Friday, April 28, 2017

Major Issues in Trade Secret Law: Part 1

I was thrilled to attend The New Era of Trade Secret Law: The DTSA and other Developments, hosted by the IP Institute at Mitchell/Hamline School of Law and its Director, Sharon Sandeen, Robins Kaplan Distinguished Professor of Law.  The conference featured presentations by esteemed scholars of trade secret law discussing works in progress regarding trade secret law in the wake of federalization. In this post and in a subsequent post, I will provide brief summaries of some of these fascinating and important works in progress and what they say about the new federal trade secret law.

The Defend Trade Secrets Act (DTSA) amends the Economic Espionage Act (EEA) of 1996, and is codified in 18 U.S.C. §18311839. The definition of a trade secret is located at § 1839.

To state the obvious: the DTSA is a federal law. However, the DTSA does not preempt state trade secret law. See § 1838 ("[The DTSA and the EEA] shall not be construed to preempt or displace any other remedies, whether civil or criminal, provided by [inter alia, state law,] for the misappropriation of a trade secret."). What is more, the DTSA is largely based on state trade secret law. Unlike in patent, copyright, and trademark law, where federalization occurred comparatively early, in trade secret law, there is already over a century of statutory and common law. Specifically, most states (not New York or Massachusetts) have adopted a statute to protect trade secrets based on the Uniform Trade Secrets Act (UTSA). Drafted in 1979, the UTSA is in reality quite short and sparse on specifics. Instead, it has been given life by state courts, and federal courts in diversity, using the common law method, by looking to contemporary sources and to a longer history of pre-UTSA common law decisions.

The DTSA has a similarly open-ended structure.

This presents a challenge for courts presented with new federal claims under the DTSA: should they view the DTSA in isolation as a federal law, and craft their own case law interpreting the statutory text or draw on the rich body of state trade secret law at their disposal? Should they draw specifically on the law of the state in which they sit? Notably, both federal and state courts will have to perform this interpretive function because, as in the trademark space, the DTSA does not give federal courts exclusive jurisdiction. § 1836(c).

Sandeen & Seaman - Interpreting the DTSA in light of state trade secret law

Professor Sandeen, with Professor Chris Seaman, address this challenging issue in their forthcoming Berkeley Technology Law Review article, blogged on previously here, Toward a Federal Jurisprudence of Trade Secret Law. They explain that the DTSA interpretation issues courts are likely to face in the common years fall into four categories:

(1) “new” language in the DTSA that is not in the UTSA, such as the seizure provision;
(2) language “borrowed” from the UTSA and defined, such as the definition of the information protectable as a trade secret;
(3) language “borrowed” from the UTSA and not defined, such as the duty of confidentiality; and
(4) issues not addressed in either the DTSA or the UTSA, such as the ban on protecting employees' general knowledge, skill, and experience

Personally I think this is too many categories. I'd have preferred just two: (1) new federal provisions and (2) provisions borrowed from state law. But four works.

Sandeen and Seaman argue, essentially, that courts should begin with the text of the DTSA but that where there are gaps or severe ambiguities in the DTSA, courts should look to other sources of law for guidance, such as the UTSA and its commentary, and, importantly, should adopt a preference for following the trade secret law, including the case law, of the forum state (or more specifically the law of the state that applies under the choice of law rules of the forum state).

As alluded to in my prior post Sandeen and Seaman's article casts doubt on the Federal Circuit's bald suggestion in TianRui v. ITC, 661 F.3d 1322 (Fed Cir. 2011) (in the context of ITC injunctions against imported products made using misappropriated trade secrets) that federal courts have open-ended authority to create a federal common law of trade secrets, rather than applying the UTSA or the law of any specific state. See id. at 1327. They argue Erie's holding is not limited to common law issues that arise in diversity cases, but instead announces a broader barrier to judicial-lawmaking by federal courts absent congressional authorization. They assert, to quote the draft, that
although a federal statute is involved, the principles enunciated in Erie mean that the process must still pay due respect to state law. The critical language of Erie states:
"Except in matters governed by the Federal Constitution or by acts of Congress, the law to be applied in any case is the law of the state. And whether the law of the state shall be declared by its Legislature in a statute or by its highest court in a decision is not a matter of federal concern. There is no federal general common law. [quoting Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938).]"
Importantly, gap-filling under the Erie doctrine also has relevance where the applicable “act of Congress” does not directly address an issue.  As Justice Scalia explained in O’Melveny & Myers v. FDIC, a case in which the Court refused to displace state law: 
"In answering the central question of displacement of [state] law, we of course would not contradict an explicit federal statutory provision. Nor would we adopt a court- made rule to supplement federal statutory regulation that is comprehensive and detailed; matters left unaddressed in such a scheme are presumably left subject to the disposition provided by state law. [quoting 512 U.S. 79 (1994) (holding in a diversity case that the California rule of decision, rather than a federal rule, governs petitioner’s tort liability).]" 
This means that when filling gaps in the DTSA, federal courts will be inclined to consider the law of the forum state first, particularly with respect to language borrowed from state trade secrets law, which is the same allegedly non-uniform law that the DTSA’s supporters invoked to justify the law’s adoption. 
Notably, the authors do not necessarily contend federal courts applying the DTSA are not authorized to make federal common law. That said, they seem to doubt the DTSA sufficiently authorizes courts to make federal common law on all trade secret issues (for instance, in the case of duty of confidentiality and improper means, discussed below). In the coming years, parties may argue over whether the DTSA provides open-ended authorization to create a federal common law of trade secrets, as the Federal Circuit suggested prior to the DTSA's passage, or is actually an implicit mandate to rely heavily on preexisting state case law.

Sandeen and Seaman's paper shows that these issues are not yet completely resolved. I recommend reading it closely. My own view is that, regardless of whether federal courts are authorized to make a federal common law of trade secrets under Erie, they should in many cases not do so. When the text of the DTSA and traditional tools of construction leave courts in doubt, they would do well to simply apply relevant state's trade secret law, including its case law, for reasons of efficiency. It seems quite wasteful to throw away over a century of judicial and statutory lawmaking by courts and by states. At a more theoretical level, by applying a preference for the forum state we can retain at least some of the inter-jurisdictional competition and regional clustering, as well as the policy experimentalism, that we had when trade secret law was purely state law.

Rowe - Addressing some key threshold statutory interpretation issues  

Professor Elizabeth Rowe, whose recent study Unpacking Trade Secret Damages reveals fascinating details on sometimes shockingly large trade secret verdicts over the years, gave an overview of key interpretation issues raised by the DTSA that are likely to trouble courts in the near future.

The tricky interpretative issues Rowe flagged can be read in light of Sandeen and Seaman's article, discussed above. For lack of space and time, I'll just give three examples: jurisdiction (specifically the interstate commerce requirement); the definition of a trade secret (specifically with respect to undeveloped ideas); and misappropriation (specifically by improper means). The first issue is sui generis to the DTSA (category 1). The second and third issues require interpreting open-ended provisions of the DTSA borrowed from the UTSA and defined (category 2) or not defined (category 3). According to Sandeen and Seaman's framework, for category 1 issues like jurisdiction, significant statutory construction and federal common-lawmaking may be required; for categories 2 and 3, courts should, when in doubt, look to the law of the state in which they sit (or of the state that the forum state's choice of law rules mandate).

Jurisdiction
There are actually three jurisdictional issues in the DTSA that may cause courts trouble: the interstate commerce requirement, jurisdiction of state versus federal courts, and extraterritorial application. Let's focus on the first: the interstate commerce requirement. (I'll discuss the third below).

The trade secret law is passed under the Commerce Clause of Article I, Section 8, Clause 3, not the IP  Clause. This means Congress can only regulate trade secret misappropriations that have sufficient nexus to interstate commerce (ISC). The is an example of Sandeen and Seaman's category 2: totally new to the DTSA and the EEA, so it will require significant interpretation and common-lawmaking by federal courts.

The ISC requirement under the DTSA, which now governs civil actions circa May 11, 2016, should theoretically be the same as it was under the EEA, which has governed criminal actions circa 1996. This is because the DTSA was grafted onto the preexisting EEA. § 1836(b)(1) gives trade secret owners a civil action under the DTSA if the trade secret "is related to a product or service used in, or intended for use in, interstate or foreign commerce."

This language is the same as the EEA's interstate commerce requirement, see § 1832 (a), and was produced by amendment in response to the Second Circuit's restrictive reading of the EEA's old interstate commerce provision in U.S. v. Aleynikov, 676 F.3d 71 (2d Cir. 2012) (holding allegedly misappropriated source code was not "related to or included in a product ...produced for or placed in interstate or foreign commerce" within the meaning of the EEA's then-current ISC provision). So we might think courts should just use the rule that existed under the EEA.

However: the DTSA is a civil statute, not a criminal statute. Courts may therefore choose to interpret the ISC nexus in the DTSA more strictly. Already, Rowe observed, at least one court has rejected application of the DTSA to a case where there was allegedly insufficient interstate nexus.

The Definition of a Trade Secret and Misappropriation
There are many issues with respect to the definition of a trade secret and what it means to misappropriate a trade secret that will need interpretation. These issues fall into Sandeen et al's category 2 or 3: borrowed from the UTSA and defined to varying degrees.  As said above, it is here that courts would often do well to apply the law of the forum state, for efficiency reasons if not because of any Erie-mandate.

     Definition of a Trade Secret - Protection for undeveloped ideas

Rowe highlighted specifically the problem presented by the definition of a trade secret with respect to protecting undeveloped ideas. There is a split in the states regarding protection for undeveloped ideas under trade secret law including under the UTSA and common law.  The relevant section of the UTSA, § 1839(3), states:
the term “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—
(A) the owner thereof has taken reasonable measures to keep such information secret; and
(B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information[.]
The key portions of the provision on this issue are 1) the list of the types of information protected, which does include highly suggestive terms such as "prototypes", and 2) the economic value requirement of (3)(B), which tracks the UTSA's language. As Robert Denicola has explained, the UTSA explicitly rejected the First Restatement of Torts's more restrictive requirement that the trade secret be in "continuous use in the operation of the business", and the legislative history of the UTSA clearly suggests an intent to extent trade secret law to undeveloped ideas. However, the UTSA's inclusion of the detail that the secret must have actual or potential value to the secret owner as well as to another who can obtain economic value from its disclosure or use seems to suggest lesser protection for undeveloped ideas of unknown value. Under this reading, a prototype that does not yet work would not necessarily not be protectable. As Denicola explains, some courts (following a longer common law tradition) have continued to restrict idea protection under the UTSA to, e.g., "novel" ideas. Arthur Miller has consequently argued idea protection is insufficient. Other courts, such as the Seventh Circuit, have held trade secret law can be used to protect even imperfect and not-yet-implemented ideas.

Which approach should courts applying the DTSA take? Should they use the DTSA's text and legislative history to decide whether Congress intended undeveloped ideas can be protected? i.e. statutory construction. Should they make federal common law, looking both at congressional intent and at the UTSA and its legislative history (which as above would likely suggest ideas are more liberally protected)?

Again, for more details on this process and the canons of construction that courts are likely to apply, I recommend Sandeen and Seaman's article. To me, the most efficient solution is for courts to see how courts in the forum state interpret the state's trade secret law with respect to undeveloped ideas. If there are no decisions on point (unlikely) they should use Erie's predictive approach and determine how the highest court in the state would hold.

     Misappropriation - Improper Means

Although Rowe did not discuss the issue of misappropriation in her talk, in earlier discussions, Rowe, along with Professor Sandeen, discussed open issues with respect to the definition of "misappropriation" of a trade secret under the DTSA–in particular, misappropriation by improper means.

The DTSA largely adopts the UTSA definition of misappropriation, and specifically defines improper means. § 1839 (5) states
 the term “misappropriation” means—
(A) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
(B) disclosure or use of a trade secret of another without express or implied consent by a person who—
(i) used improper means to acquire knowledge of the trade secret;
(ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was—
(I) derived from or through a person who had used improper means to acquire the trade secret;
(II) acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or
(III) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or
(iii) before a material change of the position of the person, knew or had reason to know that—
(I) the trade secret was a trade secret; and
(II) knowledge of the trade secret had been acquired by accident or mistake;
§ 1839 (6) further defines improper means, stating that:
the term “improper means”—
(A) includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means; and
(B) does not include reverse engineering, independent derivation, or any other lawful means of acquisition[.]
The interpretive problems here abound. One that stands out to Sandeen is that whether the means used to obtain a secret are "improper" is highly contextual. For example, picking through someone's trash left open on the street to obtain documents might seem "proper" in some circumstances, but "improper" in others. Some industries are far more close-lipped; others are known for open sharing of ideas. And then there is the "breach of a duty to maintain secrecy" prong of improper means, which courts applying state law typically construe as referencing tort and contract law's definitions of a duty of confidentiality.

In the past, what constitutes "improper means" has been interpreted with reference to the norms of the particular state in which the misappropriation occurs. For instance, in the famous improper means case, Dupont v Christopher (5th Cir. 1970), the Fifth Circuit looked to the law of the state of Texas to decide whether espioange on an incomplete plant from a plane flown in public airspace was improper:
[A]s a diversity court we must sensitize our Erie antennae to divine what the Texas courts would do if such a situation were presented to them. ...The question remaining, therefore, is whether aerial photography of plant construction is an improper means of obtaining another's trade secret. We conclude that it is and that the Texas courts would so hold. The Supreme Court of that state has declared that "the undoubted tendency of the law has been to recognize and enforce higher standards of commercial morality in the business world. (citation omitted).
To me, again, what constitutes "improper means" initially seems a clear case where courts should apply the trade secret decisions of the state. There is a lot of law on the issue in the different states already. It seems wasteful to toss it out in favor of newly crafted federal common law. The propriety of the means used to obtain a secret is a norm-laden issue that is likely to come out differently depending on the industry and the jurisdiction in which the misappropriation occurs. According to economic federalism theories, if different jurisdictions are free to compete in defining the scope of trade secret protection, this allows for efficient divergence in law according to the needs of different (mobile) firms. Firms that appreciate a laxer "open-sharing" standard can cluster in one jurisdiction, and the law can evolve around their needs; firms that prefer a stricter "commercial privacy" standard can locate elsewhere, and the law can evolve to fit their needs.

That said: there is also § 1839 (6)(B). As Rowe observed, the DTSA specifically states in (6)(b) that improper means "does not include reverse engineering, independent derivation, or any other lawful means of acquisition[.]" This is an addition to the text of the UTSA. Does the inclusion of "lawful" in the federal statute indicate that lawful conduct, such as obtaining photos via aerial photography of a plant under construction from public airspace, is not improper as a matter of federal law?   Again, I would argue (as a trade secret plaintiff) something along the lines of "this inclusion of lawful should be read in light of the forum state's prior decisions on the issue. Congress intended to indicate only lawful means like reverse engineering or independent creation, not non-trespassary aerial photography. Congress did not intend to override the law of the states. Christopher is still good law." On the other hand, the defendant could argue that this is an example of where the DTSA contains a clear mandate not to follow the forum state's law in determining what constitutes lawful versus unlawful espionage. So, even in cases where Texas state law applies, a defendant could argue that under the DTSA no remedy is permitted for lawful means of espionage.

For more on the topic of interpreting the DTSA: Along with Sandeen and Seaman's article. you may also enjoy Dennis Crouch's lifestream of the University of Missouri School of Law's panel "Implementing and Interpreting the Defend Trade Secrets Act" held in March, 2017, featuring Peter Menell, Orly Lobel, Robin Effron, and others.

Next Time: Empirical Studies of the DTSA Case Law, Rochelle Dreyfuss on Extraterritorial Application of the DTSA, and The Noncompetes/Inevitable Disclosure Conundrum...

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