April 30, 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.

Supreme Court needs to clarify the scope of the CFAA

The Computer Fraud and Abuse Act (CFAA) has been the primary “go to” statute for the federal government to prosecute hackers since it was originally enacted in 1986. Despite being amended several times since then, it is woefully out of date and appellate courts have reached contrary conclusions about the meaning of key provisions, including what it means to access a computer without authorization or in excess of authorization, which form the CFAA’s basis for criminal and civil liability. Indeed, the very recent decision by the Second Circuit in United States v. Valle, deepened the split, between, on the one hand, the Second Circuit, Fourth and Ninth Circuit that have adopted a narrow interpretation of the exceeding authorized access and, on the other, the First, Fifth, Seventh and Eleventh Circuits that have adopted a broad interpretation that, among other things, would allow an employer to claim a violation where an employee misused employer information that he or she was otherwise permitted to obtain. Since Congress has shown no ability to act, the Supreme Court needs to resolve this serious conflict.

Valle arises from a truly gruesome and ghoulish set of facts. Gilberto Valle, a/k/a, the “Cannibal Cop,” was charged with a number of counts including mproperly accessing a computer in violation of the CFAA. The evidence at trial included detailed emails and chats on websites where defendant discussed butchering, raping, torturing and eating women whom he knew. The defendant obtained details about certain of these women using various restricted databases at work, including the National Crime Information Center database. The jury convicted Valle for violating the CFAA and the court denied Valle’s motion for judgment of acquittal on the CFAA count.

On appeal, the Second Circuit reversed the judgment of conviction on the CFAA count finding finding that while he violated the terms of his employment by accessing the restricted databases for personal reasons, his actions did not constitute a violation of the CFAA because he was authorized to access the databases. The Valle Court adopted the approach set forth by the Ninth Circuit, and by the Fourth Circuit that “without authorization” applies to “outside hackers (individuals who have no authorized access to the computer at all) and ‘exceeds authorized access’ would apply to insider hackers (individuals whose initial access to a computer is authorized but who access unauthorized information or files).” The Second Circuit was concerned that while it may be distasteful not to impose criminal liability in this case, the “interpretation of ‘exceeds authorized access’ will govern many other situations” and could “unintentionally turn ordinary citizens into criminals, and, thus, “the rule of lenity requires that Congress, not the courts or prosecutors, must decide whether conduct is criminal.”

In contrast, the First, Fifth, Seventh and Eleventh Circuits have interpreted the term “exceeds authorized access” much more broadly, and upheld convictions where the defendant was authorized to access the databases, but exceeded authorized access because the defendant accessed certain files was not in furtherance of the defendant’s duty as an employee.

There is now a clear split between the narrow and broad interpretation of what it means to access a computer without authorization or in excess of authorization under the CFAA. The Supreme Court needs to resolve this circuit split at the first possible opportunity because Congress has not shown an inclination to act. Further, as one commentator has noted, the Supreme Court also must adopt the narrow interpretation in order to prevent arbitrary and discriminatory enforcement of the law under the broad interpretation, which, among other things, would be unconstitutional under the void-for-vagueness doctrine of the Due Process Clause.

Further, the fact that the government has promised not to pursue garden-variety violations of the CFAA does not provide the necessary basis to uphold the broad interpretation. Indeed, it does just the opposite. The government has admitted, in essence, that they have the power to arrest almost everyone, but we should trust them to prosecute only the serious cases. The obvious problem with this approach is that this is not a decision that should be made the government. Whatever the merits of imposing criminal liability in a case such as Valle, it is the role of Congress, and not the courts or prosecutors to decide whether conduct is criminal.

Since 1986, the CFAA has remained the principal criminal statute used by the federal government to prosecute hackers and, unfortunately, Congress appears to have largely given up any effort to remake the law to reflect the realities of the 21st Century. It is therefore high time for the Supreme Court to step in and determine the breadth of unauthorized access under the CFAA and ensure that it will not be used by the government to prosecute, for example, an individual for checking their Facebook account at work, not withstanding the government’s promise not to do so.

This blog first appeared in The Hill, Congress Blog on December 24, 2015.

The Defend Trade Secrets Act Is Not Ready for Prime Time

In my previous post, I wrote about the Senate Judiciary Committee’s hearing on the Defend Trade Secrets Act of 2015. Based on the hearing, it seems likely that the bill will more forward, but there are still a number open issues that should be addressed before the bill is ready for vote by the full Senate and House. Here are my thoughts about some of the more important issues:

 Degree of Force in executing a civil seizure order under the DTSA

The bill is silent on the amount of force that may be used in executing a seizure order. This is an issue that should be left to the district court and the Marshals Service to decide and should be determined on a case-by-case basis. Thus, the bill should be permit the use of “reasonable force.”  This language would allow a judge and the Marshals Service  to determine what is “reasonable” under the particular circumstances of the case. The Marshals Service should have the authorization to be able to determine the amount of  force necessary to execute the search so as to not endanger the lives of law enforcement or innocent bystanders, while at the same time  to obtaining the items identified in the seizure order. In some cases this may involve knocking down doors or opening locked containers if they are likely to contain the stolen trade secret information.

It should be noted that the degree of permissible force is not mentioned explicitly under the civil seizure section of the Lanham Act. See 15 U.S.C. sec. 1116(d). Courts have permitted the Marshals Service “to use all reasonable force in conducting the seizure and may open doors, locks, boxes, brief cases and containers of any type or nature to locate and identify Evidence to be seized.” Otter Products, LLC v. Anke Group Indus. 2013 WL 5910882, at *4 (D.Nev. Jan. 8, 2013). See also SATA GmbH & Co. Kg. v. Wenzhou New Century International, Ltd., (2015 WL 6680807, at *13 (C.D.Cal. Oct. 19, 2015) (“The law enforcement officers executing this Seizure Order may use all reasonable force in conducting the seizure and may open doors, locks, boxes, brief cases, and containers of any type or nature to locate and identify Evidence to be seized.”  The Otter court also required the defendant to “provide any passwords necessary to access any electronically stored documents or electronic devices;” and limited access to “any seized Evidence to” outside counsel.

 Responsibility for sorting data

The process and responsibility of reviewing and sorting the data may prove to be very difficult issues. First, with regard to sorting the data, this issue has become very contentious with regard to searching and seizing computer evidence under the 4th Amendment. While there are obvious differences between the situations, both may involve the question of comingled data. In the case of the DTSA, this may involve, for example, locating a computer file containing stolen trade secrets comingled among thousands of files that are not relevant. Should the seizure order permit the Marshals Service to seize the servers, for example, containing the single file with the stolen data for later review or should the order require that, at least, an attempt be made to remove the file with the stolen data on site. The court is in the best position to determine what is reasonable under the circumstances taking into account, for example, the type of process that it likely to be least intrusive on innocent third parties.

The issue of the identity of the party responsible for the sorting of the data should also be left to the discretion of the court which is responsible for the issuance of the seizure order. Depending on the circumstance, the court may require that the evidence be placed in the custody of a third party, who has agreed to maintain the confidentiality of the information, or in other cases, the court may order that plaintiff’s outside counsel be given custody of the information. In both of the cases cited above, the seizure orders provided that outside counsel shall retain custody of the seized items.

Are protections against wrongful or overseizure sufficient?

In both cases cited above, the courts required the plaintiff to “agree to indemnify the law enforcement officers who may assist with the seizure and hold it/them harmless form any suit, claim, cause of action, damage, loss, or injury arising from the execution of seizure described in this Order.” SATA, 2015 WL 6680807, at *13. Ottar Products (same). There is no reason that a court could not order a plaintiff to agree to similar indemnification under the DTSA.

Another issue that needs to be addressed here is the standard for determining liability for a “wrongful” seizure. The scienter level is not addressed in the bill. I do not believe that a strict liability standard should apply because such a standard would dissuade most plaintiffs from seeking a seizure order. Indeed, I think that the level should be the same as the Lanham Act that provides that a wrongful seizure cause of action shall arise only when the seizure was in “bad faith.” I think that this standard would provide sufficient disincentive to parties who may seek to obtain a seizure order for improper purposes.

Senate Judiciary Committee Hears Testimony on Defend Trade Secrets Act

On December, 2, 2015, the Senate Judiciary Committee held a hearing on the Defend Trade Secrets Act, which is authored by U.S. Senators Chris Coons (D-DE) and Orrin Hatch (R-UT) and would provide federal civil remedies for theft of trade secrets. At present, trade secrets are protected civilly only by state laws. Congress has considered enacted a civil counterpart to the Economic Espionage Act almost every year since that statute was created in 1996. According to reports, this year the chances for success are higher than ever.

Trade Secrets are the only form of intellectual property that is not protected by federal civil law. For a variety of reasons, including that patent protection has weakened in recent years, the importance and value of trade secrets has increased tremendously. Trade secret theft puts American jobs at risk and threatens incentives for continued investment in research and development in the United States. Supporters of the bill, including myself, believe that state laws do not adequately protect trade secrets and it is time for Congress to act and create a unified trade secret law in the United States. Victims of trade secret thefts should not forced to resort to creative and sometimes unsuccessful strategies to bring suits in federal courts.

The bill has received widespread support, apart from some academics who claim that such a law would cause more trouble than it’s worth. Some of the potential issues cited  included chilling innovation in the U.S., increased legal fees associated with litigating trade secret actions, and overall negative economic growth. Att the Senate hearing, however, representatives from a variety of industries, including Delaware-based DuPont, explained the need for a federal private right-of-action to give companies the ability to protect their trade secrets in federal court.

“As an innovator, DuPont depends on intellectual property protection—including trade secrets,” said Karen Cochran, Associate General Counsel and Chief IP Counsel, DuPont in testimony to the committee. “Realizing the full potential of our innovation often includes knowledge-building that can span decades. This work generates a range of intellectual property from patents to trade secrets. DuPont recently defended the trade secrets for one of our well-known products, Kevlar®. This experience brought about our realization of the importance of S. 1890 and updating trade secret protection and remedies.”

The DTSA is currently backed by at least nine members of the Senate Judiciary Committee and has over 100 bipartisan Congressional supporters in the House and Senate.

 

Defend Trade Secrets Act of 2015

On December 1, 2015, I joined with 19 other attorneys that specialize in trade secret law in writing to Congress in support of the Defend Trade Secrets Act of 2015 (S. 1890, H.R. 3326). Click here for the letter. Almost every year since the passage of the Economic Espionage Act that criminalized the theft of trade secrets, a bill has been introduced in Congress that would provide a civil counterpart. These attempts have previously gone nowhere. This year, however, Congress may actually pass such a bill. On December 2, 2015, the Senate Judiciary Committee heard testimony in support of the bill. It has bipartisan support and is sponsored by Reps. Hakeen Jeffries (D-N.Y.) and Doug Collins (R-Ga.) in the House, and Sens. Orrin Hatch (R-Utah) and Chris Coons (D-Del) in the Senate. Sen. Orrin Hatch said he believes that the bill could get through Congress before the new year.

“There is no doubt that China and other foreign competitors are working furiously to steal American innovation from all sectors of the economy, including the high-tech, life sciences, manufacturing, agricultural, aeronautics, financial services and energy industries,” Hatch, who chairs the Senate Finance Committee, said in a speech at the U.S. Chamber of Commerce.

Even though trade secret litigation continues to rise in tandem with the increasing number of methods that employees can use to steal a company’s trade secrets (flash drives, smart phones, cloud based storage devices), there is currently no federal civil cause of action that an employer can invoke if its trade secrets are misappropriated.  In most jurisdictions, trade secrets disputes are litigated in state courts under a version of the Uniform Trade Secrets Act. According to Hatch: “In the U.S., trade secrets are the only form of [intellectual property] where misuse does not provide the owner with a federal private right of action.

As a result, employers seeking to enjoin the misappropriation of a trade secret typically “plead themselves into federal court” by asserting a claim under the Computer Fraud and Abuse Act (CFAA).  While primarily a criminal statute, the CFAA also allows civil actions to be brought against an individual who “intentionally accesses a computer without authorized access, and thereby obtains … information from any protected computer if the conduct involved an interstate or foreign communication.”  (See 18 U.S.C. § 1030(a)(2).)  But where the CFAA is not applicable, employers have sparse civil federal remedies to invoke if trade secrets are misappropriated.

The Defend Trade Secrets Act of 2015 attempts to cure this situation.  The proposed bill seeks to enable employers and other trade secret owners to bring a federal civil action “if the person is aggrieved by a misappropriation of a trade secret that is related to a product or service used in, or intended for use in, interstate or foreign commerce.”   Under the bill, a successful plaintiff would be able to obtain injunctive relief, damages, unjust enrichment, royalties, and attorneys’ fees.

The bill also provides emergency relief.  If a trade secret owner can demonstrate, among other things, that immediate and irreparable injury will occur, and an injunction or restraining order will not be enough to prevent that harm, the bill authorizes a court to “seize” property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.  The bill allows a trade secret owner to seek this relief “ex parte,” or without the presence or participation of the opposing party.

While the measure hasn’t moved since it was introduced months ago, Hatch sees an opening to slip it through before the end of the year, as he sees little opposition to the measure.

“This is the type of bill that could move by unanimous consent before Congress adjourns for the holidays,” he insisted.