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 Misappropriation Preliminary Injunction Reversed

By Dennis Crouch

The Federal Circuit has reversed a preliminary injunction order in a trade secret misappropriation case, finding that the district court abused its discretion by failing to properly evaluate the likelihood of success on the merits and the balance of harms. Insulet Corp. v. EOFlow, Co., No. 2024-1137 (Fed. Cir. June 17, 2024). The appellate court held that the district court’s analysis was deficient in several key respects, including not addressing the statute of limitations defense, defining trade secrets too broadly, and not sufficiently assessing irreparable harm and the public interest.

This classic trade secret case involves former employees left to join a competitor.  As free humans, they are permitted to take their skill and wisdom to the new jobs, but are forbidden from misappropriating trade secret knowledge.  That line drawing is particularly difficult, and one reason why many employers moved toward contractual non-compete agreements. The case is also complicated because the defendant here admit to reverse engineering that apparently lead to some substantial similarities between the products.

The decision highlights a high bar for obtaining a preliminary injunction, even in trade secret cases involving competitors where we previously may have assumed irreparable harm.  The Federal Circuit here explained that lower courts are required to individually evaluate each of the four injunction factors – likelihood of success on the merits, irreparable harm, balance of hardships, and public interest. Conclusory assertions of competitive harm are insufficient to show irreparable injury.  For trade secret claims in particular, the alleged trade secrets must be defined with specificity. But, this proof is often difficult at the preliminary injunction stage of a case when the particular knowledge used by the defendant has not been fully discovered.

The Federal Circuit has been seen as largely supporting strong trade secrecy rights. However, this decision may put a damper on forum shopping attempts. (more…)

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.

Musical Chairs and Corporate Love Triangles

by Dennis Crouch

Amyndas Pharm., S.A. v. Zealand Pharma A/S, 21-1781, — F.4th — (1st Cir. Sept. 2, 2022) [Decision]

Before getting into the decision, I’ll first post my DALL-E art entitled “corporate love triangle.”

The First Circuit appellate court described this case as a game of “musical chairs”. When the music stopped “one firm [was] left out in the cold.”  I might think of it as a pair of ongoing secret love affairs that finally resulted in a jilted lover.  Old models of a love triangle was really more of a “V” — a rivalry between two potential suitors.  But, today’s pansexual environment allows for truer triangle relationships.  In this case it is all a bit more mundane. The three players are Amyndas, Zealand, and Alexion–all pharameceutical research companies focusing on auto-immune inhibition.

Here, Amyndas (the one left out) had shared confidential information with both Zealand and Alexion (subject to contractual limitations).  Later, those two companies formed an official partnership to develop a C3-binding protein (the same topic for which Amyndas had shared data).  Zealand’s patent applications also published relating to the same topic. At that point, Amyndas sued–alleging breach of the Confidential Disclosure Agreements (CDAs); misappropriation of trade secrets; and conspiracy to use misappropriated information.

The district court cut much of the case short — dismissing the case against Zealand based upon a forum-selection-clause within their CDA.  That agreement stated that “any dispute arising out of this Agreement shall be settled in the first instance by the venue of the defendant.” Here, Zealand Pharma is a Denmark company, and the district court determined that proper venue for the case is therefore in Denmark.  On appeal, the plaintiff pointed-out that the Zealand has a presence in both Denmark and Massachusetts.  This argument makes sense if you look at the federal law of venue which basically finds proper venue in any court with personal jurisdiction over the defendant.  28 U.S.C. 1391(b)-(d).  You’ll note that Section 1391(b) states that proper venue is a location where the defendant “resides.”  This seemingly narrow venue statement is blown-up by the definition in Section 1391(c)–a company “shall be deemed to reside … in any judicial district in which such defendant is subject to the court’s personal jurisdiction.” Id.

But, the appellate court considered the law as potentially instructive for construing the “venue of the defendant” as used in the contract.  But, the court concluded that its interpretation should be narrower than Section 1391 since applying the venue law “would inevitably lead to the conclusion that Zealand Pharma potentially could be sued in virtually any jurisdiction” and thus render the venue clause of the contract “largely superfluous.” Amyndas Pharm. (1st Cir. Sept. 2, 2022).  What the court did was stick with the notion that venue=residence, but then use a more natural definition of residence to be limited only to the corporate home (as is done now in personal jurisdiction contexts).

Zealand Pharma A/S is the Denmark company, its corporate family member and co-defendant “Zealand US” is a US company with a HQ in Boston, and so the lawsuit was clearly in its venue.  But, Zealand US had not itself signed the CDA and so the court refused to give any weight to its corporate affiliate’s location. “The forum-selection clause points unerringly to Zealand Pharma, not to Zealand US.”

In focusing on Denmark, the court repeats that “At the time the CDAs were signed, Zealand Pharma’s residence could only have been Denmark” and consequently limited the forum selection clause venue to Denmark as well.  One problem with the court’s statements here is the implicit suggestion that venue is frozen in stone at the moment of contracting. Some contracts do take that approach, but typically by expressly naming a particular venue (such as “New York”).  On the other hand, my reading of this contract would imply that the “venue of the defendant” is determined at the point when a lawsuit is filed.  At the time of contracting, Zealand Pharma had not yet been restructured to also form Zealand US.  In my mind, that corporate transformation could be seen as expanding the venue if the new US version was a carve-out or split that took on some of the  rights and obligations of the old company.  In any event, the appellate court affirmed the lower court’s finding that the contract required the lawsuit to be filed in Denmark and so dismissal of the Massachusetts claims were proper.   The appellate panel also pulled out its thesaurus to conclude that Amyndas arguments were “struthious” and that any further consideration would be “supererogatory.”

Trade Secrecy Claim Abroad: Still continuing the argument, Amyndas argued that the Defend Trade Secrets Act (DTSA) created a public policy that “guarantees a federal forum for trade secret theft claims.”  Prior to the DTSA, ordinary trade secret claims were based only on state law and only in Federal Court on diversity or pendant jurisdiction.  But, the DTSA gave Federal District Court original jurisdiction over trade secret actions.  On appeal, the 1st Circuit found no evidence “that the DTSA was meant to supersede the forum-selection decisions of sophisticated parties.” Id. The court concluded by noting the “sockdolager” is the absence of any public policy reason why Amyndas should be able to litigate its case in the US. The court recognized that its decision “Gives Zealand Pharma home-court advantage and a more favorable choice of law for the trade secret dispute that has arisen.”  Notably, Denmark does not allow the extent of discovery permitted by the US Federal Courts.  But, that is the way contract law goes: “Those regrets may coalesce into a bitter lesson about looking at a nascent partnership through rose-colored glasses.”

Following the district court opinion, Amyndas decided to move forward on a second front and sued Zealand Pharma in Denmark in January 2022.  In addition, it has obtained a stay of the contested patents from the European Patent Office.

On remand in the US litigation, the case is still pending against Zealand US and Alexion.  But, the key allegations were against Zealand Pharama, and so the case may well fizzle out.

I’ll note – normally an appeal is only allowed once a case is finally concluded. Here, however, the district court was careful to issue a partial final judgment under R. 54(b) that dismissed Zealand Pharma and indicated that portion of the case was ripe for appeal.

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]

Op Ed: Reflections on the American Invents Act on its Tenth Year Anniversary

by Hon. Michelle Lee. Lee was the Undersecretary of Commerce and Director of the United States Patent and Trademark Office (2015-2017).

The America Invents Act (AIA), which passed on September 16, 2011, brought about some of the most significant changes to our patent system in over 50 years. The Act included an assortment of reforms from a transition to first inventor to file in the United States, the establishment of processes for third party challenges to granted patents at the United States Patent and Trademark Office (USPTO), the creation of the first regional offices of the USPTO, providing inventors the option for accelerated patent examination, and more.

Many of the AIA reforms strengthened our patent system. For example, as a former Director of the USPTO, I cannot overstate the importance of the Agency’s ability to set its own fees and create an operating reserve. This enabled the USPTO to get through periods of government shutdown and to invest in longer-term initiatives such as much-needed information technology upgrades, hire more examiners to reduce the patent application backlog and provide additional training for examiners. The transition to a first inventor to file system was needed to harmonize the U.S. with the rest of the world. The establishment of the first regional offices of the USPTO made our intellectual property system more accessible to all, and of course, prioritized examination, allowing inventors to accelerate the examination of certain patents, makes business sense.

After passage by Congress, the attention turned to the USPTO, and its massive effort to implement the AIA. Then-USPTO Director David Kappos and his dedicated team at the Agency worked hard to implement the AIA in view of numerous proposed rules, soliciting input from stakeholders along the way. By 2013, the USPTO had completed substantially most of the initial AIA rulemaking, including for the post-patent grant review proceedings.

In 2015, I became Director of the USPTO, and the AIA changes had been in place for barely a few years. Leading the USPTO is a great honor that comes with a tremendous responsibility. As a result, I undertook as a priority to assess how these fledgling and complex reforms were going, and to make improvements where needed. Under my leadership, the USPTO continued to solicit feedback on the AIA reforms via numerous requests for comments to proposed rules and stakeholder engagements. This resulted in the implementation of multiple changes, including to the claim construction standard of soon-to-expire patents to be consistent with the (Phillips) standard used in district court litigation, submission of new testimonial evidence with a patent owner’s preliminary response, the addition of a Federal Rule of Civil Procedure 11-type certifications requiring a duty of candor in papers filed in AIA trials to prevent misuse of the proceedings, and more.

As anyone familiar with rulemaking knows, this process takes time, and that is the way it should be, as agency rules (like legislation) have significant and broad impact on all parts of our society. New rules (and laws) should be promulgated deliberately and with all due consideration of input from all stakeholders, driven by data, in compliance with the law, and with compromise to accommodate the often-times disparate and competing needs.

After the patent community had a reasonable period of time to adjust to and experience the many AIA reforms, we began hearing feedback about additional improvements needed to the AIA trials including, for example, in the areas of motions to amend, the claim construction standard and multiple petitions filed at or around the same time on a single patent. As expected for such complex policy and procedural matters, there was often little consensus on whether and what changes were needed. Given this, my team and I at the USPTO believed it important to gather data and broad stakeholder input on these and other issues raised. As a result of these efforts, we came up with a number of proposed changes and drafted proposed rules for comment. For instance, on the claim construction standard, we recognized the awkwardness and inconsistency of having the validity of patent claims construed under one standard in AIA trials, yet a different standard for patent infringement analysis in federal district court, especially when the petitioner in the USPTO proceeding was often the accused infringer in district court. To provide greater fairness and consistency, I thought it important to change the claim construction standard for all patents in AIA trials to the Phillips standard used in federal district courts.

Signing of the DTSA

Signing of the DTSA

By this time, it was the fall of 2016 with an election pending. As was customary, the then-current administration asked the USPTO to stop all significant rulemaking to allow the next administration the courtesy of defining and implementing its priorities. So, we had to pull the package of proposed reforms in the midst of being prepared for publication. While not published during my tenure, these proposals, studies and data put the Agency and my successor, former USPTO Director Andrei Iancu, in a better position to implement needed reforms more quickly. I was pleased to see one of the first reforms implemented in the next administration was changing the claim construction standard in AIA trials to that used in district court for all patents.

As I reflect on my tenure on this 10th anniversary of the AIA, the talented USPTO team and I accomplished much, including the establishment of regional offices to better support innovators (especially individual inventors and small businesses), achieving the passage of the Defend Trade Secrets Act of 2016, making initial improvements to the post-patent grant review proceedings while laying the foundation for more, numerous quality initiatives to ensure the issuance of stronger, more reliable patent rights, launching an open data initiative to provide access to the USPTO’s rich data, bringing artificial intelligence to the Agency to improve its operations, and spearheading the All-In-STEM initiative and other efforts to ensure our intellectual property system is more widely accessible to all.

Few people have had the privilege and responsibility of being the steward of this important Agency so critical to American innovation. As we await the nomination of a new USPTO Director, it is important to keep in mind the job of a USPTO Director is to keep a steady hand on the tiller and to make improvements thoughtfully and deliberately, with careful consideration of the law, stakeholder input and the data, recognizing that with complex policies and procedures and competing stakeholder interests, consensus is often difficult to achieve.

Former USPTO Directors Dickinson, Kappos, and Iancu, each of whom contributed to the enactment and/or implementation of the AIA, have all been dedicated leaders who did what they thought best when faced with the many challenges of their tenure. Just as I benefited from the foundations laid and works-in-progress achieved by my predecessors, the next Director will benefit from the cumulative efforts and learnings of all prior Directors. Our intellectual property system, like our innovations, is constantly evolving. Therefore, all stakeholders must constantly work together to achieve a balanced intellectual property system for the benefit of our inventors, economy and society. That is why I chose the dynamic and impactful practice of intellectual property law, and I wouldn’t have it any other way.

“The views expressed above are solely the author’s and do not represent the views of any organization with which Ms. Lee may be affiliated.”  Lee is vice president at Amazon Web Services and spent a decade at Google leading their patent team prior to her term as USPTO Director.

Trade Secrets Pre Patenting

by Dennis Crouch

Although trade secrets are independently important, they are play a key temporal role in the patenting process.  The touchstone of invention is when the inventors have a full mental conception of the invention, including how to make and use the invention. But, there is typically a months-long process of moving from conception to a filed patent application.  During that time the invention is typically kept secret in order to avoid losing patent rights due to early disclosure.  And, even after the patent application is filed, applicants often keep the invention secret for as long as possible in order to maintain a competitive advantage in the marketplace.  Thus, the first public knowledge of an invention is quite often at the publication date 18-months after filing.

General rights of privacy allow a person to keep secret information without  intrusion by the government or by wrongful acts by third parties.  Trade secrecy rights are an extension of these general privacy and began as common law. These rights were further developed and codified in the various states, especially with the Uniform Law (UTSA) movement that gained traction in the 1980s and 1990s.  In 2016, the U.S. Government enacted the Defend Trade Secrets Act (DTSA) that created a federal cause of action.   Although there are some differences between the various jurisdiction, all jurisdictions agree that trade secret rights originate in the holder of information, so long as:

  1. the information is not generally known to the public;
  2. the information confers economic benefit to its holder because the information is not publicly known; and
  3. the information is subject to reasonable efforts to maintain its secrecy (by the holder).

Here is my question.  In the patent world, can we simply assume that innovation that that will become part of a patent application satisfies the economic benefit of secrecy requirement?  What is the best guide you have found for maintaining trade secret protections  for pre-patent innovations?

 

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

 

The Non-Compete Ban: Impact on Patenting and Challenging Implementation

by Dennis Crouch

Non-compete agreements fly under the radar for most American lawyers.  One reason is that such restrictions have long been banned within legal practice. As an example, the American Bar Association (ABA) Model Rule 5.6(a) prohibits lawyers from entering into agreements that restrict their right to practice law after terminating an employment, partnership, or other professional relationship. The rule’s stated aim is to protect clients’ freedom to choose their legal representation, but it also ensures that lawyers can practice their profession without restriction.

The increasing prevalence of non-compete agreements in other industries has drawn increasing scrutiny from policymakers and regulators, leading to the FTC’s recent rule banning most non-compete agreements across the United States.  The new rule was announced on April 23, 2024 following a 3-2 vote by the FTC Commissioners (along party lines, with Democrats in the majority). It is set to take effect 120 days later (August 21, 2024). As I discuss below, two lawsuits have already been filed seeking to derail implementation.

(more…)

A National Right of Publicity: the Federal Anti-Impersonation Right (FAIR)

by Dennis Crouch

Intellectual property rights in the U.S. have long been a mix of state common law rights and federal statutory rights.  Patents and copyrights were established in the Constitution and enacted by the First Congress in 1790.  Those rights were fairly quickly established as exclusively federal, meaning that there is effectively no patents or copyrights offered by individual states.  Trademarks and trade secrets followed a different path – developing under state common law before later later gaining federal protections; with trade secrets moving federal most recently via the Defend Trade Secrets Act (DTSA) of 2016.  Unlike patent and copyright, trademarks and trade secrets continue to be concurrent and overlapping, meaning that state rights continue to exist and be enforceable alongside the federal right.  It is common for litigation to assert both.  With trademark law, the federal right has been around since 1870 and today occupies most of the space.  Because the federal trade secrecy right is so new (and no registration is available), it is still unclear whether we’ll see the same result.

The straggler here is the right of publicity, often termed Name Image & Likeness or NIL rights.  Although publicity rights initially emerged as a privacy interest, I find that students are quick to see its kinship to trademark law and unfair competition.  While typical privacy rights focus on personal interests and one’s peace of mind, the right of publicity is more economic and commercial in nature.  The basic idea here is that a person’s reputation is an asset — commercial goodwill.  And, that person’s brand is their name, image, and likeness.

The growth of the internet and influencer culture has raised the awareness and importance of publicity rights as the a key transferable with endorsement deals and celebrity advertising.  In the background, we also have the emergence of deep fake AI tools that allow digital impersonation of celebrities at a level never experienced (as exemplified by my AI created version of Swift above).

In a recent hearing on AI IP issues before the US Senate IP subcommittee, Adobe proposed creating a new federal right of publicity called the Federal Anti-Impersonation Right (FAIR). This would establish a minimum level of protection against the unauthorized commercial use of a person’s name, image, likeness, or other identifying aspects of their persona. Adobe argued this is needed to protect artists and creators from having their style or likeness copied by AI tools and used by others for commercial gain.  A national right of publicity could provide more consistent protections similar to those created for trademarks and trade secrets. It could also facilitate enforcement across state lines and could eventually serve as the basis for international treaties in this increasingly global space where persona rights are often exploited online and across multiple platforms.

Adobe’s proposal is largely in theory, and the terms have not yet been drawn-up. Obviously, key policy questions remain:

  • Should protections apply only to famous personalities or to anyone whose NIL is used for commercial gain?
  • How should we balance free speech, parody, and fair use concerns?
  • To what extent should online platforms be shielded from liability?
  • Should rights vest only for commercial exploitation or is there a privacy interest to protect?

The origins of publicity rights stem from privacy protections rather than commerce. This conceptual difference from trademark law is important, and I would suggest that any federal right should consider personal dignity and reputational interests, not just economic harms from impersonation.

What do you think? Are you ready for a national right of publicity?

Introducing the Trade Secret Case Management Judicial Guide

The following guest post comes from Berkeley Law Professor Peter S. Menell* who took on the pro bono task of assembling and managing a fabulous team of leading lawyers to create the Trade Secret Case Management Judicial Guide. The guide will quickly become leading the go-to source as Federal Judges manage their growing trade secrecy caseloads.  The following is an introduction and request for comments. – D.C. 

Guest post by Prof. Peter S. Menell*

As the knowledge economy expanded and concerns about trade secret misappropriation mounted in the digital age, federal policymakers undertook efforts to reinforce trade secret protection a decade ago.  These efforts came to fruition with passage of the Defend Trade Secrets Act of 2016 (DTSA).  This landmark legislation, modeled on the Uniform Trade Secrets Act, elevated and expanded trade secret law’s role in the federal intellectual property system.  DTSA fully opened the federal courts to trade secret litigation as well as added several new features, including an ex parte seizure remedy and whistleblower immunity.

DTSA added to the large and growing federal caseloads.  It also exposes more federal judges, relatively few of whom studied or litigated trade secret cases prior to their judicial appointments, to the distinctive challenges of trade secret litigation.

Origins and Design of the Trade Secret Case Management Judicial Guide

In 2019, as part of my work educating federal judges about intellectual property law and case management in conjunction with the Federal Judicial Center, I set out to assemble a team of leading practitioners, scholars, and judges experienced with trade secret litigation to develop a case management treatise to guide judges, litigators, in-house counsel, policymakers, scholars, and students in navigating this new and expanding terrain of federal intellectual property law.

David Almeling and Victoria Cundiff are two of the most experienced trade secret litigators in the nation. They have been instrumental in the Sedona Conference Working Group on Trade Secrets. Jim Pooley has long been the unofficial dean of the trade secret world—author of a leading trade secret treatise, experienced trade secret litigator and advisor, and former WIPO Deputy Director General. Peter Toren is an experienced criminal trade secret litigator who served for many years in the as a federal prosecutor with the Computer Crime and Intellectual Property Section of the Criminal Division of the United States Department of Justice where he served as Acting Deputy Chief. Professor Elizabeth Rowe litigated trade secrets cases before entering academia, where she has published numerous trade secret articles and co-authored the first trade secret law casebook.  Professor Rebecca Wexler is a rising star in scholarship at the intersection of data, technology, and secrecy in the criminal legal system, with a particular focus on evidence law, trade secret law, and data privacy.

I brought experience as a contributor to DTSA (my research and reform proposal was the basis for DTSA’s whistleblower immunity provision), lead author of a widely adopted intellectual property casebook, lead author of the Patent Case Management Judicial Guide (PCMJG), and organizer of over 60 IP education programs for federal judges since 1998.

Using the PCMJG as a template—with chapters organized in the stages of litigation and guided by an early case management checklist—we have worked through countless drafts over the past three years in developing the Trade Secret Case Management Judicial Guide. We have now completed the draft and received comments from a Judicial Advisory Board.  We have submitted the draft to the Federal Judicial Center for publication within its resource library for federal judges. We hope to complete that process this spring and welcome comments from practitioners and other members of the public in the interim. The public can access the guide at:  https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4360102

Distinctive Features of Trade Secret Litigation 

Trade secret litigation has both similarities with and significant differences from other types of civil and criminal litigation. It also parallels and differs from other types of intellectual property—patent, copyright, and trademark—litigation. Three such differences stand out: (1) the tensions surrounding protecting trade secrets over the course of litigation in public tribunals; (2) the high emotional level in many trade secret litigations; and (3) the potentially complex interplay between civil and criminal trade secret actions.

1. The Challenge of Identifying Trade Secret and Then Protecting Them throughout the Litigation

Perhaps the key difference relates to the subject matter: secrets. The secret nature of the information at issue poses significant challenges for case management because of public nature of federal litigation and freedom of expression. Patent cases also involve aspects of secrecy—such as unpublished patent applications that might bear on validity and business strategy related to damages—but trade secret litigation goes to the very heart of the cause of action: that the information that was allegedly misappropriated was not known or readily ascertainable.

Unlike a patent, which affords an exclusive right about the public, trade secrets are relative rights. While the trade secret owner will necessarily need to disclose the secret to some third parties, such as employees or commercial partners, to exploit it, once a trade secret is disclosed by the trade secret owner without restriction or is broadly revealed by third parties without authorization, it cannot be a secret. Those who learn of the secret through publicly accessible websites or publications are free to use that knowledge. The bell cannot be unrung. Moreover, those who independently develop information claimed by another as a trade secret are free to use and disclose it—so long as their development was in fact independent.

Trade secret disputes also present an early “identification” problem that differs from disputes arising over other forms of intellectual property. In patent, copyright, and trademark cases, the intangible resource has already been identified and registered with a regulatory body (or, in the case of unregistered trademarks, made public through use), and therefore can be publicly specified in the pleadings. The protected information claimed to be at issue in a trade secret case cannot be disclosed in public filings, however, without destroying the very subject matter of the plaintiff’s legal claim. Yet defendants need to know what the secrets are that they have allegedly misappropriated and the court needs to know what the case is all about to be able manage and decide it.

This produces three interrelated quandaries at the outset of trade secret case:

  • Do the pleadings adequately set forth a cause of action under the familiar Twombly and Iqbal standards?
  • When, how, with what level of specificity, and subject to what protective order provisions will the trade secret owner be required to reveal its trade secrets to the defendant?
  • What is the boundary between protectable trade secrets and general knowledge and skill?

The first of these questions requires the plaintiff to provide more than vague, conclusory statements that restate the elements of a trade secret to survive a motion to dismiss. The second quandary often requires the court to assist the parties in customizing the discovery process to ensure that the trade secrets stay protected during the course of litigation while facilitating the exchange of sensitive information, often to competing business enterprise defendants. This typically entails fashioning an appropriate protective order that takes into consideration the trustworthiness of the various players in the litigation drama: counsel, litigants, employees, experts, and possibly others. Plaintiffs will understandably be concerned that the very effort to enforce their trade secrets could result in the loss of what may be their most valuable business assets. At the same time, defendants will want to know what they are accused of misappropriating. And the public (including journalists) will be interested in what may be high profile disputes affecting important industries. Consequently, courts will often be called upon to tailor and enforce protective orders and oversee the trade secret identification process.

The third question is primarily a question on the ultimate merits, although it may inform management of the first two. Its resolution will require the court and the ultimate factfinder to delve into the thorny question of where general knowledge and skill end and protectable trade secrets begin. This assessment inevitably involves an appreciation of the technologies or information at issue, which may be beyond the general knowledge of the court. The court and factfinder may need the assistance of experts to sort out these issues to determine liability and frame out the contours of any ultimate relief.

Compounding these challenges, trade secret owners often seek immediate equitable relief to prevent the defendant and third parties from using or disclosing a trade secret before trial. Yet, for the reasons noted above, the contours of the alleged trade secrets and any improper encroachment upon them will often be difficult to assess with precision before there has been sufficient discovery to reveal what information is at risk and to fully test claims of misappropriation. And defendants will fear that early equitable relief on an incomplete record will interfere with their business operations.

Moreover, the secrecy imperative runs through the entire litigation process, not simply the pleading stage. The court must take care to ensure that hearings and filings with the court during the pretrial and trial stages do not disclose trade secrets to the general public. In enacting the EEA, of which the DTSA is now a part, Congress recognized that victims of trade secret thefts could face a dilemma between reporting the matter to law enforcement and concerns that the trade secret will be disclosed during discovery or during a criminal trial. To alleviate this concern, the Act authorizes the court “to enter such orders and take such other action as may be necessary and appropriate to preserve the confidentiality of trade secrets.” 18 U.S.C. § 1835(a). At the same time, the court must balance the public’s interest in knowing about civil and criminal proceedings against the trade secret owner’s right to limit access to the trade secrets themselves.

2. High Emotional Quotient

Complicating all of these issues is the fact that many trade secret cases are hotly contested battles that have the emotional intensity of child custody cases. Many trade secret cases pit a business enterprise against business partners, former employees, and contractors who have left the business to form or work for a competing enterprise. In some cases, the former associates are actual family members. But even if not related by blood or marriage, the ties between the plaintiffs and defendants can run deep. Co-founders of companies often have deep and continuing personal, financial, and social bonds. And the alleged misappropriation represents not just a competitive injury but a betrayal of sacred trust. The trade secrets are the product of countless hours devoted to a shared enterprise. They are the intellectual offspring of a joint relationship. The departure of a business associate or former employee can be like the dissolution of a marriage. And where the former colleague competes with the prior business, it can feel like an extreme form of disloyalty.

Trade secret protection can become intertwined with noncompetition agreements and other contractual restraints on the activities of former business associates and employees. The enforceability of such restraints on trade varies according to state law. Even where permitted, such restraints are typically required to be narrowly tailored to protect only legitimate interests, including trade secrets. Absent enforceable noncompetition agreements, employees are generally free to take their general knowledge and skill with them, even to competing enterprises. But therein lies one of the difficulties alluded to above: distinguishing protectable trade secrets from general knowledge and skill.

A second challenging tension may arise if an employee or contractor believes that an employer is engaged in unlawful activity. The employee might plan or be reporting sensitive information to the government as part of a False Claims Act case or other whistleblower action. In such cases, there is a risk that the plaintiff may use a trade secret claim to attempt to silence the whistleblower and gain backdoor discovery of what the government might be investigating. To guard against this overreach, the DTSA immunizes whistleblowers from liability under federal and state trade secret law for disclosure, in confidence, of trade secrets to government officials and attorneys solely for the purpose of reporting or investigating a suspected violation of law.

Another sensitive and difficult pattern relates to economic espionage cases in which the claim is made that an organization, potentially backed by a foreign government, has embarked upon a scheme, sometimes years in duration, to acquire trade secrets to assist development of a competing business or industry. These concerns can lead to both civil and criminal cases and have become more common and salient with growing concerns about international, sometimes state-backed espionage. These cases can be especially difficult to investigate and prosecute as a result of the discovery and jurisdiction impediments posed by international borders and the challenges posed by encrypted digital files. Some may pose concerns relating to sovereign immunity as well as diplomatic issues.

As a result of these patterns, judges in such cases may have to deal with especially high levels of distrust and willingness to escalate the litigation for business, personal, and criminal liability reasons.

3. The Interplay of Civil and Criminal Proceedings

Criminal trade secret investigations or suits are often known or anticipated to be underway during the pendency of a civil proceeding involving trade secrets. Both the government and the defendant in a civil case may have reasons for seeking a stay of the civil proceedings pending resolution of the criminal case. The government may seek a stay of the civil proceeding or of discovery in the civil proceeding to prevent interference with its investigation. The defendant may seek a stay to avoid having to invoke the Fifth Amendment during an active criminal investigation. On the other hand, the plaintiff in a civil case may want to pursue its claim expeditiously. Although most “garden variety” trade secret disputes do not include a criminal component, these are just some of the tensions that courts and litigants need to navigate when dealing with potentially parallel civil and criminal proceedings.

Using the Guide

Trade Secret Primer: Chapter 2 provides a comprehensive overview of trade secret law, tracing its legal sources, history, requirements, whistleblower immunity, defenses, and remedies. It then contrasts trade secrets with other forms of intellectual property, surveys common coincident claims and international aspects.

Early Case Management. Building upon Chapter 2’s survey of trade secret law, Chapter 3 frames the critically important early case management phase and sketches a flexible plan for the initial case management conference. Trade secret litigation typically unfolds quickly, often with the trade secret owner seeking preliminary equitable relief. The court must be ready to assist the parties in crafting a protective order, trade secret identification process, and a discovery plan. Chapter 3 offers a detailed checklist for guiding early case management and a suggested case management order that will anticipate common litigation challenges and facilitate the exchange of information, scheduling of trial stages, and promotion of efficient resolution of the case through litigation or settlement.

Trade Secret Identification. Chapter 4 guides the court through the nuanced process of identifying the trade secrets: the nature of the identification process (a procedural rule, not a merits determination), the timing of identification, the format for trade secret identification, the particularity of identification, access to the identification, and amending the identification. This issue is unique to trade secret law and thus this chapter focuses on a process that may be new to those adjudicating or litigating a trade secret case for the first time.

Preliminary Relief. Chapter 5 discusses the legal standards for evaluating requests for pre-trial equitable relief and expedited discovery in furtherance of such requests, provides examples of evidence that has been found to weigh in favor of or against pre-trial equitable relief, and offers guidance in framing orders granting equitable relief and in managing the entire process, including conducting post-hearing case management conferences following resolution of requests for preliminary equitable relief. It includes templates, tables illustrating relevant evidence, and illustrative orders.

Discovery. Chapter 6 presents the distinctive challenges of discovery in trade secret cases. It examines common discovery mechanisms, protective orders, dealing with the particular types of records often arise in trade secret cases (such as forensic images of devices, source code, employee records, and personal vs. work accounts and devices), management of disputes (including requests to seal documents), discovery from international sources, and common discovery motions. It also discusses the challenging question of how to balance the presumption of open access to the courts and court record with the need for owners of trade secrets to protect the secrets from public disclosure to avoid their destruction.

Summary Judgment. Chapter 7 addresses the summary judgment phase of trade secret litigation. Recognizing that many of the core issues in trade secret litigation are fact intensive, it addresses burdens of proof, the amenability of particular substantive issues to summary adjudication, expert declarations, and useful ways of managing and streamlining the summary judgment process and conducting summary judgment hearings.

Experts. Chapter 8 explores the role of experts in trade secret litigation. It first examines the principal areas in which experts are used and then discusses the court’s gatekeeper role in preventing unreliable expert testimony from being considered by the jury.

Pre-Trial Case Management and Trial. Chapter 9 assists courts in managing the lead up to trial, covering the pretrial conference. Chapter 10 then maps out the distinctive issues that frequently arise in trade secret cases, including late pretrial motions, jury pre-instruction, burdens of proof and persuasion, managing confidentiality in the courtroom, motions for judgment as a matter of law, jury instructions and verdict form, injunctions after trial, and exemplary damages and attorney’s fees.

Criminal Trade Secret Case Management. Chapter 11 presents the substantive law and case management issues associated with criminal trade secret prosecutions. It includes detailed discussion of the elements of proof, identifying the trade secrets, venue, defenses, confidentiality (including protective orders, trade secret owner participation, and cooperation between the government and the victim), extraterritorial application, whether to stay a parallel civil case, and sentencing/penalties.

Call for Comments

 Please send comments to me at pmenell@law.berkeley.edu.

* Koret Professor of Law; Director, Berkeley Center for Law & Technology; Faculty Director, Berkeley Judicial Institute; University of California at Berkeley School of Law.

Trade Secrecy Rising

by Dennis Crouch

A continuing trend in American law is the rise of Trade Secrecy as a powerful form of intellectual property.

The FTC and Biden Administration have called for eliminating employee non-compete agreements, which will strengthen the hard push for trade secrecy.  Most trade secret claims involve former employees moving to competitors.  If contracts limiting those transitions are unenforceable, more weight will almost certainly fall on trade secrecy rights.

Recently, President Biden also signed into law the Protecting American Intellectual Property Act of 2022.  Despite its broad name, the new law focuses entirely on international trade secrecy issues.  In particular, the law authorizes the US President to place sanctions on foreign entities that engage or benefit from “significant theft of trade secrets of United States persons.”   The law has a two-step approach: (1) the President must provide Congress with a report of violators; and (2) the President must then put sanctions on the violators (with the exception that sanctions can be waived if in the national interest).  Potential sanctions include blocking and prohibiting “all transactions in all property and interests in property of the entity.”

The new law is set to Sunset in 7 years and so will not be codified within the United States Code (USC).  However, the law does rely upon the DTSA definition of trade secret found in 18 U.S.C. 1839:

[T]he term “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if— (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.

Under Federal Law, the theft of trade secrets held by US persons for the purpose of taking information out of the US is also a felony. See, Economic Espionage Act.

But, for the most part the practice of trade secrecy law is radically different than that of patent law.  I’m wondering the extent that patent attorneys are engaging in the transition.

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.

 

 

UPDATED: Must a Plaintiff Investigate a Patent’s Validity Prior to Suing for Infringement?

Updated below to correct an error in my original analysis. -DC

WPEM LLC v. SOTI Inc. (Fed. Cir. 2021)

WPEM sued SOTI for patent infringement based upon its mobile-device software management “Speed Lockdown” tool. The complaint cites MobiControl Version 11 as infringing.  In its answer, SOTI responded with information from its Version 10, which predates the asserted patent as well as other prior art references.  Settlement discussions ensued:

  • Offer 1: P offers to settle for $429k; D says “no, the patent is invalid.”
  • Offer 2: P offers to settle for $150k; D says “no, the patent is invalid” and also sent P a R.11 notification (alleging that the complaint was filed without sufficient investigation and thus in violation of R. 11).
  • Offer 3: P offers to settle for $75k; D says “no, the patent is invalid.”
  • Offer 4: P offers to dismiss the case with prejudice and grant a license if D agrees to dismiss its counterclaims and abandon its request for attorney fees; D says “no.”

P (WPEM) subsequently asked that its case be dismissed with prejudice.  The district court dismissed the case, but also found it exceptional under 35 U.S.C. 285 and awarded attorney fees of  $180k. The primary basis of the district court’s award was WPEM’s failure to conduct sufficient pre-filing investigation and also continuing the case after learning of its frivolous case.  The court wrote:

WPEM conducted no pre-filing investigation into the validity and enforceability of the Asserted Patent.

WPEM, LLC v. SOTI Inc., 2020 WL 555545 (E.D. Tex. Feb. 4, 2020).

UPDATE – I read through the district court case again and found that I had erred in my statement above (now with strikethrough).  Rather, the district court particularly concluded that it “finds nothing exceptional about WPEM’s post-filing conduct.”  The district court considered the progressive settlement offers, but did not find them improper in any way. Id.  

On appeal, the Federal Circuit affirmed — giving deference to the district court’s judgment on exceptional case awards and finding no abuse of discretion. WPEM, LLC v. SOTI Inc., 2020-1483, 2020 WL 7238458, at *1 (Fed. Cir. Dec. 9, 2020)

WPEM’s argument on appeal was that a patentee need not conduct any investigation regarding the validity of its patents prior to filing a lawsuit because a patent is presumed valid and enforceable.  Any invalidity defense is for the defendant.  On appeal, the Federal Circuit did not disagree, but appears to have twisted the district court opinion somewhat.

Contrary to WPEM’s assertion, we do not read the district court’s opinion as failing to account for the presumptions of validity and enforceability. Instead, the court based its award of attorneys’ fees, in part, on the frivolous nature of WPEM’s infringement position (i.e., the substantive strength of WPEM’s litigation position)—an issue that could have easily been foreseen with an adequate pre-suit investigation (i.e., the unreasonable manner in which the case was litigated). As the court reasoned, because the Accused Technology is prior art to the ’762 patent, “if WPEM prevailed on its assertion that the Accused Technology is covered by the Asserted Patent, it would have had the effect of invalidating, rather than infringing, the Asserted Patent.” Because it is undisputed that the Accused Technology is prior art to the ’762 patent, see id., WPEM could not bring a successful infringement suit.

Id. The appellate decision makes logical sense but for the recognition that infringement analysis is a separate and distinct doctrine from anticipation and that the complaint (apparently) does a reasonable job of showing how the accused product actually practices the invention.

The patentee has now petitioned for en banc rehearing with the following two questions:

  1. When a plaintiff is not aware of any reason to question the validity of an issued United States Patent, is that plaintiff allowed to rely on the statutory presumption of validity when filing a patent infringement lawsuit?
  2. While invalidating the claims of a validly issued United States Patent requires clear and convincing evidence, is a District Court allowed to base a finding of exceptionality under §285 for an inadequate pre-suit investigation of patent validity using the lesser standard that the patent is likely invalid when the plaintiff is not aware of any reason to question validity?

[WPEM Petition for Rehearing].

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Fees on Fees: The defendant had asked for $267k in attorney fees, but the district court only knocked-off about $87k of that — but awarding $180k. That $90k portion was the amount SOTI’s attorneys racked-up in drafting and arguing its motion for fees. The district court refused to award fees-on-fees in this case.

The Court understands that, in pursuing a § 285 recovery, parties will inevitably incur additional attorneys’ fees. However, in this case a near doubling of the amount already incurred in fees is simply unreasonable. At some point, a party must be mindful of the use and conservation of judicial and party resources and cannot (after it realizes it will prevail) continue to incur fees far in excess of any proportional relationship to the fees incurred in the merits portion of the case.

WPEM, LLC v. SOTI Inc., 2020 U.S.P.Q.2d 38024 (E.D. Tex. 2020).

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Bill Ramey is representing the patentee in the appeal; Robert Greeson for the defense.  SOTI has not yet responded to the petition.