Welcome to the inaugural edition of Trading Secrets. Not long ago, few American companies did business with vendors from India, China, or Russia. They had no reason to be concerned that their intellectual property would be taken and replicated overseas. It is now fairly common. Similarly, once upon a time, going to work for a direct competitor was considered taboo. Now it's simply called a "lateral move"--executives, engineers, and researchers rarely spend their entire careers with one company. These changes in the business world and corporate mobility, coupled with new technology that makes it easier than ever to transfer proprietary business information from one computer to the next, have set the stage for
a continued increase in trade secret litigation.
It has been a significant year for trade secret law, with several notable verdicts and settlements, key developments in state law, and the implementation of a new federal statute, the Defend Trade Secrets Act, which for the first time authorizes federal civil claims for trade secret misappropriation. This edition focuses on reported decisions applying and changing trade secret law.1 Important aspects of trade secret law continue to be shaped across jurisdictions, including the propriety of various damages theories, trade secret specifications and the preemptive effect of the Uniform Trade Secrets Act. Also addressed are recent cases involving criminal aspects of trade secret misappropriation and the Computer Fraud and Abuse Act, which continues to play a role in many trade secret cases, and the circuit split that continues to plague that statute.
1 Naturally, the information presented here is not meant to be legal advice for any specific situation. Specific advice can only be provided after a full evaluation of the facts and circumstances of a particular matter.
Notable Recent Trade Secret Verdicts and Settlements
While the median recovery in trade secret cases has decreased during the past decade and a half, a continuing rise in the quantity of trade secret cases and a proliferation of large verdicts and settlements in recent years underscores the heightened importance of trade secret law today.2 The increase in cases filed and eyepopping verdicts reinforces the critical need to closely monitor confidentiality obligations. Here are some notable recent outcomes in trade secret cases.
April 2015 $360 Million Settlement in Virginia
In April 2015, Kolon Industries Inc. agreed to pay $360 million to resolve long-running civil and criminal cases arising from allegations that the company conspired with former DuPont Co. employees to steal DuPont's trade secrets relating to Kevlar bulletproof vests. The amount was split between $275 million to be paid in restitution to DuPont and $85 million in criminal fines to the government. The civil case originally resulted in a $920 million verdict from a Virginia jury in federal court, which was subsequently vacated by the Fourth Circuit Court of Appeals. The settlement occurred before the scheduled retrial of the civil case.
December 2015 $74 Million Verdict in Illinois
An Illinois jury ordered Caterpillar Inc. to pay $74 million to Miller UK Ltd. following an eight-week trial involving claims that Caterpillar used a supply agreement to gain access to proprietary materials for products manufactured by Miller. The lawsuit alleged that Caterpillar exploited its leverage as Miller's largest customer to systematically gain access to its trade secrets so that Caterpillar could produce its own products without having to engineer them from scratch. The trial took place in the US District Court for the Northern District of Illinois.
April 2016 $940 Million Verdict in Wisconsin
In April 2016, a jury in Madison, Wisconsin awarded Epic Systems Corporation damages of $940 million in a federal case alleging trade secret misappropriation by Tata Consultancy Services Ltd. and its US subsidiary. The verdict represents one of the largest trade secrets awards in US history and perhaps the largest verdict of any kind in Wisconsin. The case involved allegations that Tata misappropriated confidential information related to software for hospitals and medical providers, including the downloading of thousands of confidential electronic
2 While the median federal recovery in trade secret cases from 1950 to 2001 was almost $1 million, the number fell to $450,000 between 2001 and 2015. Trade secret cases brought in federal court have, on average, higher recoveries than their counterparts in state court. John Elmore, "A Quantitative Analysis of Damages in Trade Secrets Litigation," Insights, 91-92 (Spring 2016). While the median recovery figures have decreased, the number of cases (criminal and civil) has increased substantially. See, e.g., Randall Coleman, Assistant Director Counterintelligence Division, FBI, May 13, 2014 Statement Before US Senate Judiciary Committee; 2013 Joint Strategic Plan on Intellectual Property Enforcement, Executive Office of the President of the United States; David S. Almeling, et al., A Statistical Analysis of Trade Secret Litigation in Federal Courts, 45 GONZ. L. REV. 291, 293 (2010).
files. The case also involved claims under the Computer Fraud and Abuse Act and common law claims, including breach of contract.3
May 2016 $115 Million Award Upheld in Utah
In May 2016, the Utah Supreme Court affirmed a $114.8 million judgment against PacifiCorp, stemming from a $134 million trial verdict awarded by a Utah jury in favor of USA Power LLC. The original verdict followed a sixweek jury trial in state court, which involved allegations that PacifiCorp misappropriated trade secrets from USA Power to build a power plant based on a stolen design. The original verdict was divided between $21.4 million in compensatory damages and $112.5 million in unjust enrichment damages. The total amount was later reduced to $114.8 million following post-trial motions.
June 2016 $130 Million Settlement in Washington
In June 2016, a substantial trade secrets case in the world of online real estate listings came to an end in the yearslong battle of Move v. Zillow. In that case, which was filed in the King County Superior Court in Seattle, plaintiffs
Move, Inc. and the National Association of Realtors alleged that former Move executives at rival Zillow misappropriated confidential business and product plans, including Move's secret plan to merge with a competitor, Trulia. The case, which featured a six-day evidentiary hearing on evidence destruction, settled on the first day of trial, with a publicly disclosed payment of $130 million to the plaintiffs.4
October 2016 $91 Million Award in Massachusetts
In the spring of this year, a jury in Boston, Massachusetts hit Neovasc, Inc. with a $70 million damages verdict in an intellectual property lawsuit in federal court that included allegations of trade secret theft. The plaintiff in the case, CardiAQ Valve Technologies Inc., alleged wrongful conduct when it did business with Neovasc. The jury found three of the trade secrets were misappropriated and after just one day entered the $70 million verdict in favor of the plaintiff. In October, the court ordered Neovasc to pay an additional $21 million in enhanced damages because its misappropriation had been willful.
Defend Trade Secrets Act of 2016
On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (DTSA), creating, for the first time, a private federal civil cause of action to remedy the misappropriation of trade secrets.5 The DTSA creates a federal civil cause of action for the theft of trade secrets, with a full suite of remedies available, including actual damages, injunctive relief and punitive damages.
The DTSA's definitions of "trade secret" and "misappropriation" are similar to those in the Uniform Trade Secrets Act (UTSA), with "misappropriation" focused on the acquisition, disclosure, or use of a trade secret by "improper means." Unlike the UTSA, the DTSA expressly defines "improper means" to exclude "reverse engineering, independent derivation, or any other lawful means of acquisition" (which is consistent with case law applying the UTSA).
Unlike other areas of federal law that protect intellectual property, the DTSA does not broadly preempt the body of state law that has exclusively governed trade secrets in the civil context for many years. Precisely how the DTSA interacts with existing state law--including state commonlaw causes of action often relevant to trade secret claims but foreclosed by many states' versions of the UTSA-- may be the subject of future disputes. Moreover, there may be instances where state law provides broader protection for trade secrets than federal law.
DTSA allows "owner[s]" of trade secrets to sue for alleged misappropriation, but only "if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce." Under 18 U.S.C. 1837 (a remnant of the Economic Espionage Act of 1996), the DTSA appears to reach at least some conduct occurring outside the United States, namely, conduct by a defendant who is a US citizen or corporation or where "an
3 Jenner & Block LLP represented Epic in the case, including the trial in the US District Court for the Western District of Wisconsin. 4 Jenner & Block LLP represented the plaintiffs in this case. 5 The DTSA amended the Economic Espionage Act of 1996, which itself was amended by the Foreign and Economic Espionage Penalty Enhancement Act of 2012. See 18 U.S.C. 1831 et seq. Under those Acts, the theft of trade secrets can be a federal crime but, before the DTSA was signed by the president, federal civil suits were limited to actions by the attorney general for injunctive relief.
act in furtherance of the [misappropriation] was committed in the United States."
The DTSA includes a three-year statute of limitations that incorporates a delayed discovery exception. The new statute also makes clear that, for limitations purposes, "a continuing misappropriation constitutes a single claim of misappropriation."
The DTSA carves out an exception to encourage individuals to report suspected theft of trade secrets. In the one area where it purports to supersede state law, the DTSA provides immunity--from civil or criminal liability "under any Federal or State trade secret law"--for disclosing a trade secret either (1) in confidence to a government official or an attorney "solely for the purpose of reporting or investigating a suspected violation of law" or (2) "in a complaint or other document" filed under seal "in a lawsuit or other proceeding." Employers are required to "provide notice of [this] immunity . . . in any contract or agreement with an employee that governs the use of a trade secret or other confidential information." This provision applies to employment contracts executed or updated after the date of the DTSA's enactment (May 11, 2016), and employers can comply by identifying to the employee "a policy document provided to the employee that sets forth the employer's reporting policy for a suspected violation of law." Importantly, for purposes of the whistleblower provision, the statute defines "employee" to include "any individual performing work as a contractor or consultant for an employer."
If an employer fails to provide the proper notice, it cannot obtain an award of exemplary damages or attorneys' fees against an employee who misappropriates trade secrets. Accordingly, employers should amend any contract templates governing the use of company trade secrets or other confidential information to ensure that appropriate notice provisions are included in any agreement signed or updated after May 11, 2016. Employers should also amend their employee manuals and policy documents to spell out their policies on reporting concerns with respect to the use of confidential or trade secret information.
Under the DTSA, a trade secret owner may apply to a federal court--through an affidavit or verified complaint filed on an ex parte basis--for an order to seize property "necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action." Although the DTSA empowers federal courts to grant such civil
seizure orders, they are not required to do so, and courts' discretion is limited to "extraordinary circumstances" and situations where the court can "clearly" find "from specific facts" that several particular requirements are satisfied. The statute identifies factors the court is to consider.
When a seizure order is issued, law enforcement officials who execute the seizure are to place the seized property in the court's custody, and the court is required to "secure the seized material from physical and electronic access during the seizure and while in the custody of the court." The court must hold a hearing no later than seven days following the seizure, at which time the party that sought the order must prove "the facts supporting the findings of fact and conclusions of law necessary to support the order."
The DTSA also attempts to restrict trade secret owners from using the civil seizure provisions for unfair competitive advantage. For example, when a court issues a seizure order, it must also "take appropriate action to protect" the target of the order from any publicity by the trade secret owner about the seizure. A cause of action for "damages by reason of a wrongful or excessive seizure" was also created by the statute.
In a departure from some state laws, the DTSA appears to limit courts from issuing injunctions based solely on the concept of inevitable disclosure--the notion that certain employment circumstances make misappropriation of a trade secret inevitable, even in the absence of intent or other evidence that misappropriation is likely. In particular, the statute appears on its face to bar injunctive relief that "prevent[s] a person from entering into an employment relationship" based "merely on the information the person knows," and instead requires courts to base injunctive relief on "evidence of threatened misappropriation." The kind and amount of "evidence of threatened misappropriation" necessary to obtain an injunction is likely to be the subject of future disputes.
Remedies for trade secret misappropriation under the new DTSA are similar to those available under the uniform state trade secret statute, including injunctive relief as well as damages for actual loss, unjust enrichment, or, in lieu of other damages, a reasonable royalty.6 Punitive damages and attorneys' fees are available under the DTSA for willful and malicious misappropriation, although punitive damages are capped at two times the damages awarded. As noted above,
6 The Senate Judiciary Committee cautioned, however, that it does not intend to "encourage the use of reasonable royalties" but rather that it "prefers other remedies that, first, halt the misappropriator's use and dissemination of the misappropriated trade secret and, second make available appropriate damages." Committee of the Judiciary, Senate Judiciary Report, Defend Trade Secrets Act of 2016, S. Rep. No. 114-220, at 9 (2016).
however, an employer cannot recover legal fees or punitive damages against an employee unless it provided the proper whistleblower notice. The DTSA's injunction provisions seek to impose a balance between the kind of restrictions necessary to protect trade secrets, and restrictions that go too far and unduly restrain competitive activity. Nonetheless, the scope of injunctive relief is likely to be heavily contested in many trade secrets cases, just as it often is in actions pending under state law. For example, as noted above, injunctive relief for "actual or threatened misappropriation" is expressly limited to avoid undue restrictions on employment. Such injunctions must not "prevent a person from entering into an employment relationship." In addition, recognizing the difficulties of crafting appropriate injunctive relief in some cases, the statute empowers a court, "in exceptional circumstances that render an injunction inequitable," to enter an injunction that "conditions future use of the trade secret upon payment of a reasonable royalty for no longer than the period of time for which such use could have been prohibited."
Computer Fraud and Abuse Act
The Computer Fraud and Abuse Act (CFAA) prohibits individuals from accessing or attempting to access electronic data "without" or "in excess of" authorization. The statute provides for criminal penalties in the form of fines and imprisonment of up to 20 years, depending on the severity of the violation, and civil penalties in the form of compensatory damages, injunctive relief, or other equitable relief. The statute is regularly invoked in cases involving misappropriation of electronically stored trade secret information, but federal courts of appeal are split as to whether the CFAA applies only when data is accessed through a technological breach (i.e., a hack), or whether it can be applied more broadly to other forms of unauthorized access.
The First, Fifth, Seventh, and Eleventh Circuits have adopted a broad interpretation of the CFAA, holding that the statute applies to individuals who have technical access to the data at issue, but who access that data in violation of use restrictions, or against the interests of their employers. See, e.g., International Airport Centers, L.L.C. v. Citrin, 440 F.3d 418, 420 (7th Cir. 2006) (holding a former employee could be held liable under the CFAA for accessing company information "without authorization" because, even though the employee's access credentials had not been revoked, the employee's authorization expired when he acted "in violation of the duty of loyalty that agency law imposes on an employee.").
The Second, Fourth, and Ninth Circuits, on the other hand, have adopted a narrow interpretation of the CFAA, holding that the statute is intended to punish hackers who have no technical access to the computer at issue, as well as individuals whose initial access is authorized but who then access unauthorized information or files. See, e.g., U.S. v. Nosal, 676 F.3d 854 (9th Cir. 2012) (Nosal I); United States v. Valle, 807 F.3d 508 (2d Cir. 2015). In Nosal I, for example, Judge Kozinski held that the term "`exceeds authorization' in the CFAA is limited to violations of restrictions on access to information, and not restrictions on its use.'" 676 F.3d at 864.
Recent district court decisions have consistently interpreted the CFAA in accordance with the guidance of their respective courts of appeal. See, e.g., Launius Mktg. Specialists, Inc. v. Pepper, No. 15-1042, 2016 WL 2957875, at *3 (S.D. Ill. May 23, 2016) (following Citrin in rejecting dismissal of CFAA claims where the plaintiff "alleges a breach of loyalty"); Associated Mortgage Bankers, Inc. v. Calcon Mut. Mortgage LLC, No. 13-5927, 2016 WL 519659, at *9 (E.D.N.Y. Feb. 5, 2016) (following Valle in dismissing a CFAA claim).
Interestingly, the Ninth Circuit recently revisited the scope of the CFAA in Nosal II, --- F.3d ---, 2016 WL 3608752 (9th Cir. 2016), where it determined that technical access to data (i.e., possession of a username and password) would not prevent a CFAA claim where the individual receiving the data lacked permission to use the computer system. Nosal was criminally convicted under the CFAA
for accessing data "without authorization" when he "used the login credentials of a current employee to gain access to computer data owned by the former employer and to circumvent the revocation of access." Id. at *9. The Ninth Circuit affirmed Nosal's conviction, holding that the CFAA's "without authorization" prong (which applies to both civil and criminal claims) prohibited Nosal's actions even though he did not circumvent technological barriers to access the protected information, because his access had been explicitly revoked. The dissent cautioned that, in so holding, the Ninth Circuit had "los[t] sight of the antihacking purpose of the CFAA" and "jeopardiz[ed] most password sharing." Id. at *19.
We anticipate continued development regarding the scope of the CFAA, including the possibility of an amendment by Congress or a Supreme Court decision resolving the current split of authority.
Trade secret specifications
Many jurisdictions require a plaintiff to identify its trade secrets with "reasonable particularity" prior to engaging in discovery. See, e.g., Cal. Civ. Proc. Code 2019.210.7 Courts have struggled to apply this requirement, however, typically calling on plaintiffs to merely "identify or designate the trade secrets at issue with sufficient particularity to limit the permissible scope of discovery by distinguishing the trade secrets from matters of general knowledge in the trade . . . ." Advanced Modular Sputtering, Inc. v. Superior Court, 132 Cal. App. 4th 826, 835 (2005). Federal courts sitting in California apply this rule as well. E.g., Loop AI Labs Inc. v. Gatti, --- F. Supp. 3d --- 2016 WL 3654378, at *2-3 (N.D. Cal. July 6, 2016) (applying California's reasonable particularity standard, but noting "there is no bright-line rule governing the level of particularity required"). New York also tends to require plaintiffs to distinguish their trade secret from the general knowledge of the field so as to allow defendants to prepare their defense. See MSCI Inc. v. Jacob, 945 N.Y.S. 2d 863, 865 (N.Y. Sup. Ct. 2012); Dorset Indus., Inc. v. Unified Grocers, Inc., 893 F. Supp. 2d 395, 412-13 (E.D.N.Y. 2012) (declining to apply higher standard at motion to dismiss stage); see also AutoMed Techs., Inc. v. Eller, 160 F. Supp. 2d 915, 925-26 (N.D. Ill. 2001) (applying similar standard under Illinois law).
Whether a plaintiff has defined its trade secret with sufficient particularity is inherently a fact-based inquiry, and the goal is to put the defendant on notice and give the
defendant an idea of what is relevant in discovery. Vesta Corp. v. Amdocs Mgmt. Ltd., 147 F. Supp. 3d 1147, 1155 (D. Or. 2015). But some courts have been more stringent with this requirement and may require enough specificity to allow the parties to "adequately discern what might be legally protectable." Tucson Embedded Sys., Inc. v. Turbine Powered Tech. LLC, 2016 WL 1408347, at *8 (D. Ariz. Apr. 11, 2016) (granting summary judgment for defendant even though plaintiff "invested significant time and resources" to develop the trade secret because plaintiff failed to disclose sufficient detail).
The specificity issue can be difficult for plaintiffs to manage. They can be stuck between wanting to cast a wide net to capture all of the trade secrets they believe may have been misappropriated while, at the same time, feeling pressure from courts and defendants to nail down their trade secrets with sufficient clarity. Mishandling the requirement can result in dismissal of a plaintiff's claims or open plaintiffs to cumbersome discovery. See, e.g., Tucson Embedded Sys., 2016 WL 1408347 at *8.
Nonetheless, many plaintiffs continue to use sweeping, "catch all" trade secret descriptions, which they view as appropriate until they have learned precisely what was stolen by the defendant. This can be risky. For instance in Via Technologies, Inc. v. Asus Computer International, language in a trade secret disclosure that trades secrets "include, but are not limited to" certain items was deemed improperly vague as it was over-inclusive. 2016 WL
7 While the particularity requirement has not been universally adopted by states and federal courts, it is widely recognized as an important factor or implicit requirement. See, e.g., Big Vision Private Ltd. v. E.I. DuPont De Nemours & Co., 1 F. Supp. 3d 224, 258-59 (S.D.N.Y. 2014) ("While the Second Circuit has not explicitly adopted this requirement, each Circuit Court of Appeals to have opined on this issue has required a comparable degree of specificity, as have numerous district courts across the country."). The newly enacted federal Defend Trade Secrets Act does not have an explicit particularity requirement. See 18 U.S.C. 1832, et seq. (enacted May 11, 2016).
1056139, at *3 (N.D. Cal. Mar. 17, 2016). Even though the disclosure described several subparts in detail, the court found that the disclosure "gives Defendants--and the court--practically no guidance on precisely what [plaintiff] claims as its trade secrets." Id.; see also Loop AI Labs, 2016 WL 3654378, at *3 (noting inventory-like list of trade secrets without more detail is insufficient). In response, the court limited the plaintiff to conducting discovery only as to what it had specifically identified, namely the sections of its disclosure described in detail. Via Techs., Inc., 2016 WL 1056139, at *3. Overly broad disclosures may also make it easier for a defendant to obtain dismissal as to many, or all, of a plaintiff's trade secrets because a vague disclosure may touch on areas that are in the public domain, generally known in the industry, or publicly disclosed by the plaintiff itself, such as through investor presentations or marketing materials. Although the definition of a trade secret can evolve throughout the litigation, these changes are often met with
charges of being a "moving target" and claims that prior disclosures were insufficient. See, e.g., Xtec, Inc. v. Hembree Consulting Servs., Inc., --- F. Supp. 3d ---, 2016 WL 1702223, at *6 (S.D. Fla. Apr. 28, 2016).
One thing to keep in mind is that robust protective orders and confidentiality designations are vital when identifying trade secrets. Indeed, a court recently considered a plaintiff's public filing of its trade secret disclosure without confidentiality protections as a key factor in ruling the disclosure was insufficiently detailed. Loop AI Labs., 2016 WL 3654378, at *2-3; see also Big Vision Private Ltd., 1 F. Supp. 3d at 261 (noting absence of a written confidentiality agreement between the parties at the time of alleged disclosure of plaintiff's trade secrets as a factor in finding plaintiff's specification insufficient).
Damages Remain Essentially Unchanged under the New Defend Trade Secrets Act
Though the Defend Trade Secrets Act (DTSA) creates a federal claim for trade secret misappropriation, the types of available damages were, in large part, unaffected by the new federal statute. As such, the DTSA borrows from the Uniform Trade Secrets Act and provides the same three categories of damages: actual damages, unjust enrichment, and reasonable royalty. 18 U.S.C.A. 1836 (2016). However, a court may also award exemplary damages in the amount of two times the awarded damages where the trade secret was "willfully and maliciously misappropriated." Id.
The DTSA also provides a new incentive with respect to damages to encourage whistleblowers to report suspected trade secret theft. Specifically, the DTSA requires employers to notify employees, contractors, and consultants of whistleblower immunity. 18 U.S.C.A. 1833 (2016). Importantly, if an employer fails to provide the proper notice, it cannot recover legal fees or punitive damages against an employee who misappropriated its trade secrets. 18 U.S.C.A. 1833 (2016).
Inevitable Disclosure Doctrine
The inevitable disclosure doctrine allows a court to grant a former employer immediate relief by imposing a preliminary injunction prohibiting a departing employee from taking a new, competitive job based on a prediction of future trade secret misappropriation, without evidence of the employee's actual or threatened disclosure. Essentially, the inevitable disclosure doctrine can fill the evidentiary void before discovery when an employer does not have particularized evidence of employee misconduct.
The doctrine has been hotly debated for years, and courts continue to take divergent views of the inevitable disclosure doctrine. Below are key states grouped according to their treatment of the doctrine.
1. States that have adopted the inevitable disclosure doctrine in its strongest form.
Arkansas, Delaware, Minnesota, New Jersey, Pennsylvania, and Utah courts apply the inevitable disclosure doctrine to grant injunctive relief without proof of actual misappropriation, proof of the traditional requirements for establishing threatened misappropriation, an express non-competition agreement, or bad faith or inequitable conduct. In these states, a former employee can be enjoined from performing certain post-employment activities if the former employer can show that, by simply performing duties for the new employer, the employee cannot help but utilize or disclose knowledge of trade secrets gained through that employee's work for the former employer. See, e.g., UtiliSave, LLC v. Miele, 2015 WL 5458960 (Del. Ch. Sept. 17, 2015) (noting that the defendant could not "unlearn" what he learned while working for his former employer and that "his extensive knowledge would almost certainly filter into his work and result in disclosure of [his former employer's] trade secrets"); WebMD Health Corp. v. Dale, 2012 WL 3263582 (E.D. Pa. Aug. 10, 2012) (finding that because the defendant was exposed to confidential information about his former employer's sales, marketing, and pricing strategies, he "would be likely to use that information, either consciously or not, when competing against" his former employer at his new job).
2. States that apply the inevitable disclosure doctrine only where a non-competition agreement exists.
5405543 (S.D.N.Y. Aug. 29, 2013) (refusing to grant a permanent injunction against a former employee based on the inevitable disclosure of trade secrets when the employer had not alleged that the employee had misappropriated any of its trade secrets or signed a noncompete agreement).
3. States that conflate the inevitable disclosure doctrine with threatened misappropriation.
Indiana, Michigan, Missouri, and some Illinois courts apply the inevitable disclosure doctrine to support trade secret misappropriation claims only where the plaintiff proves bad faith conduct on the part of the former employee or the new employer. See, e.g., Liebert Corp. v. Mazur, 357 Ill. App. 3d 265 (2005) (finding a preliminary injunction necessary to prevent the inevitable disclosure of trade secrets when the defendant copied the employer's confidential files and tried to delete evidence of wrongdoing).
4. States that reject the inevitable disclosure doctrine.
California, Georgia, Maryland, Virginia, and Louisiana courts have rejected the inevitable disclosure doctrine. See, e.g., Parrish v. Latham & Watkins, 238 Cal. App. 4th 81, reh'g denied (July 21, 2015), review granted on other grounds and opinion superseded, 357 P.3d 769 (Cal. 2015).
5. States where adherence to the inevitable disclosure doctrine is unclear.
Florida, Massachusetts, North Carolina, Texas, and Washington courts have not provided a clear indication of whether they have adopted the doctrine. See, e.g., Moore v. Commercial Aircraft Interiors, LLC, 168 Wn. App. 502 (2012).
The Defend Trade Secrets Act (DTSA), as discussed above, appears to reject the inevitable disclosure doctrine, expressly forbidding injunctions that limit employment based "merely on the information the person knows" or that "conflict with an applicable state law prohibiting restraints on the practice of a lawful profession, trade, or business." 18 U.S.C. 1836(b)(3)(A)(i)(I)-(II). It remains to be seen how this provision will be applied in practice.
Connecticut, New York, and Ohio courts apply the inevitable disclosure doctrine only when the former employee is bound by a covenant not to compete. The inevitable disclosure doctrine does not constitute an independent form of trade secret misappropriation in these states. See, e.g., Janus et Cie v. Kahnke, 2013 WL
With nearly all 50 states having adopted some form of the Uniform Trade Secrets Act (UTSA), including its preemption language, the issue of preemption continues to play an important role in trade secret cases.
On July 19, 2016, for example, a federal judge in Florida dismissed two claims brought by the plaintiff in Developmental Technologies, LLC v. Valmont Industries, Inc. et al., No. 8:14-cv-02796 (M.D. Fla.), on the ground that they were preempted by Florida's UTSA. The case centers on allegations that defendants DuPont and Valmont Industries misappropriated proprietary information regarding underground irrigation technology and used it to develop a competing product. The court held that two of the claims brought by Development Technologies one for common law misappropriation of ideas, the other for violating Florida's Deceptive and Unfair Trade Practices Act (FDUPTA) were premised on the same underlying facts as plaintiff's trade secret claim, and were therefore preempted by the Florida UTSA's provision "displac[ing] conflicting tort, restitutionary, and other law of this state providing civil remedies for misappropriation of a trade secret." The court's winnowing of claims in this lawsuit is a reminder of how important it is for practitioners to
understand their respective jurisdictions' interpretation of the UTSA's preemption clause.
Of the 47 states to enact the UTSA, all but three Iowa, Nebraska, and New Mexico have adopted preemption clauses largely identical to that in Florida's UTSA. Courts have, however, followed very different approaches in interpreting this clause. This has resulted in what the Sixth Circuit has described as "at least two axes . . . of interpretive uncertainty" regarding the scope of UTSA preemption. Stolle Mach. Co., LLC v. RAM Precision Indus., 605 F. App'x 473, 484 (6th Cir. 2015).
The First "Axis of Uncertainty"
Minority Approach. Courts in a minority of jurisdictions including Illinois, Wisconsin, New Jersey, Pennsylvania, and Virginia have held that other state law claims are preempted only if they are based on misappropriation of information that qualifies as a "trade secret" under the UTSA. Accordingly, in these jurisdictions, claims involving confidential information that does not qualify as a trade secret are not preempted. Plaintiffs are therefore free to bring a claim under the UTSA while at the same time pleading other state law claims in the alternative. If the court determines at summary judgment that the information
at issue does not qualify as a trade secret, the plaintiff can still argue that the defendant is nonetheless liable for the theft of non-trade secret confidential information, for example, under a theory of conversion or unjust enrichment.
Majority Approach. The majority of jurisdictions including courts in California, Tennessee, Michigan, Ohio, Hawaii, Indiana, Kansas, New Hampshire, Tennessee, Utah, and Arizona have taken a broader view of UTSA preemption. Courts in these jurisdictions view the UTSA as the exclusive remedy for theft of valuable commercial information. Insofar as information does not qualify as trade secret under the UTSA, these courts hold that the information does not deserve legal protection. Under this approach, courts can dismiss claims as preempted by the UTSA based solely upon the pleadings, because unlike under the minority approach, courts do not need to first determine whether information qualifies as a trade secret to determine whether claims are preempted.
The Second "Axis of Uncertainty"
Courts are also divided in how they analyze a plaintiff's causes of action to determine which should be preempted by the UTSA. Courts follow three general approaches:
Field Displacement. A minority of courts perform a one-step analysis to determine whether the common law or state law claims are aimed at protecting information covered by the UTSA, finding the claims preempted if so;
Comparison of Elements. Many more courts compare the elements of the state claim to the elements of the UTSA claim, finding the claims are preempted if the elements are similar; and
Nucleus of Facts. Favored by California courts, this analysis focuses on whether the core facts of the underlying wrong significantly overlap with the facts underlying the UTSA claim, finding preemption if so.
Under these analyses, some causes of action are more likely to be preempted than others.
Frequently Preempted Close Calls
Conversion; Unjust Enrichment; Conspiracy; Fraud; Common Law Misappropriation
Breach of Fiduciary Duty; Breach of Confidential Relationship; Breach of Implied Covenant of Good Faith; Unfair Competition
Tortious Interference with Contract; Tortious Interference with Prospective Economic Advantage
Contractual Remedies; Criminal Remedies
Circling Back: Developmental Technologies, LLC. v. Valmont Industries, Inc. et al.
In some jurisdictions, courts have taken clear and consistent positions regarding their approach to UTSA preemption. In many more jurisdictions, however, courts have sent mixed messages. The scope of preemption under Florida's UTSA has been especially murky. Because no Florida state court has directly addressed the issue of UTSA preemption, all guidance on this issue comes from federal courts. While federal courts have in the past applied the Field Displacement and Comparison of Elements analyses, the court's approach in Developmental Technologies, LLC. v. Valmont Industries, Inc. et al. follows the recent trend of applying the Nucleus of Facts test to determine whether claims are preempted under Florida's UTSA. Additionally, while at least one federal court in Florida has held that dismissal based on preemption is
inappropriate until the court determines which information at issue, if any, qualifies as a trade secret which indicates the court followed the minority approach on this issue many more federal courts in Florida have dismissed claims as preempted based solely on the pleadings, and the court in Developmental Technologies followed that trend.
As referenced above, the Ninth Circuit recently affirmed the criminal convictions of Defendant David Nosal under the CFAA and the Economic Espionage Act in Nosal II, --- F.3d ---, 2016 WL 3608752 (9th Cir. 2016). With respect to the CFAA, the Ninth Circuit noted that although the meaning of "`exceeds authorized access' in the CFAA has been subject to much debate among the federal courts, the definition of `without authorization' has not engendered dispute." Id. at *21. The Court held that Nosal, a former employee whose computer access credentials had been revoked, acted "without authorization" when he or his co-conspirators used the login credentials of a current employee to gain access to computer data owned by his former employer and to circumvent the revocation of access. Id. at 24. The Court emphasized that its decision did "nothing to expand the scope of violations under the CFAA." Id. at 23. However, in his dissent, Judge Reinhardt wrote that the case was about password sharing, and in his view the CFAA "does not make millions of people who engage in this ubiquitous, useful, and generally harmless conduct into unwitting federal criminals." Id. at *46.
A recent case in the Eastern District of Texas may also have broader implications regarding the application of the CFAA. In June 2016, in USA v. Thomas, No. 4:13-cr-00227 (E.D. Tex.), a jury found an IT administrator guilty of violating the CFAA for deleting company files before he resigned. The defendant was charged with causing "unauthorized damage" to his former employer under the CFAA. In a press statement, the prosecuting US attorney commented, "The jury's verdict in this case sends an important message to IT professionals everywhere: an employee in the defendant's position holds the proverbial keys to the kingdom and with that power comes great responsibility." The verdict carries a maximum sentence of 10 years in prison and restitution up to $250,000.
The CFAA has also played a role in government efforts to combat foreign hacking. In March 2016, Chinese businessman Su Bin pled guilty to conspiring to violate the CFAA by hacking the computer networks of the Boeing Company and other major American military contractors. USA v. Bin, No. 8:14-cr-00131 (C.D. Cal.). Bin was charged with conspiring with Chinese military officers to obtain sensitive United States military aircraft designs, including for Boeing's C-17 strategic transport aircraft and F-22 fighter jet, and attempting to sell the information to Chinese companies. In July 2016, Bin was sentenced to nearly four years in prison and ordered to pay a $10,000 fine.
The newly enacted Defend Trade Secrets Act gives new teeth to the EEA. In addition to creating a private right of action under the EEA, it provides for ex parte seizure orders to prevent the propagation or dissemination of stolen trade secrets, which is not available under state law. It also increases the maximum criminal penalty for an organization convicted of a criminal violation from $5 million to "the greater of $5,000,000 or three times the value of the stolen trade secret to the organization, including expenses for research and design and other costs of reproducing the trade secret that the organization has thereby avoided." And finally, it adds criminal theft of a trade secret and foreign economic espionage as qualifying predicate offenses under RICO, so EEA violations may be used to establish a pattern of racketeering activity under RICO. With these changes, we anticipate additional criminal actions under the EEA.
Finally, the Supreme Court has proposed an amendment to Rule 41 of the Federal Rules of Criminal Procedure that would authorize federal judges to issue warrants allowing law enforcement to utilize "remote access" to seize or copy electronic information relating to a crime, including theft of trade secrets. The amendment will become law on December 1, 2016, unless rejected by Congress.
Courts have increasingly denied preliminary injunctive relief in trade secrets cases in recent years, reasoning that damages are an adequate remedy so long as they are reasonably ascertainable. This is likely to present challenges for trade secret plaintiffs seeking provisional relief, particularly as damages models continue to develop.
In Touzot v. ROM Dev. Corp., ROM sued a former employee who started a competing balsa-wood supply business. Despite the fact that the employee had a covenant not to compete and an agreement not to solicit ROM's customers, and notwithstanding the court's conclusion that ROM had fulfilled the other requirements for injunctive relief, the court denied the motion for a preliminary injunction because it found that damages were calculable. No. CV 15-6289 (JLL), 2016 WL 1688089 (D.N.J. Apr. 26, 2016).
In Apex Tool Group, LLC v. Wessels, the court rejected an attempt to secure a preliminary injunction in a former employee case, reasoning that the plaintiff had not substantiated its claims that it would suffer harm to its goodwill and competitive advantage and, therefore, that any injuries that it might incur would be fully compensable in damages. 119 F. Supp. 3d 599, 610 (E.D. Mich. 2015).
In PolyOne Corp. v. Kutka, the court relied on the plaintiff's claim that it could calculate a reasonable royalty as a sufficient basis to hold that actual damages were ascertainable and denied the motion for a preliminary injunction on that basis. 67 F. Supp. 3d 863, 874 (N.D. Ohio 2014).
In Charles Schwab & Co. v. Staley, the court denied a preliminary injunction in a former employee case where Charles Schwab's portfolio consultant left for JP Morgan. The court held that, notwithstanding that the defendant's action was "suspicious," it could not grant a preliminary injunction because Charles Schwab's injuries were compensable with damages. No. 1:15-CV-01148-TWP, 2015 WL 5567172, at *5 (S.D. Ind. Sept. 22, 2015).
Trade Secret Protection in U.S. Discovery
Effective December 1, 2015, Federal Rule of Civil Procedure 26 was amended to expressly incorporate proportionality considerations into the scope of permissible discovery.8 District courts have since held that trade secrets need not be produced in litigation even if relevant unless production is "necessary."
In Pertile v. General Motors, LLC, the District of Colorado denied the plaintiffs' motion to compel GM to produce Finite Element Analysis (FEA) Models for the vehicles at issue, despite all parties acknowledging their relevance to the plaintiffs' claims. No. 15-518, 2016 WL 1059450 (D. Colo. Mar. 17, 2016). Because the FEA Models were trade secrets, the court employed a burden-shifting test to the request for discovery: "If GM is able to prove harm associated with disclosure, then the burden shifts back to Plaintiffs to establish that the FEA Models are not only relevant, but necessary, to prove their case." The court found that GM met its burden of establishing that disclosure of the FEA Models "might" be harmful by showing it had dedicated considerable resources to developing the FEA Models, and that the Models are considered trade secrets. In then held that, even though the plaintiffs themselves were not competitors of GM, it was possible that their expert (with whom the FEA Models would be shared) could
provide consulting services to GM's competitors, and that nothing in the parties' protective order prohibited the expert from doing so. Finally, the court concluded the plaintiffs fell short of their burden to prove that discovery of the FEA Models was "necessary" because they failed to show that GM's production was otherwise inadequate.
The District of Nebraska applied a similar test in ACI Worldwide Corp. v. Mastercard Techs., LLC to shield trade secrets from production by a third party. No. 14-31, 2016 WL 3647850 (D. Neb. July 1, 2016). While recognizing that third-party BHMI's source code "may be tangentially relevant" to the plaintiff's claims against MasterCard as well as one of MasterCard's defenses, the court denied the request to compel production because the plaintiff had "not met its burden to show the source code is necessary to prepare the case for trial against MasterCard." But see In re Subpoena to Boardwalk Storage Company, LLC, No. 1439, 2016 WL 1357747 (M.D. La. Apr. 5, 2016) (compelling production of relevant trade secrets to the US government without expressly finding necessity where third party failed to show that the protective order would not adequately protect the information).
European Union Directive on Trade Secrets
New EU laws aimed at helping businesses protect their trade secrets against unlawful acquisition, use and disclosure have been approved by the Council of Europe. Directive (EU) 2016/943 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure (the "Directive") entered into force on July 5, 2016, and EU Member States are required to implement it into national laws by June 9, 2018. The Directive aims to harmonize trade secret protection across Europe by imposing a minimum standard of protection (which may be increased by national laws).
What and Who is Protected?
A trade secret is defined under the Directive as information that: (a) is a secret in the sense that it is not generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question; (b) has commercial value because it is a secret; and (c) has been subject to reasonable steps by the person lawfully in control of the information (the "trade secret holder") to keep it secret.9 The Directive will enable a licensee to protect a trade secret, as well as its original owner.10
8 The rule now provides that, "[u]nless otherwise limited by court order," parties "may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense and proportional to the needs of the case, considering the importance of the issues at state in the action, the amount in controversy, the parties' relative access to relevant information, the parties' resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs it likely benefit." Fed. R. Civ. P. 26(b)(1). 9 Article 2(1) of the Directive. 10 Article 2(2) of the Directive.
What Activities are Prohibited?
Under the Directive, it will be unlawful for anyone, without consent, to acquire a trade secret through: (a) unauthorized access to, appropriation of, or copying of any documents or other materials lawfully under the control of the trade secret holder containing the trade secret or from which the trade secret can be deduced; or (b) any other conduct which is considered contrary to "honest commercial practices"11 (which is not defined).
Disclosure or use of an unlawfully gained trade secret, or disclosure/use in breach of a contractual duty or duty of confidence will also be unlawful.12
Third parties will be liable if they acquire, use or disclose a trade secret from another person if they knew or should have known that the trade secret had been obtained unlawfully, or if they knowingly or recklessly manufactured or imported goods produced as a result of the unlawful use of a trade secret.13
Exceptions to otherwise unlawful conduct include where the acquisition, use or disclosure of the trade secret was carried out for (a) exercising freedom of expression and information (as set out in the EU's Charter of Fundamental Rights); or (b) revealing misconduct, wrongdoing or illegal activity (as long as it was done in the general public interest).14 Further, nothing in the Directive is intended to limit an employee's mobility and so does not limit an employee's use of (a) information that does not constitute a trade secret; or (b) experience and skills honestly acquired in the normal course of their employment.15
On the other hand, the Directive clarifies that it is lawful to acquire trade secrets by (a) independent discovery or creation; (b) reverse engineering from a product or object that has been made available to the public or is lawfully in the possession of the acquirer of the information; and (c) any other practice which is in conformity with "honest commercial practices".16
Remedies for Breach of an Obligation
Remedies include injunctive relief (both interim and final) and an award of damages.17 The limitations period for bringing a civil claim may not exceed six years, but Member States can elect to implement a lesser period.18
Implementation in the UK
The extent to which the Directive will have a significant impact in the UK remains to be seen. As a result of Brexit, the UK may not be obliged to implement the terms of the Directive, although politically it may be in the UK's interest to do so. Further, the substance of the Directive is already broadly reflected in UK law and thus its implementation is unlikely to lead to significant changes in practice.
Additional International Trade Issues to Consider
Theft of trade secrets by foreign entities has increasingly become a concern for any company with trade secrets requiring protection. It is also a particular concern for corporations in and the government of the United States. The Defend Trade Secrets Act (DTSA) and the TransPacific Partnership Agreement (TPPA) have the potential to change the landscape of trade secret law around the globe, both by enhancing the ability of companies in the United States to go after foreign theft and through requiring foreign countries to implement stronger protection regimes of their own.
The DTSA, discussed in detail elsewhere in this update, applies to certain conduct occurring outside the United States through 18 U.S.C. 1837(2). That section applies the laws of the broader chapter, including the DTSA, to "conduct occurring outside the United States if . . . an act in furtherance of the offense was committed in the United States." Although this would not cover every instance of trade secret misappropriation that occurs, it may potentially cover acts such as hacking computer systems based in the United States. As time passes and case law develops, the boundaries of the applicability of the DTSA should become clearer.
In addition to enabling companies to go after foreign-related theft, the DTSA also requires the attorney general to
11 Article 4(2) of the Directive. 12 Article 4(3) of the Directive. 13 Articles 4(4) and 4(5) of the Directive. 14 Article 5 of the Directive. 15 Article 1(3) of the Directive. 16 Article 3(1) of the Directive. 17 Articles 10-14 of the Directive. 18 Article 8 of the Directive.
produce a public report every two years detailing the "scope and breadth of the theft of the trade secrets of United States companies occurring outside of the United States." This includes the extent of such theft, the threat of the theft, the abilities and limitations of owners in preventing theft, and information about trade secret protections available in each trading partner country of the United States. Furthermore, the law requires updates about progress made under international agreements and information about how the United States government works with other countries to prosecute trade secret theft and requires the attorney general to make recommendations to the legislative and executive branches about how to remedy the problems posed by trade secret theft. The first report is due by May 11, 2017.
The second significant item to watch is the TPPA, which is currently signed by 12 countries but has not yet been ratified by any.19 Article 18.78 of the TPPA requires parties to enact criminal procedures and penalties in certain circumstances surrounding trade secret theft. The agreement provides some leeway for implementation in the member countries, but still sets a flexible minimum for the criminalization of trade secret misappropriation.20 Ultimately, however, criminal penalties are only as effective as the governments that are enforcing them, making the potential ratification of the TPPA only the first step in reforming international trade secret law. The near future will be a key time to watch the implementation of both the DTSA and the TPPA, to see whether the current promise of the documents stands up to the real-world pressures of diverging wills and differing national interests.
19 The 12 signatories are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam.
20 Specifically, the Trans-Pacific Partnership Agreement states that "each Party shall provide for criminal procedures and penalties for one or more of the following: (a) the unauthorized and wilful access to a trade secret held in a computer system; (b) the unauthorized and wilful misappropriation of a trade secret, including by means of a computer system; or (c) the fraudulent disclosure, or alternatively, the unauthorized and wilful disclosure, of a trade secret, including by means of a computer system." The agreement further states that a party may limit the availability of such criminal penalties to acts with certain motives, specifically when "(a) the acts are for purposes of commercial advantage or financial gain; (b) the acts are related to a product or service in national or international commerce; (c) the acts are intended to injure the owner of such a trade secret; (d) the acts are directed by or for the benefit of or in association with a foreign economic entity; or (e) the acts are detrimental to a Party's economic interests, international relations, or national defence or national security." https://ustr.gov/sites/default/files/TPP-Final-Text-Intellectual-Property.pdf.
Our Trade Secrets and Restrictive Covenants Practice
Jenner & Block's Trade Secrets and Restrictive Covenants practice is at the forefront of trade secret law. We are highly experienced at securing victories for our clients, as plaintiffs and defendants, both in and out of the courtroom. Our interdisciplinary team comprises members of the firm's Litigation, Intellectual Property, and Labor and Employment practices. This coordinated approach results in a team that is highly collaborative and excels at providing proactive counseling to avoid litigation and successfully and efficiently resolving litigation if it does arise. Our lawyers have litigated trade secret cases throughout the country, in both state and federal courts, from temporary restraining orders to trial and appeals. With a proliferation of cases aimed at protecting or attacking valuable intellectual property, trade secrets are more important than ever.
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