Thursday, January 4, 2018

Extraterritorial Reach Of The Defend Trade Secrets Act: How Far Did Congress Go?

In the aftermath of the Defend Trade Secrets Act (DTSA), a little discussed, but potentially quite significant, issue is whether civil trade secret plaintiffs can now use federal trade secret law to reach misappropriation that occurs in other countries pursuant to DTSA Section 1837. See 18 U.S.C. § 1837.  This post is a follow-up to my prior post on presentations at last spring's conference "The New Era of Trade Secret Law: The DTSA and other Developments", hosted by the IP Institute at Mitchell/Hamline School of Law. Professor Rochelle Dreyfuss spoke at the conference about her work-in-progress with Professor Linda Silberman, discussed herein.

On May 11, 2016, the Defend Trade Secrets Act (DTSA) was passed into law, creating a federal civil action for trade secret misappropriation. The DTSA is now codified in in Title 18 of the U.S. Code, 18 U.S.C. §§ 1831-1839. Unlike the Uniform Trade Secrets Act (UTSA), some version of which is in force in most states, the DTSA is not a stand-alone trade secret statute. Instead, the DTSA was passed as an amendment to the Economic Espionage Act (EEA) of 1996. Whereas the EEA provides a criminal trade secret remedy and is enforced at the discretion of federal prosecutors, the DTSA provides a civil action for misappropriation of trade secrets, allowing private parties to seek injunctions and damages. See § 1836(b) ("An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce."). Several of the DTSA's major provisions track the EEA's. Most importantly, the DTSA's definition of "trade secret," codified in Section 1839, is the same as the EEA's.

Less discussed is DTSA Section 1837.* As Dennis Crouch observed on Patently-O, "Section 1837 was left unchanged with DTSA’s amendments to EEA, but seemingly applies to the new private civil cause of action for trade secret misappropriation." In other words, Section 1837 was originally the EEA's extraterritorial jurisdiction provision; now Section 1837 is also the DTSA's extraterritorial jurisdiction provision.

The gist of Section 1837 is that the DTSA, and the EEA, apply to conduct occurring abroad if either of the following are true: (1) the offender is a natural person who is a U.S. citizen or permanent resident alien or a U.S. company, or (2) "an act in furtherance" of the misappropriation of trade secrets was committed within United States territory. Under a plain language reading, Section 1837 appears exceptionally broad. The defendant can be a U.S. citizen/permanent resident alien like former Uber employees Anthony Levandowski and Richard Jacobs (Uber's former "intelligence" expert and the new star of the Waymo/Uber dispute). Or the defendant can be a foreigner who has never even set foot in the U.S., so long as an "act in furtherance" was committed within United States territory.

However, in their new article, Misappropropriation on a Global Scale: Extraterritoriality and Applicable Law in Transborder Trade Secrecy Cases, Professors Rochelle Dreyfuss and Linda Silberman of New York University School of Law cast doubt on the assumption that Section 1837 authorizes such broad extraterritorial reach. Professor Robin Effron of Brooklyn Law School explores similar issues in her new article, entitled Trade Secrets, Extraterritoriality, and Jurisdiction, and likewise casts doubt on the degree to which DTSA can, or should, be used to reach foreign conduct. 

As Professor Effron observed back in 2003, the EEA's broad extraterritorial reach for purposes of criminal trade secret actions was always somewhat exceptional in the intellectual property world, where protection has generally "been held to be more territorially limited." (Effron 2003, pp. 1489-90). That said, even absent express guidance from Congress, federal trademark law under the Lanham Act has occasionally been read to reach foreign conduct that has harmful effects in the United States. See Steele v. Bulova Watch Co., 344 U.S. 280, 287 (1952). (Effron 2003, p. 1506) ("While some traditional intellectual property laws such as patent and copyright generally do not operate extraterritorially, courts have been more willing to sanction extraterritorial application of unfair competition laws such as the civil trademark provisions of the Lanham Act[]...."). Moreover, prior to the passage of the DTSA, the Federal Circuit held in TianRui v. International Trade Commission, 661 F.3d 1322 (Fed Cir. 2011), that the International Trade Commission (ITC) has authority under 19 U.S.C. § 1337 to enjoin importation of products incorporating trade secrets, even if the acts of misappropriation occurred entirely abroad.

The question now is whether DTSA Section 1837 creates similarly broad authorization to bring civil actions in these types of situations.

Examples Of "Extraterritorial" Trade Secret Cases

At the outset it is not entirely clear what types of cases will test Section 1837’s reach, if any. Professor Effron's 2016 article reveals that under the EEA, prosecutors mostly chose to bring criminal actions against American defendants (i.e. U.S. citizens or permanent residents or U.S. companies), or in cases where significant conduct occurred within United States territory. Thus, at least when used in the criminal context, Section 1837 was only rarely used to reach non-U.S. defendants with "attenuated" contacts with the U.S. (Effron 2016, pp. 774-776).

That said, there are few types of cases that might test Section 1837's breadth as plaintiffs seek to bring private actions under the DTSA.

Example 1. A Chinese citizen enters the U.S., gains authorized access to a U.S. company's lab in Washington state, and, without authority, removes the finger of the U.S. company's cellphone-testing robot. He takes photographs of the finger, and sends the photographs back to China, where his employer receives, and allegedly uses, the information in the photographs to make its own robot. The finger is then mysteriously returned to the Washington lab. See T-MOBILE USA, INC. v.Huawei Device USA, Inc., 115 F.Supp.3d 1184 (2015) (DTSA/UTSA case).

Example 2. A Chinese company manufactures a product in China after hiring away nine employees from a U.S. company. The employees were trained in the U.S. company's proprietary manufacturing process while still employed in the United States. But otherwise, all acts of trade secret misappropriation occurred entirely outside the United States. C.f. TianRui v. ITC, 661 F.3d 1322 (Fed Cir. 2011) (ITC "section 337" importation case).

Example 3. A British company licenses its trade secrets to a Taiwan-based Taiwanese company. A different Taiwanese company allegedly misappropriates the secrets by obtaining them from a consultant to the first Taiwanese company who owed a duty of confidentiality with respect to the information. The second Taiwanese company uses the secrets to construct a plant in Taiwan, and enters a contract to build parts with a U.S. company located in New Jersey. C.f. BP Chemicals v. Formosa Chemical & Fibre, 229 F.3d 254 (2000) (casting doubt on whether New Jersey state law would govern the consultant's sharing of the secrets in Taiwan).

Example 4. A U.S. company enters a contract with a foreign company to manufacture cell phones on the U.S. company's behalf. In the process of manufacturing the phones to fulfill the contract, the foreign manufacturing company obtains extensive access to trade secrets developed in the United States, which it sells to another foreign company. The second foreign company uses the U.S. company's trade secrets to make similar phones, which it sells overseas and never imports into the United States. Assume the sale and use of the trade secrets is not prohibited by any foreign law.

A plain reading of Section 1837 suggests the DTSA would allow plaintiffs to bring civil actions in at least the first three examples above, but probably not the fourth. In Examples 1-3, we can identify at least one “act in furtherance” of the misappropriation that occurred within United States territory. (The conduct in Example 4, I think, is still outside the reach of U.S. trade secret law unless the products are imported into the United States, at which point the ITC would have authority to enjoin the importation under Section 337. But please correct me if I am wrong.)

However, the articles reviewed in this post suggest that, in fact, the DTSA's extraterritorial reach is not as broad as it at first appears. And if it is read to be this broad, perhaps it shouldn't be as a policy matter.

How did this work pre-DTSA?

It is worth stepping back for a minute to recall how this would have worked when civil trade secret actions could be brought only under state law. As Professors Elizabeth Rowe and Daniel Mahfood at University of Florida explained in their pre-DTSA article, there were two main challenges when it came to using state trade secret law to reach out-of-state conduct. Christopher Seaman's pre-DTSA article also covers such issues.

First, the court (state or federal in diversity cases) had to obtain personal jurisdiction over the defendant. This meant analyzing the long-arm statute of the forum state and the constraints of Due Process, which require either that the defendant be subject to general jurisdiction in the forum state or have "minimum contacts" with the forum state. See International Shoe v. State of Washington, 326 U.S. 310 (1945); see also Fed. R. Civ. P. 4(k)(1)(A).

Second, the court (state or federal in diversity cases) had to apply the forum state's conflict of law rules to decide which U.S. states' law applied, if any, to the case. Conflict of laws rules, which vary by state, typically assess issues such as where misconduct occurred, where the injury occurred, where property involved in the action lies, and which state's law has the strongest interest in governing the dispute. One of few examples of this analysis can be found in BP Chemicals v. Formosa Chemical & Fibre, 229 F.3d 254 (2000) (Example 3 above).

Under the DTSA, the general issues are the same - establishing personal jurisdiction over defendant/s, and determining whether United States law applies. But the law and geographic scope for each issue is different.

Personal Jurisdiction Under the DTSA: Turning to FRCP 4(k)(2)?

Courts in DTSA cases must obtain personal jurisdiction over the defendant. Let's assume here the case is brought in federal court (although DTSA cases can also be brought in state court).

Professor Effron contends getting personal jurisdiction under the DTSA could be a "recipe for disaster." "The DTSA itself," she explains, "does not provide a special jurisdictional hook[.]" (Effron 2016, p. 773). Rather, as Sharon Sandeen has observed, "[a]lthough the extra-territorial provision of the EEA might apply to foreigners who commit an act within the U.S.[,]... it does not solve the related issues of whether U.S. courts can obtain personal jurisdiction over such individuals and whether any resulting judgment can be enforced." (Effron 2016, p. 773, quoting Sharon K. Sandeen).

"Recipe for disaster" may be too strong a turn of phrase. Absent an express statutory provision, federal courts' personal jurisdiction authority in DTSA cases will be determined by Federal Rule of Civil Procedure 4(k)(1)(A), which allows federal courts to use the long-arm statute of the forum state, or by Federal Rule of Civil Procedure 4(k)(2), which gives federal courts broader personal jurisdiction authority for claims arising under federal law in some circumstances.

As Professor Effron notes, most trade secret cases continue to involve U.S. citizens or foreign employees of U.S. companies who take secrets from their employers. (Effron 2016, p. 773). When the defendant is a U.S. company or individual subject to general jurisdiction in the forum state, or has clear "minimum contacts" with the forum state that give rise to the claim, such as working for a U.S. company based in the forum and then taking that company's trade secrets, this will not create problems. On the other hand, obviously, if the plaintiff seeks to sue a U.S.-based defendant outside its home state, plaintiff may have to work harder to establish minimum contacts with the forum giving rise to the claim. See Gold Medal Products Co. v. Bell Flavors and Fragrances, Inc., 1:16-CV-00365, 2017 WL 1365798 (S.D. Ohio Apr. 14, 2017) (holding in a DTSA case that the court lacked personal jurisdiction over a U.S.-based company located outside the forum state, despite plaintiff's argument that defendant intentionally hired away plaintiff's employee while the employee was still working for plaintiff in the forum state).

The more difficult scenario, illustrated by Examples 2, 3, and needless to say 4, above, is establishing personal jurisdiction when the defendant is a foreign citizen or foreign company, and has not actually set foot in the United States. This is where FRCP 4(k)(2) (sometimes called "alien personal jurisdiction") has potential utility.** The gist of FRCP 4(k)(2) is that defendants will be subject to personal jurisdiction in federal court for federal trade secret claims so long as defendants are not subject to personal jurisdiction in any U.S. state, and yet have "minimum contacts" with the United States as a whole. See United States v. Swiss Am. Bank, Ltd., 116 F. Supp. 2d 217 (D. Mass. 2000), aff’d, 274 F.3d 610 (1st Cir. 2001). If a federal court has 4(k)(2) personal jurisdiction over defendant for a DTSA claim, this will also presumably give rise to "supplemental" personal jurisdiction for state law trade secret claims (this is sometimes called "pendant personal jurisdiction").

Professor Effron argues that "Rule 4(k)(2) is unlikely to provide a viable personal jurisdiction option for more than a handful of potential DTSA defendants[,]" given that many defendants' "contacts with the United States are so diffused that they unlikely reach the constitutional threshold of minimum contacts."  

I am not sure this is true. As said, the hardest cases will be where defendant is a foreign company or foreign individual that has never been to the United States. But I suspect that even in those harder cases, at least some courts will find a way to establish personal jurisdiction over defendants. Along with using FRCP k(k)(2), courts can also seek to rely on the "Calder effects" test, which is used to establish personal jurisdiction in intentional tort cases. Here courts use a slightly laxer standard that asks whether defendant took an intentional action; that was expressly aimed at the forum state; with knowledge the injury would be felt in the forum state. Calder v. Jones, 465 U.S. 783 (1984). Federal courts wishing to take maximum advantage of their personal jurisdiction authority with respect to non-U.S. defendants could use both FRCP 4(k)(2) - asking whether the defendant has minimum contacts with the U.S. as the whole even if it does not have minimum contacts with any single U.S. state - and the Calder effects test - asking whether the defendant intentionally aimed its conduct at the United States as a whole by taking trade secrets from a U.S. company, knowing the company would duffer injury in the United States. But c.f. Gold Medal Products Co. v. Bell Flavors and Fragrances, Inc., 1:16-CV-00365, 2017 WL 1365798 (S.D. Ohio Apr. 14, 2017) (rejecting plaintiff Ohio-based employer's argument that the defendant must have known plaintiff would suffer injury in Ohio since defendant had contacted the employee while he was still working in Ohio, stating that “[plaintiff] errs by placing too much emphasis on the fact that [plaintiff] felt the effect of [defendant's] allegedly tortious conduct in Ohio.”).

All that said, when trade secret cases are brought in state rather than federal courts, I agree with Professor Effron that this may be a "recipe for disaster," especially for cases involving foreign defendants. "Minimum contacts" with a single forum state are typically much harder to prove than minimum contacts with the United States as a whole. See, e.g., J. McIntyre Machinery v. Nicastro, 564 U.S. 873 (2011).

Choice Of Law Under The DTSA: When does U.S. trade secret law apply to foreign conduct?

With respect to the choice of law issue, Dreyfuss and Silberman's article is highly elucidating. 

As explained above, the extraterritorial reach of the DTSA is provided in Section 1837, which was originally designed for criminal actions for theft of trade secrets under the EEA. That is, Section 1837 dictated (and still dictates) when federal prosecutors can bring criminal actions for theft of trade secrets under Section 1831, which covers stealing trade secrets for the benefit of a foreign government, or Section 1832, which covers private theft of trade secrets related to interstate or foreign commerce.

The predicates for federal trade secret law to apply under Section 1837 are:

(1) the offender is a natural person who is a U.S. citizen or permanent resident alien, or is a U.S. company, or

(2) "an act in furtherance" of the misappropriation of trade secrets was committed in the United States.

The general rule is that a federal law is presumed to apply only within United States territory unless the "affirmative intention of the Congress clearly expressed" is to give a statute extraterritorial effect, or Congress is deemed to have given "implied authority" for the law to apply to the extraterritorial conduct at issue. See Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010); see also American Law Institute, Restatement of the Law Second, Foreign Relations Law of the United States, § 38 (1965) (“Rules of United States statutory law, whether prescribed by federal or state authority, apply only to conduct occurring within or having effect within the territory of the United States, unless the contrary is clearly indicated by the statute.”).

We might think that even under these rules, the DTSA provides a shut-and-close case. After all, Section 1837 is an express provision authorizing extraterritorial application when either of the above pre-conditions are met. See § 1837. Section 1837 thus appears to represent "affirmative intention of the Congress clearly expressed." Morrison, 130 S. Ct. 2869 (2010). The presumption against extraterritoriality should not apply.

However, Dreyfuss & Silberman argue that because Section 1837 is an extraterritoriality provision that was originally created to define the extraterritorial scope of a criminal statute (the EEA), it should not be construed to reach as broadly with respect to civil actions under the DTSA. (Dreyfuss & Silberman, p. 45) (“[T]he relationship between the civil provision and the original criminal statute is not straightforward. Moreover, the ramifications of engrafting the extraterritorial provision of the criminal statute on to the civil cause of action leads to an astonishingly broad reach.”).

In support of their position, Dreyfuss and Silberman cite to RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090 (2016), where the Supreme Court held in a 5-4 decision that the Racketeer Influenced and Corrupt Organizations Act (RICO) does not necessarily apply extraterritoriality in civil actions, despite extraterritorial application in the criminal context; thus, a civil RICO plaintiff must prove a domestic injury in order to establish liability. (Dreyfuss & Silberman, p. 23, p. 45). The Court in Nabisco reasoned that the usual presumption against extraterritoriality was not overcome for civil actions under RICO in part because civil actions do not come with the same “check imposed by prosecutorial discretion”, and “providing a private civil remedy for foreign conduct creates a potential for international friction…” (Dreyfuss & Silberman, pp. 24-25). That is, there may well be a conflict between what's prohibited under U.S. law, and what's prohibited under relevant foreign laws. The Court held that, given these discrepancies, “clear direction from Congress [was] required[]” to overcome the presumption against extraterritoriality - which direction the Court did not find in the RICO statute. (Dreyfuss & Silberman, p. 25) (quoting Nabisco, 136 U.S. at 2107).

Dreyfuss and Silberman argue that applying the EEA’s extraterritoriality provision to civil trade secret claims under the DTSA creates a similar problem. They note several similarities to the situation the Court confronted in Nabisco. (Dreyfuss & Silberman, pp. 46-48). These include that, as with civil RICO claims, civil trade secret claims are not “mediated through prosecutorial discretion[,]” and that a civil right of action for trade secret misappropriation creates the potential for conflict with the trade secret laws of other nations. (Dreyfuss & Silberman, pp. 47-48). For instance, in Examples 2, 3, and 4, above, what if the trade secret laws of the putative defendants' home nations (e.g. China, Taiwan, etc.) do not prohibit, perhaps even condone, the acts they took to obtain plaintiffs' trade secrets?

What is more, the authors contend, it seems unlikely that Congress considered these issues when it passed the DTSA. It is worth quoting a passage from their article that makes their case in particularly compelling terms.
[There are several reasons to think] Congress did not fully consider the interaction between § 1837, on extraterritoriality, and § 1836(b), on civil liability. While it is true that there is a reference in § 1836(b) to “foreign commerce,” we have seen that such language has generally not been sufficient to overcome a presumption against extraterritorial application. Furthermore, § 1837 was not amended when § 1836 was changed. That the references in §1837 are to “offender” and “offense,” not “infringer” or “infringement” suggests that Congress had not affirmatively considered the relationship between the two sections, as envisioned by Nabisco. Also, to the extent that Congress has addressed concerns about conflicts in the remedial provisions in paragraph (3) of
 § 1836, it is puzzling that it considered only potential conflicts with state laws. The statute and legislative history refer to U.S. state law (such as the Uniform Trade Secrets Act) but do not mention foreign laws.
(Dreyfuss & Silberman, p. 47)

The authors conclude that, given weak evidence of congressional intent to allow private actions against purely foreign conduct, courts should be wary of overriding the ordinary presumption against extraterritoriality, and be more willing to assess the extraterritorial reach of the DTSA on a case by case basis. They recommend assessing the sorts of factors courts have used to assess extraterritoriality in trademark cases. These include whether the defendant is a U.S. citizen, whether the conduct has a substantial effect on interstate commerce, and whether there is prospect of conflict with foreign law. (Dreyfuss & Silberman, pp. 29-31, 48-49 (citing Vanity Fair Mills, Inc. v. T. Eaton Co., 234 F.2d 633 (2d Cir. 1956) (citing Steele v. Bulova Watch Co., 344 U.S. 280, 287 (1952))).

Applying these factors, rather than simply presuming extraterritorial application per Section 1837, would potentially cast doubt on whether U.S. law applies, at least in some trade secret cases . For instance, in Example 3 above, these factors would likely weigh against applying U.S. law. Defendant is a Taiwanese company; there is no discernable harm to any U.S. party since the plaintiff is a British company; and there is potentially a conflict with foreign law. Specifically, U.S. law and Taiwanese law might differ on whether the consultant who shared plaintiff’s information with defendant was under a duty of confidentiality. Similar arguments can be made in all four cases.

I will let readers judge for themselves. But I will say that, after having read Dreyfuss and Silberman's article, I found the argument against extraterritoriality significantly more compelling than I did before. Presumably a case will arise to test their theory in the near future.

* Section 1837 states in full:

This chapter also applies to conduct occurring outside the United States if—

(1) the offender is a natural person who is a citizen or permanent resident alien of the United States, or an organization organized under the laws of the United States or a State or political subdivision thereof; or

(2) an act in furtherance of the offense was committed in the United States.

18 U.S.C. § 1837.

** FRCP 4(k)(2) provides that:

[f]or a claim that arises under federal law, serving a summons or filing a waiver of service establishes personal jurisdiction over a defendant if:

(A) the defendant is not subject to jurisdiction in any state's courts of general jurisdiction; and

(B) exercising jurisdiction is consistent with the United States Constitution and laws.

Fed. R. Civ. P. 4(k)(2).

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