By Daniel F. Roland and Christopher C. Howes, of Finnegan, Henderson, Farabow, Garrett & Dunner, LLP
As an owner of a National Association for Stock Car Auto Racing (NASCAR) team and a three-time Super Bowl champion as a head coach in the National Football League (NFL), Joe Gibbs fully understands competition.
But while Gibbs undoubtedly knows that his adversaries may try to gain an advantage by studying or replicating the competition, he may not have expected that his NASCAR competitors would look for an edge by stealing IP. And that is exactly what may have just happened.
Formula 1’s ‘Spygate’
NASCAR recently learned of allegations that an engineer for Joe Gibbs Racing accessed proprietary information and shared it with another Cup Series team. Reports indicate that the engineer in question–who is in a contract year—had discussed future employment opportunities with other teams and allegedly received a cash payment for the proprietary information. While the allegations appear to have made their way around the track, NASCAR cannot intervene until a lawsuit is filed or a complaint is lodged with NASCAR.
This is not the first time a potential trade secrets scandal has hit the racetrack. In 2007, two of the biggest teams in Formula 1 were embroiled in a controversy now known as ‘Spygate’. McLaren was found to have illicitly possessed confidential Ferrari technical information—essentially the blueprints for the 2007 Ferrari F1 car—and was ultimately fined $100 million by the Fédération Internationale de l’Automobile and thrown out of the constructor’s championship.
The potential NASCAR scandal is just the latest in a trend of cases involving alleged IP theft among rivals. For example, DraftKings, the popular sports gambling company, recently sued a former senior vice president in federal court, claiming that he tried to lure away its customers and misappropriated its trade secrets when he left the company to join its competitor Fanatics (DraftKings v Hermalyn, 2024).
And in 2023, the New York Knicks, a National Basketball Association (NBA) team, sued the Toronto Raptors, alleging that the Raptors poached a former Knicks employee and directed him to steal the Knicks’ trade secrets and confidential information on the way out, such as scouting reports, diagrams of opponents’ key plays, and the Knicks’ prep book (New York Knicks v Maple Leaf Sports & Ent).
Factors at play
The uptick in cases involving purported IP theft should not necessarily be surprising with the increase in employee mobility and the ease with which employees can access and transfer information today.
The courts have played a role too, handing out astronomical damages awards in the hundreds of millions to trade secret plaintiffs. In fact, in 2022, a jury awarded one plaintiff over $2 billion for the theft of its trade secrets. Although the case was remanded for a new trial by the appellate court, the huge damages figure made headlines and surely caught the attention of would-be plaintiffs.
The passage of the Defend Trade Secrets Act (DTSA) in 2016 also expanded the reach of US trade secret law, and plaintiffs have used it to take aim at international theft.
For example, in an issue of first impression for a federal appellate court, the Court of Appeals for the Seventh Circuit examined the extraterritorial reach of the DTSA after Motorola sued China-based Hytera for misappropriation, claiming Hytera “poached three engineers from Motorola in Malaysia, offering them high-paying jobs in exchange for Motorola’s proprietary information” (Motorola Sols v Hytera Commc’ns Corp, 2024).
On the extraterritoriality issue, the Seventh Circuit sided with Motorola on appeal, concluding that the DTSA permits plaintiffs to recover damages against foreign defendants even if most of the wrongful conduct occurs outside the US.
As the court explained, there need only be an “act in furtherance” of the offence within the US, which in this case was marketing products embodying stolen trade secrets.
After concluding that Motorola could recover damages for all foreign sales involving the trade secrets acquired by theft, the Seventh Circuit affirmed the compensatory and punitive damages award that totaled over $400 million.
Foreign actors
The increased scrutiny on trade secret theft has extended to the criminal context too, with the Department of Justice prioritising its efforts to combat theft by foreign actors. For example, in one recent case, an engineer was caught stealing General Electric’s trade secrets and sending them through surreptitious means to himself and a co-conspirator to support their business ventures abroad.
He was convicted of conspiracy to commit economic espionage under 18 U.S.C. § 1831(a)(5) and sentenced to 24 months in prison. On appeal, he argued that the statute requires proof of foreign government sponsored or coordinated intelligence activity, i.e., that he was in cahoots with the foreign government.
The Second Circuit examined the criminal statute and rejected his argument, explaining that, under § 1831, “a volunteer spy is just as guilty as one recruited and handled by a foreign government” (US v Zheng, 2024).
New laws and non-competes
Proposed legislation also looks to implement added measures to stop trade secret theft.
One bill, for example, targets the border, aiming to prevent non-citizens from immigrating into the US and/or classifying them as deportable if they violate certain laws, including theft of trade secrets.
Another bill looks to increase monitoring efforts to counter “national security threats and espionage in the US, including trade secret theft [and] theft of US IP and research”.
But the shifting legal landscape is not all in favour of the ‘offence’. The Federal Trade Commission (FTC) recently sought to ban most non-compete clauses in employment agreements—a move that would make it easier for employees to leave their current job to join or start rival companies. Although a federal court issued an injunction preventing the FTC from implementing its rule nationwide, (Ryan v Fed Trade Comm’n,2024) the effort to ban non-competes will not likely go away.
Not only has the FTC appealed the court’s decision, but several states have also banned employee non-competes, with at least six others having pending legislation to do the same. This potential shift will force companies to rethink employee agreements and consider alternative ways to protect their business interests without non-competes.
As evidenced by these cases and the recent efforts of legislative and governmental bodies, companies must consider a host of factors when seeking to protect their intellectual property. While it appears the NASCAR saga is far from a chequered flag in terms of a resolution, this developing story serves as a strong reminder about the importance of protecting proprietary information, especially when a rival is just around the turn.
The following article appeared initially in World Intellectual Property Review, and is reprinted here with its permission.
