison or NTD$5,000 fine.


34

4. Victim Must file Complaint –

For this type of crime, there is no sua sponte criminal

investigation or prosecution. Prosecutors will initiate

criminal investigation only when victim files a complaint.

5. Statute of Limitations –

Criminal Complaint for this type of crime must be

filed by the victim within 6 months after learning

the identity of the offender.


35

6. If Other Crimes also Involved –

• Use of fraudulent means to steal trade secrets, or

• Acquire trade secrets through breach of trust

(failure to fulfill duty entrusted to him/her)

Sentence up to 5 years prison and/or

NTD$1,000 fine.

7. Filing Complaint is NOT Required

Prosecutors may initiate sua sponte criminal investigation

without a request and there is no statute of limitations for

above type of criminal action.

New Criminal Remedy

36

Amendment to Taiwan Trade Secret Act –

Passed by Executive Yuan Oct. 25, 2012

(Not Effective Yet)

Sentence up to 5 years prison and NTD$10 million

if a person:

1. Acquires trade secret through improper means, or

2. Reproduces, misappropriates or discloses trade

secret without authorization,

OR

1. Has been requested by the trade secret owner to destroy the

confidential information, but

2. Fails to destroy the confidential information as requested.

New Criminal Remedy

37

Amendment to Taiwan Trade Secret Act –

Passed by Executive Yuan Oct. 25, 2012

(Not Effective Yet):

Enhanced Penalty –

A person may be sentenced up to 5 years prison AND

NTD$50 million if

The unlawful misappropriation or disclosure

of trade secret occurs outside Taiwan.

Assisting the Prosecutor

38

The prosecutor’s investigations are closed to

the public, under Taiwan Criminal Procedure Act,

but the victim may assist.

• Help prosecutor identify the trade secret (e.g.,

datasheet, schematics, customer list, etc.) that has

been misappropriated.

• Provide record showing the information is economically

valuable and has been kept confidential (e.g., only certain

employees had access).

• Provide relevant documents, such as confidentiality

agreement signed when employee joined the company.

Gathering Evidence

39

Prosecutor may request court to issue Search Warrant, under

Taiwan Criminal Procedure Act, to search the body, property,

electronic record, residence or other premises of an accused.

A third party’s premises may be searched only when there is

probable cause to believe the body, property or electronic

record of the accused is located there.

- Provide prosecutor with evidence showing

that the confidential information is in the

possession of the accused or

in third party’s premises.

- Identify the location of trade secrets.

Taiwan Civil Actions

40

Possible Causes of Action –

1. Breach of Employment Contract

2. Breach of Confidentiality Agreement

3. Misappropriation under Current Trade Secret Act -

a. Injunctive relief and Secrecy Maintaining Order are available. b. May request destruction of products generated from misappropriation or devices used for misappropriation. c. To preserve confidentiality of trade secret, access to court docket may be restricted and hearings may be non-public.

Civil Action for Misappropriation

41

Misappropriation under Trade Secret Act -

a. Acquire trade secret through improper means.

b. Knew or should have known the information is trade secret

acquired by improper means, but still proceed to acquire,

use or disclose such trade secret.

c. After obtaining trade secret through legitimate reasons,

knew or should have known it’s a trade secret defined

under (a), but proceed to use/disclose that secret.

d. Use/disclose legally acquired trade secret by improper

means.

e. Use/disclose trade secret in violation of laws that impose

duty to maintain secrecy.

Save Costs by Ancillary Action

42

Court filing fee for civil action in Taiwan:

- About 1% of claim amount for trial at first instance

- About 1.5% for appeal

Filing fee may be waived if civil action is filed on same subject

matter as criminal case, after criminal case is filed, but before

appellate court issues decision in criminal case.

Don’t Miss the Deadline

43

Statute of Limitations for Civil Action –

● Taiwan Trade Secret Act – civil action must be brought within

2 years after learning of misappropriation or 10 years after the

misappropriation happens, whichever comes earlier.

● MediaTek case – Taiwan IP Court dismissed MediaTek’s civil

claim for NTD$ 20M, because it was filed after the statute of

limitations expired (MediaTek learned of the violation in 2007/3,

but didn’t file civil action until 2012/2).

MediaTek v. Yang

44

MediaTek: one of largest Taiwan-based IC design companies.

2007: Former MediaTek digital TV marketing employee disclosed

secrets regarding IC design to new employer, Mstar Semi-

conductor, a competitor. MediaTek filed criminal complaint for

disclosing commercial secrets in violation of Taiwan Criminal Act.

Taipei District Court sentenced the

employee to 9 months in prison,

which could be commuted to a fine of

NT$270,000 (US$9,225).

2011: MediaTek appealed decision, brought ancillary civil action

at Intellectual Property Court. IP Court affirmed the criminal

judgment but dismissed the civil action for statute of limitations.

AUO v. China Star Optoelectronics

45

AUO is TWN’s 2d largest LCD panel-maker.

AUO filed civil lawsuit in 2012, alleging two

high-level execs stole trade secrets before

quitting to work for a major PRC competitor.

Prosecutors launched criminal investigation, searching the

former employees’ houses in Sept. 2012.

Potential threat to Taiwan’s entire LCD-panel industry.

Taiwan criminal and civil investigations are ongoing.

46

Legal Remedies

In the U.S.

Why Take Action in the US?

47

Possible Reasons:

● Defendant is US company/citizen

● Witnesses/evidence in the US

● Defendant has US assets

● Defendant imports into US

● More reliable legal system in US

● Stronger remedies under US law

● US discovery system

Criminal Remedies in the U.S.

48

Theft of Trade Secrets Economic Espionage

18 USC 1832 18 USC 1831

Elements

It is a crime to knowingly: Basically the same, but knowing

the theft will benefit a foreign

government, company or agent.

● Steal trade secrets

● Possess stolen trade secrets

● Attempt either of the above

Sentence

Person: 10 years prison

plus $250,000 fine

Person: 15 years prison

plus $500,000 fine

Company: $5M fine Company: $10M fine

Drawbacks of Criminal Action

49

● Govt may decline to prosecute

Other priorities, especially if foreign victim.

● Slower than civil action

Overworked; must present case to grand jury, etc.

● Higher burden of proof than civil case

Beyond reasonable doubt v. preponderance of evidence.

● May stop/slow the discovery process

Defendant may “plead the 5th” due to criminal case.

Prosecutor may demand discovery put on hold.

On the other hand, civil suit may result in prompt seizure of

evidence, injunction, Order banning evidence destruction…

Civil Action may be Possible

50

Most States have laws authorizing trade secret claims.

Mostly based on the Uniform Trade Secrets Act (UTSA).

It MAY be possible for a:

● US or foreign Plaintiff to sue a

● US or foreign Defendant

● In State court in the US, based on

● Violations committed inside/outside the US

Remedies under UTSA (State law)

51

1. Monetary Damages

● Actual Loss

● Wrongful Gain

● Reasonable Royalty

2. Double Damages if willful/malicious

3. Injunction for actual/threatened misappropriation

4. Attorney fees may be awarded if:

● Plaintiff filed the lawsuit in bad faith

● Motion to terminate injunction made/opposed in BF

● Willful and malicious misappropriation

Required for State Lawsuit

52

To win Lawsuit:

● Trade secret

● Plaintiff owned it

● Defendant had access

● Knew/should have known was trade secret

● Acquired wrongfully. Circumstantial evidence OK

(access + similar product)

Was it a Trade Secret?

● How well known outside company

● How well known inside company

● Measures taken to protect secrecy

● Value to owner/competitors

● Money/effort spent developing it

● Ease of legal duplication/acquisition by others

Common Defenses

53

● No jurisdiction

● Statute of Limitations

US: 3 yrs after knew/should have known of violation.

● Not a Trade secret

- Already publicly known

- Readily ascertainable by proper means

- Lack of reasonable efforts to keep secret

● Defendant’s technology not derived from Plaintiff’s

- The technologies are different/distinguishable

- Defendant’s was independently developed

Lawsuit in Federal Court?

54

Fed court probably better than State court if foreign parties.

Fed law only authorizes criminal (not civil) actions.

State claim may be permitted in Fed court, if combined with

Fed claim such as:

● Patent Infringement (35 USC 271)

● Copyright Infringement (17 USC 501)

● Unfair Competition (15 USC 1125)

● RICO (18 USC 1961)

Fed court may reject state claim if it would predominate.

(Richtek v. UPI, N.Dist.CA, 2011: TWN trade secret claim rejected.)

Jurisdiction may be Obstacle

55

Personal Jurisdiction Required

1. The legal violation occurred in the state, or

Defendant has continuous/systematic contacts w the state

(office, assets, employees, sales, activities, etc.) and. . .

2. Suing Defendant there would not violate Due Process.

Jurisdiction against foreign individuals is especially difficult.

Personal Jurisdiction rejected:

AFTG v. Nuvoton, Fed Cir. 2012 (Asus, Pegatron, Micro-Star)

Richtek v. UPI, N. Dist. CA 2011 (4 TWN corps/16 individuals)

Wistron v. Adams, N. Dist CA 2011 (Wistron, Aopen)

Forum Non Conveniens

56

Even if one establishes Personal Jurisdiction . . .

Court may dismiss case if it should be decided elsewhere.

Factors Courts Consider:

● Location of witnesses and evidence

● Available process to compel testimony

● Possible need to view the premises

● Need to apply foreign law

● Unfairness of burdening potential jurors

● Availability of satisfactory due process elsewhere

(Taiwan is regularly recognized as an adequate forum)

Block Defendant’s US Imports

57

Even if no jurisdiction against wrongdoers . . .

May be possible to block imports of wrongful products by filing

Complaint with International Trade Commission (ITC).

● ITC has authority to ban imports into US of goods made

using “unfair methods of competition” (19 USC §1337).

● Usually for patent infringement. Now may be used to block

goods derived from stolen trade secrets (Tianrui, 2011).

● Fast/powerful, but Complainant must prove the wrongful

goods threaten a US “domestic industry.”

(Both parties sell goods in the US derived from the secret.)

58

Summary and

Action Plan

What is a Trade Secret?

59

● Information that has economic value, because . . .

● Not generally known or readily ascertainable, and

● Reasonable efforts are used to keep it secret.

THEREFORE,

Without reasonable efforts to keep it secret:

► It may be stolen or wrongfully disclosed, and

► Legal remedies for trade secrets may be unavailable.

TOP PRIORITY: Prevent Loss

60

● Conduct IP audit

Identify sensitive info, develop plan.

● Physical security features

Fences, cameras, locks, etc.

● Security procedures

Restrict access, mark “confidential”, etc.

Regular employee trainings

● Careful when hiring

Background check, strong contracts

● Careful when employees depart

Monitor, remind of obligations, check afterwards

● Careful with 3d Parties

Restrict access, strong contracts

Legal Remedies in Taiwan

61

Criminal Action

● Present Trade Secrets Act lacks criminal penalties.

● Amended Trade Secrets Act will have criminal penalties.

● Violation of Criminal Act for employee to intentionally

breach confidentiality agreement.

● Enhanced penalties if fraud/electronic device involved.

Civil Action

● Launch criminal action first for information gathering.

● Launch criminal action first to waive court filing fees.

● Statute of Limitations: earlier of 2 years after learning of

the violation or 10 years after the violation occurs.

● Monetary damages and injunctive relief available.

Legal Remedies in the U.S.

62

● Why U.S.? Defendant’s assets/imports. Discovery.

● Economic Espionage Act: Federal crime, but . . .

may be unavailable for foreign victims.

● Civil action may be possible in state/federal court, but. . .

jurisdiction may be a hurdle unless U.S. parties.

● Forum non conveniens also a hurdle if most parties,

evidence and relevant acts in Asia.

● ITC: Block imports into U.S. of wrongful goods, but

requires “domestic industry”

Chris Neumeyer

Managing Partner, Asia Law

Foreign Legal Affairs Law Firm

[email protected]

www.asialaw.biz

63

Thank You

Jessica Chiang

Senior Counsel

Delta Electronics, Inc.

[email protected]

www.delta.com.tw

mailto:[email protected]