Episode 18 - Litigation Finance Helps Companies Keep Their Cool During Trade Secrets Disputes

 

Read the transcript below:

Stephanie Southwick:
Hello and thank you for tuning into the Beyond Hourly podcast, hosted by Omni Bridgeway, one of the world's most experienced dispute funders and judgment enforcement specialists. Our podcast focuses on advancements in legal services that drive economic value for law firms and the clients they serve. Episodes of this podcast can be found on our website, www.omnibridgeway.com, iTunes, Spotify, and other podcast networks. We welcome you to subscribe to the podcast and leave us reviews.

I'm your host, Stephanie Southwick. I'm an investment manager based in Omni Bridgeway's San Francisco office. Prior to joining Omni Bridgeway, I was the managing partner at a business and IP litigation boutique in Silicon Valley. My role at Omni Bridgeway involves assessing litigation investment opportunities generally, and more specifically, in the trade secret space.

Our guest today is James Pooley. Jim is one of the world's leading experts in trade secret law and management and I'm absolutely thrilled to be speaking with him today. Jim has over four decades of experience in the IP and trade secret space as a trial lawyer in Silicon Valley at Orrick, Herrington & Sutcliffe, Morrison & Forrester, and others. He spent five years in Geneva as the Deputy Director General of the international Patent System, PCT, for the World Intellectual Property organization.

Jim is also an author. He writes the leading legal treatise on trade secrets law appropriately called Trade Secrets and wrote the book Secrets: Managing Information Assets in the Age of Cyber Espionage. He has testified before Congress about the Federal Trade Secrets Act and was inducted into the IP Hall of Fame in June 2016. I could go on about Jim's esteemed career, but I think our listeners get the picture.

Jim, welcome to the Beyond Hourly Podcast. I'm really looking forward to chatting with you about trade secrets, law and management, and how litigation finance fits into a trade secrets management program from your perspective.

Jim Pooley:
Thanks for having me on Stephanie. I look forward to it.

Stephanie Southwick:
Thank you for joining us today. Before we dive into trade secrets, I want to hear a little bit more about you and your background. In particular, how you became interested in trade secrets.

Jim Pooley:
Well, it was accidental honestly. There wasn't anything in my background that suggested where I would end up. In fact, I sometimes told people that my high school science teachers would be really amused to find out what I am doing now. It happened because I came to California and got a summer job in the summer of 1972. I grew up in the East Coast, but I wanted to come to California. I managed to get an offer from this little 11 lawyer firm as their first summer associate—that firm is now Wilson Sonsini.

I came back the following year, in 1973. At that time, there were four big law firms in Palo Alto—they had between 10 and 15 lawyers each. That was it. And “Silicon Valley”, the name had just been coined by one of the firm's clients. It was a brand new thing and I wanted to be a trial lawyer. That was it.

So I handled lots of commercial stuff, but obviously because of the way Silicon Valley grew—with people leaving one place and starting another (and back then it was more of a churn than there is today) there were lawsuits that happened all the time. I noticed because there weren't that many lawyers around and so I handled a lot of these things. And over time I handled, seems like, more than anybody else. After a few years of this, I started reflecting on trade secrets as just a kind of case. I observed that there was one common theme that ran through them—they were all very different and they had certain aspects that were similar to the divorces that I had worked on too, the emotional content and so forth.

But the one thing that was common throughout all of them—it was someone that had done something stupid. Somebody had made a big mistake, a big error of judgment. So it occurred to me that the rules of the road are not that difficult in trade secret law, if you will. If you behave yourself the right way, you shouldn't have any exposure. It occurred to me that if I wrote a book about this, published it, and told people about the rules and so forth, these cases would disappear.

I found an expert witness I was working with who also happened to have a publishing company that published software books. He agreed to take my book on as his only non-software work. So in 1982, that book was published. I can tell you now, it's very, very clear, my initial objective totally failed.

Stephanie Southwick:
I was chuckling to myself that you thought you could write a book and convince people not to do stupid things.

Jim Pooley:
No, no, no. People didn't stop doing stupid things just because they might know something more, which is part of why ... We'll probably get into this, the whole idea of how you decide to bring a case or not is sort of grounded in these issues.

But there I was. The book came out and six weeks later the IBM Hitachi case broke and there were pictures on the evening news of the Japanese executives being taken to the courthouse in San Jose in handcuffs. My book was on a lot of desks of journalists so I became a talking head and that's how I got my career in trade secrets.

Then as time went on, I became so interested in the dynamic of trade secret cases because they're all very interesting morality plays, and also a bit on the scholarship, academic side. That's how I came to write the treatise. I started teaching it and I fell in love with the area. Although I got into patents as a result of doing the trade secret work in patent cases, trade secrets have remained the primary focus of my professional career.

Stephanie Southwick:
Would you mind sharing with us some of your observations on how trade secret law has evolved since, I don't know, what, 1973 or whenever you first started practicing in this area?

Jim Pooley:
First of all, people are paying a lot more attention to it. There's a lot more to be said about the law because back in 1973, everything was based on common law and one state's law might be different than another. In the late '70s, the Uniform Trade Secrets Act was introduced to try to establish some uniformity and homogenize the standards among the states. That didn't work out so well, honestly, because the states put in their various versions according to their own whims and political processes.

We ended up with something where there were still a lot of variety, but people were more and more interested in it because you follow the money. It was industries that got established and grew very, very quickly. As a result, people got concerned about information assets traveling too little, too freely from one place to another. The law developed because more and more of these cases got filed and most of them, frankly, or more than any other place, in California.

With the end of the Cold War, we got focused on what might happen to industrial secrets as a result of these spies being released into the private sector. So the Economic Espionage Act got passed in 1996. Then over time, again, more and more of these cases were getting litigated and there was a concern about lack of uniformity and the burden on companies to have to go from state to state.

In 2016, we got the Defend Trade Secrets Act at the federal level and now, a lot of cases are being handled by federal courts that didn't use to get there so easily because you had to have either complete diversity in citizenship or some other federal claim that allowed you to get into court. Now the law has evolved to where it's more uniform and more sophisticated.

Stephanie Southwick:
You've mentioned that people are paying more attention to trade secrets perhaps now than they have in the past. I'd pose this. I think I know the answer, but why should companies pay more attention to trade secrets? Why is this something that they should be planning for and actually managing?

Jim Pooley:
There are two main reasons. One, you just look at the headlines. Part of the reason the title of my book includes the term cyber espionage—we live in a digital environment where these very important information assets, the things that drive success in a modern economy, are stored and communicated on digital systems that are essentially insecure. And we end up with hundreds or thousands of employees who walk around carrying all of the company's trade secrets on their smartphones.

The risk level to the integrity of information that is important to the company is pretty clear. We have information that's very valuable that's become essentially vulnerable, but it's not just those externalities that are the problem. We also, in order for companies to succeed, they have to deal with their supply chains, with partners that ... Nobody has a siloed environment anymore in business, and so all businesses have to share information in order to succeed and that creates this tension around protecting the information and keeping control over it and also sharing it with the partners that you need to. That makes the focus on managing information flows and access way more important than it used to be. Back when I started on information security, the only thing that a company really needed to do was to guard the photocopier and watch who went in and out the front door of the building.

Stephanie Southwick:
Things have changed, right.

Jim Pooley:
Right. This is hard to remember, right? But there was a time before the internet, before any networks of any note in business at least. It was all a paper-based economy.

Stephanie Southwick:
You are back in Silicon Valley and you're back litigating now and also doing some consulting work on trade secrets management. Tell us what you mean by that. What is the trade secrets management component and what do you do?

Jim Pooley:
What I try to do is help companies deal with this conundrum that I described a moment ago, that is, what is their most important job in terms of asset preservation and building new aspects to their business and new revenue streams and so forth. The most important aspect of that is to keep control over the data assets. At the same time, they have to share them with thousands of different actors. How do you do that? How do you make it happen in a way that balances the need for security, and all security is annoying, as we know. If you've done two factor authentications, you have a taste of that, right? How do you balance all of this and how do you manage the various people who are engaged in the system, who touch these assets, to make sure that you're doing everything that you can do relative to the risks that you have?

The challenging part of this is it's really ubiquitous. These assets are everywhere, and you can be forgiven for thinking about this as something that looks like it's impossible. How do you boil the ocean with all this information that you use throughout your business? The fact is that this is really just an issue of risk management. If you sit down and think about it—or the business owners, those that run certain divisions or business units, if they really think about it—they will know where the four or five top areas of concern are. What are those crown jewels that really support the profitability and success of the business? What I try to do is help companies go through a process that is familiar to them. A risk management process where they identify those assets, talk about the risks that are out there, the threats that exist, and look at the various measures that are available to mitigate those risks and create an overall program that works for everybody and that courts will recognize as reasonable efforts when they get there.

These days, honestly, the job is a little bit easier because there are tools available. There's one in particular that I work with a lot. It's developed by Aon and I actually helped the company put it together and design it. It's called the trade secret registry. This focuses on that first aspect that we talk about. What is it that we have that deserves particular attention? So that we can then log it, put it into a blockchain based system, and know that it's there and we can wrap management procedures around it. That's the kind of work that I think is very high value and I enjoy doing that.

Stephanie Southwick:
I can imagine how invaluable that registry is because as a litigator in my former life, I realized that companies and especially inventors and engineers didn't usually think in trade secrets. They understood patents, but trade secrets to them were legal constructs and not something that they thought about until somebody stole them.

Jim Pooley:
Exactly.

Stephanie Southwick:
Right. And I would often think this is so interesting because we're asking them, "Well, what are your trade secrets?" And they're saying, "Well, I don't know. What are our trade secrets?" Because that's just not the way that they were trained to think. I think that's fantastic. You have a tool to help companies really identify these trade secrets before they're stolen.

Jim Pooley:
Exactly. This conversation becomes particularly awkward when the company wants you to go in and get a restraining order and you say, "Okay. But what is it that we're talking about?" And here, now you have a conversation that really ought to take a few days to identify and examine the boundaries of all of this stuff. The benefit of having already done that work is that you just pull it down, you can run into court and say, "Here, your honor, this is what we have."

The other advantage of things like this, from an operational point of view, is for example, offers of insurance. If you've gone in and identified all your crown jewels, placed some value on them, you've qualified yourself to have those things insured. Speaking of financing, they also can be used for non-dilutive financing of the company or for any needs that they have. There's a lot more flexibility in management once you have a really good idea of what you have.

Stephanie Southwick:
Are you also helping companies evaluate potential litigation? What kind of factors are you helping them with?

Jim Pooley:
I don't serve as the first chair trial lawyer anymore. It's a lot of fun, but I've done that enough. Let others do it now. What I try to do is add my experience and judgment to a team that is engaged in litigation or is looking at whether or not to do it, or come in and help a company decide, "Is this a case where we actually should file a lawsuit or not?" Or, "We've already filed one. How's it going?" So, I come in and offer a second pair of eyes to evaluate the case.

That's sometimes a very important aspect of how a company manages litigation because of course, as you know and I think a lot of people who are listening to this appreciate, trade secret litigation, unlike patent or other kinds of IP litigation, can be very emotional. The people who are making decisions about it themselves can get a little bit distracted by emotions around abandonment, revenge, what have you. I count it as one of the high value propositions that I bring to my clients: The ability to provide an independent source of evaluation to what they're doing.

Stephanie Southwick:
From your perspective, how can litigation funding fit into that analysis of whether or not a lawsuit should be filed?

Jim Pooley:
Well, in a word, perfectly. Because if you start with what's the problem or the challenge that companies have when they're facing litigation, and whether or not to bring it and how to do it, one of the fundamental issues that they need to confront is their own inability to adequately assess whether or not this thing makes business sense or whether they're being drawn into it for the wrong reasons.

Litigation finance offers a specific and clear answer to that conundrum. Because it's an outside party that knows what they're doing coming in to evaluate a case and make an assessment based on their interest in investing in it. All of a sudden you have this independent source that's free to help you decide whether or not this is a good business decision or not. Their interests are perfectly aligned with yours—the ones that you should be focused on, which is: Is this going to be advantageous at the end of the day to the businesses? Is this going to align with our business objectives? Yu have a ready partner coming in to help you do that and give you a sober assessment. That's a big shift. We didn't have that years ago. I think the kinds of things that you guys are doing are very helpful generally to companies in making tough decisions.

Stephanie Southwick:
Well, we agree with that for sure. Do you have any observations and trends in trade secrets litigation that you could share with us?

Jim Pooley:
Well, yes. One of the things that has happened, I think those of us who were engaged in litigation notice this very much frequently and deeply in cases, and that is identification of trade secrets. This process that we alluded to a little earlier, people don't really specifically describe their trade secrets until the time they get into litigation. That still is true. And judges these days are paying a lot more attention to making the plaintiff define their trade secrets at a level of particularity that can sometimes be very frustrating. What has happened is that over—and of course in California we have a specific rule that requires that before discovery can start—what's happened is that over the years we've become very sophisticated about doing that. The rules are a little more predictable and the process makes sense and it is easier to engage. The other thing, and a major shift from 30 years ago, is the courts focus on reasonable efforts.

This is the requirement that in order to establish a trade secret, you have to prove that you've exercised reasonable efforts to maintain control over its secrecy. That requirement used to be just checked off easily by courts. They would never issue summary judgement on that question. And these days judges are much more skeptical. Particularly now that we have more cases in federal court where judges, I think, are generally more skeptical than in state courts so the process of meeting that requirement has become a little more complicated. This is another part of what I do these days, is act as a testifying expert on that particular issue. But you know, 30 years ago judges never paid any attention to this. They thought, "Well, anybody making that kind of argument is like the car thief who's complaining that you left the keys in the car." They wouldn't give it much thought.

Stephanie Southwick:
Interesting. And we've also seen a trend in large jury verdicts too, right?

Jim Pooley:
Oh yes. These days we get nine figure verdicts. Verdicts in the hundreds of millions of dollars and it hardly bears mention. In part that's because there's more of these cases and in part because there's been a developing understanding and sophistication about the role that information assets play in making a company successful. So that translates into a damage analysis where the information that was taken has an impact either on the plaintiff or providing a benefit to the defendant that is measured in these very, very large verdicts that you've seen. Hundreds and hundreds of millions. Just in the last couple of years, there've been about four or five of them.

Stephanie Southwick:
Right. We probably need to wrap up soon, but I did want to ask you about your book, your most recent book, Secrets: Managing Information Assets in the Age of Cyber Espionage. And am I right that the book is more geared toward businesses and management folks and your legal treatise is more geared toward lawyers—is that right?

Jim Pooley:
Absolutely. The legal treatise is about 900 pages long and fully footnoted and so forth. There's not a single footnote in the business book. It's the modern version of that thing that I did in 1982. I no longer believe that it's possible to end this kind of litigation with a book, but it's something that I wrote in order to help businesses do the kinds of analysis that I was talking about earlier to be able to better manage the risks that attend handling secrets in the information based and digital economy.

Stephanie Southwick:
If our listeners wanted to buy your book, where can they find it?

Jim Pooley:
It's on Amazon.

Stephanie Southwick:
Probably obvious, but just wanted to make sure. Well, thank you so much, Jim. It's been an absolute pleasure speaking with you. Thanks so much for appearing on Omni Bridgeway's Beyond Hourly Podcast and sharing your knowledge.

Jim Pooley:
Thank you, Stephanie. It's been my pleasure.

Stephanie Southwick:
As I mentioned at the outset, episodes of the Beyond Hourly Podcast can be found on our website, www.omnibridgeway.com, iTunes, Spotify, and other podcast networks. We'll be back soon with another episode. Until then, I'd like to thank our audience for listening in and invite you to subscribe to the podcast and leave us reviews.

Please feel free to follow up with me, Stephanie Southwick, at [email protected] for any feedback, ideas, or insights you have on topics we should cover on the podcast. Thank you and be well.