Reasonable Measures Podcast

Protecting Trade Secrets Without Non-Competes

Tim and Chris shift their focus to a high-profile legal battle involving Jane Street and Millennium Management. Jane Street accuses Millennium and two former employees of stealing proprietary trading algorithms after the employees left the company. Interestingly, Jane Street does not use non-compete agreements, even though they are permissible in New York. Instead, the firm relies on intellectual property agreements and internal policies to safeguard its trade secrets. Despite these measures, the company alleges that it suffered significant financial losses after the employees departed, underscoring the challenges of protecting sensitive information.

The discussion reveals the potential risks of litigation, as even redacted information about Jane Street’s algorithms—such as their focus on options trading in India—was inadvertently disclosed during the case. This incident highlights the delicate balance between seeking legal remedies and maintaining the confidentiality of trade secrets during court proceedings. Tim and Chris also question whether non-competes would have mitigated the risks in this case, suggesting that direct protection of trade secrets is often more critical.

Emerging Trends in Trade Secret Disputes

The episode concludes with a brief preview of the International Trade Commission (ITC) as a growing venue for trade secret disputes. Traditionally used for patent cases, the ITC is increasingly being considered as an alternative for addressing trade secret theft, especially when it involves blocking the importation of infringing goods. Chris notes that this approach provides trade secret owners with another option for protecting their intellectual property, particularly in industries facing international competition.
Through these discussions, the episode underscores the evolving landscape of non-compete agreements and trade secret litigation. From the challenges of maintaining secrecy during legal battles to the rise of new forums like the ITC, businesses must navigate complex and shifting legal frameworks to safeguard their competitive advantages.

Takeaways:

The FTC ruling banning non-compete agreements has sparked heated debates and lawsuits from companies seeking to block the ruling.
The Jane Street case highlights the importance of protecting trade secrets directly, even without non-compete agreements.
The ongoing legal battles surrounding non-compete agreements and trade secrets demonstrate the challenges of maintaining secrecy during litigation.
The International Trade Commission is emerging as an attractive venue for trade secret disputes, offering an alternative to traditional patent litigation.

Transcript:

Tim (00:02.606):
Hey Chris, episode three. We’ve, we’ve, we’ve hit a milestone. Episode three. All right. So, you know, based on our conversation last time, we said we would circle back to the FTC ruling, the ban on non-compete agreements. And I think we’ve agreed that in the past week, there has been a lot of coverage on whether or not these agreements are a good thing or a bad thing. And there seems to be heated debates in support of both of those sides. And so how about today, we just punt on that? I think we’ll come back to it at the end with some of Ken Griffin’s comments lately. But really want to talk about what’s going on in the courts today. So if I’m not wrong, there are three cases that have been brought almost immediately upon the ruling. And those three cases are from the US Chamber of Commerce, Ryan LLC, which is a tax service, and ATS Tree Services. What a cool group of companies. And so these are companies that are suing the FTC for what? What’s going on here, Chris?

Chris Buntel (00:05.415):
Hey Tim, great to be here. We’ve made it into… Fantastic.

Tim (00:32.079):
There seems to be a lot of debate about whether these agreements are a good thing or a bad thing. And there seems to be heated debates in support of both sides. So, how about today, we just punt on that. I think we’ll come back to it at the end with some of Ken Griffin’s comments lately. But really want to talk about what’s going on in the courts today. So if I’m not wrong, there’s three cases that have been brought almost immediately upon the ruling. And those three cases are from the US Chamber of Commerce, Ryan LLC, which is a tax service, and ATS Tree Services. What a cool group of companies. And so these are companies that are suing the FTC for what? What’s going on here, Chris?

Chris Buntel (01:28.199):
So today is also a big day beyond just all this activity, where today, May 7, the FTC is publishing their proposed rules. So the clock starts now. And in 120 days, which is September 4, if you do the math, these rules will become effective unless there’s an injunction. So so far, these three entities and probably more are at strictly looking to enjoin the FTC from enacting the rules on September 4th. So they’re not seeking money, not seeking damages. They’re just strictly trying to block the FTC from doing this. And they’re all saying basically the same thing, which is the FTC, in their opinion, is way over exceeding their mandate. The FTC normally does kind of procedural administrative type rules. And they feel like this is just a big expansion of the reach of the FTC. So it’s been a real interesting week for sure.

Tim (02:38.992):
So, I think that, you know, so we said last week, yeah, 30 million contracts that have been, you know, entered into in good faith between two parties basically get the kibosh right there, just done, and that decision is really on the back of a three to two vote. So essentially, three people, and I think, you know, Ken Griffin made this point in his CNBC interview, which I thought was great. So we have three people, non-elected officials, who have made this decision for us, right, to get rid of 30 million contracts. So I think when you put it in that context, it is pretty incredible, isn’t it?

Chris Buntel (03:23.751):
It is. I mean, a lot of people are amazed at kind of the land grab that’s being done by the FTC here versus, you know, letting Congress enact rules that are more substantive, which should be kind of the normal way you would go about this. And for the FTC to do it, you know, a lot of people feel like that’s a pretty bold move.

Tim (03:46.257):
So, and I think, you know, I’m not sure. I think you probably have better numbers than I do, but four or five states have already banned non-competes, right? So California is the one everybody talks about. Like, you know, life goes on, innovation continues, competition’s fine. And a few other states, Minnesota, North Dakota, Oklahoma, and then a bunch of other states are tightening provisions in and around non-competes. So, you know, I think if left to the states, it looks like there’s a fairly clear trajectory, does it not?

Chris Buntel (04:20.071):
Yeah, it is. And a lot of people are acting like the FTC came out of nowhere trying to ban non-competes. But the reality is, non-competes have been under attack for years. And the four states have banned them basically outright. And a lot of other states are really still allowing them, but tightening up the scope and the coverage much more than before. So in some ways, the FTC is just the latest bullet being fired against non-competes, but they’ve been under attack for years. It’s really not all new. But it’s certainly getting a lot more attention. This is newsworthy. And the fact that Minnesota or North Dakota or Washington are tightening up doesn’t quite get the headlines.

Tim (05:01.777):
And so, so… Yeah.

Tim (05:15.314):
I mean, like, if you, when we started tangibly, you know, three years ago, if you would have told me, you know, prime time CNBC slots are being, you know, trade secrets are sort of like what’s being talked about at Powell would have been like, eh, I don’t know, man. That’s a, seems a little aggressive. So, so what about the cases? So right now there’s two cases in Texas and one, where’s the other one? Somewhere Pennsylvania.

Chris Buntel (05:41.959):
Pennsylvania. Yep.

Tim (05:44.786):
So like what’s next? What’s going to happen? How long is it going to take?

Chris Buntel (05:50.183):
Yes, I mean, it’ll go through the normal process, normal procedure. Right now, it’s a district court. And then assuming it gets appealed, it’ll go up to the Fifth Circuit for Texas and the Third Circuit for Pennsylvania. And it’ll be really interesting to see if the circuit courts handle it differently or come to a different decision, because that would actually tee this up to go to the US Supreme Court.

The US Supreme Court is extremely picky on which cases it hears. And depending on the year, it can be like 1% or as high as 3%, but still a really tiny fraction of cases that are petitioned to the Supreme Court actually get heard. But the ones that they tend to take are either your really compelling federal issue, which getting rid of non-competes certainly could qualify for that, or when you have different circuit courts giving very different results to the same question. So here, in a way, it’s great that the ATS Tree Services, if it gets appealed, will go to a different circuit court, because that makes it easier to have this difference in how the courts handle it, and ultimately with the goal, perhaps, of going to the US Supreme Court.

But you were asking about timing. This won’t be a quick battle. This is going to stretch a year, maybe multiple years, if it goes that far. We’ll see.

Tim (07:30.195):
And so really the main goal right now is to say, look, we just, we want an injunction so that this rule doesn’t go into full effect September 4th. Is that, that’s the bottom line?

Chris Buntel (07:41.863):
Yeah, and that’s what all three, they’re all basically saying the same thing, which is, you know, you’ve over exceeded your rulemaking ability. We want an injunction blocking September 4th.

Tim (07:57.252):
So I noticed that it was today, US District Judge Campbell Barker, Tyler, Texas, in written order said that under an informal court doctrine known as the first-to-file rule, he’s basically saying that the Chamber of Commerce and the Ryan LLC filings are effectively the same thing, and that Ryan gets priority because they filed first. This kind of like…

Chris Buntel (08:09.479):
Mm-hmm.

Chris Buntel (08:22.087):
Yeah, but by one day, they were one day faster pulling the trigger. And actually, everyone thought the US Chamber was moving super quickly. Like everyone said, they’ll be the first one. And Ryan beat them literally by one day.

Tim (08:27.859):
It’s like it.

Tim (08:39.412):
So, I mean, it’s maybe some silliness here, but I mean, this kind of harkens back to the first file in the patent world. So, I mean, I’m sure a ton of legal work went into preparing both of these cases, right? So, is all of that work that went into the US Chamber of Commerce sort of case just sort of go, you know…

Chris Buntel (08:41.959):
Yeah, it is.

Chris Buntel (08:47.559):
Yep, same thing.

Tim (09:08.628):
Go sit on the sidelines to that legal team.

Chris Buntel (09:12.423):
Pretty much. We’ll see if the cases get combined, given that they’re both in Texas. One is in the Eastern District, one’s in the Northern District, but they’re still within Texas. So we’ll have to see. And actually, a lot of the legwork had already been done by one of the dissenting opinions from an FTC commissioner previously, who kind of laid out the logic of why, in her opinion, she thought the FTC was reaching too far. So a lot of that initial legwork had already been done by the commissioner, former commissioner. But yeah, this is a wild show to watch and it seems to change almost by the day or certainly by the week.

Tim (09:52.02):
Beautiful.

Tim (10:01.045):
All right, we’ll keep an eye on it. I’m sure this is not the last time we’ll talk about it. Okay. Yeah.

Chris Buntel (10:06.343):
Yeah, not at all. And again, I think there’s a lot of activity at the state level. And our friend Russell Beck has a great blog and resources on his law firm’s website. It’s Beck, Reed, and Ryden. They’re kind of considered the dominant authority on what’s going on in the 50 states. So there’s a lot of information out there. Again, the FTC, it’s not the first. It’s just the most visible.

Tim (10:14.544):
Yeah.

Tim (10:32.95):
Yeah, yeah, good shout out to those folks. I love their non-compete chart. You can kind of go and click through it and see where all the different, yeah, where they stand. Good stuff. All right, second topic today is a Jane Street. So this is an ongoing case, a headline from the Financial Times about a month ago, a little less.

Chris Buntel (10:41.991):
It all makes sense.

Tim (10:59.318):
Jane Street accuses Millennium Management and two ex-employees of stealing trade secrets. And so these are sort of the biggest firms on Wall Street. Why don’t you jump in, Chris, and talk a little bit about the fact pattern here?

Chris Buntel (11:18.407):
Yeah, the fact pattern is not terribly unique where, you know, Jane Street had a couple of employees who developed a trading algorithm that was wildly successful, generated tons of profits. And they built a team of people around 25 or so who actually, you know, processed trades using this algorithm and made a lot of money. And then the two guys left Jane Street to join Millennium.

And then kind of the profit from the trading went down at Jane Street, went down by half within a month of these two guys leaving. So of course, Jane Street sued, you know, alleging a lot of different things, including DTSA for trade secret theft, breach of contract, and a bunch of other very normal causes of action. The interesting one is Jane Street…

Tim (12:01.334):
Amazing.

Chris Buntel (12:16.839):
As an entity, chose not to use non-competes. So in New York City, non-competes still exist. They’re okay. But for whatever policy or procedural reasons, they don’t use non-competes for their people. So when I first started reading this complaint, I expected non-competes to show up somewhere, but it never does because just as a corporation, they choose not to use them, which was pretty interesting.

Tim (12:47.479):
That’s fascinating. Yeah, keep going.

Chris Buntel (12:48.375):
But we’ve talked before about how if you don’t have non-competes, either because you can’t use them or in this situation you choose not to use them, you have to protect your trade secrets directly instead of indirectly. And that’s exactly what’s happening in this litigation.

Tim (13:09.943):
So I think you mentioned offline, so on the surface from the complaint, it looks like Jane Street did everything by the book. They had the IP agreements in place. They had exit interviews. All the things you would say are, that’s really good hygiene. And despite that, and so here’s what’s sort of known about this case, obviously, for a couple of weeks.

Chris Buntel (13:27.463):
Mm-hmm.

Tim (13:39.128):
But when I saw this interview today with Ken Griffin from Citadel, it’s really interesting because a lot of territory was covered in the interview. But one of the things he was arguing was that this FTC decision is a big disaster. Non-competes are critical for the financial services industry. Interestingly enough, Jane Street didn’t have one. But what he was arguing, it sounded like to me was that, you know, because there was no non-compete, here’s what happened, is that essentially the trade secret or elements of the trade secrets or hints of the trade secret started to come out during the court case. And it was just enough hints for, you know, people skilled in the art, like folks at Citadel to kind of go, okay, now we understand the algorithm, right? Off we go. Trade secrets up in smoke. And so when I heard that, I was like, well, doesn’t that actually kind of support the idea that a non-compete’s not really going to help you there? Isn’t this really more about protecting the trade secret itself, the algorithm or series of algorithms as its own thing, as its own asset? And so, anyway, what do you think about that and maybe talk a little bit about all those elements of the trade secret started kind of come out during the case because that’s pretty interesting.

Chris Buntel (15:16.775):
Yeah, it is. And Jane Street did a lot of things right, or maybe did everything right. Yeah, they had good policies, good forms, good procedures, an amazing IP agreement that was very thorough. And even the complaint itself, if you read it, it’s redacted like crazy. So there’s lots of sentences or half sentences that are just blacked out, and it all has to do with the actual algorithm. Now, apparently during some of the hearings, it was accidentally leaked out by the defendant’s lawyers that the algorithm has something to do with options trading in India. But there was no more detail than that. So the actual algorithm itself, as far as I can tell, is still secret. How did they identify which options or which price disparities can lead to a favorable trading result? Hasn’t been revealed yet. So the fact that it’s in India, I mean, that’s some information, but to me, the algorithm still has not been disclosed. And there are mechanisms in court where you can produce confidential information to the court safely. This has been done for decades now, where you have things like protective orders or have things be for the eyes only of the outside counsel.

Tim (16:34.346):
Okay. Sure.

Chris Buntel (16:44.551):
You can have special masters. There’s a variety of ways that you can bring confidential information or trade secrets to the court’s attention without just broadcasting it to the world. So it’s certainly possible.

Tim (17:00.762):
What’s kind of fascinating to hear you say it’s the defendants’ lawyer that, you know, managed to get some of this stuff out in the open. So it sounds pretty tenuous to me. But yeah, like when I look at what Ken Griffin’s sort of arguing, it does sort of strike me as though, you know, it speaks to the broader conversation around these non-competes, which is…

Chris Buntel (17:07.431):
Yeah, it was. It was.

Tim (17:28.475):
Non-competes aren’t like a magical thing that protect your trade secrets, right? They control people. And so I would say, if anything, and probably what we’re going to find as this case continues to play out is just how well protected were those algorithms? Did they have their own identity? How many people of that team of 25 knew the core algorithm? Maybe it was just a handful.

Chris Buntel (17:33.421):
Not at all.

Tim (17:57.563):
Or maybe it was all 25 or maybe it was a whole firm. And so I think when you peel back those layers, you really start to kind of understand, is this thing really a trade secret or not?

Chris Buntel (18:09.607):
Well, and I think the fact that it involved the derivatives market in India, if I told you that, you couldn’t suddenly go make a billion dollars profit. And to me, that’s nowhere near enough information. They have some way of filtering all of the trade opportunities and intelligently and correctly predicting which ones will be profitable. There’s a lot more to it than just go to India. Maybe it works particularly well in India. The other interesting thing that I noticed was they’re arguing that because Jane Street’s profit went down the month after these two guys shifted, somehow that indicates that the trade secret was stolen. And normally you would look at the defendant and say, wow, suddenly they started making a lot more money because of the theft. This one is interesting because it’s kind of the other way around where the plaintiff made less money because of a departure. So there’s a lot of interesting things going on in this case for sure.

Tim (19:20.027):
Super. Thanks for that, Chris. That’s a great review. And another one to kind of keep an eye on. I think this is firms this big, this prominent on Wall Street. This is going to continue to get headline kind of press. So what’s up next?

Chris Buntel (19:35.655):
Yeah, and this case, I mean, this case is only a couple of weeks old, so it’s still just getting out of the gate. And the amount of money involved in these trades, this algorithm, it’s a massive amount. This is not small change. This is serious cash here. So both sides are not going to give up easily. So it’s definitely one to watch.

Tim (20:01.02):
Awesome, okay, and let’s tie this off with what’s coming up next. I think we’re going to talk about the ITC… is that, is that the idea?

Chris Buntel (20:10.247):
Yeah, that’s the next one teed up. And it’s really an interesting topic. So the ITC traditionally is used with patents, but it can also be used with trade secrets as a way of blocking imports of goods into the US. So there’s no damages. It’s strictly closing the border to an offending product entering the US. And it’s really good because a lot of people are starting to think of it as an attractive venue for trade secret disputes in addition or as an alternative to the traditional patent one. So again, it’s one more arrow for trade secret owners to consider.

Tim (20:53.629):
And it’s heating up as a space. There’s been some really interesting cases over the last couple years and okay, don’t want to don’t want to go into it now because we’ll just keep talking. So let’s tie it off, man. Great episode three. Take it easy. Thanks, Chris. Later. See ya. Bye.

Chris Buntel (20:55.239):
It is.

Chris Buntel (21:04.167):
That’s right.

Chris Buntel (21:07.687):

Awesome, thanks, we’ll talk soon.