Tuesday, September 6, 2016

Sandeen and Seaman: Toward a Federal Jurisprudence of Trade Secret Law

If you're interested in the fate of trade secrets law, and you like conflicts of law, I recommend taking a look at Sharon Sandeen and Chris Seaman's paper, Toward a Federal Jurisprudence of Trade Secret Law, when it comes out. As we know, Congress has now passed a federal civil cause of action for trade secret misappropriation: the Defend Trade Secret Act of 2016 (DTSA). For the first time, civil trade secret plaintiffs can choose to sue under federal law. But the DTSA leaves courts with some major interpretive challenges. This is the subject of Sandeen and Seaman's project. I was fortunate to get a glimpse at the IP Scholars trade secrets panel last month.  Read more at the jump.

The first issue to recognize is that despite passage of the U.S. Defend Trade Secrets Act, there is not a uniform federal law of trade secrets as there is in patent law under the U.S. Patent Act. To the contrary, there are now two overlapping fields of trade secret law: one federal, one state. Because the DTSA does not preempt state trade secrets laws, plaintiffs can sue under state law, federal law, or under both state and federal law. (So far, plaintiffs appear to be bringing both kinds of claims. See, e.g., Bonamar v. Turkin, (S.D. Fla. May 16, 2016)). Also, jurisdiction over DTSA claims is not exclusive to federal court, meaning that federal trade secrets claims can now be brought in either a federal or a state forum. While we might think plaintiffs would choose the federal forum, this isn't necessarily the case. Federal pleading standards, for one thing, could hurt plaintiffs with vague allegations.  

Outside these forum allocation issues, there is another challenge: choice of law. Trade secret law is technically statutory law, at least in states that adopted the Uniform Trade Secrets Act (UTSA), and now under the DTSA. But trade secret law is fundamentally based on common law. When applying state laws based on the sparsely worded UTSA, pre-DTSA courts (including state courts and federal courts in diversity cases) looked to the decisions of the courts of that state to flesh out fundamental trade secrets doctrines––primarily, subject matter, secrecy, reasonable efforts, and economic value requirements, along with the meaning of "misappropriation." So the choice of law question is: now that we have a federal statute, what law are federal district courts going to use in order to interpret the text and flesh out the doctrines of the DTSA? 

Sandeen is a long time trade secrets scholar and the co-author of the leading trade secrets case book. Seaman teaches civil procedure along with trade secrets. So they are the perfect team to take on this question. They start with the premise that federal law is federal law. So in theory federal courts, as well as state courts hearing DTSA claims, will simply apply...the DTSA. This means engaging in basic statutory interpretation. Courts can look at a variety of sources, such as legislative history, statutory definitions, dictionaries, etcetera, to interpret the DTSA's terms.

The wrinkle is that, as said, trade secret law is statutory only in the sense that it is codified in statutes passed by legislative branches of government. Several terms of the DTSA still need to be filled in, such as what constitutes “reasonable measures” to maintain secrecy, and to what extent a trade secret must have "independent economic value", either to the owner or to others. When the text of the DTSA and basic statutory interpretation tools fail them, courts will have to do some serious gap filling. At this point, the question becomes: what source of law should they use to do so?

The courts, Sandeen and Seaman speculate, can go two directions. The first is to engage in what is called "interstitial lawmaking": where federal law draws upon or relies upon a pre-existing concept under state law. (For a fascinating example, see Will Baude's article on federal laws that rely upon common law interpretations of marriage.) This leads to a horizontal conflicts of law question buried within a vertical conflicts question: assuming courts use state law to interpret the DTSA, which state's law will they use? Presumably, the answer will be the law of the state in which the deciding court sits. C.f. Erie Railroad Co. v. Tompkins.

The other option is that federal courts may be authorized under the DTSA to make "federal common law": a federal jurisprudence of trade secrets based on the decisions of federal courts relying on a broad selection of sources. (Though it requires federal courts to apply the law of the states in which they sit for common law claims in diversity cases, Erie did not eliminate federal courts' authority to make common law in order to fill in the gaps of federal statutory schemes. See, e.g., United States v. Standard Oil Co. of California, 332 U.S. 301, 307 (1947) ("[A]lthough federal judicial power to deal with common law problems was cut down in the realm of liability or its absence governable by state law, that power remained unimpaired for dealing independently, wherever necessary or appropriate, with essentially federal matters, even though Congress has not acted affirmatively about the specific question.")). 

In crafting federal common law under the DTSA, federal courts could look to various sources, from the text and legislative histories of the UTSA, to the Restatement (First) of Torts, to the case law of different states. As Michael Risch pointed out at the panel, another source of law courts could use, both in interpreting the DTSA and in crafting federal common law, are criminal cases decided under the Economic Espionage Act of 1996 (EEA). Since the DTSA was actually tacked on to the EEA, many elements of the EEA directly govern the DTSA, such as what constitutes a trade secret and the scope of the "interstate or foreign commerce" requirement. (Notably, Congress passed an amendment expanding the EEA's jurisdictional reach in 2012, now codified in 18 U.S.C. §1832(a). This also should delineate the DTSA's interstate commerce requirement). So the EEA is certainly a logical source of law to turn to, whether courts are simply interpreting the text of the DTSA or creating federal common law.  

On the other hand, the universe of cases decided under the EEA is very small, and pales in comparison to the long history of state statutory and common law decisions. So in my view, the state cases will provide courts with a much richer wellspring of rules and policy considerations, and courts are unlikely to ignore them. Based on Sandeen's talk at IPSC, it seems that she and Seaman also believe the creation of a federal common law, divorced from state law precedent, is highly unlikely. Instead, federal district courts are more likely to draw on the trade secret decisions of the states in which they sit, as occurs in typical Erie situations. Indeed, Sandeen suggested that the case law, and the DTSA itself, contain a strong preference for relying on the forum state's law rather than creating federal common law, if not an implicit mandate to do so. I look forward to seeing them support that argument.

One final note is that I hope the authors take the time to consider trademark law's trajectory. Trademark provides a very plausible historic precedent within the intellectual property genre for how a novel federal IP regime can emerge on top of state common law regimes. In his fascinating paper on the history of trademark's evolution from state to federal law, Mark McKenna has discussed in detail how post-Lanham Act courts dealt with the challenges of interpretation and allocation of state and federal roles. In addition, Lee Ann Lockridge has made a compelling argument that, in light of federal protection for trademarks under the Lanham Act, state trademark registrations (if not necessarily state common law trademark) should simply be abolished As with trademark law, there are really two major questions to think about: what does the new federal jurisprudence of trade secret law look like; and what is the role of state trade secret law, if any, now that a federal cause of action is available?

** Update: Indeed, Sean Pager informs me that before the DTSA was passed, the Federal Circuit implied, in the International Trade Commission case 
TianRui Grp. Co. v. Int'l Trade Comm'n, that trade secret law is quite amenable to federal common law. The Federal Circuit wrote that "the nonstatutory unfair competition provision of section 337 [which gives the ITC authority to adjudicate claims of unfair competition in importation of articles into the U.S.] falls comfortably into both of the categories that have been described as calling for the application of federal common law—instances in which “a federal rule of decision is ‘necessary to protect uniquely federal interests,’ ... and those in which Congress has given the courts the power to develop substantive law.” TianRui Grp. Co. v. Int'l Trade Comm'n, 661 F.3d 1322, 1327 (Fed. Cir. 2011) (citations omitted). "Fortunately, trade secret law varies little from state to state and is generally  governed by widely recognized authorities such as the Restatement of Unfair Competition and the Uniform Trade Secrets Act. Moreover, the federal criminal statute governing theft of trade secrets bases its definition of trade secrets on the Uniform Trade Secrets Act, so there is no indication of congressional intent to depart from the general law in that regard. In any event, there is no dispute in this case pertaining to the substantive law of trade secrets."  Id.at 1327–28 (citing the EEA). 

Off the top of my head, questions this raises include: Is the Federal Circuit correct that trade secret law is sufficiently uniform from state to state to easily distill into a single law? (Jim Pooley and Sandeen and Seaman have disagreed about this.) More importantly, even if the Federal Circuit is correct that the main go-to authorities in all the states are the Uniform Trade Secrets Act, the First Restatement of Torts, and (less so) the Third Restatement of Unfair Competition, these just give courts skeletal principles; they do not give concrete examples of what to do in the wide variety of cases that arise. For that courts will need to analogize to past cases––these are mainly state law. Also, should we be skeptical of the Federal Circuit's pronouncement of federal authority to make uniform law? The Federal Circuit has been criticized for over-harmonizing both patent law and contract law surrounding patents. Trade secret cases are not patent cases. The Federal Circuit does not have exclusive jurisdiction unless a patent claim is also involved; they go up through the state system or through the federal district courts and the regional circuit courts. In any case, we will see what Sandeen and Seaman have to say about the Federal Circuit's pre-DTSA pronouncements.

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