October 22, 2017

Senator McCaskill Introduces Bill to Strip Native American Tribes of Sovereign Immunity

On October 5, 2017, Senator Claire McCaskill introduced legislation that would remove the right of Native American Indian Tribes to assert sovereign immunity in inter partes review (IPR) proceedings at the United States Patent and Trademark Office (USPTO) conducted by the Patent Trial and Appeal Board (PTAB). As discussed in my previous posts on this issue, the bill was introduced in response to the assignment by Allergan of the patents covering RESTASIS to the Saint Regis Mohawk Tribe, with the Tribe granting back to Allergan an exclusive license. The purpose of the transaction was to permit the Tribe to assert sovereign immunity and defeat the jurisdiction of the PTAB of the USPTO, which has been hostile to the rights of patent owners in IPR proceedings.

Senator McCaskill’s bill doesn’t appear to be particular well thought out in a number of respects. First, it would discriminate against Native American Indian Tribes while allowing state universities to continue to assert sovereign immunity pursuant to the PTAB’s earlier decision relating to a patent owned by the University of Florida Research Foundation.

Second, the bill only covers IPR proceedings, Tribes could still assert sovereign immunity in post grant proceedings and covered business method proceedings. The reasons behind Sen. McCaskill’s hastily and poorly drafted bill are open to debate, but as a Washington cynic, I would guess that it may have something to do with fundraising for her 2018 Senate reelection campaign.

The Saint Regis Mohawk Tribe issued an immediate and scathing statement after the bill was introduced, which reads:

“The Saint Regis Mohawk Tribe is outraged that U.S. Senator Claire McCaskill (D-MO), has introduced legislation that specifically targets Indian tribes, yet exempts state universities and other sovereign governments engaged in the very same IPR process.  The double standard that is being introduced by the Senator as a solution for a perceived abuse of the IPR proceedings does nothing to solve the underlying problem. The Tribes authority is inherent and has been reaffirmed through treaties and legislation from the earliest days of the country.

It is cruelly ironic that Indian Tribes, with the highest unmet health care needs in the entire country, are being attacked for exercising their sovereign obligation to fill gaps in health coverage caused by the federal government’s abject failure to uphold its trust responsibility.  The fact that the Mohawk community is home to three unmitigated EPA Superfund sites that harm the health of the community and surrounding non-Native communities is a stark example of the government’s failure.  Congress shouldn’t double down on its mistakes by denying the Tribe’s sovereign authority in the IPR process.

As the largest private employer in Northern New York, the Tribe has a responsibility to ensure the livelihood and well-being of its tribal members and its hundreds of non-Native employees. The Tribe remains committed to working with all Members of Congress to discuss how its recent economic diversification efforts benefits the Tribe, its members, and the surrounding communities without harming competition among pharmaceutical companies (both private and generic) or artificially inflating drug prices.”

Senator McCaskill’s efforts would be better and more productively spent on efforts to improve the patent system, which is stacked against patent owners especially those lacking the resources to fight effectively to protect their patents.

 

Release 28 to Intellectual Property & Computer Crimes Published

The Computer Fraud and Abuse Act (CFAA) contains numerous subsections sanctioning a party for obtaining access to a protected computer either without authorization or in excess of authorization. Release 28 to my treatise, Intellectual Property & Computer Crimes features an analysis of these concepts of authorization, including whether authorization needs to be obtained both an individual party as well, as an entity that controls access. In addition, there is discussion of what constitutes exceeding authorization, including using such access to obtain or alter information in the computer that the accesser is not entitled to.

The Release also examines whether individuals other than the computer’s owner may bring an action under the CFAA because they may be proximately harmed by unauthorized access, particularly if they have rights to data on the computer.

Other topics receiving treatment in this Release include:

  • Sentencing Commission amending Section 2B5.3, setting out a formula to use to determine the pecuniary harm by trademark and copyright counterfeiting by treating this infringing like theft and fraud
  • Economic Espionage Act (EEA) amending the definition of a trade secret to address “independent economic value”
  • Ninth Circuit examination of whether disclosure to a single competitor destroys trade secret protection because the information became generally known or ascertainable by the public
  • Interpretation of Section 2411(2)(D) of the Electronic Communications Privacy Act (ECPA) which only requires the consent of one party to a communication contrasted with some state laws which requires the consent of all parties

Indian Tribe files Motion to Dismiss IPR Proceeding based on Sovereign Immunity

The Saint Regis Mohawk Tribe filed a Motion to Dismiss all of the IPR proceedings relating to the Allergan drug RESTASIS on September 19, 2017. As discussed in my previous post, the drug company Allergan recently assigned the patents to the Tribe, with the Tribe granting back to Allergan an exclusive license. Allergan must pay the Tribe quarterly royalties of $3,750,000 for its field-of-use license. The purpose of the transaction was to permit the Tribe to assert sovereign immunity and defeat the jurisdiction of the PTAB of the USPTO, which has been hostile to the rights of patent owners in IPR proceedings. The Tribe argues that it is a sovereign government that cannot be sued “unless Congress unequivocally abrogate is immunity or the Tribe expressly waives it” and neither of these exceptions applies in this instance.

As the Tribes notes, Supreme Court recognized in 1832 in Worcester v. State of Georgia that sovereign Indian Tribes are “‘distinct independent political communities,”  and, as such, have inherent sovereign immunity. Such immunity can only be waived by the Tribe or “congressional abrogation,” and absent such waiver all suits against the Tribe are barred. The Tribe argues that Congress has not unequivocally abrogated the Tribe’s immunity from suit by statute (as required by the Supreme Court), and that neither has the Tribe unequivocally waived its immunity. Therefore, according to the Tribe, the “action must be dismissed.”

It is interesting that in the Section addressing whether the proceeding may move forward without the consent of the Tribe, the Tribe notes that the petitioners still have an adequate remedy since they have challenged the validity of the same patents “in a recently completed five-day bench trial in the Eastern District of Texas” and “The Tribe will not assert sovereign immunity in the Eastern District of Texas case. So dismissing this case does not deprive Petitioners of an adequate remedy; it only deprives them of multiple bites at the same apple.”

The Tribe is relying on well and long established principles of law, and the PTAB should dismiss the IPR proceedings. However, given the track record of the PTAB, this outcome is far from certain.

Will the Supreme Court or Native Americans Come to the Rescue of the U.S. Patent System?

The drug company Allergan has transferred its dry-eye drug Restasis patents to the Saint Regis Mohawk Tribe in upstate New York in an attempt to avoid a challenge to the validity of the patents in an Inter Partes Review before the United States Patent and Trademark Office. Allergan apparently will pay $13.75 to the tribe in exchange for the tribe claiming sovereign immunity as grounds to dismiss the challenge to the validity of the patents before the USPTO brought by Mylan. The tribe will lease the patents back to Allergan and receive $15 million in annual royalties so long as the patents remain valid. Allergan also is waiting for a decision from a federal district court in the Eastern District on the validity of the same patents, but by transferring the patents to the Tribe, the company hopes to avoid having the same issue heard in two venues. Allergan’s actions may not be as far-fetched as they appear at first blush: the USPTO has ruled, in a case involving the University of Florida, that challenges to the validity of patents held by the University should be dismissed. As an arm of the state of Florida, the university should be granted sovereign immunity.

Allergan’s actions have been criticized as an end-run around a program that was implemented by Congress in 2011 as part of the America Invents Act. In a telephone hearing on the St. Regis Tribe’s motion to dismiss the IPRs at the PTAB, Mylan’s counsel called the patent transfer a “sham transaction” on seven occasions.

At the time the AIA was enacted, most of the analysis of the Act’s impact was focused on the change from the first to invent to the first to file. However, in the subsequent six years, the biggest change was the introduction of a number of post-grant patent procedures that allow for potential infringers to attack the validity of issued patents through the Inter Partes Review (IPR) and post grant review conducted by the Patent Trial Appellate Board of the USPTO. Ostensibly the intent of this procedure was to remove defective patents or claims that were mistakenly issued. Unfortunately, it has resulted in nothing less than the destruction of the patent system.

While the USPTO “promotes misleading statistics the erroneously suggest the impact of IPR has been minimal, the truth on the ground in the real world is quite different.” From experience, many patent owners do not bring legitimate patent infringement actions out of concern that they simply cannot afford to defend an IPR that can cost upwards of $250,000. Plaintiff lawyers who previously may have brought a patent infringement action on a contingency fee basis prior to the enactment of the AIA and IPR are now put off by the almost certainty that their client will face an IPR, and a likely stay of the infringement action in federal court Moreover, there is the very high probability that the patent that is being asserted or at a minimum, a number of the claims of the patent will be held to be invalid by the PTAB. In short, there is a big difference in value between a patent that is subject to an IPR and one that is not.

According to the leading patent blog, IPWatchdog, “only 4 percent of all PTAB petitions end with a final written decision in which all claims are upheld as patentable! … Of the 1,556 patents for patent review proceedings at the PTAB that have reached final written decisions only 16 percent of those final written decisions left all claims upheld. Of the remaining percent of cases, a full 69 percent (1,076 petitions) have led to findings of all claims unpatentable; with 15 percent of final written decisions a mixture of claim findings in which at least some claims have been invalidated… The numbers move even more significantly tilted when adding in both pre- and post-institution settlements; … only 8 percent of petitions reach a final written decision of all claims upheld.”[i] Accordingly, it is not surprising that Allergan has chosen this unconventional approach to avoid the PTAB.

Fortunately, there may be hope for patent owners other than having to transfer their patents to an entity with sovereign immunity. The Supreme Court is set to hear Oil States v. Greene’s Energy, which that will consider the constitutionality of post-grant patent validity challenges in an administrative venue, as opposed to proceeding in federal district court. The question faced by the Supreme Court concerns is whether patents should be considered exclusive private property with the attendant rights that, and cannot be taken away in an administrative proceeding. In other words, to determine whether there is a private property right in one’s invention and that it cannot simply be taken away by the PTAB.

As many of the amicus curiae briefs demonstrate, there is “a striking unanimity in the judicial decisions construing decisions as private property rights,” and that the Federal Circuit is wrong in its decision that patents are “public rights.” For example, one of the briefs cites Chief Justice John Marshall from an 1813 circuit case (Evans v. Johnson) that found that “[a] patent was certainly required to make the property right enforceable, but the right itself ‘was vested in the inventor, from the moment of discovery,’ but the right itself ‘was vested in the inventor, from the moment of discovery,’ was an ‘indefeasible property in the thing discovered,’ and was being merely ‘perfected by the patent.’” According to another brief, the Supreme Court recently reiterated this understanding in Board of Trustees of Leland Stanford Junior University v. Roche Molecular Systems, where the court cites the 1890 patent case Solomons v. U.S., “whatever invention [an inventor] may thus conceive and perfect is his individual property.”

Despite the strength of the position that patents are private property rights, there is no assurance that the Supreme Court will accept this view, especially in light of the Supreme Court’s confused and confusing recent patent law decisions. But hopefully, the Court will find that patents are private property and are protected by the same due process and substantive rights as any other individual right or property. Otherwise, there are more than 500 tribes in the United States and state universities that may be interested in exploring transactions such as the one entered into by the St. Regis Tribe. Many patent owners, not just pharmaceutical companies, will undoubtedly be interested in being able to enforce their rights without the risk of having to face an IPR.

[i]  http://www.ipwatchdog.com/2017/06/14/90-percent-patents-challenged-ptab-defective/id=84343/ (June 14, 2017).

 

Handle with Care: Civil Seizure Under the Defend Trade Secrets Act

Introduction

On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act (“DTSA”), which became effective that very same day, and is the most significant development in intellectual property law in recent years. The DTSA amends the Economic Espionage Act of 1996 (“EEA”) to provide for civil remedies in federal courts for the misappropriation of trade secrets. This article addresses the civil seizure provision, which generally, is considered the most controversial section. It represents a significant departure from existing state trade secret law, even after being toned down in the final version of the DTSA, in response to concerns of how it may be abused. It is a particularly important and powerful remedy for trade secret owners and is intended to stop the dissemination of a trade secret, especially to overseas, before its value has been lost through public disclosure. However, Congress also included a number of provisions that are intended to protect against abuse and wrongful seizures including with severe consequences. Consequently, it is a powerful potential weapon that must be handled with great caution

Obtaining a Seizure Order

Under the DTSA, a court may—upon an ex parte application and based on an affidavit or verified complaint showing “extraordinary circumstances, issue an order providing for the seizure of property necessary to prevent the propagation or dissemination of trade secret that is the subject of the action.” 18 U.S.C. § 1836(b). The only existing seizure remedy in intellectual property law is found at 15 U.S.C. § 1116(d) of the Lanham Act, which applies to “counterfeit” marks. The provisions of this section are similar to the seizure provisions and, accordingly, the courts may look to guidance to this section in addressing applications under the DTSA.

To issue a seizure order, a court must find “that it clearly appears from specific facts” the following:

  1. Other forms of relief such as the issuance of an injunction pursuant to Rule 65 of the Federal Rules of Civil Procedure “would be inadequate to achieve the purposes of this paragraph because the party to which the order would be issued would evade, avoid, or otherwise not comply with such an order.” 18 U.S.C. § 1836(b).
  2. The failure to issue a seizure order will result in “immediate and irreparable injury” to the trade secret owner. Id. This should not be an issue in most cases, because once a trade secret is disclosed, its value is lost, and almost, by definition, largely valueless and the trade secret owner will suffer “irreparable injury.” Similarly, a trade secret owner will have little recourse where there is the possibility that the trade secret is being transmitted outside the United States, and under these circumstances, a court will likely find that a trade secret owner will suffer “immediate and irreparable injury” if the trade secret is not seized before it departs the United States. This has actually happened in a number of cases under the EEA. For example, in United States v. Hanjuan Jin 833 F.Supp.2d 977, (N.D.Ill. 2012), aff’d 733 F.3d 718 (7th Cir. 2013), the defendant was stopped at O’Hare airport by a Customs officer on the jet bridge, as she literally was about to board her flight to China. After determining that she had not truthfully answered questions about the amount of currency she was carrying she was taken into custody and an examination of her laptop revealed proprietary Motorola documents, where had been employed. She was subsequently convicted for violating 18 U.S.C. § 1832, and sentenced to 48 months imprisonment.
  3. The harm suffered by the trade secret owner: (1) outweighs the harm to the “legitimate interests of the person against whom” the seizure is requested; and (2) “substantially outweighs the harm to any third parties” by virtue of the seizure order. Section 1836(b)(2)(A). The second prong may prove to be particularly difficult for a trade secret owner to establish because the standard of “substantially outweighs” is particularly high and because it requires the court to consider the impact on third parties. For example, a business, which hires a former employee of the victim, and who unbeknownst to the new employer, brings with them to their new job a stolen trade secret, could suffer grave harm if its business were substantially interrupted. Without this requirement the victim could seek to shut down the new employer’s business even if it had nothing to do with the theft of the trade secret. Congress was so concerned about potential abuse that it imposed a more stringent test than under Section 1116(d)(B)(vi) of the Lanham Act that does not does not require that the interests of third parties be considered, let alone that the interests of the trade secret owner “substantially outweigh” those of third parties.
  4. The applicant must establish that it is likely to succeed in showing that the “information is a trade secret” and the defendant either “misappropriated the trade secret” or “conspired” to misappropriate the trade secret. Section 1836(b)(2)(A)(i)(IV)(aa)(AA), (BB).
  5. The person against whom the seizure is sought has possession of the trade secret and any property to be seized. Section1836(b)(2)(A)(V)(aa), (bb).
  6. The applicant must describe with “reasonable particularity” the property to be seized and to the location of the trade secret to the extent reasonable under the circumstances. Section1836(b)(2)(A)(VI).
  7. The person against whom the seizure order is issued would “destroy, move, hide or otherwise make [the trade secret] … inaccessible to the court, if the applicant were to proceed on notice.” Section1836(b)(2)(A)(VII).

The applicant must not “publicize[]the requested seizure.” Section 1836(b)(2)(A)(VIII). This is intended to avoid the movant from using the publicity of a seizure to force the entity against whom the seizure is sought into settling the matter before the court has even had a chance to consider the matter.

Execution of the Seizure Order

The contents of the seizure order must also meet six requirements (Section 1836(b)(2)(B)):

  1. Set forth “findings of fact and conclusions of law required for the order” (Section1836(b)(2)(B)(i)).
  2. Provide for the narrowest seizure necessary to accomplish the purpose (Section 1836(b)(2)(B)(ii)).
  3. Direct the seizure to be undertaken in a manner that “minimizes any interruption of the business operations of third parties and, to the extent possible, does not interrupt the legitimate business operations of the person accused of misappropriating the trade secret (Section 1836(b)(2)(B)(iii)).”
  4. Provide “guidance to law enforcement officials executing the seizure that clearly delineates the scope of the authority.” (Section 1836(b)(2)(B)(iv)). This provision was a recent addition to the bill and added to ensure that the extraordinary remedy of a seizure was accomplished in a manner that suits the circumstances of a particular case and which protects the interests of both the victim and the party against whom the seizure is sought. The DTSA provides examples, including (1) the “hours during which the seizure may be executed,” and (ii) “whether force may be used to access locked areas.”
  5. Schedule a hearing be held no later than seven days after the seizure order has issued, and allow the person against whom the seizure order is directed to move to dissolve or modify the order. (Section 1836(b)(2)(B)(v)).
  6. Require that the person seeking the seizure order provide adequate security for the payment of damages that may be suffered by virtue of a wrongful or excessive seizure. Section 1836(b)(2)(B)(vi). This appears for a court to require the same considerations as that required for a temporary restraining order under Rule 65(c) of the Federal Rules of Civil Procedure. Section 1116(d)(5)(D) provides the same requirements.

Court Hearing

The DTSA also requires that the court hold a hearing within seven days of the issuance of the seizure order, at which the applicant has “the burden to prove the facts supporting the findings of fact and conclusions of law necessary to support the order. Section 1836(b)(2)(B)(vii). If the party fails to meet that burden, the seizure order shall be dissolved or modified appropriately.” Section 1836(b)(2)(F)(i), (ii). The party against whom the seizure was obtained “may move the court at any time to dissolve or modify the order after giving notice to the party who obtained the order.” Section 1836(b)(2)(F)(iii). The court may also modify the time limits for discovery under the Federal Rules of Civil Procedure as may be necessary to prevent frustration of the hearing, by permitting, for example expedited discovery. Section 1836(b)(2)(F)(IV)

Protections for Wrongful Seizure

Because of the potential for abuse by the movant, Congress included a number of provisions to protect the interests of the party against whom the seizure is sought. First, as noted above, an applicant must not publicize the seizure and a court also must “take appropriate action to protect the person against whom” the seizure was granted from publicity by the applicant about the seizure order. Section 1836(b)(2)(C). Next, the DTSA requires all seized materials “shall be taken into the custody of the court.” Section 1836(b)(2)(D)(i). This means that the movant is not entitled to have the “stolen” property returned as part of this process. If the “seized material includes a storage medium” or the trade secret is allegedly “stored on a storage medium, the court shall prohibit [it] from being connected to a network or the Internet without the consent of both parties, until the hearing is held” (Section 1836(b)(2)(D)(II)). To protect the non-moving party, it also requires the court to “take appropriate measures to protect the confidentiality of seized materials that are unrelated to the trade secret information seized … unless the person against whom the order is entered consents to disclosure of the material.” Section 1836(b)(2)(D)(iii). A court may also appoint a special master “to locate and isolate all misappropriated trade secret information and to facilitate the return of unrelated property and data to the person from whom the property was seized.” Section 1836(b)(2)(E). The court also is not permitted “to allow the applicant to be involved in the seizure. Id. Finally, a court may also permit a technical expert not affiliated with the applicant “to participate in the seizure” if such expert “will aid the efficient execution of and minimize the burden of the seizure.” Id.

The DTSA provides the person against whom the seizure was obtained with a cause of action “for wrongful or excessive seizure” is entitled to the same relief as that set forth in15 U.S.C. § 1116(d)(11). That section provides “damages for lost profits, cost of materials, loss of good will, and punitive damages in instances where the seizure was sought in bad faith, and, unless the court finds extenuating circumstances, to recover a reasonable attorney’s fee.” Finally, any person “claim[ing] an interest in the subject matter seized” may make a motion at any time seeking to encrypt the seized material and “[t]he motion shall include, when possible, the desired encryption method.” Section 1836(b)(2)(H).

Conclusion

The DTSA’s provision for civil seizures provides victims of trade secret theft with a powerful remedy to prevent further dissemination of the trade secret and limit further harm. However, Congress balanced this powerful tool with severe consequences for those movants who misuse it. When seeking to use this remedy, victims of trade secret theft must be careful to comply with all the detailed requirements or they may be far worse off than before. It is a powerful weapon, but like most powerful weapons, it must be handled with great care lest it cause serious self-inflicted injury.

 

Misappropriation of a Trade Secret Under the DTSA

This article first appeared in IPWatchdog on June, 10, 2016.

On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act (“DTSA”), which became effective that very same day. The DTSA amends the Economic Espionage Act of 1996 (“EEA”) to provide for civil remedies in federal courts for the misappropriation of trade secrets. My previous blog on the DTSA addressed the definition of a “Trade Secret” under the DTSA (see IP Watchdog, May 24, 2016), this will address what it generally means to “misappropriate” a trade secret under the DTSA.

The DTSA amends the definition of misappropriation from what was found in the EEA to bring the definition more in line with that of the Uniform Trade Secrets Act (UTSA) that has been adopted by almost all U.S. states. Indeed, apart of explicitly recognizing certain potential defenses that are discussed in the commentary of the UTSA, the DTSA is identical to the UTSA. According to the House Report, “The Committee intentionally used this established definition to make clear that this Act is not intended to alter the balance of current trade secret law or alter specific court decisions.”  House of Representatives, Report No. 114-529, April 26, 2016, at 14. Federal courts therefore, will look to state decisions involving the state’s version of the UTSA for guidance.

The misappropriation element of the DTSA reflects the tort aspect of trade secret law. The definition of misappropriation that was adopted by the DTSA from the UTSA includes a wide range of conduct from theft to violation of a preexisting duty owe by the defendant or even by some third party. Such a preexisting duty may be express, arising from a contract or implied, such as the duty of employees to protect the trade secrets of their employers. Thus, by sanctioning the acquisition, use and disclosure of a person’s valuable proprietary information by improper means, trade secret law minimizes “the inevitable cost to the basic decency of society when one … steals from another.”  Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 487, 94  S.Ct. 1879, 40 L.Ed. 2d 315 (1974). Thus, the element of misappropriation reflects the understanding that “good faith and honest fair dealing, is the very life and spirit of the commercial world.”  Id. at 416. [Read more…]

Definition of a “Trade Secret” Under the DTSA

This originally appeared in IP Watchdog on May 24, 2016.

On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act (“DTSA”), which became effective that very same day. The DTSA amends the Economic Espionage Act of 1996 (“EEA”) to provide for civil remedies in federal courts for the misappropriation of trade secrets. Prior to the enactment of the DTSA, civil trade secret misappropriation was strictly a matter of state law and, although, nearly all statues have enacted some version of the Uniform Trade Secrets Act (UTSA), material differences among them made application of state law less than uniform. The DTSA does not eliminate or preempt the various state trade secret rights, but provides the key to federal courts for victims of trade secret misappropriation, if the Act’s jurisdictional threshold is met as set out in the 18 U.S.C. § 1836.

Over the course of the next several months I will post a blog addressing the key terms of the DTSA and issues that may arise under it, including, among other things, the definition of a trade secret, misappropriation, damages, civil seizure, potential defenses, extra-territorial jurisdiction, potential impact on businesses, whether to litigate in federal or state court, and whether to make a criminal referral. The present focus is on the definition of a “trade secret” under the DTSA.

The sine qua non of an action under the DTSA is the existence of a “trade secret,” and it adopts the broad definition of a trade secret as set out in the EEA, as slightly amended by the DTSA. Given that, courts are likely to look, at least initially, to decisions involving the EEA for guidance in construing the definition of a trade secret. In general, the form of the information qualifying as a trade secret under the DTSA is extremely broad, and includes information of any form, regardless of “how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing,” and of any type, “financial, business, scientific, technical, economic, or engineering information,” so long as: (1) the information is actually secret, because it is neither known to, nor readily ascertainable by, another person who can obtain economic value from the disclosure or use of the information; (2) the owner has taken “reasonable measures” to maintain the secrecy; and (3) independent economic value is derived from that secrecy.

  1. Degree of Secrecy

The value of a trade secret consists of it not being known to others. Thus, “the right to exclude others is central to the very definition of the property interest. Once the data that constitutes a trade secret is disclosed to others, or others are allowed to use data, the holder of the trade secret has lost the property interest in the data.” Prior to Congress amending Section 1839, pursuant to the DTSA, the government was required that the information was not generally available to “the public” before being obtained by the defendant. Under this standard, information that was known in an industry but was not known to the public could theoretically still meet the definition of a trade secret. Without deciding this issue, an appellate court in an EEA case used the example of “Avogadro’s number” to illustrate the difference between “public” and “person who can obtain economic value from its disclosure or use, pointing out that this number has been known to chemists since 1909, but not to the general public and certainly cannot be considered a trade secret. Now by amending section 1839, Congress has made clear that the relevant test is whether the information is generally known by “another person who can obtain economic value from the disclosure or use of the information,” which is the same standard as under the UTSA and focuses on whether the competitors of the trade secret owner actually know or can easily discover the secret.

Further, every part of the information need not be completely confidential to qualify for protection as a trade secret. A trade secret can include a combination of elements that are in the public domain, if the trade secret constitutes a unique “effective, successful and valuable integration of public domain elements.”

Reasonable Measures

In order to qualify as a trade secret, the owner must undertake “reasonable” measures to protect the information. The test focuses primarily on the actions of the owner and on the economic circumstances surrounding the particular industry, and is a question of fact.

The cases addressing what constitutes a “reasonable measure” are legion, and, in general, have found that reasonable measures depend on the extensiveness of the security measures and how well they are followed. Congress intentionally did not define what constitutes a “reasonable measure” under the EEA. “[W]hat constitutes reasonable measures in one particular field of knowledge or industry may vary significantly from what is reasonable in another field or industry” and the owner of the information “must assess the value of the material it seeks to protect, the extent of theft, and the ease of theft in determining how extensive their protective measures should be.”

Reasonable measures can include advising employees of the existence of a trade secret, limiting access to the information on a “need to know” basis, storing the information on a computer database accessible only by a special password, requiring employees to sign confidentiality agreements, keeping secret documents under lock, requiring all third parties, including licenses to sign non-disclosure agreements, marking documents as a “trade secret” or “confidential.” The bottom line is that each trade secret owner must assess the value of the protected material and the risk of its theft in devising reasonable security measures.

One of the greatest risks for a trade secret owner is that an employee accidentally discloses a valuable trade secret, for example, in a speech at a conference, by posting it on the Internet or disclosing it in a published patent application. All these examples, and many more have resulted in the loss of trade secret protection. It is incumbent for employers to educate their employees about the importance of protecting trade secrets, and how easily trade secret protection can be lost.

Independent Economic Value

The plaintiff must also prove that the trade secret derives “independent economic value … 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.” This is not proven to be an issue for the government in criminal proceedings under the EEA. In the civil context, courts have held that information may qualify that affords only a “slight” advantage to the holder.

In short, whether the information at-issue meets the definition of a trade secret is almost always extensively and hotly litigated in a trade secret case. In particular, since the extent of the security measures taken by the owner of the trade secret need not be “heroic,” “absolute,” or “fail-safe,” a defendant can always point to additional measures that the owner should have taken, but did not. It is important, therefore, for trade secret owners must implement security measures that are commensurate with the value of a particular trade secret, and enforce those measures, if it expects to succeed in litigation.

Five Things to Know About the Defend Trade Secrets Act

This article originally appeared in IP Watchdog on May 11, 2016.

On April 27, 2016, Congress passed the Defend Trade Secrets Act (“DTSA”), which President Obama has indicated that he will sign soon. The DTSA extends the current Economic Espionage Act of 1996 (“EEA), which criminalizes trade secret thefts, to the civil arena. This means for the first time, trade secret owners can now bring suits in federal district courts, without having to resort to another basis for jurisdiction, such as the ill-fitting Computer Fraud and Abuse Act. While not without critics, the DTSA is a major step forward in the protection of intellectual property in the United States, not least because federal law now fully recognizes four types of intellectual property (patents, copyrights, and trademarks). This article highlights five important things that every trade secret owner should know, which includes almost every company in the U.S.

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Release 25 – Intellectual Property & Computer Crimes

Release 25 to my book, Intellectual Property and Computer Crimes, is here. The release contains a comprehensive revised analysis of the case law on the Stored Communications and Wiretap Acts, which address issues that were not even remotely foreseeable at the time Congress originally enacted the Electronic Communications Privacy Act in 1986. Other topics discussed in this Release include: (1) whether a defendant in a copyright infringement suit need prove an antitrust violation to prevail on a copyright misuse defense; (2) “separate accrual rule” under the Copyright Act’s statute of limitations; (3) a Supreme Court decision on whether copyright distribution and importation rights expire after the first sale, regardless of where the item was manufactured or sold; (4) entitlement of violations of the CFAA to restitution under the Mandatory Victims Restitution Act and the Identity Theft Enforcement and Restitution Act; (5) circuit split on whether the copying of information without more, states a cognizable claim of “damage” under the CFAA.

Defend Trade Secrets Act of 2016

On Thursday, January 27, 2016, the Senate Judiciary passed a voice vote in favor of the Defend Trade Secrets Act of 2016 (“DTSA”).  The bill, which was sponsored by Sens. Orrin Hatch (R-Utah) and Chris Coons (D-Del), and may offer the best chance ever for the passage of a civil trade secrets law.

The DTSA would build upon the Economic Espionage Act, including its definition of a “trade secret,” and would seek to provide for injunctions, civil seizure orders preventing the dissemination of the subject trade secret(s), preservation of evidence and damages.  The amendments approved by the Committee on Thursday propose:

  • A definition of “misappropriation” of a trade secret generally consistent with that contained in the UTSA and related state uniform acts;
  • Stringent requirements for obtaining a seizure order, making clear that such order will issue only in “extraordinary circumstances”;
  • Requirement of proof of “actual or threatened misappropriation” in order for an injunction to issue, but while expressing the clear intent to not restrict employee mobility (the order cannot “prevent a person from entering into an employment relationship”);
  • The provision of damages for actual loss caused by the misappropriation, damages for unjust enrichment, and reasonable-royalty damages, as well as exemplary damages in an amount not more than 2 times the amount of damages awarded (a provision which previously provided for trebled damages);
  • Statute of limitations of 3 years after the date the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered (shortening the limitations period from the previously proposed 5 years);
  • Whistleblower protections for individuals who disclose trade secrets to the government and in the context of retaliation lawsuits; and
  • An award of attorneys’ fees to the prevailing party when a claim of misappropriation is brought in bad faith, a motion to terminate an injunction is made in bad faith, or the trade secret is willfully and maliciously prosecuted.

To “reduce the threat of and economic impact caused by the theft of the trade secrets of the United States companies occurring outside the United States,” the Act also would require an annual Report on Theft of Trade Secrets occurring abroad to be made by the Attorney General to the Committee on the Judiciary of the House of Representatives and the Senate.

Congress, for many years, has considered enacting a civil trade secrets law to complement the EEA, and should now finally act. The DTSA gives plaintiffs access to federal courts, which are better equipped than state courts to handle interstate and international misappropriation of trade secrets. Congress has adequately addressed many of the concerns that opponents have expressed over the years. It is now time for Congress to act and pass the DTSA.