The newly filed trade secret lawsuit Collateral Analytics v Nationstar Mortgage (N.D. Cal., No 18-cv-019) may be interesting to follow. Collateral Analytics offers a searchable database of real estate information to its customers (a large number of customers). According to the complaint, Nationstar was one of the customers and abused that relationship by downloading much of the database and is preparing to use that information to start a competitor (Quantarium).
In my mind, the case raises several important legal questions:
- Can a database provided to thousands of customers on a retail basis be considered a “trade secret” – even if subject to a confidentiality contract?
- Reverse engineering is a legitimate mechanism for discovering competitive trade secrets. Is a contract that prohibits such reverse engineering enforceable? (Here, there were apparently some software limits to protect the data that had to be overcome before the data could be obtained en mass.
- In some ways, the approach here is designed to fit database property rights within the trade secret realm. Is that appropriate — especially recognizing that Congress has considered but rejected sui generis database protections. (The lawsuit also claims violation of the Computer Fraud and Abuse Act).
Enjoy: CollateralAnalyticsComplaint
Dennis, regarding the question about the enforceability of a contract restricting the customer from reverse engineering of a database so as to download its contents for competitive purposes, if the contract is supported by adequate consideration and not against federal or state policy and thus illegal under either federal or state law, then the contract is enforceable.
While one can reverse engineer a product rightfully in one’s possession without restriction, one cannot reverse engineer a product one does not own so as to get into good competition with the person who actually owns the product.
This is somewhat like the issue of exhaustion where one can impose any kind of reasonable restriction one desires on a product one continues to own and only lands or leases to somebody else, but where one cannot impose such restrictions after an unrestricted sale.
..and what of “restricted” sales…?
As you might remember, lends and leases that are actually sales is an affront that needs MORE scrutiny.
anon, “restricted” sale? These are the kind when title passes after a condition subsequent, such as payment of money. Until title passes, the product is still owned by the seller and he or she can impose restrictions on use.
Ned,
I am talking about the faux “rentals” and “leases” that are nothing more than sales in disguise, with zero chance or even requirement of the property being re-obtained by the entity putting the item into the stream of commerce.
A rose by any name, and all…
Ned, I think the question of whether a contract prohibiting reverse engineering is enforceable isn’t really a state law question. Sure, if it has adequate consideration, and isn’t unconscionable, most courts will enforce it as a matter of state law. This is true even for cases where you have a contract of adhesion, such as one of those “click-through” licenses that no one reads.
But I think the bigger question is whether such a restriction is preempted by federal intellectual property law. Under the famous Sears and Compco decisions in the early 1960s, the Supreme Court held that state law cannot be used to protect against copying of something that’s publicly available. In Bonito Boats (1989), the Supreme Court reiterated Sears/Compco rationale by invalidating a Florida state law prohibiting the copying of boat designs. The Supreme Court stated: “In essence, the Florida law prohibits the entire public from engaging in a form of reverse engineering of a product in the public domain. This is clearly one of the rights vested in the federal patent holder, but has never been a part of state protection under the law of unfair competition or trade secrets.” The court went on to hold that allowing state laws to protect items from being copied or reverse engineered would essentially duplicate federal patent law, but without the rigorous eligibility standards you have to go through to get a patent. That, the Court said, upset the balance between state law and federal IP law.
So I think under Bonito Boats, a very strong argument can be made that state contract law cannot restrict reverse engineering of a product that itself isn’t subject to any confidentiality restrictions. So if the product is available to the public without confidentiality restrictions, you cannot use state law to restrict the ability to reverse engineer the product to discover how it works; that’s the argument that could be made.
Obviously this wouldn’t apply to niche products, where you sell a product to a few customers under an arm’s length negotiation. But in a typical end-user license contract, a classic contract of adhesion such as the “click-through” agreements you see every day, I think Bonito Boats (1989) could be used to invalidate an anti reverse-engineering clause in those contracts.
LR,
I like your thinking, but how do you account for Trade Secrets in the first place (since your logic could be extended to the same type of ‘keep out’ preclusion effect)?
Is not the “wiggle room” provided for by Trade Secrets enough to provide a(t least a type of a) mirror “no reverse” choice outside of the reach of patents?
Lode runner, surely, if the particular product is in the public domain state law cannot prevent the copying of it by others. Neither can it prevent reverse engineering to the extent such does not violate a patent or copyright because of the federal policy about freedom a copy things that are not protected by the federal intellectual property laws.
But the premise of my remarks remains: so long as the proprietor holds title and does not to give lawful title to its contracting party, but only temporary possession, it can impose restrictions by contract. I believe those of the facts in this case. The particular database is not in fact in the public domain and free for anybody to copy.
“But the premise of my remarks remains:”
As does the weakness (and abuse) – as when an interaction looks like a rose, has thorns like a rose and even smells like a rose, but is called something else.
When “holding title” occurs “in name only,” abuse occurs – avoidance of a meaningful application of exhaustion doctrine occurs.
Anon, the question of whether an adhesion contract is unenforceable depends on the relative bargaining power of the participants, and whether enforcement would be unconscionable.
I do not think that either of these preconditions obtains here.
“either of these preconditions obtains here.”
That may be all well and good, Ned, but my point is expressly made in view of the larger context than just the immediate case.
That’s why the database owner need to rely on copyright law – as a compilation – and use contract language to restrict usage and downloading and caching – in the context of a copyright protected work. I’m with you that the trade secret / patent nexus – to protect a database – is not the correct approach. But then again, we have the new federal trade secrets act – and many D. Ct judges unversed in IP, so why not give it a shot as an advocate.
Where did Collateral Analytics get its “real estate information”, I wonder?
Not sure that I understand your insinuation.
You are aware of course, that trade secrets do not require “invention” and can – and often do – contain items that are fully “public,” right?
You are aware of course, that trade secrets do not require “invention” and can – and often do – contain items that are fully “public,” right?
I am.
Also very much aware of massive gaping @ h0le behavior among data-collecting corporations in general.
Your feelings are noted.
As is the general lack of tie to law.
(Rather unsurprising)
People in the enforced altruism system known as capitalism sure are mean aren’t they MM?
capitalism as an “enforced altruism system”…?
It’s enforced by reality. If you don’t provide a good or service to someone that desires it you will starve/be homeless, or have to go grow your own food, which is just providing a product/service to yourself that you want. Or else live on hand outs, perhaps gubmit handouts, as in our quasi capitalist system.
Watch more Ben Shapiro. You can catch his thug life vids on youtube, they’re entertaining.
The reality of “its enforcement” has nothing to do with altruism.
Your move to “quasi” is an abdication of the attempted statement.
Big picture–the big corporations are going to keep pushing Trade Secret law. It will eat the Valley.
It will eat the Valley.
Good riddance.
Your “Good riddance” smacks of insincerity.
Elsewise, you would not tout their party line in being anti-software patent.
Your “Good riddance” smacks of insincerity. Elsewise, you would not tout their party line in being anti-software patent.
News flash: very very few people have brains as dysfunctional as yours.
Your Accuse Others meme is showing.
Yep. And the DNA databases are all going to be in silos, behind as high a trade secret wall as these guys can erect, another un-intended consequence of SCOTUS – you can’t patent protect a discovery (if that discovery could otherwise be found in nature) and of course the enactment of the Fed trade secret law.
On questions 1 and 2, see my article “Hidden in Plain Sight”
link to papers.ssrn.com
I think it will turn on the nature of the information. If it’s all public and the database applies no authored algorithms etc. to analyze or transform the information (e.g. a phone book), copying is likely not unlawful (although reselling it may be a breach of contract because the provider only provided the information with the consideration that the receiver would not copy and supply it to third parties).
If the information was modified in meaningful ways (rather than merely organized) it suspect a copyright right is created and exists.
I think the trade secret route is a loser because the provider voluntarily disclosed it to the receiver in exchange for money, i.e. it was not stolen.
I’m too lazy busy and tired to look it up, but I think there were cases around this in the early mid ’80’s when databases started to become available and valuable.
Trade-secret misappropriation does not require “stealing” if the misappropriator has a duty of confidentiality. Under the UTSA,
(2) “Misappropriation” means: . . . (ii) disclosure or use of a trade secret of another without express or implied consent by a person who . . . (B) at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was . . . (II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use . . . .
“even if subject to a confidentiality contract?”
The devil BE in those details.
“Is a contract that prohibits such reverse engineering enforceable?”
Was the party signing the “no reverse engineering” clause coerced? Was such a clause of the nature of “shrink-wrap” or otherwise preventing a meaningful evaluation of signing the contract? Given the limited comment here, I am not certain that such a level is reached, but admit that (additional) details may change that view.
“designed to fit database property rights within the trade secret realm. Is that appropriate
I do not see why not – regardless of the rejection of sui generis database protection. If anything, one might even take that rejection as a sign that existing protections – such as Trade Secrets – were thought to be sufficient.
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