SS&C Technologies’ recent US$44 million jury verdict in a lawsuit against Clearwater Analytics has put Wall Street’s legal and human resource managers on alert to protect their firms from the receipt of trade secrets when hiring key employees from the competition.
“HR and legal departments are a company’s first line of defense against litigation from trade secret theft and they must understand their firms’ trade secret policies completely,” cautions Gregory Ewing, a partner at CKR Law in Washington, D.C.
Indeed, HR managers at five Wall Street wirehouses tell FinOps Report that in light of the SS&C court case and decision they are reviewing their hiring practices and legal contracts to ensure they are air-tight when it comes to what information new employees can and can’t bring over. Three of the five firms say that they have even retained external law firms to audit their procedures for high-risk candidates. “We aren’t taking anything for granted so we are verifying all of our steps,” says one HR manager. Those steps include re-reading interview questions, employment offers, employment contracts and subsequent oversight of hired employees.
Legal experts warn that lawsuits in state and federal courts involving the theft of trade secrets are on the rise as information becomes more valuable and control of it more contentious. Sales and product development managers appear to be causing financial and fintech firms the most angst, because they possess information that goes far beyond understanding the tasks involved with doing their jobs– otherwise known as industry knowledge. They have access to trade secrets, or the confidential sauce of formulas and information, critical to the success of the firm they work for. That data isn’t patented, but it is protected from being used by a rival firm under state and federal laws.
The difference between industry knowledge and trade secrets is a thin line, but it does exist. Knowing which firms to target for sales pitches is one thing. Knowing how much they are willing to pay a service and whom to solicit for a contract is another. Yet another example of the distinction: Knowing how an application works and knowing the design on how it can work more effectively than your competitor’s.
Financial technology firm SS&C Technologies, headquartered in Windsor, Connecticut was apparently successful in convincing a jury in Chicago that Idaho-based Clearwater Analytics knew SS&C Technologies’ enterprise sales director Bradley Sossa held trade secrets when it hired him in September 2015 and knew he intended to use them at the new firm. In short, the theft was deliberate and planned. The US$44 million, awarded after a two-week trial in late April 2019, includes US$28 million in punitive damages reflecting “willful and malicious conduct” on the part of Clearwater Analytics.” The remainder is compensatory reflecting a “reasonable royalty” on the use of SS&C Technologies’ data.
Stil pending is a separate lawsuit SS&C Technologies also filed in 2016 against its former director of business solutions Richard Pullara for taking product information from the firm with him when he joined Clearwater Analytics and helping recruit Rossa. Originally filed in a Connecticut federal court, the case was quickly moved to a Connecticut state court in Hartford. Pullara left SS&C in March 2012 after a 12-year stint to join Clearwater Analytics as a manager for insurance solutions. That role wouldn’t give him responsibilities for directly pitching products to prospective clients, but the data he had in his possession from SS&C could easily help Clearwater Analytics’ sales staff. Pullara allegedly stored company documents on his personal USB drives before leaving SS&C. Those documents included SS&C’s bluprints for software products and services, pricing information on products and prospective customer lists.
Based on company descriptions there is a glaring overlap between SS&C Technologies and Clearwater Analytics’ products and target markets. Therefore, any information in Clearwater Analytics’ possession from SS&C Technologies could clearly put the Idaho-based firm in a competitive advantage. Both firms say they provide automated investment accounting, performance, compliance and risk reporting software solutions for insurance firms, fund managers, banks and other institutions.
In its lawsuit filed in Illinois state court in 2016, SS&C Technologies alleged that when Rossa, an eight-year veteran of SS&C, caught wind of the fact he might be fired after an eight-year stint, he sent himself and employees at Clearview Analytics emails with attachments of SS&C Technologies’ current and prospective customers, marketing materials, user guides, and responses to requests for proposals. Clearwater Analytics’ employees then integrated some of the information into Clearwater’s sales materials, databases and emails.
SS&C Technologies won’t comment on the jury verdict against Clearwater Analytics other than to say it is happy it won after a three-and-a-half year battle. In a statement to FinOps Report, Clearwater Analytics insists that once it was notified by SS&C Technologies about the potential lawsuit, it quarantined the documents, established a no-calls list, and “worked hard to ensure” that it did not use the information in any way. Clearwater Analytics also fired the enterprise sales representative and the manager involved with hiring him.
Citing disappointment at the jury verdict, Clearwater Analytics would not comment on whether it would appeal for the judge to either overturn the jury’s verdict or to reduce the penalty. Clearwater Analytics would also not explain why Pullara is still employed at the firm. Rossa’s Linked-in account also shows that he remained with Clearwater Analytics until April 2017 when he left to join Electra Information Systems in Chicago for an 11 month stint as senior sales director in its Chicago office. As of February 2018, Rossa has been working as a vice president of sales for French insurance software firm Prima Solutions in Chicago. That’s the same firm he worked for between May 2005 and May 2007 as director of North American sales.
During the jury trial in Illinois, Clearwater Analytics sought to downplay the importance of Rossa’s data saying that it did not rise to the level of trade secrets and was confidential at best. The jury obviously didn’t buy that argument, apparently believing that the details in the documentation Rossa took over to Clearwater Analytics were too specific to fall under the category of common industry knowledge or even confidential. They were in fact trade secrets.
If proving information isn’t a trade secret doesn’t work, how about firing an employee after he or she is already hired and deleting all of the information brought over. That also might not work as shown by SS&C’s victory. State trade secret laws don’t require a firm to prove it was financially damaged by the theft of the trade secrets to win compensation. All it has to do is prove that the hiring firm has the trade secrets in its possession and could have used them. That’s how SS&C was able to win a “reasonable royalty” or the equivalent of a licensing fee. ” SS&C admitted that it never lost a single customer, or a single source of revenue and that Clearwater did not gain any customers or revenue on the basis of the information contained in the documents,” says Clearwater Analytics in its statement to FinOps Report.
What is then the best approach to protecting against successful trade secret litigation? Having prevented a problematic employee frm a rival firm from being recruited in the first place would be ideal. No employee, no potential receipt of trade secrets. Hiring the employee, but preventing the receipt of the trade secrets would have been the second best defense, say legal experts who spoke with FinOps Report.
It stands to reason that a firm would ask potential hires about any non-disclosure, non-solicitation and non-compete agreements they signed with their previous employer. They can’t violate those, period. Rossa and Pullara did so with the help of Clearwater Analytics, says SS&C Technologies.
Next is applying the old motto: the best offense is a good defense. “The hiring firm must make it clear during the interviewing process that it doesn’t want any information that would be construed as trade secrets,” says Richard Rosenblatt, a partner with the law firm of Morgan Lewis in Philadelphia. The prohibited list of information includes sales lists with sales prospects, their contact details and buying preferences, print outs of any company IT architecture, blueprints of any application design or development work, notes from company meetings or conferences attended while at the former employer. “The new firm should go as far as to recommend that the employee to be hired not attend any strategic meetings after accepting an offer from the new firm,” says Rosenblatt.
The new firm can enforce its prohibition of accepting trade secrets by putting it in writing. “The prospective employee’s offer letter and/or any employment or restrictive covenant agreement should state clearly that the hiring company does not want, does not need, and will not accept trade secrets from the prior firm, and that any use or disclosure thereof will be grounds for termination,” says Erik Weibust, a partner with the law firm of Seyfarth Shaw in Boston. “The new firm should advise the prospective employee, and even suggest that the prospective employee hire independent counsel to advise him or her about the dangers of using or disclosing trade secrets to the new firm, even if inadvertently because of the new position.”
The second rule of thumb after imposing contractual obligations is don’t ask, don’t tell. Even if the employee is behaving appropriately, the new firm might accidentally screw itself up by asking the wrong questions. “Human resource and other hiring managers should be instructed never to ask any questions that might elicit a response involving the disclosure of trade secrets during the hiring process,” says Weibust. “Asking questions that elicit disclosure of trade secret information, even if unintentionally, could end up being used as evidence of interference or encouraging misappropriation by the new employer.” The best course of action: strictly stick to asking about experience and expertise.
The third rule of thumb is to prevent, if not mitigate, the inevitable. It’s not that hard for an employee to use trade secrets to help out the new firm even if it seems unintentional. “The new hire doesn’t need to bring data in physical form,” says Ewing. “Having the information in one’s head and passing it onto a co-worker or supervisor in any way can be just as deadly.” Hence, that is the reason why financial firms must make it clear to new hires and existing employees that passing along trade secrets is off-limits, says Ewing.
What if the new hire never brings over any documentation from his or her previous employer and never discusses any trade secrets with his or her new colleagues or supervisor. Isn’t that good enough? Maybe. “The employee could still unintentionally use the trade secrets he or she has learned if he or she is doing the exact same tasks,” says Rosenblatt. “It becomes a matter of inevitability.” What then? Changing the responsibilities of the employee one is hiring to ensure he or she is not the same job does provide some defense.
The last words of advice represent common sense. Yet they are the ones often overlooked. Never hire an employee who seems to be using a former employer’s trade secrets to garner favor with the interviewers. “Employees who are too willing to divulge information about their former employer or make promises of bringing over clients will virtually guarantee a lawsuit,” says Ewing.
Wall Street and fintech firms can’t simply avoid hiring employees from their rivals. There is also no way to actually avoid litigation if the former employer is either angry or suspicious. However, taking the right steps could prevent the litigation from either reaching a jury or having a successful outcome. SS&C Technologies obviously thought it had a strong enough case to prove intentional misconduct, so it went on the offense. Clearwater Analytics obviously didn’t have a strong enough defense. What it ended up doing once it caught wind of SS&C’s lawsuit proved to be too little too late.
Clearwater Analytics wouldn’t answer FinOps Report’s question about whether it had changed its hiring policies as a result of the SS&C lawsuit and jury verdict. In its statement to FinOps Report, Clearwater Analytics deflected attention from its procedures, saying: “The outcome of this matter will not change how we serve our customers. Nor does it restrict in any way our current product offering or ifluence our product development roadmap.”