View the“Trade Secrets” issue of COMMUNIQUÉ (August 2019), the official publication of the Clark County Bar Association. See features written by members of Nevada’s legal community listed as follows:
- “Protecting the Crown Jewels: Overview of the Trade Secrets Act” by Meng Zhong, Esq.
- “Spoliation of Electronically Stored Information and Adverse Inferences – A Game Changer” by Joanna M. Myers, Esq.
- “The Practicalities of Protecting Your Client’s Confidential and Proprietary Information in Federal Court” by Jennifer L. Braster, Esq.
- “Summaries from 7-1-19” by Joe Tommasino, Esq.
Additional content may be found in the 32 pages of the full color issue of the publication (print and PDF versions), including these special features:
- “Pass the Ghost Burger, Please” By Clark County Bar President Jason P. Stoffel
- View from the Bench: “The Little-Known Secret of Las Vegas Justice Court” By Judge Cynthia Cruz
- Pro Bono Corner: “”Kids in Foster Care Are Our Kids and Deserve Our Support” By Brittni Tanenbaum
- Bar Activities
- Member Moves
- Court News
- The Marketplace
Special thanks to the following advertisers for their support of COMMUNIQUÉ (August 2019):
- Advanced Resolution Management
- Aldrich Law Firm, LTD.
- Ara Shirinian Mediation
- Bank of Nevada
- Dawson & Lordahl PLLC
- Greenberg Traurig, LLP
- Holley Driggs Walch Fine Puzy Stein & Thompson
- Howard & Howard Attorneys PLLC
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© 2019 The content on this page was originally published in COMMUNIQUÉ*, the official publication of the Clark County Bar Association. (August 2019). All rights reserved. For permission to reprint this content, contact the publisher Clark County Bar Association, 717 S. 8th Street, Las Vegas, NV 89101. Phone: (702) 387-6011.
Protecting the Crown Jewels: Overview of the Trade Secrets Act
By Meng Zhong, Esq.
This article provides a broad overview of misappropriation of trade secrets and available remedies.
What is a trade secret?
A trade secret is any information that (1) derives economic value from not being generally known, and which the public cannot readily discover through proper means (e.g., by reverse engineering) and (2) is subject to reasonable efforts to maintain secrecy. NRS 600A.030(5). Put simply: it is a valuable secret that is treated like a secret.
Treating information like a secret can include marking it “confidential,” not sharing the secret with anyone outside the business, and limiting access to the information to your most trusted employees. NRS 600A.032; Finkel v. Cashman Prof’l, Inc., 128 Nev. 68, 75, 270 P.3d 1259, 1264 (2012).
What laws govern trade secrets in Nevada?
Nevada’s Uniform Trade Secrets Act is set forth at Chapter 600A of the Nevada Revised Statutes. The Trade Secrets Act displaces conflicting tort laws. NRS 600A.090. This means that if another tort claim arose from the same factual episode as the misappropriation claim, it may be duplicative of the misappropriation claim, and should be dismissed. Frantz v. Johnson, 116 Nev. 455, 465, 999 P.2d 351, 357–58 (2000).
What is misappropriation?
Misappropriation occurs in four ways. One, someone acquires a trade secret through improper means. NRS 600A.030(1), (2)(a), 2(b). Two, someone discloses a trade secret knowing that it was acquired through improper means. NRS 600A.030(2)(c)(1)-(2). Three, someone uses a trade secret knowing that it was acquired through improper means. NRS 600A.030(2)(c)(1)-(2). In these three scenarios, “improper means” includes theft, bribery, misrepresentation, breach of the duty to maintain secrecy, and espionage through electronic means. NRS 600A.030.
But misappropriation can occur even without improper conduct. The fourth scenario in which misappropriation can occur is when someone discloses or uses a trade secret knowing that the trade secret was acquired through accident or mistake. NRS 600A.030(2)(c)(3).
Thus, to prove misappropriation, knowledge is key – lack of knowledge that the trade secret was acquired improperly or gained through accident/mistake are defenses to misappropriation, and may even curtail damages awards. NRS 600A.030(2)(c) and NRS 600A.050.
Someone misappropriated my trade secret. What are my legal remedies?
Injunction. Actual or threatened misappropriation may be enjoined. NRS 600A.040(1). The movant will need to show that absent injunctive relief, they will suffer irreparable injury. Excellence Cmty. Mgmt. v. Gilmore, 131 Nev. Adv. Op. 38, 351 P.3d 720, 724 (2015).
Monetary Damages. Monetary damages are calculated by plaintiff’s loss plus the defendant’s unjust enrichment. NRS 600A.050(1). Damages may be measured by a reasonable royalty for the use of the trade secret. Id.
Punitive Damages. Willful, wanton or reckless misappropriation may warrant exemplary damages not to exceed two times the monetary damage award. NRS 600A.050(2).
Attorneys’ Fees. Attorney fees may be awarded to the prevailing party in cases of willful and malicious misappropriation. NRS 600A.060(1). A plaintiff’s bad faith claim of misappropriation can subject the plaintiff to pay attorneys’ fees to the defendant, and if either party moves to terminate an injunction or resists termination of an injunction in bad faith, they can also be subjected to attorneys’ fees. NRS 600A.060(2)-(3).
Criminal penalties. Under certain circumstances, misappropriation can constitute a category C felony, with a prison term between one to ten years and a fine of no more than $10,000. NRS 600A.035.
Spoliation of Electronically Stored Information and Adverse Inferences – A Game Changer
By Joanna M. Myers, Esq.
Use of computers and data processing systems to conduct business is increasingly the norm. It is not uncommon today for a company’s trade secrets to be comprised entirely of electronically stored information (“ESI”), such as proprietary software. Other commonly stolen trade secrets, like customer databases, may be wholly embodied in ESI. Small electronic storage devices now have the capacity to store information that previously would have filled a gymnasium, meaning most trade secrets thefts go unwitnessed. Under these circumstances, the sole evidence proving a theft occurred (or that it did not) may be in the form of ESI. Loss of relevant ESI can have a devastating effect on a party’s ability to prove its case. Although the key evidence may be gone, all is not lost. Demonstrating the opposing party destroyed or “spoliated” ESI can result in sanctions in the form of adverse inferences. An “adverse inference” means that the missing evidence is presumed harmful to the party responsible for its absence. Adverse inferences can significantly improve a party’s position in the dispute—sometimes even putting a party in a better position than it would have been had the ESI evidence not been destroyed.
ESI is particularly susceptible to spoliation given the ease of its destruction. Theft of electronically stored trade secrets can happen quickly, as can the destruction of the evidence of the theft. A party seeking to destroy evidence no longer needs to pull an all-night secret shredding operation. ESI can be destroyed instantly with the click of a mouse, by deleting or overwriting files, modifying file metadata, replacing a hard drive, or simply throwing a computer, tablet, phone, or other device in the trash. ESI can also be destroyed as a result of a party’s negligence; for example, by the party’s failure to preserve ESI under the control of third-party service providers that periodically purge data, such as deleted emails and documents in cloud storage accounts. Regardless of how destruction occurs, even the most sophisticated party likely leaves a trail in the ESI that remains. Evidence demonstrating spoliation of ESI may end up being the key to a successful misappropriation of trade secrets claim or defense.
Absent an admission of spoliation, piecing together proof of ESI spoliation is challenging and generally requires an in-depth forensic examination of electronic device transaction histories, or “audit trails.” Forensic examination of the audit trail may identify documents that have been deleted, purged, uploaded to cloud accounts, or transferred to other devices. Forensic examination of ESI and device hardware may also uncover the use of scrubbing or wiping software or the replacement of hard drives. Thus, if trade secret theft is suspected or alleged, a party should immediately consider engaging a computer forensic expert to preserve all ESI in its possession.
ESI stored on the computers or electronic devices in the opposing party’s possession is also discoverable. The only restriction is that the party may be protected against undue burden and expense and/or invasion of privileged or private matters. Playboy Enterprises, Inc. v. Wells, et. al., 60 F.Supp.2d 1050 (S.D. Cal. 1999). In the event a civil action has been commenced, it may be prudent to seek accelerated discovery to ensure preservation of ESI on the opposing party’s personal computers, tablets, phones, and other devices. Preservation of ESI is typically achieved through the creation of device “mirrors” or “clones” because such copies generally do not take long to make, allowing for the quick return of the devices to the owner. Given ESI’s susceptibility to spoliation, where the facts indicate destruction of ESI is likely, courts exercise their discretion, and issue orders for the mirroring of devices, even before discovery officially commences. See e.g., United Factory Furniture Corp. v. Alterwitz, No. 2:12-CV-00059-KJD-VC, 2012 WL 1155741, at *2 (D. Nev. Apr. 6, 2012) (finding “good cause” existed to permit expedited discovery and issue a mirroring order where a party’s continued use of personal computers may result in the overwriting or destruction of relevant ESI); Coburn v. PN II, Inc., No. 207-CV-00662-KJD-LRL, 2008 WL 879746, at *2 (D. Nev. Mar. 28, 2008) (ordering a “clone copy” of the hard drive(s) in question); Playboy Enterprises, Inc. v. Wells, et. al., 60 F.Supp.2d 1050 (S.D. Cal. 1999) (permitting mirror-imaging of defendant’s hard drive where defendant destroyed emails relevant to the litigation).
In the event the forensic examination yields evidence of spoliation, the non-spoliating party may seek sanctions, including, among others, the sanction of adverse inference. Whether to impose sanctions in the form of an adverse inference is within the trial court’s discretion. Bass–Davis v. Davis, 122 Nev. 122, 134 P.3d 103 (2006). The recent 2015 amendment to the Federal Rule of Civil Procedure 37(e)(2) specifically provides for use of adverse inferences to remedy spoliation of ESI. The Rule states, in relevant part, “upon finding that the party acted with the intent to deprive another party of the information’s use in the litigation”… a court may “(a) presume that the lost information was unfavorable to the party; (b) instruct the jury that it may or must presume the information was unfavorable to the party; or (c) dismiss the action or enter a default judgment.” Nevada’s 2019 amendments to Rule 37 mirror the language of the federal rule. NRCP 37(e)(2). Of the sanctions available for intentional destruction of ESI, adverse inference is the most common sanction, whereas dismissal of a case or entry of default judgment remains rare. See e.g., Zitan Techs., LLC v. Liang Yu, No. 3:18-CV-395 RCJ (WGC), 2019 WL 95779, at *4 (D. Nev. Jan. 3, 2019); Fowler v. Wal-Mart Stores, Inc., Case No. 2:16-CV-450 JCM (GWF), 2017 WL 3174915, at *3 (D. Nev. July 26, 2017); Leon v. IDX Sys. Corp., 464 F.3d 951, 959 (9th Cir. 2006).
Adverse inferences can greatly improve the position of the party prejudiced by spoliation, while devastating the affected party’s case. The significant shift in the parties’ respective positions is partly due to the inference the evidence is harmful to the party responsible for its destruction. More importantly, however, the relevance of destroyed ESI cannot be ascertained since it no longer exists, and so the affected party is precluded from asserting any presumption of irrelevance. Alexander v. Nat’l Farmers Org., 687 F.2d 1173, 1205 (8th Cir.1982). In other words, adverse inferences are exceedingly difficult to overcome. Moreover, adverse inferences can haunt a party throughout the entire litigation—from the preliminary injunction stage through the issuance of jury instructions. See e.g., Zitan Techs., LLC, 2019 WL 95779, at *4 (destruction of hard drive giving rise to adverse inference supporting a finding of irreparable harm); Oracle USA, Inc. v. Rimini St., Inc., No. 2:10-CV-00106-LRH, 2015 WL 5089779, at *5 (D. Nev. Aug. 27, 2015) (adverse inference instruction given to the jury); CPA Lead, LLC v. Adeptive Ads LLC, No. 2:14-CV-1449 JCM (CWH), 2014 WL 7072316, at *10 (D. Nev. Dec. 15, 2014) (finding jury entitled to draw adverse inference from defendant’s failure to comply with the court’s order to turn over evidence).
In today’s digital world, where the outcome of a theft of trade secrets case may rely primarily, or entirely, on evidence in the form of ESI, it is important for a party to consider the preservation and collection of ESI early on. ESI should be analyzed, not only for use as evidence supporting a party’s claims or defenses in the traditional sense, but also for potential evidence of spoliation that may give rise to a game-changing adverse inference.
Joanna M. Myers is Of Counsel at Holley Driggs Walch Fine Puzey Stein & Thompson and an adjunct professor at the William S. Boyd School of Law. Her practice focuses on intellectual property, entertainment, and Internet law. She also counsels clients on privacy, defamation, and First Amendment matters..
The Practicalities of Protecting Your Client’s Confidential and Proprietary Information in Federal Court
By Jennifer L. Braster, Esq.
Invariably in litigation, practitioners will face situations in which their client’s proprietary information or trade secrets are an issue in the case. Practitioners need to be aware of the hurdles and steps to protect clients’ proprietary information and trade secrets when producing the information in discovery, filing the information with the court, and opposing such production in discovery.
Protective orders in discovery
At the onset of a case, counsel should enter into a protective order to permit the production of documents and designation of deposition testimony as confidential or attorneys’ eyes only. Counsel should consider the following when drafting the order:
- The protective order should include provisions addressing when a receiving party disputes the producing party’s confidentiality designation. The order may, but does not have to, include provisions providing time limits for when the receiving party may dispute a designation, e.g., within 30 days of receipt of a document. The order may also include provisions as to which party is obligated to file a motion on this issue, e.g., the producing party or the party disputing the designation.
- To avoid disputes later on, counsel should include a provision identifying which party has the burden with respect to establishing confidentiality (or lack thereof). As a general matter, courts have held the burden rests with the producing party.
- The protective order should include provisions addressing the designation of deposition testimony as confidential. Some practitioners elect to designate specific sections of a deposition as confidential during the deposition itself. Other practitioners will mark a deposition confidential at the onset and then provide specific confidentiality designations thereafter. Depending on the type of litigation, the latter may be easier from a practical standpoint. The protective order can include provisions requiring a party to provide the specific confidentiality designations within the review and sign period or otherwise the entirety of the transcript then will be deemed non-confidential.
- The protective order should instruct the parties as to the handling of confidential materials upon conclusion of the litigation. Often, the protective order will require the receiving party to either destroy or return any confidential documents.
- To the extent a non-party, such as an expert or party employee, is required to view confidential materials, they should be required to execute an agreement to comply with the terms of the protective order.
Standard for sealing in the public record
In federal court, a party cannot simply rely on its confidentiality designations as a basis for sealing such materials in the public record. Procedurally, the party must file a separate motion to seal. In that motion to seal, the party must establish why sealing is necessary.
There is a strong presumption of public access to judicial records. Leave to file documents or testimony under seal should only be granted where “‘compelling reasons’ . . . outweigh the public’s interest in disclosure,” including where “‘court files might . . . become a vehicle for improper purposes,’ such as the . . . release of trade secrets.” See Kamakana v. City & County of Honolulu, 447 F.3d 1172, 1178-80 (9th Cir. 2006) (internal citation omitted). In Kamakana, the Ninth Circuit Court of Appeals made a distinction between documents attached to dispositive motions and documents attached to non-dispositive motions. A party seeking to seal documents attached to a non-dispositive motion must only show “good cause” for the sealing of these documents versus “compelling reasons” for documents attached to dispositive motions. See id. at 1180.
To meet either the “compelling reasons” or “good cause” standard, a party likely will want to attach a party declaration identifying why such documentation must be protected. Factors to consider are whether the materials contain trade secrets or proprietary information, the types of harm if such information is released in the public record, efforts the moving party has undertaken previously to protect such information, and access to that information within its own company. Further, if the information can be redacted while leaving meaningful information available in the public record, that is preferred. Foltz v. State Farm Mut. Auto Ins. Co., 331 F.3d 1122, 1137 (9th Cir. 2003).
Protecting a party’s proprietary information from discovery
Often times, the most typical dispute between parties is not over the designation of materials as confidential but whether such materials are subject to discovery at all. A party may oppose not only the production of hard copy documents but also electronically-stored information (“ESI”) and discovery into their systems or databases because of concerns about trade secrets or proprietary information. The Advisory Committee Notes to the 2006 Amendments recognize that there is no “routine right of direct access to a party’s electronic information system,” and “[c]ourts should guard against undue intrusiveness resulting from inspecting or testing such systems.”
The federal courts analyze several different factors in determining whether such materials should be produced. As an initial matter, under the 2015 amendments to the federal discovery rules, discovery must be proportional to the circumstances and needs of the case. On Demand Direct Response, LLC v. McCart-Pollak, Case No. 2:15-cv-01576-MMD-NJK, 2018 WL 2014067, at *3 (D. Nev. Apr. 30, 2018) (internal citations omitted).
The issue of proportionality dovetails with the issue of the scope of the discovery requested. If there are less intrusive means to provide the information sought, those means should be considered. For example, the producing party may be able to provide the requested information without having to provide the receiving party with access to their proprietary databases and ESI. Similarly, if only specific items in the database are needed, those only could be provided. See The Sedona Conference, The Sedona Conference Database Principles Addressing the Preservation and Production of Databases and Database Information in Civil Litigation, 15 Sedona Conf. J. 171, 176 (2014). “The fact that a client stores documents in a database does not mean that the opposing party has the right to obtain access to all the documents in the database . . .” Coast to Coast Health Care Servs. v. Meyerhoffer, No. 2:10-cv-00734, 2012 U.S. Dist. LEXIS 49903, at *3 (S.D. Ohio Apr. 10, 2012).
If a party is faced with a motion to compel production of its confidential or proprietary information, the party needs to be prepared to explain to the court not only why such information is confidential or proprietary, but also why it is either not discoverable or is disproportionate to the needs of the case. Federal courts acknowledge that the responding parties are “best situated to evaluate the procedures, methodologies, and technologies as to their own electronically stored information.” Ashcraft v. Experian Info. Solutions, Inc., 2:16-cv-02978-JAD-NJK, ECF No. 122; n. 2 (D. Nev. Nov. 26, 2018) (internal citations omitted). Thus, a party should provide the court with sufficient information regarding production of their ESI so the court can analyze the information in relation to the circumstances of that case.
As shown above, in dealing with clients’ proprietary information, practitioners must be prepared to address these issues during the entire course of litigation to ensure continued protection of their clients’ trade secrets and proprietary information.
Jennifer L. Braster is a founding partner at Naylor & Braster, a commercial litigation firm in Las Vegas, Nevada. Jennifer routinely practices in both the federal and state courts in Nevada and in the areas of commercial litigation, consumer finance, and appellate law. Contact her at 702-420-7000.
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