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Intro & Background
In Silicon Valley, it is common to hear employees from big tech companies, such as Google, Apple, and Intel, leaving their respective companies to form or join a startup. This would be frowned upon by former employers anywhere else. Nevertheless, this is one of the big merits of working and living in Silicon Valley, the freedom to move between competitors or actually being one. The supportive environment between startups and big tech has been reputably well known. But, that leads us to the question of why would Apple go after a startup and what the implications will be for the future of startups regarding similar matters of misappropriation of trade secrets and non-compete clauses.
In 2022, Apple sued startup Rivos, accusing it of coordinating a campaign to poach former Apple employees to steal Apple’s sensitive computer chip information for Rivos’s competing “System-on-Chip” (SoC) technology. In its lawsuit, Apple alleged that former employees misappropriated trade secrets by taking gigabytes of sensitive information and breached contract with their confidentiality agreements with Apple. Rivos responded by counter-suing Apple, claiming that Apple’s excessive non-compete clauses were “overbroad” and attempted to thwart emerging startups through anticompetitive measures.
US District Judge Edward Davila in San Jose stated Apple had “sufficiently identified” a trade secret and demonstrated substantial harm caused by three former employees. However, the court granted motions to dismiss the Defend Trade Secrets Act claim against the three former Apple employees. Additionally, Judge Davila dismissed Apple's trade secret claims against Rivos. Although Apple has been given a chance to amend the complaint, it has plans to settle with Rivos and its counterclaim by March 15.
While the parties decided not to follow through with the lawsuit, it adds to current discussions surrounding non-compete agreements (NCAs) and what the future may hold for these agreements.
Misappropriation of Trade Secret
What is a Trade Secret?
A trade secret is information that (A) is or has potential economic value because it is not generally known, (B) is valuable to others who cannot legitimately obtain the information, and (C) is subject to reasonable efforts to maintain its secrecy.
Apple claims that some of its employees took sensitive specification and design files regarding Apple’s cutting-edge, advanced SoC designs to startup company, Rivos, after accepting employment offers. Apple alleges that these employees transferred files containing information related to unreleased Apple SoCs marked “Apple Proprietary” and “Confidential.”
Apple’s Information has Value Because it is Not Generally Known
When a trade secret is stolen at the development stage, or in situations where the victim's company has not sold or licensed the technology, it can be difficult to establish the market value. Courts have held that “where the goods have no readily ascertainable market value, any reasonable method may be employed to ascribe an equivalent market value.” Research and production costs may impact the value of the trade secret, but the “true value of the information may be far more or far less than the cost of development and may depend on immeasurable attributes, such as the originality or soundness of the underlying ideas.”
Apple seems to satisfy this element in its complaint. It claims that its trade secrets “form the foundation of Apple’s competitive advantage in the SoC market” and are the product of years of research and development that cost Apple a substantial amount.
Apple’s Information is Valuable to Those Who Cannot Legitimately Obtain it
To satisfy this element, Apple states the seemingly obvious, “SoC design is complex and challenging, and requires considerable expertise and experience.”
Apple Utilized Reasonable Efforts to Maintain its Information’s Secrecy
Companies have established that they made reasonable efforts to protect the secrecy of information by showing they required “signing confidentiality and non-disclosure agreements, used passwords to protect computers and networks, only disclosed trade secret information on a need-to-know basis, and included confidentiality provisions in the employee handbook.”
Apple claims it protects its trade secrets by using passwords and encryption to protect data, limiting the distribution of confidential information to key employees on a need-to-know basis, providing employees with written policies, and implementing procedures emphasizing their duty to maintain Apple’s confidential information and the use of confidentiality agreements and non-disclosure agreements.
Because these efforts to maintain the information’s secrecy closely align with what courts have held are reasonable efforts, Apple meets the threshold issue establishing that the information at issue is trade secret.
Misappropriation
Apple alleges misappropriation of a trade secret under the Defend Trade Secrets Act (DTSA) in its complaint. The DTSA was enacted in 2016 primarily to offer a federal civil cause of action for trade secret misappropriation. Under the DTSA, misappropriation is established through acquisition, disclosure, or use of a trade secret.
First, misappropriation can be established through the acquisition of a trade secret by a person who knows or has reason to know that the trade secret was acquired by improper means. Common examples of improper means include theft, bribery, misrepresentation, breach or inducement of a duty to maintain secrecy, and espionage through electronic or other means.
Second, misappropriation can established through disclosure or use of a trade secret without express or implied consent by a person who: (1) used improper means to acquire knowledge of the trade secret; or (2) at the time of disclosure or use, knew or had reason to know that their knowledge of the trade secret was either: (i) derived through a person who had utilized improper means to acquire it; or (ii) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or (iii) derived through a person who owed a duty to a person seeking relief to maintain its secrecy or limits its use; or (3) before a material change of their position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.
Was This Misappropriation?
The facts alleged in the complaint point strongly towards Rivos’s misappropriation of Apple’s trade secrets. Both former Apple employees, Kaithamana and Wen, who have since become Rivos employees, dealt with managing and developing the architecture, respectively, of Apple’s SoCs. They both executed an Apple Intellectual Property Agreement (IPA) as a condition of their employment, agreeing in pertinent part, to keep all Apple Proprietary Information in confidence for the duration of their employment and thereafter. The agreement also stated that upon termination of employment, they would return all material relating to work and not take any material or copies thereof. However, Apple alleges that Kaithamana and Wen both copied Apple’s proprietary and trade secret SoC designs the day before they left the company through hard drives and personal folders.
Many of the facts alleged point towards the acquisition of these trade secrets through theft and breach of duty to maintain secrecy.
Another Theory – Inevitable Disclosure Doctrine
The USPTO published a paper at the end of 2021 to establish how the DTSA has been affecting causes of action for misappropriation. The inevitable disclosure doctrine is one of the larger common law theories that has infamously helped establish misappropriation. This doctrine stems from a Seventh Circuit decision in 1995 in the matter of PepsiCo, Inc. v. Redmond. The court held that a plaintiff may prove misappropriation of a trade secret by demonstrating that the defendant's new employment will inevitably lead to them relying on the plaintiff's trade secrets. Although multiple courts and circuits have not chosen to adopt this doctrine, it has been widely used in misappropriation of trade secret claims in many jurisdictions. In Apple’s complaint, they allude to this doctrine by alleging that Kaithamana took on the same role that he had at Apple at Rivos and by suggesting that Wen performs a similar job function at Rivos that he had performed at Apple. However, this will probably be insufficient to prove misappropriation, because with the enactment of the DTSA, courts recognize the intent of the act to reject this doctrine. While some courts may still utilize this common law doctrine, the DTSA suggests a move toward a stronger burden of proof for a claim of misappropriation of trade secrets.
Potential Ban on Non-Compete Agreements and Non-Solicitation Agreements
In its countersuit, Rivos alleged Apple’s NCAs were overbroad and applied beyond trade secrets. According to Rivos, the NCAs covered anything “learned” during the course of employment. Traditionally, non-competes are used to protect certain confidential information from competitors, regardless of worker type. They protect trade secrets and competitive advantages by locking in employees and limiting their job mobility. Beyond restricting mobility, studies by the U.S. Government Accountability Office have shown that NCAs may also reduce wages and impede the creation of new firms. There has been momentum at both the state and national levels to ban the enforceability of non-compete and non-solicitation agreements. The Federal Trade Commission is expected to vote in April on a rule to ban NCAs that, naturally, has been met with considerable opposition. Commercial industry groups argue the FTC has overstepped its statutory limits. New York’s governor vetoed legislation banning NCAs. Meanwhile, California doubled down in opposition to NCAs by passing Assembly Bill 1076 and Senate Bill 699. The bills, which apply to in-state and out-of-state employees who move to California, void the application of any NCA. As a result, firms in California were required to inform those who were employees working under one of the changes by February 14th—with written notice. Rather than securing employees in place or limiting their ability to find competitive jobs via NCAs, companies are being encouraged to review and supplement their confidentiality agreements to bolster trade secret protection. Considering the uncertainty surrounding NCAs, it follows that here a settlement would be in both parties' interests.
*The views expressed in this article do not represent the views of Santa Clara University.