The DTSA Giveth But Does Not Taketh Away

Further thoughts on the Defend Trade Secrets Act and inevitable disclosure

Guest post by Maxwell Goss. Dr. Goss is a business litigator with Rossman Saxe, P.C. in Troy, Michigan. His practice focuses on non-compete, trade secret, intellectual property, and shareholder law and litigation. Dr. Goss blogs at Law and the Creative Economy.

Last week I wrote about the doctrine of “inevitable disclosure” as it relates to the Defend Trade Secrets Act of 2016 (DTSA), the statute that created a general, private cause of action for trade secret misappropriation under federal law. Because inevitable disclosure is of continuing importance and controversy, I wanted to unpack the issues further here. As discussed below, the DTSA leaves room for trade secret plaintiffs to assert inevitable disclosure.

Trade secret plaintiffs frequently face problems of proof. Gathering evidence that a suspected individual or company has actually misappropriated trade secrets, or legitimately threatens to misappropriate trade secrets, can be a substantial hurdle to getting a lawsuit off the ground.

Take a typical scenario where an employee of company A goes to work for company B, and A alleges that the employee is using its trade secrets on behalf of B. In some cases, company A will have evidence that the employee swiped its secrets before leaving, perhaps by emailing himself a customer list or downloading technical specifications onto a flash drive. Company A might even have evidence that company B is now using the secrets, perhaps because it is soliciting A’s customers or has launched a product based on A’s specifications. In many cases, though, the activities of the employee and the new employer are a black box. The employee was exposed to trade secrets at Company A, and is now working for Company B, but Company A has not uncovered evidence of specific disclosures to Company B. Company A may have reason to believe the employee must be disclosing secrets to B, or threatens to do so, but has no way to confirm this directly prior to filing suit and obtaining discovery—a catch-22. Is company A without recourse?

Enter the “inevitable disclosure” doctrine. Under this common-law doctrine, a trade secret plaintiff may base a claim for trade secret misappropriation on a showing that disclosure of trade secrets is “inevitable.” In PepsiCo, Inc. v. Redmond, the landmark Seventh Circuit case on inevitable disclosure, a former employee of PepsiCo went to work for a competing beverage company. Notably, there was no allegation that the employee had stolen specific information and given it to the competitor. Instead, PepsiCo argued that the employee could not help but use the company’s trade secrets to help its competitor “achieve a substantial advantage” and “respond strategically” through his knowledge of PepsiCo’s pricing, distribution, and marketing information. Because his reliance on such information was inevitable, the court affirmed an injunction barring the former employee from assuming his position at the competitor company.

The doctrine of inevitable disclosure is controversial, and is only recognized in some jurisdictions. One objection is that it essentially allows courts to impose a non-compete on those who never signed a non-compete agreement. Another objection is that it facilitates abusive lawsuits against former employees based on flimsy evidence. Yet another objection is that it can enable a company to obtain an injunction that damages a competitor without any evidence of wrongful conduct by the competitor itself. Unsurprisingly, then, inevitable disclosure was frequently discussed in the lead-up to the passage of the Defend Trade Secrets Act. As enacted, the DTSA did ultimately limit the application of the doctrine. Though the language of the DTSA largely tracks that of the Uniform Trade Secrets Act (UTSA), which has been enacted in some form in nearly all states, the DTSA departs from the UTSA in that it expressly disallows injunctions that “prevent a person from entering into an employment relationship” and prohibits any conditions placed on a person’s employment in an injunction based “merely on the information the person knows.”

In light of this language, many observers have concluded that inevitable disclosure is a dead letter under the DTSA. For example, one article states that the DTSA “explicitly rejects the inevitable disclosure doctrine under federal law.” To take another example, I recently attended a (very good) presentation in which it was stated that inevitable disclosure is “foreclosed” by the DTSA. And I would be remiss not to mention that I myself declared in a CLE presentation last year that “[t]he DTSA seemingly rejects inevitable disclosure by dictating that conditions on employment in an injunction may not be based merely on information the person knows.”

But the doctrine of inevitable disclosure lives on under the DTSA, albeit in a diminished form. As explained in my previous post, the court in Molon Motor and Coil Corp. v. Nidec Motor Corp. recently held that a plaintiff had successfully stated a claim for trade secret misappropriation under the DTSA where it had pled allegations supporting an inference that a former employee who went to work for a direct competitor would inevitably have disclosed the plaintiff’s trade secrets to the competitor during the period in which the DTSA has been in effect. The court added: “Of course, further discovery could upend any or all of this, but at this stage, continued use beyond the May 2016 effective date [of the DTSA] is plausible.” Notably, the court then ordered the parties to discuss a “discovery plan on the trade secret claims.” In short, the plaintiff’s allegations of inevitable disclosure entitled it to move forward on both its federal and state trade secret claims.

It would be easy to dismiss Molon as dealing only with a narrow issue of limited importance. The Court’s principal concern, after all, was how the DTSA applies where the alleged theft at issue preceded its passage—an issue relevant in only a few and declining number of cases. But the ruling should not be dismissed so quickly. In reaching its holding, an essential part of the Court’s analysis was that was that inevitable disclosure can in fact support a DTSA claim. This conclusion has at least two potential implications applicable beyond the specific procedural posture of the case.

First, the DTSA could be used to secure jurisdiction in federal court and then state law could be used to secure an injunction based on inevitable disclosure. Consider companies A and B again. Company A wants to sue an employee of company B in federal court—for instance, because of perceived advantages in bringing the case before a federal judge or because of the streamlined process for obtaining discovery across state lines under the federal rules. But suppose the parties are citizens of the same state. Prior to passage of the DTSA, unless there had been some hook other than diversity jurisdiction for bringing the case in federal court, company A would have been forced to bring the case in state court. Under the DTSA, diversity of citizenship does not matter. Company A can bring the case in federal court regardless of the parties’ citizenship.

If company A goes this route, is it stuck with the DTSA’s strict limitations on injunctive relief, including the prohibition of injunction based “merely on the information the person knows”? Very arguably not. By its own terms, the DTSA does not preempt state trade secret law, and state law claims will nearly always be available in cases where the DTSA applies. Assuming the applicable state law permits injunctive relief based on inevitable disclosure, company A could file a concurrent claim for trade secret misappropriation under state law and obtain an injunction based on an inevitable disclosure theory. In such a case, the DTSA would be used to obtain federal court jurisdiction while state law would be used to obtain the desired relief.

Second, the DTSA stops well short of barring all injunctive relief based on inevitable disclosure. The limitations on injunctions under the statute apparently extend only to employment relationships: An injunction may not “prevent a person from entering into an employment relationship,” and any conditions on employment must be based on “evidence of threatened misappropriation and not merely on the information the person knows.” This suggests that an injunction that does not impact employment may still be based on inevitable disclosure.

For example, if company A can offer evidence that an employee who departed for company B will inevitably disclose A’s trade secrets to B, a court conceivably might grant an injunction prohibiting B from using or disclosing A’s trade secrets. For companies that believe their trade secrets are being misused but cannot get into the “black box” of the competitor’s activities prior to discovery, this could be a major advantage. More controversially, a court could grant an injunction directly against the employee based on inevitable disclosure, provided the injunction does not prevent the employee from working for company B or impose conditions on his or her employment.

If the Molon opinion is any indication, the DTSA giveth but the DTSA does not taketh away. That is, a trade secret owner can use the DTSA to bring its case in federal court, and can avail itself of the distinctive benefits and relief available under the DTSA, without losing its ability to assert inevitable disclosure in jurisdictions recognizing the doctrine under state law. Of course, it is unknown how other courts would address similar issues. (As far as I can determine, while a few opinions have made passing reference to inevitable disclosure in DTSA cases, Molon is the first to directly address the applicability of the doctrine under the DTSA.) At a minimum, though, the opinion indicates that rumors of the demise of inevitable disclosure are greatly exaggerated.

The Defend Trade Secrets Act and Inevitable Disclosure

When Can a Company That Hires its Competitor’s Former Employee Be Sued in Federal Court?

Guest post by Maxwell Goss.  Dr. Goss is a business litigator with Rossman Saxe, P.C. in Troy, Michigan. His practice focuses on non-compete, trade secret, intellectual property, and shareholder law and litigation.

The Defend Trade Secrets Act (DTSA) was enacted a year ago, on May 11, 2016. One of the most sweeping changes in intellectual property law in recent years, the statute creates a private cause of action for trade secret misappropriation under federal law.

For trade secret owners, the advantages of the DTSA include access to nationwide discovery and enhanced remedies such as ex parte seizure of property to prevent propagation of stolen trade secrets. For those accused of trade secret theft, the DTSA provides substantial protections including strict limitations on the injunctive relief available and entitlement to a hearing no later than seven days after a property seizure.

An open question has been the status of the controversial “inevitable disclosure” doctrine under the DTSA. Under state law in some jurisdictions, courts will enjoin a company’s former employee from working for a competitor if the company establishes that the employee would “inevitably” use its trade secrets in his or her new position. Trade secret owners like the doctrine of inevitable disclosure because actual misappropriation can be hard to prove. At the same time, the doctrine has been criticized as effectively allowing courts to impose a non-compete on someone who never signed a non-compete agreement.

How does inevitable disclosure fare under the DTSA? The statute provides that an injunction to prevent misappropriation may not “prevent a person from entering into an employment relationship,” and that any conditions placed on a person’s employment in an injunction must be based on “evidence of threatened misappropriation and not merely on the information the person knows.” In light of this language, some have concluded that the inevitable disclosure doctrine is a dead letter under the DTSA.

But a recent court opinion indicates otherwise. Interestingly, the opinion was issued on May 11, 2017, the one-year anniversary of the DTSA, by the United States District Court for the Northern District of Illinois, a federal court in the Seventh Circuit, where inevitable disclosure was first definitively recognized. In Molon Motor and Coil Corp. v. Nidec Motor Corp., the plaintiff, a maker of bespoke motors and gearmotors, sued a competitor after an employee who had allegedly downloaded the plaintiff’s designs and technical data went to work for the competitor.

The defendant moved to dismiss the case, arguing (among other things) that the DTSA did not apply because the alleged acts at issue occurred before the DTSA was enacted in May 2016. The court rejected this argument. Noting that the “key question is whether the inference of inevitable disclosure reasonably extends to continued use beyond the Act’s effective date,” the Court reasoned:

At least on the limited record—the Third Amended Complaint—the alleged trade secrets are not of the nature that would necessarily go stale in the course of a couple of years. A motor design, and the quality control data associated with it, plausibly would retain its trade secret value well into the future. If it is plausible that some of the alleged trade secrets maintain their value today, then it is also plausible that Nidec would be continuing to use them. Of course, further discovery could upend any or all of this, but at this stage, continued use beyond the May 2016 effective date is plausible.

In short, even though the plaintiff company’s former employee had allegedly downloaded the files and gone to work for the competitor before the DTSA went into effect, the court found it plausible that there was a “continuing use” of the information by the competitor after the statute went into effect. Based on this finding, the court allowed the plaintiff to go forward on its DTSA claim.

How does this ruling square with the DTSA, which requires that an injunction be based on “evidence of threatened misappropriation and not merely on the information the person knows”? Though the Molon opinion does not connect the dots, the answer, in part, seems to be that the opinion was addressing a motion to dismiss, not a motion for injunction. A court may not be able to enjoin someone based on inevitable disclosure under the DTSA, but this does not mean a plaintiff may not sue someone based on inevitable disclosure under the DTSA. That is, even where injunctive relief may not be available as an initial matter, a trade secret owner might nevertheless file a claim and move forward with discovery—which could ultimately turn up the evidence necessary to fully substantiate a claim.

Molon represents a significant development in the body of law unfolding under the DTSA. In jurisdictions where inevitable disclosure is recognized, the ruling could help trade secret owners get a case off the ground even where information obtainable in a pre-suit investigation is necessarily limited. On the other hand, defendants will be quick to point out that Molon does not alter the specific allegations needed to plead a trade secret claim premised on an inevitable disclosure theory. Moreover, where an injunction is sought, it should be emphasized that any conditions placed on employment under the statute must be based on evidence of threatened misappropriation and not merely information the person knows.

What the Defend Trade Secrets Act Means for Trade Secret Defendants

Guest Post: Where we Stand with Trade Secret Enforcement in Federal Courts

Guest Post by Prof. David Opderbeck (Seton Hall), originally published on his blog The CyberSecurity Lawyer.

Introduction

Trade secrets are important to cybersecurity because many data breaches involve trade secret theft.  The Defend Trade Secrets Act of 2016 (DTSA) amended the Espionage Act of 1996 to provide a federal private right of action for trade secret misappropriation.   Some commentators opposed the DTSA in part because it seems redundant in light of state trade secret law and could lead to unnecessary litigation and restrictions on innovation.  Now that the DTSA has been in effect for nearly a year, I conducted an empirical study of cases asserting DTSA claims (with the able help of my research assistant, Zach Hansen).  This post summarizes the results of that study.

Methodology

We ran keyword searches in the Bloomberg Law federal docket database to identify cases asserting DTSA claims in federal courts.  It is not possible to search only on the Civil Cover Sheet because there is no discrete code for DTSA claims.  Our search ran from the effective date of the DTSA (May 26, 2016) through April 21, 2017 (just prior to our symposium on the DTSA at Seton Hall Law School).  After de-duping, we identified 280 unique Complaints, which we coded for a variety of descriptive information.  Our raw data is available online.

Findings

This chart shows the number of filings by district:

We were not surprised to see that the Northern and Central Districts of California, Southern District of New York, or District of Massachusetts were among the top five.  We were surprised, however, to see the Northern District of Illinois tied for first.  This could reflect the influence of the financial services industry in Chicago, but further research is required.

The next chart shows the number of filings by month:

It is interesting to note the decline in filings following the initial uptick after the May 26, 2016 effective date.  Perhaps this reflects a slight lull during the summer months.  Filings then remained relatively steady until March, 2017, when they increased significantly.  This could have something to do with the quarterly business cycle or bonus season, since many of the cases (as discussed below) involve employment issues.  Or, it could reflect a random variation given the relatively small sample size.

We next examined other claims filed along with the DTSA counts in these Complaints:

We excluded from this chart related state law trade secret claims.  Not surprisingly, nearly all the cases included claims for breach of contract.  As noted above, trade secret claims often arise in the employment context in connection with allegations of breach of a confidentiality agreement or covenant not to compete.  Another finding of note was that a fair number of cases assert Computer Fraud and Abuse Act claims, although the number is not as high as expected.  Most trade secret cases today involve exfiltration of electronic information, but perhaps many cases do not involve hacking or other access techniques that could run afoul of the CFAA.

We also noted a smaller but not insignificant number of cases asserting other intellectual property claims, including trademark, copyright and patent infringement.  Since many documents taken in alleged trade secret thefts are subject to other forms of intellectual property — particularly copyright — this may show that some lawyers are catching on to the benefit of asserting such claims along with DTSA claims.

Finally, our review of case status revealed the following:

  • 198 cases in various pre-trial stages
  • 61 cases dismissed
  • 5 preliminary injunctions
  • 4 final judgments, including 2 permanent injunctions
  • 3 default judgments
  • 1 case sent to compulsory arbitration
  • 8 undetermined / miscellaneous

At first blush, the number of cases dismissed seems high, given that none of the cases have been pending for more than a year.  We assume the vast majority of these cases settled, though further investigation is required.  In contrast, the number of preliminary injunctions granted seems very low.  Again, further investigation is required, but so far it does not seem that the DTSA is resulting in the kind of preliminary injunction practice we expected to see under a federal trade secret statute.

Trade Secret Protections at the Patent Office

The USPTO is hosting a free symposium on Trade Secret Protections – May 8, 2017, from 9 a.m. to 4 p.m. EDT at the Alexandria HQ as well as via webcast. More info here: https://www.uspto.gov/​learning-and-resources/​ip-policy/​enforcement/​trade-secret-symposium.

DTSA enforcement continues to primarily focus on charges against former employees who join a competitor.  In Santander Securities v. Gamche, 2017 WL 1208066 (E.D. Penn. April 2017), the case centers on Gary Gamche who left Santander and joined a competitor Citizens Securities as a financial advisor – taking with him a list of his clients.  Similarly, in Brand Energy v. Irex, the construction company claims its former employees stole its proprietary business information (target bids and potential customer information); joined competitor Irex; and began poaching business.  So far, there are only a few DTSA decisions. In Brand, the Pennsylvania District Court  recently denied the defendant’s 12(b)(6) motion to dismiss for failure to state a claim upon which relief may be granted – finding that the alleged use easily fits within very broad definition of misappropriation found in the new federal statute.

Although the DTSA is limited to post-enactment misappropriations, the court in Brand held that it can apply to “continuing misappropriation that occurs after the effective date.”   Following Adams Arms, LLC v. Unified Weapon Sys., Inc., 16–cv–1503, 2016 WL 5391394, at *5–7 (M.D. Fla. Sept. 27, 2016).

In addition to the DTSA claim, the court found that the RICO and CFAA claims had been appropriately pled.

CFAA (Computer Fraud and Abuse Act) is interesting in that it imposes liability on anyone who knowingly “accesses a … computer without authorization, or exceeds authorized access” of the computer.  Here, Brand’s theory is that of ‘indirect access.’ After leaving BRAND, the defendants convinced a current employee to access the database and provide information.  According to the judge here, the defendants can be seen as accessing the computer (albeit indirectly and non-electronically via the employee) without authorization.  The statutory justification for this outcome is the court’s conclusion that Congress could have particularly defined “access” as “personal access” or “direct access” but instead left the term broadly stated.

 

 

Brand Energy v. Irex.

Rights of Trade Secret Owners in Federal Cases

by Dennis Crouch

By longstanding tradition, US courts are open, transparent in proceedings, and transparent in judgment.  The FISA courts that I cover in my internet law course are so controversial because they are so contrary to that tradition.  Courts are also sensitive to the disclosure of trade secrets and, in the past, have liberally allowed parties to file documents under seal to avoid destroying those rights.  Most recently, for instance, the Supreme Court permitted Shukh to file redacted public briefs to avoid discussing secret information regarding his invention rights. See Supreme Court Rule 5.2.

The Defend Trade Secrets Act (DTSA) includes an new provision added to the Economic Espionage Act (EEA) that, depending upon how it is interpreted, may govern how district courts handle trade secret information in all cases. The new section will be codified as 18 U.S.C. 1835(b) and reads:

(b) Rights Of Trade Secret Owners.—The court may not authorize or direct the disclosure of any information the owner asserts to be a trade secret unless the court allows the owner the opportunity to file a submission under seal that describes the interest of the owner in keeping the information confidential. . . .

Courts already liberally allow parties to file documents under seal – so that doesn’t provide the entire impact of the provision.  Rather, the provision’s importance is that it extends beyond briefs being filed by parties and instead reaches disclosures at trial and court opinions.   Thus, the statute presumably prevents a court from disclosing a trade-secret in its opinion without first providing the trade-secret owner with the opportunity to brief the issue of disclosure.  In addition, it provides non-parties with a right to request (under seal) non-disclosure of their trade secret rights.

Unlike other provisions in EEA/DTSA, this “right” is not expressly limited to actions arising from the EEA/DTSA. Rather, it may be read broadly as a provision providing procedural rights of trade secret owners in all federal cases.  If so, it will effectively serve as a form of trade secret privilege and will end-up being the most cited aspect of the new law.

The DTSA was presented to President Obama for his signature on April 29, 2016 and should become law within the week.

Trade Secret Litigation in Federal Court

LexMachina has released a new report on Trade Secret litigation in Federal Court.

The basics: Federal Trade Secret litigation is up about 30% following enactment of the Defend Trade Secrets Act (DTSA) in 2016.  (1134 cases filed in 2017). The DTSA created a federal cause of action for trade secret litigation and resulting original jurisdiction in federal court for the federal claims. Prior to the DTSA, state-law trade secret claims found their way into federal court either via supplemental jurisdiction (typically linked to an a federal IP claim) or via diversity jurisdiction (parties from different states).

The vast majority of trade secret actions include additional causes of action — most often breach of contract or other commercial law claim.

[Report here – Registration Required]

Implementing and Interpreting the Defend Trade Secrets Act (DTSA)

undefinedI am looking forward to our event at the University of Missouri School of Law on Friday, March 10, 2017: Implementing and Interpreting the Defend Trade Secrets Act.  Sponsored by our Center for Intellectual Property and Entrepreneurship (CIPE) and the Business, Entrepreneurshisp & Tax Law Review (BETR)

Key Points for Friday:

Speakers include Mark Halligan from FisherBroyles in Chicago; Peter Menell, Professor at University of California, Berkeley School of Law; Robin Effron,
Professor at Brooklyn Law School; Yvette Joy Liebesman, Professor at
Saint Louis University School of Law; Orly Lobel, Professor at
University of San Diego School of Law; and me (Crouch).

Some Background Reading:

  • Menell, Peter S., Misconstruing Whistleblower Immunity Under the Defend Trade Secrets Act (January 3, 2017). UC Berkeley Public Law Research Paper No. 2893181. Available at SSRN: https://ssrn.com/abstract=2893181
  • Effron, Robin, Trade Secrets, Extraterritoriality, and Jurisdiction (December 1, 2016). Wake Forest Law Review, Vol. 51, No. 6, 2016; Brooklyn Law School, Legal Studies Paper No. 475. Available at SSRN: https://ssrn.com/abstract=2896137
  • Lobel, Orly, Enforceability TBD: From Status to Contract in Intellectual Property Law (June 2, 2016). Boston University Law Review, Vol. 96, 2016; San Diego Legal Studies Paper No. 16-217. Available at SSRN: https://ssrn.com/abstract=2788857
  • Goldman, Eric, Ex Parte Seizures and the Defend Trade Secrets Act (November 30, 2015). Washington and Lee Law Review, Vol. 72, No. 284, 2015. Available at SSRN: https://ssrn.com/abstract=2697361
  • Cannan, John, A (Mostly) Legislative History of the Defend Trade Secrets Act of 2016 (May 4, 2016). Available at SSRN: https://ssrn.com/abstract=2775390

 

Copyright, Trademark, and Artificial Intelligence

Back in August 2019, the USPTO published a notice requesting public input on the interplay between patent law and artificial intelligence (AI). In October, the USPTO expanded its notice to extend the inquiry to include copyright, trademark, and other IP rights.  The PTO has now extended that deadline for comments until January 10, 2020. 84 FR 66176.

Questions for the public: 

1. Should a work produced by an AI algorithm or process, without the involvement of a natural person contributing expression to the resulting work, qualify as a work of authorship protectable under U.S. copyright law? Why or why not?

2. Assuming involvement by a natural person is or should be required, what kind of involvement would or should be sufficient so that the work qualifies for copyright protection? For example, should it be sufficient if a person (i) designed the AI algorithm or process that created the work; (ii) contributed to the design of the algorithm or process; (iii) chose data used by the algorithm for training or otherwise; (iv) caused the AI algorithm or process to be used to yield the work; or (v) engaged in some specific combination of the foregoing Start Printed Page 58142activities? Are there other contributions a person could make in a potentially copyrightable AI-generated work in order to be considered an “author”?

3. To the extent an AI algorithm or process learns its function(s) by ingesting large volumes of copyrighted material, does the existing statutory language (e.g., the fair use doctrine) and related case law adequately address the legality of making such use? Should authors be recognized for this type of use of their works? If so, how?

4. Are current laws for assigning liability for copyright infringement adequate to address a situation in which an AI process creates a work that infringes a copyrighted work?

5. Should an entity or entities other than a natural person, or company to which a natural person assigns a copyrighted work, be able to own the copyright on the AI work? For example: Should a company who trains the artificial intelligence process that creates the work be able to be an owner?

6. Are there other copyright issues that need to be addressed to promote the goals of copyright law in connection with the use of AI?

7. Would the use of AI in trademark searching impact the registrablity of trademarks? If so, how?

8. How, if at all, does AI impact trademark law? Is the existing statutory language in the Lanham Act adequate to address the use of AI in the marketplace?

9. How, if at all, does AI impact the need to protect databases and data sets? Are existing laws adequate to protect such data?

10. How, if at all, does AI impact trade secret law? Is the Defend Trade Secrets Act (DTSA), 18 U.S.C. 1836 et seq., adequate to address the use of AI in the marketplace?

11. Do any laws, policies, or practices need to change in order to ensure an appropriate balance between maintaining trade secrets on the one hand and obtaining patents, copyrights, or other forms of intellectual property protection related to AI on the other?

12. Are there any other AI-related issues pertinent to intellectual property rights (other than those related to patent rights) that the USPTO should examine?

13. Are there any relevant policies or practices from intellectual property agencies or legal systems in other countries that may help inform USPTO’s policies and practices regarding intellectual property rights (other than those related to patent rights)?

Artificial Intelligence (AI) Patents

 

Federal Circuit and Sealed Opinions

by Dennis Crouch

The Federal Circuit has been releasing a substantial number of sealed opinions that stem out of confidential briefs.  The Court’s usual operating procedure is to issue the opinion in a sealed form along with an order to show-cause as to what aspects of the opinion (if any) need to remain under seal.

The court’s approach appears to comport well with the requirements under the Defend Trade Secrets Act of 2016 (DTSA). In particular, 18 U.S.C. 1835(b) reads:

(b) Rights Of Trade Secret Owners.—The court may not authorize or direct the disclosure of any information the owner asserts to be a trade secret unless the court allows the owner the opportunity to file a submission under seal that describes the interest of the owner in keeping the information confidential. . . .

In a 2016 essay, I explained that the statute appears designed to “prevents a court from disclosing a trade-secret in its opinion without first providing the trade-secret owner with the opportunity to brief the issue of disclosure.”

I’ll note here that the “rights” defined by Section 1835(b) appear purely procedural — the trade secret owner gets a chance to explain its position in an under-seal filing.  It does not actually prevent the court from subsequently disclosing the alleged trade secret.

Rights of Trade Secret Owners in Federal Cases

USPTO Oversight Hearing by Senate Judiciary Committee

New USPTO Director Andrei Iancu testified in Congress on April 18 for the first time in his new official capacity — this time before the Senate Judiciary Committee.  The Director must certainly be a visionary — as the chief guide of U.S. intellectual property policy.  At the same time, the Director is head of a multi-billion-dollar agency with 12,000+ employees.

Although not speaking for the Senate as a whole, Senator Coons kicked-off the hearing with a statement that AIA Trials: “The current review system is systematically biased against patent owners.”  From Senator Coon’s perspective, the AIA was designed to give the USPTO Director authority to “fine-tune” the AIA trial proceedings without further congressional actions — and that Director Iancu should take this opportunity to correct the imbalance.

One key statement from Director Iancu is that he is ready to work with Congress on legislative solutions to the “uncertainty” created by Supreme Court 101 jurisprudence.

The following is the Director’s Opening Statement:  (more…)

Secrecy in Court; Takings; and A Proposal for Redaction with Replacement

by Dennis Crouch

In-court secrecy continues to thrive – at least in regards to protecting business interests.  Almost all patent infringement lawsuits include secrecy orders negotiated by the parties without much court participation.  Courts often view themselves as arbiters of disputes between the parties – and if the parties agree on a particular issue then there is no dispute.

The right to secrecy in federal courts was upped a bit further with the Defend Trade Secrets Act of 2016 in situations where the parties don’t agree.  The DTSA includes a requirement that a court “may not authorize or direct the disclosure of any information the owner asserts to be a trade secret” without first allowing an under-seal submission of a description of the confidential interest.  18 U.S.C. 1835.  Although not stated, the implication is that the court must then review the submission before requiring disclosure.

The Federal Circuit allows submission of confidential appellate briefs, but requires non-confidential versions to also be submitted with the filings – basically blacking-out the particular confidential information.  Further, Federal Circuit Rule 28(d)(1)(A) requires that a party seeking to mark confidential more than 15 words in its brief must petition the court.  That petition was filed and granted in the case of Georgetown Rail Equipment v. Holland L.P. In granting the motion, the court wrote that:

Georgetown Rail Equipment is seeking additional words to mark portions of its response brief describing confidential pricing information, confidential internal financial information, contractual terms relating to confidential agreements with customers, and confidential information of two non-parties. Those details were designated as confidential in the underlying proceedings. In light of the limited and focused nature of the proposed markings, the court will grant the motion.

[OrderGrantingMotionForExpandedConfidentialBrief]  The

When it comes to issuing an actual opinion, an important question is whether the Federal Circuit (or lower court) is bound by the confidentiality of a submission under seal containing trade secret information.  I.e., may the court publicly disclose a trade secret – and thus destroy the property right; if disclosing a trade secret submitted under seal, must the court first weigh the public interest in open courts against the harm of disclosure; and would an improper disclosure by the court be seen as a taking?

I have talked through some of these issues with Federal Circuit judges who indicated their usual pathway  is to attempt to avoid disclosing the secret information in the opinion – if possible. In Georgetown Rail Equipment v. Holland L.P., however, the court apparently found that approach untenable and instead issued decision on August 1 under seal: Sealed Judgement and Opinion.  At the same time, the court issued an Order to Show Cause as to “why the opinion should not be unsealed.” The court writes:

Because the record in this case contains extensive material marked as confidential, the court has issued its opinion dated August 1, 2017 under seal. The court does not believe, however, that the opinion contains confidential material. The parties are hereby ordered to show cause, by means of a single joint response coordinated among the parties, why the opinion should not be unsealed. The response to this order must specify which words, if any, are proposed to be redacted, and must specifically state the cause for each such requested redaction. If the parties propose redactions, the response to this order must also propose specific words to replace each of the proposed redactions in an unsealed opinion. The joint response shall be filed no later than August 15, 2017.

[Order to Show Cause] [Aside: It will be interesting to see the redacted version of the submission.]

The court is on the right track with this order. However, it is also problematic because it focuses parties on the question of whether “the opinion contains confidential material” as if that is the sole question.    The parties are hereby ordered to show cause, by means of a single joint response coordinated among the parties, why the opinion should not be unsealed.  A proper analysis of the issues will take the next step of explaining why the parties’ private interest in confidentiality in the court proceeding outweighs the storied tradition of open and public courts.

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Redaction with Replacement: The court here also provides an innovative suggestion that could transform the redaction process.  Rather than simply blacking-out information from its opinion, the court here asks the parties to “propose specific words to replace each of the proposed redactions in an unsealed opinion.”  Redaction with replacement is likely the gold-standard approach for judicial opinions and appellate briefs, but we’ll see how it works in this case.

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The patent at issue here is U.S. Patent No. 7,616,329 covering a method for inspecting railroad.  Most of the redactions in the briefs fit in the following pattern:

He testified that, but for Holland’s infringement, Georgetown would have inspected XXXXX miles of track for UP over a XXXXXXX period at a rate of $XXXXX, thereby realizing $XXXXX in revenues.