Guest Post: Why we Need a Seizure Remedy in the Defend Trade Secrets Act

 

Guest post by James Pooley.  Pooley is the former Director General of WIPO. He recently testified at the Senate Judiciary Committee in favor of the Defend Trade Secrets Act. See his earlier Patently-O guest post here.

INTRODUCTION

In a recent essay published in the Washington and Lee Law Review Online,[1] Professor Eric Goldman of the Santa Clara University School of Law criticized the ex parte seizure provisions of the Defend Trade Secrets Act (“DTSA”), which is pending before Congress in identical Senate (S.1890) and House (H.R.3326)  bills. In his view, the legislation is unnecessary, unprecedented, and carries an unacceptably high risk of abuse and collateral damage.

I strongly disagree. Trade secrets face far different threats in the digital age, and having federal courts able to intervene immediately in cross-border cases is critical. In exceptional circumstances, impoundment of a secret by the court will do what this sort of remedy has always done: get the property out of the hands of someone who threatens to destroy it or flee the jurisdiction, so that the matter can be heard on notice before the harm occurs. The seizure provisions of the DTSA have been carefully constrained to prevent abuse, to minimize harm, and to discourage any but the most compelling applications.

SEIZURE PREVENTS TRADE SECRET LOSS BEFORE IT HAPPENS

Most trade secret theft can be adequately addressed with preventive orders entered after a noticed hearing. This is because most actors in these cases can be expected to follow the orders of a court, and because our legal tradition values notice and the higher quality of information that is produced by the adversarial process.

Notwithstanding that preference, as we all learned in civil procedure class, courts in extraordinary cases may act without giving notice because of an acute danger to someone or something. This has been true across the range of legal disciplines, including trade secrets, and the majority of state laws, as well as the Federal Rules, have acknowledged this by articulating the high bar that a plaintiff has to meet before any matter can be heard ex parte. While that bar is necessary to ensure the case is exceptional, the flip side of the coin is that the harm to be avoided is irreparable.

Professor Goldman argues that the DTSA will be useless against the thief who plans to hijack information over the Internet, or who is on his way to the airport with the secrets in his pocket. But these scenarios only prove the need for a federal remedy: when a trade secret owner discovers that such a thing is about to occur, he can’t waste time figuring out what some county court might do. If there is a chance that a surprise intervention by law enforcement can prevent the loss, it is a federal court that is in the best position to respond and to deliver process that works across state lines. Like a terrorist attack, we can only hope to be vigilant and discover it before the button is pushed. But when we do have that kind of information, we also should be able to deploy the most effective tools to prevent the harm. In the right circumstances, one of those tools should be law enforcement, acting under the guidance and supervision of a federal court, to take temporary possession of the trade secret. That is the focus of the DTSA seizure provisions.

EX PARTE SEIZURE FOR TRADE SECRETS IS NOT “UNPRECEDENTED”

In his essay, Professor Goldman asserts that the seizure provisions “would represent an unprecedented innovation. No state trade secret law has a trade secret-specific ex parte seizure process [that is] similar . . . .” This stretches the meaning of “unprecedented” pretty far. He gets away with it only because the second sentence is so narrowly drawn, claiming only that no state has a “trade secret-specific ” process. But that doesn’t mean that states have not used broadly applicable seizure procedures in trade secret cases. In fact they have, although they may call them by another name, such as sequestration, or attachment. Texas, for example, allows for ex parte sequestration in a variety of circumstances, and it has been applied in at least one case to software. See Glenn, Ex-Parte Seizure of Intellectual Property Goods, 9 Tex. Intell. Prop. L.J. 307 (2001) (discussing Tex. Civ. Prac. & Rem. Code §62.001, and Learn2.com, Inc. v. Bell, 2000 U.S. Dist. Lexis 14283 (N.D. Tex. July 20, 2000)).

Moreover, the UTSA itself includes § 2(a), which “authorizes mandatory injunctions requiring that a misappropriator return the fruits of misappropriation to an aggrieved person, e.g., the return of stolen blueprints or the surrender of surreptitious photographs or recordings.” Commissioners’ Comment, 14 U.L.A. at 451. While the Act doesn’t expressly authorize granting such injunctions ex parte, neither does it prohibit them. Again, the circumstances justifying issuance of an order without notice have traditionally been defined by local rules in state courts and by FRCP Rule 65 in federal courts.

Indeed, Professor Goldman acknowledges that trade secret owners “already may seek ex parte TROs, including impoundment,” under FRCP Rule 65, reinforcing this with the statement that “existing federal TRO procedures already provide for ex parte seizures for trade secret owners.” He finds this authority in the Committee Notes to the 2001 amendments, which explains that “impoundment may be ordered on an ex parte basis under subdivision (b) [of Rule 65] if the applicant makes a strong showing of the reasons why notice is likely to defeat effective relief.” While he uses this reference to argue that the DTSA seizure provisions are unnecessary, it directly contradicts his claim that they are “unprecedented.”

DTSA SEIZURE PROVISIONS ARE BUILT ON THE LANHAM ACT

Another reason why the “unprecedented” argument fails is that the DTSA seizure language was directly patterned on the Lanham Act, 15 U.S.C. §1116(d), expressly authorizing ex parte seizure and impoundment of counterfeit goods. As a condition of such an order, the statute requires that it clearly appear from specific facts sworn by the applicant that some other order would not be adequate, that the applicant is likely to succeed on the merits, that immediate and irreparable injury will occur without the order, and that the “matter to be seized” is located at a specific place. Execution of an order has to be by law enforcement, and seized materials must be held by the court in accordance with a protective order to prevent disclosure of confidential information. The plaintiff must be prohibited from publicizing the order or getting access to the defendant’s trade secrets in the course of the seizure. Finally, a hearing has to be held between ten and fifteen days later, at which the plaintiff will have the burden to demonstrate continuing justification for the order.

The DTSA imposes all of these same restrictions, but adds more. Only property “necessary to prevent propagation or dissemination of the trade secret” can be seized. This means, for example, that records and other evidence of the acts of misappropriation or misuse cannot be taken away, thereby reducing the risk of disruption to the defendant’s other business operations. In fact, the court is specifically required to order only “the narrowest seizure of property necessary” and to provide that the seizure “be conducted in a manner that . . . does not interrupt the legitimate business operations of the [defendant] that are unrelated to the trade secret that has allegedly been misappropriated.”

As with other predicate requirements, the plaintiff’s showing must “clearly” demonstrate “from specific facts” that the information is a trade secret, that the target of the seizure has the secret in their possession, and that if notice were given the target “would destroy, move, hide, or otherwise make such matter inaccessible to the court . . . .” (This latter requirement provides assurance to cloud vendors and others who might be holding information for someone accused of misappropriation.) And the merits hearing must be held no more than seven days later (not ten to fifteen as in the Lanham Act), during which time anyone affected by the order may move to modify or dissolve it.

THE RISK OF ABUSIVE SEIZURE IS LOW AND WELL MITIGATED BY DTSA

So it should be obvious – particularly to any practitioner that has tried to convince a federal judge to issue any sort of ex parte order – that getting relief under this section will be very, very difficult. And while making it hard to get is the first line of defense against abuse of any legal process, the legislation provides serious consequences in case it turns out that the plaintiff was wrong. In the first instance, the court has to require a bond adequate “for the payment of the damages that any person may be entitled to recover as a result of a wrongful or excessive seizure” or attempted seizure. But the amount of the bond is only a guarantee and “shall not limit the recovery” of damages for wrongful seizure. Those damages are expressly tied to the Lanham Act, 15 U.S.C. § 1116(d)(11), which includes lost profits, cost of materials, loss of good will, punitive damages where bad faith is shown, and attorneys fees.

In other words, the risk analysis that any litigant must do before requesting a seizure remedy is not just that it might try and fail – although in my experience that is a very likely outcome – but that if it succeeds in getting the order it may be found to have oversold its case. Federal judges are not known for suffering fools gladly, and in addition to the opportunity to impose liability for damages they have Rule 11 sanctions in their tool kit. Therefore we can reasonably assume that the vast majority of counsel will exercise good judgment in discouraging marginal applications, and that to the extent any abusive behavior occurs, appropriate consequences will be imposed, just as they have been in other areas of the law.

CONCLUSION

Professor Goldman envisions the future without giving sufficient weight to the past or present. Of course there is risk involved in this as in all other processes run by humans. The relevant questions are: how important is the goal, how serious are the risks, and what can be done — informed by our analogous experience — to mitigate those risks to an acceptable level? By any objective measure, the authors of the DTSA have done their job well, and we have reliable answers.

The goal — having a federal resource that matches the modern threat of irreparable harm to an essential industrial asset — is critically important, not just for the limited number of cases where the tool will be used, but also for those that will not mature into problems because it is there. The abstract risk of meritless, abusive applications to federal courts must of course be acknowledged, but our experience with similar procedures shows what it takes to discourage such behavior. And the measures written into the seizure provisions of the DTSA — demanding the greatest care and judicial scrutiny possible and imposing very serious consequences for getting it wrong — provide a generous margin of comfort to conclude that seizures will happen only where necessary and where properly controlled to minimize harm.

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[1] http://ssrn.com/abstract=2697361.

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About Dennis Crouch

Law Professor at the University of Missouri School of Law. Co-director of the Center for Intellectual Property and Entrepreneurship.

16 thoughts on “Guest Post: Why we Need a Seizure Remedy in the Defend Trade Secrets Act

  1. What about this provision:
    “(C) PROTECTION FROM PUBLICITY.—The court shall take appropriate action to protect the person against whom an order under this paragraph is directed from publicity, by or at the behest of the person obtaining the order, about such order and any seizure under such order.”

    This seems terrible. Secrecy in a court proceeding should be limited to instances when there is an extremely good justification (like the contents of the alleged trade secret). Seizure orders should be shouted on the roof tops so that we the people can have some understanding as to whether they are being abused or not. Additionally, would this prevent the target of the seizure to loudly publicize the order if they so wished?

    1. I re-read it a couple of times. I think it is a little confusing, but I think I understand now. At first, I thought it meant that the order is granted by or at the behest of the person obtaining the order. Now I think it means that the “by or at the behest of the person obtaining the order” is connected to the publicity. So, the party taking out the order cannot publicize that they are doing so, but the party receiving the order can do whatever.

  2. So, the plaintiff can get an ex-parte seizure order on a showing of irreparable harm. The order is backed by a bond (that is money) that would make a defendant whole for any harmed caused by the siezure. What about irreparable harm to the defendant who has something wrongly siezed? If the plaintiff can suffer irraparable harm, can’t the defendant? If money can make the wronged defendant whole, can’t it make the plaintiff whole too?

  3. With respect to the poster, any seizure remedy is silly. There is no way to prove without a lengthy trial that a Trade Secret even exist. Often the trade secret is widely known, or can be easily figured out.

    Besides, Trade Secrets have a clear remedy: Cash. No one is being hurt. No one has liberty at stake. Injunctions per Ebay are thus inappropriate since the aggrieved party can be made whole with cash.

  4. Pooley: Like a terrorist attack,

    Remember folks: “there’s no such thing as trade secret tr0lls”.

    We can trust Professor Pooley. He’s a very serious person.

    1. Pooley: Federal judges are not known for suffering fools gladly, and… they have Rule 11 sanctions in their tool kit.

      I don’t know about the “gladly” part but the Federal courts seems to favor “suffering f0 0ls” far more than they prefer issuing Rule 11 sanctions.

      This is a country where some “true believers” recently tried to convince the Supreme Court that they owned the concept of using a computer to provide diagnostic information. Those people were certainly “f0 0ls” by any criteria but they weren’t sanctioned (although they certainly should have been). That’s just one recent example out of hundreds.

      Now consider a company whose business model is to provide “advisory” information based on “secret” information (e.g., computer-generated correlations) it has amassed. They do this providing “over the Internet” (because they are, like, totally on the cutting edge). The company — like many companies above a certain size — includes one or two “f0 0ls”. The “f0 0ls” wants to weaken one of their competitors by creating litigation liability. They have a war chest for that purpose. They might have literally ten thousand or a hundred thousand (or more) different “secrets” that they can choose from to launch their campaign. But they’re “reasonable” so they approach the competitor with an offer …

  5. “need a Seizure Remedy” ….Hmm…is that kinda like an injunction *was* in the Patent world?

    Good luck with that….

  6. There may be some circumstances where ex parte seizure would be appropriate, but this bill does not adequately address such cases. As a threshold matter, the bill does not define “trade secret.” Under the USTA, a trade secret is “information, including a formula, pattern, compilation, program, device, method, technique, or process . . .” Consequently, trade secrets are generally considered to be intangible and incapable of “seizure.” That is why trade secret-specific seizure is unprecedented. Mr. Pooley appears to be confusing goods produced by, or “fruits of” misappropriation with the trade secret itself.

    Additionally, the bill is too vague. It only requires that “the application describes with reasonable particularity the matter to be seized and, to the extent reasonable under the circumstances, identifies the location where the matter is to be seized” and leaves open what is “reasonable particularity” and “reasonable under the circumstances.” If a person misappropriates a confidential program and stores it in an electronic file, what matter must be described and at what location? The program itself is intangible and the file might be located on a flash drive under the name, “Used,” in a folder named, “Grandma’s Underwear.” Would an applicant be allowed to have law enforcement look in Grandma’s Underwear to seize Used matter?

    The bill also limits seizure to property “necessary” to prevent the propagation or dissemination of the trade secret. This is also vague since it is unclear how seizing any property can prevent the propagation or dissemination of information. While it is possible to prevent a trade secret from being disseminated by a particular document, electronic file or device, such seizure will not necessarily prevent dissemination of the same trade secret through other copies or by other means.

    1. Steve, thanks. Food for thought.

      We have the same issue arise in the recent case involving providing exclusion orders for information. It really does not make sense.

    2. Thanks Steve. The reality: wow, they want to put in remedies for trade secrets like there are for patents. Gee, I wonder why. All this trade secret push is the third horseman for patents and innovation in this country.

      Always, ask, how will this trade secret law affect employment contracts and the exchange of information? NO trade secret law should even be considered without answering these questions first.

      1. One thing people may want to consider is how odd it is that people like Lemely protect their start-ups with trade secret type of protection and not patents and yet they push for the free exchange of information. Either they are completely ignorant of the real world or have a hidden agenda. Patents are what allows information to flow–workers in the high tech industry to present papers, to move to other jobs, etc. Trade secrets block the flow of information. Employees can’t move to other similar jobs; employees can’t publish papers.

        Really just stomach turning when we have people telling us night is day and day is night (or the Sun revolves around the Earth) and people cannot contest them from fear.

          1. If you are a paid blogger, it would be best to avoid statements like “Presumably you’re not afraid of being laughed at.” For one, it makes you look like a troll and not someone to take seriously. It therefore diminishes your other arguments. Also, when you make statements like that, it disparages whoever your client is. If they’re paying the bill, they should get someone who is good. These types of statements indicate you’re not.

    1. Alex,

      I am not sure that I understand the context of your question.

      I tend to view it in light of link to patentlyo.com but I am not sure that it the manner in which you are asking about the intersection with the constitution.

      Except for the sui gen eris “right**” of Prior User Rights (“PUR”), trade secrets are gen erally considered to be a separate animal than those rights gen erated under the Patent Clause of the Constitution (falling possibly under the Commerce Clause for their origination of controlling law).

      **the AIA’s PUR are technically a defense rather than a “right” as patent rights are understood.

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