• Lessons Learned From the Avant! Criminal Trade Secrets Case
  • April 29, 2003 | Author: Donald Werner Searles
  • Law Firm: Fenwick & West LLP - San Francisco Office
  • In a triumph of perseverance, the Santa Clara District Attorney's Office recently claimed victory in the landmark Avant! trade secrets case, People v. Avant!, No. 210570, (Sup. CT. 2061). After one criminal complaint, two indictments, three attempts to have the District Attorney's Office disqualified from handling the case, four years of pre-trial maneuvering, and five different judges, on May 22, 2001, Avant! Corp. and seven of its current and former executives entered no contest pleas to charges of securities fraud and misappropriating trade secrets from its competitor, Cadence Design Systems, Inc. Under the terms of the plea agreements, Avant! agreed to pay a $27 million fine and its President and CEO, Gerry Hsu, agreed to pay a $2.7 million fine. The remaining defendants agreed to pay an additional $5 million in fines and face possible incarceration. In addition, Avant! was ordered to pay almost $200 million in restitution. Given the difficulties in reaching this conclusion, however, it remains to be seen whether other companies are willing to follow Cadence's lead and refer trade secret thefts for criminal prosecution.

    The Avant! case first came to the public's attention in late 1994, when police raided the Los Gatos home of Mitch Igusa, a former Cadence engineer who was alleged to have received secret payments in exchange for providing Cadence's trade secrets to Avant! Among the more damning pieces of evidence collected by the District Attorney's Office in Igusa's home and elsewhere were: the source code of Avant!'s ArcCell place-and-route software (used in the design of computer chips), which was identical to that of Cadence; an electronic footprint showing that a Cadence employee had e-mailed six megabytes of source code to his private account before joining Avant!; copies of Cadence's software with the copyright notices removed; and a "Resignation Q & A" containing scripted responses for defendants' use during their exit interviews with Cadence.

    The Pros and Cons of Referring A Case for Criminal Prosecution

    Although this evidence made for a compelling case under California's criminal trade secrets statute, Cal. Penal Code § 499c (West 2000), the resulting judicial paralysis is likely to give future corporate victims pause before turning to law enforcement for protection of their trade secrets. Before deciding on turning over a trade secrets case to a county prosecutor or the U.S. Attorney's Office, the corporate victim should carefully consider the pros and cons involved.

    The most obvious advantage to criminal prosecution over civil litigation is the cost to the victim. Particularly where the alleged perpetrator is without sufficient funds to pay a meaningful damages award, criminal prosecution may be the most expedient means for punishing the wrongdoer. In addition, law enforcement agencies have numerous investigative tools not available to private litigants, including the ability to compel testimony from recalcitrant witnesses, use search warrants to seize evidence without prior notice, and surreptitiously record conversations with potential suspects. Depending on the need for such measures, referring the matter for criminal prosecution may be the only means to obtain the necessary evidence to prove the theft and the identity of the thief.

    As Cadence discovered, however, there are costs involved in referring a matter for criminal prosecution. One of the most significant costs is the victim's loss of control over the process, including settlement. Plus, the looming presence of a criminal case makes it far less likely that defendants will agree to any civil resolution. Moreover, global resolutions of both criminal and civil charges are extraordinarily difficult to negotiate, as the prosecutor is generally unwilling to risk the appearance that he or she is improperly using the threat of criminal charges to facilitate the resolution of a civil case.

    Furthermore, a criminal prosecution does not obviate the need for filing a parallel civil proceeding, since California's criminal trade secret law does not provide for immediate injunctive relief. Cal. Penal Code § 499c. Civil discovery, however, is likely to be stayed indefinitely, as it was in Avant!, since Fifth Amendment self-incrimination issues make it difficult for defendants to defend the civil case while facing indictment. See, e.g., Pacers, Inc. v. Superior Court, 162 Cal. App. 3d 686 (1984) (authorizing stay of civil discovery pending expiration of criminal statute of limitations).

    In light of a criminal defendant's right to a public trial, expansive criminal discovery rights, and constitutional guarantees of compulsory process and right of confrontation, it is difficult to protect a company's trade secrets from disclosure in a criminal prosecution. See e.g., Cal. Evid. Code § 1061 (West 2000), setting forth procedure for obtaining an order protecting the confidentiality of trade secrets in a criminal case. Since the government is required to prove every element of the offense beyond a reasonable doubt, each element will be vigorously contested, resulting in a painstaking examination of whether the allegedly-stolen technology constitutes a trade secret. This examination presents a criminal defense lawyer with the opportunity to raise numerous defenses that make it difficult for a jury to unanimously agree on a verdict. For example, it may be possible to argue that the alleged trade secrets were reverse engineered from products obtained by proper means, which would be a complete defense to a claim of trade secret misappropriation. See, e.g., Sony Computer Entertainment v. Connectix Corp., 203 F.3d 596 (9th Cir. 2000). It may also be possible under the equitable defenses of unclean hands and laches to place into issue the company's motivations in forwarding the case for criminal prosecution, and thereby obtain discovery of internal memoranda that might otherwise be protected under the attorney-client privilege and work product doctrine. See, e.g., Unilogic, Inc. v. Burroughs Corp., 10 Cal. App. 4th 612 (1992), permitting an unclean hands defense to be asserted affirmatively against a legal claim for damages.

    The Unresolved Legacy of Eubanks

    Assuming the decision has been made to refer a trade secrets theft for criminal prosecution, the victim must not become overly involved in the prosecutor's investigation, as it may result in the prosecutor's disqualification. In People v. Eubanks, 14 Cal. 4th 580 (1996), the California Supreme Court disqualified the Santa Cruz District Attorney from the Borland/Symantec criminal trade secrets case after Borland, the victim, paid a $13,000 bill already incurred by the District Attorney's office in hiring a computer expert to conduct a portion of the investigation. The Supreme Court found that Borland's financial assistance resulted in a potentially disabling conflict of interest since "the private financial contributions were of such a nature and magnitude likely to put the prosecutor's discretionary decision making within the influence or control of an interested party." Id. at 599.

    In Avant!, the defense repeatedly sought to recuse the District Attorney's Office under Eubanks since the prosecutor relied extensively on the research and data generated by Cadence's experts in its own civil case. In addition, Cadence also loaned the prosecutors a computer workstation to process information. The District Attorney's Office successfully fought these challenges on the theory that Cadence was not paying off a debt "already incurred." But shortly before the Avant! defendants entered their no-contest pleas, the California Supreme Court requested that the Office respond to the defense's writ, raising the specter that the Court was not satisfied with the narrow interpretation of Eubanks given by the lower courts.

    Avoiding Criminal Exposure

    A company accused of trade secret theft should be prepared for such charges. The presence of "illegal" data within a company is like a virus that quickly spreads. As Avant! found, a company's very existence can be challenged as an ongoing criminal enterprise based on its alleged possession of another company's trade secrets. To protect against such an accusation, and the potentially dire consequences of a criminal prosecution, every company should have a detailed compliance plan. Such a plan will enable a company found in possession of unauthorized secrets to argue that it was victimized by a rogue employee. See, e.g., United States Sentencing Commission, Guidelines Manual, §8A1.2 (Nov. 1998).

    Finally, a company facing an accusation of trade secret theft should respond carefully. Avant!'s executives issued various seemingly-innocuous denials of wrongdoing, including the following:

    • "The Company's products are based on the Company's proprietary architecture and technology, which provide a breadth of automated IC physical design capabilities."

    • "The Company believes its products and trademarks do not infringe upon the proprietary rights of third parties."

    • "Avant! has never made any improper use of Cadence technology, stolen any purported trade secrets, infringed any copyrighted material or engaged in any wrongful acts toward Cadence."

    The Santa Clara District Attorney's Office, however, took the position that each of these statements was false, in that Avant!'s executives allegedly knew that its products were based on trade secrets that had been stolen from Cadence, and used these statements as the basis for the securities fraud charges.

    In conclusion, criminal enforcement, under Cal. Penal Code § 499c represents an important weapon in the fight against trade secret theft. But, as Avant! teaches, this remedy must be used carefully and with a full awareness by the victim of its potential advantages and disadvantages.