Source: https://patentlyo.com/patent/2016/01/amended-defend-secrets.html
Timestamp: 2019-04-24 06:36:03+00:00

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Guest post by James Pooley. Pooley is the former Deputy Director General of WIPO. He recently testified at the Senate Judiciary Committee in favor of the Defend Trade Secrets Act. See his earlier Patently-O guest posts . He wishes to thank Prof. Peter Menell for contributing to this post.
The notable amendments generally fall into four categories: (1) harmonizing with existing standards under the Uniform Trade Secrets Act (“UTSA”); (2) tightening up the process for preventive seizure of secrets; (3) ensuring that injunctions do not unreasonably restrain employee mobility; and (4) providing an exception for whistleblowers who disclose confidential information in order to report a crime to the authorities. The first three of these are laid out in a “Substitute” for S.1890, and the fourth is described in a separate amendment proposed by Senators Patrick Leahy and Chuck Grassley.
The amendments have also changed the term of the statute of limitations from five years to three. Although a number of states have designated longer periods (from four to six years), this brings the DTSA into line with the UTSA as it was originally proposed. In the same vein, the enhanced damages provision, which had allowed a punitive assessment up to three times the compensatory award, has been adjusted to match the provisions of the UTSA at twice the amount of compensatory damages.
The ex parte seizure provisions have been substantially tightened, providing more assurance that this remedy will not be abused. First, the bill now expressly refers to seizure as available only in “extraordinary circumstances.” Second, an ambiguity identified by Senator Whitehouse at the December hearing has been resolved by clarifying that the target of the seizure must be in “actual” possession of the trade secret and property to be seized. Third, access to the seized material is more limited: only federal law enforcement can perform the seizure, with assistance as necessary from state authorities and an independent technical expert, but the applicant is barred. And following the seizure, the court may have the material sorted by a special master who, like the technical expert, must be under confidentiality restrictions. Fourth, in issuing its order the court must direct when the seizure may be carried out, and whether force may be used to access locked areas. Finally, in a new section the bill requires the Federal Judicial Center to develop “best practices” for seizure and handling of electronically stored information.
One of the most interesting and potentially impactful provisions of the amendments concerns the preservation of employee mobility. Recognizing the critical importance of preventive relief to a right that can be so easily destroyed, the UTSA has always permitted injunctions against “threatened misappropriation,” and the same language is used in the DTSA. But because the DTSA would establish a national standard, some expressed fears that the “inevitable disclosure doctrine,” which has been expressly rejected in some states, might be used by federal judges to block an employee from taking a new job. The draft bill had tried to address this concern with a proviso that no injunction could “prevent a person from accepting an offer of employment under conditions that avoid actual or threatened misappropriation,” but this did not quiet the controversy.
To understand the nature of the dispute we need to wind back the clock to 1995, when the Seventh Circuit issued its decision in Pepsico v. Redmond, 54 F.3d 1262 (7th Cir. 1995), affirming a five-month injunction against a former marketing executive who had lied about his plans to take an identical position with another company that was about to launch a directly competitive product. Although the court had emphasized the executive’s bad behavior, it also summarized that “defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.” Commentators promptly wrenched this phrase from its context and warned that Pepsico could be used to justify enjoining someone from taking a job just because of what he or she knew. This is how the so-called “inevitable disclosure doctrine” was born.
Having (mis)construed Pepsico this way, it was easy for some to make it a target, raising the alarm that “inevitable disclosure” was the equivalent of a post-hoc judicially-imposed non-compete agreement. Perhaps unsurprisingly, the backlash was particularly strong in California, where employees are protected by a robust public policy against restrictive covenants. In Whyte v. Schlage Lock, 101 Cal. App. 4th (2002), an intermediate appellate court issued a blistering condemnation of the doctrine and flatly declared it unacceptable under California law. It did this in response to the plaintiff’s argument that the doctrine should be available as an “alternative” to proving “threatened misappropriation.” Just what kind of evidence might be enough to establish a threat under the UTSA was not addressed. However, that question was answered several years later in another appellate decision, Central Valley General Hospital v. Smith, 162 Cal. App. 4th 501 (2008). The court said that evidence of bad behavior, like a prior misappropriation, an intention to misappropriate, or a refusal to return confidential material, would be enough to supply the inference.
In the meantime, however, the ideological battle lines had been drawn, and the forces mustering against inevitable disclosure, reinforced by many academic and popular articles, were determined to stamp it out if possible, or at least to protect their own jurisdiction from infection. The fervor of the debate apparently distracted everyone from critically examining what “inevitable disclosure” meant, or how it was actually being applied in places that didn’t have a reflexive opposition to it. It turns out that the doctrine was almost never used as the opponents assumed, that is where the only threat indicator was how much the employee knew. In fact, in those cases judges typically explained their denials by reminding the plaintiff that if all this information had been so critically important they could have demanded that the employee sign a non-compete agreement.
Following last December’s hearing, and in the wake of continuing concerns over the relevant DTSA language, I reached out to my friend Mark Lemley, professor at Stanford Law School. Mark and I had worked together before on issues relating to California’s “high velocity” labor market, and after some discussion about what appeared to be this false conflict over the inevitable disclosure doctrine, we suggested to Senate staff that the issue could better be reframed around the kind and quality of evidence that should be required – under the UTSA or the DTSA – to prove “threatened misappropriation,” and that the inquiry should focus on the employee’s behavior, not merely on how much they knew.
The new language on threatened misappropriation has at least two very positive effects. First, it makes express the apparent consensus from the courts that “threatened” misappropriation may not be established merely by the importance of the information that someone knows. This makes sense not only as a matter of public policy but also of evidence law. Second, it relieves us from the energy-draining debate over “inevitable disclosure,” which was pretty much a straw man that people loved to punch. Courts will not have to consider whether a jurisdiction accepts or rejects this abstract “doctrine,” but instead will ask: what is the actual evidence from which we should conclude that this person (or their new employer) can’t be trusted to honor the integrity of the plaintiff’s trade secrets? Outcomes in particular cases should not be substantially different.
A second major amendment was offered separately by Senators Leahy and Grassley, addressing a new, and in my opinion long neglected, question: how do we assure that employees and contractors who come upon evidence of illegal activity, but who are constrained by nondisclosure agreements from communicating those facts, can safely speak to their lawyers and to law enforcement officials? One might think that this question would already have been reliably answered by now, but it hasn’t been. In a wide-ranging and thoughtful on the subject, Tailoring a Public Policy Exception to Trade Secret Protection, Professor Peter Menell of the UC Berkeley School of Law explores not only the sparse, murky, and sometimes contradictory legal authority, but also the psychology of whistleblowing and the importance of a clear “safe harbor” for those who are thinking of reporting wrongdoing. As he notes, “[t]he same routine non-disclosure agreements that are essential to safeguarding trade secrets can be and are used to chill those in the best position to reveal illegal activity.” As a practical matter, employees and contractors face a stark dilemma, where the upside is a clear conscience (and possibly a reward for uncovering fraud) but the downside can involve painful and relentless retaliation as well as personal, financial, legal, and professional risk. Insulating the whistleblower from costly trade secret exposure serves larger societal interests in law enforcement, tax compliance, and surfacing and deterring securities fraud and fraud against the government..
Yet because of the difficulty of enforcing trade secrets once they leak, companies risk potentially significant losses if employees or contractors mistakenly disclose legitimate trade secrets—i.e., those that do not reveal illegal conduct. Peter’s article provided a balanced and effective solution to this dilemma that protects whistleblowers without jeopardizing disclosure of legitimate trade secrets. The proposed safe harbor insulates whistleblowers and their counsel from trade secret liability for disclosing trade secret information in confidence to government officials or as part of a lawsuit alleging retaliation by an employer provided that the information is filed under seal. (The federal Trade Secrets Act, 18 U.S.C. § 1905, generally prohibits governmental employees from disclosing trade secrets.) The proposed statutory exception to trade secret liability provides clear assurance to potential whistleblowers that they do not violate their NDAs merely by consulting legal counsel regarding reporting allegedly illegal conduct to a responsible government official through a confidential channel. In addition, this safe harbor insulates lawyers advising potential whistleblowers about their options and serving as conduits for presenting evidence of allegedly illegal conduct to the government. The efficacy of the safe harbor is enhanced by requiring that NDAs prominently include notice of the law reporting safe harbor to ensure that those with knowledge of illegal conduct are aware of this important public policy limitation on NDAs and exercise due care with trade secrets in reporting such activity.
After Peter’s article appeared just as the DTSA was gaining momentum in the fall, the Senate staff reached out to him to help craft appropriate language. The Leahy/Grassley amendment provides immunity under federal or state law against any claim for violation of an individual’s nondisclosure obligations for disclosure, made in confidence, to (a) an attorney or government official, for the purpose of reporting or investigating a violation of law, or (b) a filing made under seal in a lawsuit “or other proceeding.” In order to ensure that employees (a term that also includes contractors) know about their rights, employers are required to give an appropriate notice in the nondisclosure agreement (as is often done now with state inventor statutes), although this can be a reference to the company’s separate policy document. A failure to comply with the notice provision would block any award of attorneys’ fees or enhanced damages against an employee under the DTSA. Significantly – and this point was emphasized by Senator Feinstein at the hearing on January 28 – the whistleblower protection would not extend to any otherwise improper acts by the employee, such as hacking information in violation of the Computer Fraud and Abuse Act.
The DTSA in its current form is a strong bill, meeting its original objective of giving plaintiffs access to federal courts, which are better equipped to handle cases of interstate or international misappropriation of trade secrets. In my opinion, all reasonable objections have been adequately addressed, and there are sufficient protections built in against abuse. Moreover, passage of this bill would substantially improve the environment for both plaintiffs and defendants, by making trade secret litigation more predictable, establishing a national standard for issues like “threatened misappropriation,” and striking the right balance of interests to promote responsible efforts by whistleblowers to report possible violations of law.
Mr. Pooley’s article grossly understates the problem with the “inevitable disclosure” doctrine — calling it a “straw man” or a “false conflict.” Not so. In jurisdictions where it has been adopted, large corporations have often used “inevitable disclosure” to prevent an ex-employee from working for a competitor, even in the absence of **any** actual or threatened misappropriation of real trade secrets.
As merely one example, during the late 1980s and early 1990s, IBM sued Seagate to prevent an ex-IBM employee merely from working for Seagate because of the employee’s knowledge of IBM’s disk drive technology. See IBM Corp. v. Seagate Technology, Inc., 941 F. Supp. 98 (D. Minn. 1992) (preliminary injunction in effect from December 1989 to April 1992, when it was dissolved by the Eighth Circuit). There are other examples, especially involving established companies trying to crush smaller startups.
Mr. Pooley is correct that the California courts have rejected “inevitable disclosure” as a basis for relief. But several non-California courts still follow it — sorry, Jim, but there is a “real” conflict, not a “false” one — and the original proposed language in the DTSA could have imposed this terrible doctrine nationwide, including in California. Fortunately the amendments appear to have fixed the problem. But make one thing clear: had those amendments not been adopted, many California lawyers (including myself) would have vigorously opposed this statute.
Still, the question is what will employment look like for a new engineer hired by Google. That is question that should be answered. How much can Google closed down disclosure and lock up employment.
Under existing California law, the answer is: Not much, if the ex-employee is careful. The ex-employee must be careful not to take anything on departure that comes even close to being confidential — no code, no emails; wipe the home computer clean of anything Google related. And the ex-employee’s new employer should make sure the ex-employee hasn’t brought anything improper to the new company. Once at the new company, the ex-Googler should take care not to use or discuss anything he/she remembers about Google confidential stuff.
But in California, the ex-employee is free to take the new job.
I believe the employee involved was eventually compensated by IBM.
But, IBM did establish the idea in its employee’s heads, and in the minds of any hiring executive that might hire an IBM employee, that if you leave to work for a competitor, there might be h*ll to pay. Now, if the rights of individuals were not at issue, this system might be justifiable.
Also, the doctrine is so effective in keeping secrets secret, that it really undermines the rationale of Kewanee in not preempting trade secret law in the first place. Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 94 S. Ct. 1879, 40 L. Ed. 2d 315 (1974).
Ned, I think we are substantially in agreement.
I used the IBM v. Seagate case just as an example. Even if the employee was “eventually compensated” by IBM, the preliminary injunction lasted for years! This kept the employee from working in the field in which he was trained, and allowed IBM to slow down a competitor.
I don’t know if it’s practical to get rid of “inevitable disclosure” in the states that allow it. But we can sure keep it from spreading.
I wonder if allowing employees to keep top secret information on private servers not under the company control is effectively a disclosure?
I think a good argument can be made.
You need more facts first.
I wrote an article on the problem of trade secrets stored in the cloud and proposed some legislative solutions so that we do not need to litigate this issue for years. See Lost in the Cloud: Information Flows and the Implications of Cloud Computing for Trade Secret Protection, available at: link to vjolt.net.
It turns on whether your view of “third party” is invoked by a provider who likely is NOT interested in the contents – and would have NO [legitimate] business reason to view the contents – of the space provided.
I would have written less if I had more time.
anon, I think the issue depends and should the patent upon whether putative the trade secret owner has taken reasonable steps to keep the information secret. Given that privately owned servers are essentially available to the public – are least are not controlled by the trade secret owner, I would argue that allowing employees to keep top-secret information on a private server is effectively a public disclosure of that information regardless of whether or not one can prove public access in fact.
This is why a company wanting to maintain trade secrets must adopt a policy to keep its top-secret information entirely under servers of its own control – or encrypt transmissions when it uses communications devices outside of its own control such as the Internet.
With respect to the government analog, clearly the policy of the government is to keep top information on servers controlled by the government. If the government permits employees to keep top-secret information on servers not under its control, then the government essentially is not keeping its top-secret information secret.
I once had a secret cypto clearance due to my work on Minuteman III missiles. Let me tell you, the hoops we had to go through the keep what we were doing secret was amazing. The idea that we could take anything containing top-secret information off the premises was absurd.
The “control” – or lack thereof is a mere fabrication on your part.
There IS an expectation that items “in the cloud” are NOT in a free-for-all-ANYONE-can-access state.
If that were true, then NO law firm would ethically be allowed to use any cloud storage.
What do you make of this:?
anon, our company years ago decided to forgo using some of the more popular patent portfolio management services because our data would be located on databases not under our control.
I can fully understand how a company having top-secret information would hardly allow it to be located on a server of an employee without any guarantee of any kind as to security. This is virtually a public disclosure of the information. I really do not care whether others argue that it is not a public disclosure. It is.
You will pardon me, but this is a CLASSIC “Ned says so, so it must be so” incident.
CLEARLY, your choice is ONLY a choice, and simply does NOT determine what is and what is not a public disclosure for the legal points here.
The fact that you feel one way about it is simply inconsequential to the actuality of what that term means.
Here too, your attempt to buttress your TOP-secret anecdote is simply misleading, as there just is NOT that same level of control required for EITHER trade secrets or for the ethical duties of attorneys.
You are very much free to choose for yourself a level of secrecy above and beyond that which is necessary. But do NOT make the egregious mistake of thinking that your choice mandates that same level for the legal items here.
Your “story” about “top secret” is a non sequitur, trade secrets do NOT require that level of effort.
anon, the reference to “top secret” is there to indirectly discuss a controversy that now rages in the news.
But I think the analog to trade secret law is apparent.
And just as apparent Ned – per my comment, is the difference.
You anecdote does not carry the point that you think it does – quite the opposite, in fact.
Ordinary skill in the art and skilled in the art are two statutory distinct beasts, albeit in extremely important matters of degree.
Sorry, this comment was not intended for this string.
Still hate it. But I don’t loathe it as much.
Still think lots of employers are going to try and use it a non-compete, especially in California.
Thank you, Mr. Pooley, for the interesting history of the “inevitable disclosure doctrine”. That was a good read.
Thank you for the additional views.
But I do have to wonder about the apparent disparity of power (and resources) between a corporation and a single employee. Would any protections “under the law” suffer from that disparity? Would those protections be just a paper tiger?
For example, even in California, with its noted protections, we had a recent sharing that corporations were engaging in “price fixing” of a sort, with colluding about how to not engage employees (directly affecting employee mobility and power to drive their salary to a true market value).
What does it mean to not engage an employee?
Not offering positions to employees that work for competitors, I believe.
I had the same concern, anon. Though Feinstein’s amendment is an improvement, I worry about the chilling effect that this legislation will have on employment mobility.
Here’s the thing: I don’t know if I want to strengthen trade secret law. I want businesses to use patent protection, not trade secret. These issues, these unintended consequences, are not at all problematic in patent law.
J, give us a world patent, and you have a deal.
You need a world sovereign first, Ned.
You do know that patent law is particular** to a sovereign, right?
**notwithstanding treaties that seek to extend mutual treatments between sovereigns.
Nah Ned, treaties are not enough. They still reflect back to the sovereigns signing them.
The aspect that you are missing is the “citizenship” aspect – the bane of the current set up that allows nonsingle-“citizen” Big Corporations to play their “move the asset” game with NO drawbacks.
Individuals (as in real inventors) do not have that “ploy” mechanism.
I agree 100 per cent with this excellent analysis by Jim Pooley. All of the amendments upgrade the DTSA legislation.
We gotta work on the ALL CAPITAL LETTERS IN THE TITLE IT’S ANNOYING.
It’s not necessary, that’s for sure.
Perhaps it serves to highlight the INCREDIBLE URGENCY but there’s other ways of doing that.

References: v. 
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 § 1905
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