July 23, 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.

 

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