Saturday, February 22, 2020

Deepa Varadarajan on Trade Secret Injunctions and Trade Secret "Trolls"

I wrote some previous posts about eBay in trade secret law, and in particular Elizabeth Rowe's empirical work. Rowe found not all trade secret plaintiffs actually ask for injunctions, even after prevailing at trial, along with many other fascinating findings. I would be remiss if I did not flag a characteristically excellent discussion of this issue by Deepa Varadarajan, in a piece that may have flown under readers' radars.

In Trade Secrecy Injunctions, Disclosure Risks, and eBay's InfluenceVaradarajan provides a conceptually clean way to apply eBay in trade secret law that I had not consciously considered before. Now that I hear it, it makes sense and I'm grateful that Varadarajan spells it out. In short, the crux question is whether there's a risk of public disclosure or widespread dissemination of the trade secrets.

Trade Secret Injunctions

For those who missed my prior post, the "eBay-meets-trade-secret-law" issue is: should a court grant an injunction as a matter of course in trade secret cases, or should it require plaintiff to prove it suffered irreparable harm; that damages would be inadequate to compensate that harm; and that plaintiff's future harm isn't outweighed by the costs an injunction would impose on others like competitors or employees, who'd be prevented from engaging in market activity or from pursuing a new job, or by considerations of the "public interest." 

Varadarajan explains that the the Tenth Circuit has "explicitly" rejected a presumption of irreparable harm and that other circuits like the Third and Ninth have moved in a similar direction. (This reflects Rowe's observations as well). Meanwhile, some other circuits have behaved differently, with the Second, Fifth, and Federal Circuits presuming irreparable harm and appropriateness of an injunction. The Second Circuit, Varadarajan points out, stresses, in particular, circumstances where there's a risk of disclosure or widespread dissemination of the trade secret.  (15-17). 

"A rebuttable presumption of irreparable harm might be warranted in cases where there is a danger that, unless enjoined, a misappropriator of trade secrets will disseminate those secrets to a wider audience or otherwise irreparably impair the value of those secrets. Where a misappropriator seeks only to use those secrets — without further dissemination or irreparable impairment of value — in pursuit of profit, no such presumption is warranted because an award of damages will often provide a complete  remedy for such an injury." 
Varadarajan's normative take is that the Second Circuit is onto something: trade secret misappropriations that threaten to result in disclosure or dissemination of the trade secret pose a qualitatively different risk from those that involve only "use" of the trade secret without dissemination.  (23-24).  "Absent empirical data," Varadarajan concludes, "it is hard to know with certainty when a presumption of irreparable harm is optimal—helping to limit opportunistic behavior without chilling legitimate design-around activity." (24). But sometimes, presuming at the outset that plaintiff would suffer irreparable harm just makes too much sense to risk not doing so. “ 'Disclosure' cases likely fall into this category, as acts of dissemination often pose significant and incalculable harm to the plaintiff." (24).  

Accordingly, Varadarajan thinks courts should follow the Second Circuit's lead, in cases like Faiveley, applying a presumption of irreparable harm if there's a risk of dissemination, but not if the only concern is someone else using the trade secret without disclosing it. (24).  

The broader suggestion here, that eBay isn't one-size-fits all, is compelling, and reminiscent of Mark Lemley's concerns in the trademark context. For the most part, I agree with Varadarajan's specific conclusion that disclosure or widespread dissemination is the key risk that justifies a presumption. The need for secrecy is what makes trade secrets different from any other form of IP; keeping that secrecy should be a pivotal consideration in crafting the remedy.

That said, elsewhere I've critiqued Varadarajan's and Joseph Fishman's somewhat liberal distinction between "use" and "disclosure" cases. I argued that "use" of a trade secret by anyone other than plaintiff or a licensee almost always involves a risk of disclosure, not least because another's "use" places the trade secret in the hands of someone who's not necessarily employing the same "reasonable measures" to preserve secrecy as plaintiff.  So we should be cautious in letting even non-competing uses of live trade secrets get off Scot-Free.

Still, in this context, I think I agree with Varadarajan's proposed distinction between "use" and "disclosure," to the extent it's applied at the remedy stage, not the liability stage. In these cases, plaintiff has won on the relevant evidentiary standard: likelihood of success on the merits for a preliminary injunction or preponderance of the evidence for a permanent injunction. The court has found there was a trade secret at the time of the misappropriation, and that misappropriation occurred or is at least "threatened." So the court should be able to presume "irreparable harm" when the record shows (again, on the relevant evidentiary standard) that there's a risk of a very public disclosure or of widespread dissemination even absent a very public disclosure. This would likely be more administratively efficient and would avoid rendering trade secret law obsolete--which I think might be the case if we had a rule that said: "maybe you get an injunction to protect secrecy, but maybe not."

Importantly, this would not mean injunctions are not available in "use" cases. The Second Circuit itself, in the quoted passage above, made this clear.  "Irreparable harm" should be presumed when defendant's actions would cause plaintiff's trade secrets to be disseminated to a wider audience "or otherwise irreparably impair the value of those secrets." If defendant is about to directly compete in a way that impairs plaintiff's market position, diverting sales or the like, then this would be bad too.  I don't think Varadarajan would necessarily disagree with that, because I think she's focused here, like in her article with Fishman, mostly on non-competing uses.

Trade Secret Trolls

Back to the trolls. Varadarajan has a very nice discussion at the end of her article about the need to get beyond seeing eBay as just a case about "trolling." That is, in patent law, what eBay is known for is Justice Kennedy's concurrence: the new wisdom that non-practicing entities don't necessarily get an injunction because it's money they want anyway.  Ryan Holte has argued this is wrong, by the way, that eBay should be cited "for what it held" — i.e. apply the equitable factors, don't presume injunctions are warranted in all cases— not for what Kennedy said in dicta about non-practicing entities.

Varadarajan, I think, would agree that viewing eBay as all about the trolls is narrow-minded, especially outside patent law.  Trolling, Varadarajan observes, is not present in trade secret law in the same way as in patent law. "[T]rade secrecy," she writes, "does not have a much-publicized bogeyman akin to a 'patent troll.' ” (22).  But eBay's cautionary note —i don't just presume plaintiff is going to suffer harm here that cannot be compensated through money damages —is still applicable.
"[T]the underlying concerns relating to ambiguous IP boundaries—including inadequate notice, high search costs, and strategic hold-up behavior—that animate the post-eBay patent calculus, are nonetheless relevant to trade secrecy." (22).  
In particular, as I have written along with many others, the potential harmful effects for employees in trade secret and in non-compete-style contract cases is more prominent here than in patent infringement cases, so there is more need than ever to balance the harm to plaintiff against the costs to people like departing employees.

But returning to the troll point... I agree the term "trade secret trolls" is a bit of a misnomer, since strangers can't plausibly accuse strangers, and send out mass cease and desist campaigns like they can in patent law. The misappropriator has to be someone with a connection to the plaintiff that might plausibly give rise to a duty of confidentiality, or have engaged in bad acts to obtain the secret. Otherwise, there isn't a plausible trade secret claim that has a hope of surviving a motion to dismiss or, worse, a characterization as "frivolous." (Jim Pooley has an article making out this important conceptual distinction, which he wrote in response to Dave Levine and Sharon Sandeen's provocative article opposing federalization, "Here Come the Trade Secret Trolls.")

At the same time, though, trade secret law, similar to patent law, does not require plaintiffs to be literally using the trade secret in the business. So in that sense, the trolling possibilities here might be a real issue. Varadarajan to some degree flags this, arguing that, post-eBay "courts should be more scrutinizing of injunctive relief—as they have been in the patent context[,]" and specifically pinpointing, inter alia, cases where "the plaintiff is not itself commercially utilizing the trade secret..."  (22). 

I would go further here and actually re-frame this a bit. Yes, in cases where the plaintiff is not itself "commercially utilizing" the trade secret in some way, courts should probably be less likely to grant an injunction, for the same reasons as in the patent context. You aren't using it, so it must be money you're after.

However, as Mark Lemley and I stress in our recent paper, Abandoning Trade Secrets, in trade secret law, unlike in patent law, "use" is not necessarily the benchmark of a trade secret's value to its owner. The legal standard under federal law and (outside New York) state law, is that the trade secret must derive "independent economic value" from remaining a trade secret. So a non-using trade secret owner that is nonetheless deriving value from maintaining secrecy could actually be just as scared of competing uses as a trade secret owner who is not actively using the information in the business.

For example, if the trade secret owner (say Coca Cola) has strategically shelved a trade secret (the formula for "New Coke") to preserve its own market in a stronger product line (e.g., original Coke, Diet Coke), then Coca Cola would deserve an injunction to avoid disclosure of the shelved information, or to avoid direct competition from a product they intentionally chose not to develop -- irrespective of the fact that Coca Cola here is technically a "non-practicing entity."

On the flip side, in Abandoning Trade SecretsLemley and I argue it is possible to abandon a trade secret due to failure to derive "independent economic value" from maintaining secrecy, such as by completely exiting the market in which the information used to derive value. When this happens, there is not even a trade secret at all, because, like in the — wait for it — trademark law context, the trade secret has been legally abandoned. So forget about an injunction. In fact, plaintiff shouldn't be winning the case at all because, if the secret truly no longer derives "independent economic value" from its secrecy (which, as we explain, is judged from the time of the act of misappropriation), then there's no trade secret and no claim under trade secret law.  Contract law, maybe, but not trade secret law.


In sum, I generally agree with Varadarajan that "risk of disclosure" cases are most problematic and should warrant automatic presumption of an injunction.  My only addition is that I am not sure that "risk of use" cases are all that much less scary for plaintiffs (for the reasons I've said elsewhere).

I also think we may need to entirely re-frame the distinction between "practicing" versus "non-practicing" entities in trade secret law.  In trade secret law, use in the business — "practicing" — isn't the crux of the issue. A trade secret plaintiff has to be deriving independent economic value from the information remaining a secret. Plaintiff can be deriving that value even if it's not actively "practicing" the trade secret.  I suspect Varadarajan would agree with this point; she uses the phrase "commercially utilizing" the trade secret, which I assume she'd take to include strategic shelving.  She and I might still disagree a bit on whether the risk of a competing use is less scary for trade secret owners than a direct threat of disclosure. But in sum, I think her overall take — presume irreparable harm when risk of disclosure is at issue — makes a lot of sense. I love the paper, and all of her work.

No comments:

Post a Comment