CHAPTER 3 THE THEFT OF TRADE SECRETS: EVIDENCE FROM THE
3.9.1 Cluster 1: Copyrightable Trade Secrets in Service and Retail Sectors
The following two case studies are in the service (software developers) and retail (fashion industry) sectors. In both cases, the trade secret could have been protected by copyright, but it would have proved insufficient for the subsequent criminal prosecution of these thefts.
Fashion: U.S. v Gantt and White
In U.S. v. Gantt and White, the theft of customer lists and other proprietary information demonstrates the strategic importance of trade secrecy protection for potentially copyrightable confidential information in the public relations industry. The trade secret in this case is a database of customer lists; while basic databases do not qualify for copyright protection, the significant time and effort required for its development would allow for copyright protection in this case.
The victim company, ENK, runs trade shows for the fashion industry. A then-‐
current employee of ENK, Gantt, aged 24, and a former employee, White, aged 27, conspired to make copies of ENK’s database. In total, Gantt and White
misappropriated half a gigabyte of password-‐protected proprietary information, including contact lists, invoices, floor design and décor and pricing information.
Gantt used this information to solicit business for her temporary employment agency. The theft was uncovered when another employee reported that Gantt was conducting this business during her working hours at ENK. Gantt was eventually fired, after having e-‐mailed various lists to White and copying files to a USB drive.
Maintaining the confidential nature of these strategic business documents was crucial to ENK’s business model. As such, the information was maintained electronically in password-‐protected folders.137 The court papers refer to the files as “ENK’s ‘crown jewels’ and note that the information would give any
137 ENK International, LLC v. Morgan Gantt and Jeffrey White, 1:08-‐cv-‐08007-‐RJS filed 16/09/08 in S.D. NY, Document 1, Nature of the Action, p. 5.
competitor a tremendous advantage in closing its competitive gap with ENK.”138 The vast amount of files copied by Gantt constituted “an invaluable blueprint for operating a successful fashion industry tradeshow business.”139 The loss of the confidentiality of this strategic information represented a potentially huge negative impact on ENK’s business model. Furthermore, the theft of these trade secrets caused reputational harm to ENK. Gantt’s employment agency sought to provide temporary staff for exhibitors at ENK trade shows. However, one of the show venues had a contractual arrangement with ENK that only unionized labour would be used at their shows. Gantt’s unauthorized staffing of the trade shows violated this agreement and potentially damaged ENK’s relationship with the venue.
Gantt’s staffing agency was greatly aided by her knowledge stemming from the ENK documents. As an entry-‐level employee, the civil suit alleges, “Gant was operating MyTempO! Staffing, her private temporary employment business, from ENK’s offices during work hours, utilizing ENK’s resources and leveraging her connections and access she gained through her employment with ENK.”140 In addition to the financial motivation of the theft, disgruntlement was also a motivation. Gantt’s co-‐defendant, White, was fired from ENK in the months before the theft occurred. White’s disgruntlement provides an example of the harmful intent that merits the criminal treatment of trade secret theft. As Dnes (2009) argues, this subjective intent141 falls clearly on the criminal side of the tort-‐criminal boundary.
This case provides an example of the technological methods used to prove the theft of trade secrets. An internal investigation at ENK used tracking software to record an image of Gantt’s work computer screen every three minutes. The evidence gathered via this software demonstrated that Gantt was specifically targeting ENK events for her staffing agency. Text messages between the two
138 Ibid., p. 12.
139 Ibid., p. 2.
140 Ibid., p. 7.
141 Subjective intent looks at the state of the defendant’s mind in anticipation of the crime (i.e. the expected crime), which is in contrast to objective intent which looks at the outcome.
defendants were also traced from Gantt’s ENK-‐issued Blackberry. Together, White and Gantt left an electronic trail that led to their indictment. The
technological tools allowed ENK to both understand the extent of the theft and examine White and Gantt’s use of the trade secrets.
ENK’s business is based on designing, organizing and marketing trade show events and thus the company’s value rests in its business network and not on physical assets. As a small business,142 ENK’s provides an illustrative example as to the strategic and financial importance of trade secrets to smaller businesses.
The use of the EEA statutes allowed ENK to enforce the protection of these trade secrets with criminal prosecution in addition to relying on contractual law. The criminal charges against Gantt and White were filed in October 2008 shortly after the civil suit filed by ENK. In the civil suit, ENK received a temporary injunction against Gantt or White’s use of any data stemming from the ENK confidential documents. Ultimately, however, the criminal charges were dropped. The civil case was dismissed with prejudice in December 2009 after the parties agreed to an undisclosed settlement agreement.
Computer Hacking: U.S. v. O’Neil143
The O’Neil case is a prime example of the use of technology in corporate espionage. O’Neil, the 43-‐year-‐old CEO of Business Engine Software (BES), a software product and services company, along with two of his colleagues, was charged with various counts of stealing confidential business information from a competitor, Niku (now owned by Computer Associates International.) The BES employees were convicted of hacking into Niku’s computer system and
downloading over 1,000 strategic documents containing technical specifications, product designs, customer proposals and prospective customers. Given the software and confidential business information nature of these documents, the only available IP protection for Niku was trade secrecy and copyright. However,
142 According to a profile on manta.com, the company has turnovers of $520,000 and 12 employees. www.manta.com/c/mm3lns0/fashion-‐coterie
143 USA v. McKimmy, McMenamin and O’Neil, 3:04-‐cr-‐00118-‐PJH-‐3, filed 05/05/2004 in N.D. CA.
as software can be reverse engineered, Niku chose trade secrecy and thus derived value from the secrecy of the files.
The actions of BES were uncovered somewhat by chance when a brother-‐in-‐law of the Chief Information Officer (CIO) of Niku received an unsolicited phone call from BES. Finding the call unusual, the CIO investigated the Niku’s access logs and discovered that BES had accessed the system over 6,000 times since 2001.
Using an online Niku training program that was not password-‐protected, BES was able to hack into the confidential information.144 In a separate civil suit, BES paid Niku $5 million.145 The chance discovery of this theft underscores the tenuous status of trade secrets and the difficulty associated with detecting their theft. Furthermore, it provides a clear example of the argument put forth in Dnes (2009) that criminal actions are relatively harder to detect.146
Niku had taken significant steps to protect these trade secrets. The civil suit provides details on how the company undertook the reasonable steps required for trade secrecy: non-‐disclosure agreements with employees, restricted access to sensitive documents, knowledge of trade secrets only on a need-‐to-‐know basis, controlled access to company facilities and further security steps.147 The software company also employed a sophisticated password system in which users had access only to necessary documents. The only users with full access were the system administrators, which were the accounts BES hacked. Niku’s sophisticated protection of the trade secrets, despite their failure, indicates that the company was well aware of the business importance of maintaining trade secrecy.
As a software and business services company, Niku has limited options for protection of its innovations. The documents consisted of over 1,000 files of
144 Gilbert, Alorie (December 09, 2005), “Former software chief admits stealing trade secrets.”
Cnet news.com, available from www.news.com/2102-‐7350_3-‐5989750.html
145 Ibid.
146 Dnes (2009) argues that the coercive power of the state via criminal actions acts as a deterrence. He argues that this is less applicable to tort-‐related actions as the accident or nuisance is more apparent.
147 Complaint, Document 1 in Niku vs. Business Enterprise, 3:02-‐cv-‐03866-‐MHP filed 12/08/2002 in N.D. CA., p. 5.
strategic business information, potential customers, ongoing deals and pre-‐
market products. Copyright protection is available for software but does not prohibit reverse engineering. Hence, Niku’s reliance on trade secrecy is a strategic mixing of copyright and trade secrecy to protect its software and confidential business information. The stolen trade secrets included design and architecture documents for an unreleased Niku software codenamed
“Barracuda.” In testimony, the Senior Vice President of Research & Development at Niku stated that,
The Barracuda documents contain Niku’s secret innovations in the field, the functionality of which Niku has not revealed in any released product. … Beyond allowing a competitor to free-‐ride on Niku’s efforts to save time and resources in bringing a product to market, because the Barracuda information is the cutting-‐edge of Niku’s technology, it would allow a competitor to “leap frog” Niku in the market and offer customers next-‐
generation products before Niku would be able to release those features.
This statement highlights the value of trade secrets in the R&D stages of product development. Copyright protection would have been insufficient, as it would not have prevented competitors, once they had the documents, from reading and acting on the information. Thus trade secrets were crucial to the strategic protection of these Niku documents and the prosecution of their theft.
One article described the documents as “the crown jewels” of Niku.148 The business and marketing information, including details of potential customers and ongoing negotiations, had great potential value for competitors. In fact, the use of these documents allowed BES to become last-‐minute competitors in major deals. 149 One Niku executive testified that
In none of these transactions, involving Prudential, Tesco or Lloyds, was I made aware, at the inception of Niku’s negotiations with each of them, that Niku was in a competitive situation with Business Engine, and I was
surprised to learn, after Niku had spent considerable time and effort in attempting to develop a relationship with those customers, that they were evaluation Business Engine’s competing products. … I have strong reason to believe that Business Engine or its agents used the customer related
148 Kerstetter, Jim (August 23, 2002), “You’re Only as Good as Your Password,” Business Week.
149 Ibid.
information it obtained from Niku’s computer system to interfere with Niku’s relationship with those customers.150
The theft of these trade secrets gave BES a considerable competitive advantage.
At the same time, Niku protected this information using trade secrets, the only IP protection available. This case further reinforces the importance of trade
secrecy for service companies.
The motivations of this crime appear to be financial in that the trade secrets gave the defendants access to potential buyers and detailed information on sales tactics. As such, their reputation and financial compensation at BES would have likely increased with their improved sales. It also points to Wheeler’s (2005)
“culture of competition” within BES as three of their executives were convicted in this criminal case. In addition to the direct negative impact of the criminal case, it is likely that the case had indirect reputational costs for BES. Towards the end of 2005, when the criminal case was well underway, a spokesperson for BES emphasized that BES was trying to put the episode behind them.
The O’Neil case presents a modern tale of cyber crime and industrial espionage in Silicon Valley. It emphasizes the software industry’s reliance on trade secrets and the insecurity that arises from the digitization of trade secrecy. All three of the BES employees were convicted and O’Neil was sentenced to 12 months imprisonment and fined. As noted earlier, the civil case resulted in a settlement of $5 million for Niku. However, at the time, Niku was already suffering as a company in 2002 and had cut back from 1,100 employees to 300 and seen sales fall 38% from 2001.151 Niku has since been acquired by Computer Associates.