Source: https://patentlyo.com/tag/trade-secrets/page/2
Timestamp: 2019-04-21 18:08:32+00:00

Document:
The following are a collection of posts on trade secrets. Trade secrets are essentially of two kinds. On the one hand, trade secrets may concern inventions or manufacturing processes that do not meet the patentability criteria and therefore can only be protected as trade secrets. This would be the case of customers lists or manufacturing processes that are not sufficiently inventive to be granted a patent (though they may qualify for protection as a utility model). On the other hand, trade secrets may concern inventions that would fulfill the patentability criteria and could therefore be protected by patents. In the latter case, the SME will face a choice: to patent the invention or to keep it as a trade secret.
Constitutional Challenge to Inter Partes Review: Although the Constitutional issues in Cooper v. Lee and MCM v. HP were law-professor-interesting, they were not substantial enough for certiorari. The Supreme Court has now denied the Cooper and MCM petitions — leaving the IPR regime unchanged. Although Cooper v. Square is still pending, its chances are slight. The Supreme Court has also denied certiorari in Encyclopaedia Britannica (malpractice), Gnosis (appellate review), and GeoTag (case-or-controversy).
A new 101 Challenge: In its first conference of the term, the Supreme Court denied all of the pending petitions regarding patent eligibility. However, Trading Technologies has filed a new petition asking whether a new card game is categorically unpatentable so long as it uses a standard deck (rather than a novel deck) of cards. My post on the case asks: Does the Patent Statute Cabin-in the Abstract Idea Exception? That question references Section 100 of the Patent Act that expressly allows for the patenting of new use of a known manufacture.
Extra Territoriality of Trade Secrecy Law: On the trade secrecy front, Sino Legend has petitioned to review the Federal Circuit’s affirmance of the International Trade Commision’s ban on Legend’s importation of rubber resins used for tire production. The underlying bad-act was a trade secret misappropriation that occurred in China and the question on appeal asks: Whether Section 337(a)(1)(A) permits the ITC to adjudicate claims regarding trade secret misappropriation alleged to have occurred outside the United States. A Chinese court looked at the same case and found no misappropriation.
Design Patent Damages: Oral arguments were held earlier this week in Samsung v. Apple. During the arguments, all parties agreed that (1) the statute does not allow for apportionment of damages but rather requires profit disgorgement; (2) the article-of-manufacture from which profits can be calculated may be a component of the product sold to consumers; and (3) the determination of what counts as the article-of-manufacture is a question of fact to be determined by the jury. The only dispute then was on the factors that a jury should be considered and when the “inside gears” of a product should ever be included in the calculation.
Upcoming Supreme Court Oral Argument: SCA Hygiene (laches) on November 1; Star Athletica (copyright of cheerleader outfit) on October 31.
I agree that all claims on appeal fall outside of 35 U.S.C. § 101. I write separately, however, to make two points: (1) patents constricting the essential channels of online communication run afoul of the First Amendment; and (2) claims directed to software implemented on a generic computer are categorically not eligible for patent.
Prof. Elizabeth Rowe (Florida) has posted a new article on trade secret damages: Unpacking Trade Secret Damages. The article looks at outcomes of about 150 federal trade secret lawsuits that went to trial and received a verdict. These cases are all pre-DTSA and thus in federal court on diversity or supplemental jurisdiction grounds. Prof Rowe found – in my view – a surprisingly low percentage of cases where punitive damages or attorney fees were awarded (~2% and 8% respectively – of cases with an award).
The award distribution is also highly skewed. “[T]en cases account for half of the total damages of the approximately $2.4 billion awarded since 2000.” Top on this list is DuPont’s 2011 award of 900 million against Kolon.
Many insurance policies include “intellectual property” exclusions.
Hammond v. TCA, arose out of a failed business relationship in which Hammond (a software developer) had been cut-out as the middle-man. In the case, TCA alleged that it owned the software and Hammond counterclaimed. That underlying case eventually settled.
[T]he intellectual property exception to the Policy precluded coverage. To repeat, that exception bars coverage for “personal and advertising injury” “[a]rising out of any infringement of copyright, patent, trademark, trade secret or other intellectual property rights.” The basis for the claim of attorney’s fees here was under 12 Pa.C.S. § 5305 (PA UTSA) and 17 U.S.C. § 505, which allow shifting of attorney’s fees in cases of bad faith trademark [sic] and copyright claims, respectively. Though no intellectual property claim was filed against Hammond, the basis of the request for attorney’s fees was an alleged infringement by him of TCA and LanTEK’s intellectual property rights. Hence the intellectual property exception precludes coverage.
[Read the 3rd Circuit Non-Precedential Decision].
Of course, the oddity of this result is that attorney fees under both the UTCA and Copyright Act are generally thought to require first an underlying claim of trade secret or copyright infringement. Hammond has petitioned for writ of certiorari, but the petition appears to have little chance of success.
In one of the first written decisions based upon the Defend Trade Secrets Act (DTSA), Judge Tigar has granted Schein’s motion for a temporary restraining order (TRO) blocking former employee Jennifer Cook “from accessing, using, or sharing” allegedly stolen confidential data. Cook was a sales representative for Schein’s dental-supplies business and left to join competitor Patterson Dental. The TRO also prohibits Cook “from soliciting, contacting, or accepting business from any HSI customers assigned to her while she was employed by Plaintiff.” In addition to the standard fiduciary duty employees owe to their employer, Cook had also signed a confidentiality and non-solicitation agreement.
Here – as with most trade secret cases – the basis for the case begins with a breach of contract. That breach is then used to establish misappropriation. The trade secret claim gets the plaintiff to Federal Court and offers additional remedies not otherwise accessible.
Judge Tigar here failed to even consider this issue in his opinion — likely because, as is typical with TROs, the defendant was given no chance or opportunity to respond to the allegations.
Many aspects of trade-secret & non-compete law do not apply cleanly when a lawyer leaves the firm. Confidentiality outside the firm is already required by the rules of professional conduct and client-secrets are thought of as the property of the client rather than the firm. Further, agreements between former partners divvying-up clients (or other covenants not to compete) are largely unenforceable because they are seen as improperly limiting clients ability to choose their lawyer.
With that in mind, a new Defend Trade Secrets Act (DTSA) lawsuit has been filed by the patent attorney Zurvan (Van) Mahamedi against his former partner William (Trip) Paradice. The Mahamedi-Paradice firm split in April 2016 and both lawyers reached-out to firm clients (including Qualcomm) claiming to be the successor firm.
Although it is still unclear the extent that patent attorneys will take-on DTSA practice – at least we know that they will serve as the subject matter for the actions.
Thus far, DTSA actions (like most Computer Fraud and Abuse Act actions) stem from an ‘abuse’ of contract. Here, the Partnership Separation Agreement spells out a number of duties and obligations and Mahamedi’s basic allegation is that Paradice has failed to comply with those terms. The hook with the DTSA and CFAA is that the plaintiff gets to protect its property right (rather than merely suing for breach) and do so in Federal Court.
Read the Separation Agreement: Separation Agreement.
In this newly filed DTSA case, Universal Protection (a company providing security guards, etc.) has sued its former employee Thornburg for trade secret misappropriation (as well as various breach contract claims involving his non-compete agreement and breach of loyalty). In the case, Thornburg apparently developed a good relationship as head of security for a customer (JBS) and decided to quit his job and start-up a competing company where he could charge the company less and make more money. The primary trade-secret at issue here is apparently the pricing plan provided to JBS and the security plan (developed by Thornburg while at JBS). [Read the complaint: UniversalProtectionServiceDTSA].
It is now time to begin looking for an opinion in the Halo/Stryker regarding whether the Federal Circuit’s test for willful infringement is too rigid. Those cases were argued in February 2016. We can also expect a decision in Cuozzo prior to the end June 2016.
The patent in the case involves a DNA amplification kit used for personal identification. And, although the allegedly infringing kids were made in the UK, one commodity-component (the Taq polymerase) was supplied from the U.S. Focusing on the language of the statute, the Solicitor Generals argues that liability for export of a single component of a multi-component invention “is contrary to Section 271(f)’s text and structure, and it is inconsistent with the presumption against extraterritoriality.” Separately, the brief argues that the Federal Circuit was correct in its holding that a party can actively induce itself – thus 271(f)(1) inducement does not require a third party to be induced. [USPromega CVSG Petition].
Post Grant Admin: I previously discussed GEA Process Engineering. That case involves the Flip-side of Cuozzo and asks whether an appeal can follow when the PTAB exceeds its authority by terminating an already instituted IPR proceeding? The respondent (Steuben Foods) had previously waived its right to respond, but the Supreme Court has now requested a response. That move makes certiorari more likely, but the result will depend upon the outcome in Cuozzo.
Attorney Fees: Newegg Inc. v. MacroSolve, Inc., No. 15-1369. Professor Mark Lemley’s brief on behalf of Newegg asks that the attorney-fee framework of Octane Fitness actually be implemented. [NewEggPetition]. Although Octane Fitness gives district courts discretion in determining whether to award fees, Newegg argues that the E.D. Texas court improperly applied “a special, heightened burden of proof.” The Supreme Court is currently considering the Kirtsaeng attorney fee case for copyright law. That decision may shed some light on the patent cases as well.
A new petition in Automotive Body Parts, No. 15-1314, focuses on a question of civil procedure regarding a clerk’s transfer of a design patent case out of E.D.Tx in a manner that violated the local rules. Here, the clerk transferred the case immediately after the judge ordered transfer even though the local rules call for a 21 day delay. The case is rising through a petition for mandamus, but my view is that the petition fails to show why transfer is so harmful (except for the reality that patent plaintiffs are usually given more respect in E.D.Tx.).
The court was scheduled to discuss Cooper v. Lee at its May 12 conference. No action was taken following that conference – lightly suggesting to me that the court is holding judgment until it resolves Cuozzo. Apart from the AIA Trial challenges, most potential life changing case on the docket for patent attorneys is Cubist v. Hospira that focuses on the role of secondary indicia of non-obviousness. As with most Supreme Court patent cases over the past decade, Cubist argues that the Federal Circuit’s rules are too restrictive and should instead follow a looser factor-based analysis when considering the issue. In the next couple of weeks, the court will consider the Cubist petition as well as that of Dow v. NOVA (appellate review standard); Vehicle Intelligence (abstract idea); and WesternGeco (damages calculation for 271(f) infringement by exporting components).
Secret Offers to Sell: The Federal Circuit is not slowing down its patent jurisprudence in any way – except for the rash of R.36 affirmances. An important case is Helsinn that focuses on whether the AIA abrogated the rule in Metallizing Engineering.
When U.S. courts interpret U.S. statutes, they tend to read an inherent territorial limitation into the law. “It is a long-standing principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States,” Morrison v. National Australia, 130 S.Ct. 2869 (2010) (internal quotation omitted). However, when Congress clearly requires a longer reach, the courts oblige.
18 U.S.C. § 1837 (DTSA Amendments) (The EEA/DTSA is collectively codified in Chapter 90 of Title 18). It will be interesting to watch this play-out, but I expect that we will see a number of extra-territorial and cross-border cases over the next few years.
To be clear, a court would still need personal jurisdiction over the defendant. See International Shoe.
A possible but unlikely limitation on the extraterritorial application could occur if the courts read a territorial limitation into the definition of trade secret such that information is only protectable under the DTSA if created and/or stored in the U.S.
Guest post by Mark Ridgway and Taly Dvorkis, Allen & Overy, LLP, London.
It has been a busy year for law makers seeking better protection for trade secrets. Much coverage has been given to the Defend Trade Secrets Act (DTSA), which provides a federal private right of action for trade secret protection. President Obama signed the DTSA on May 11, and the law takes effect immediately. Patently-O has covered the DTSA legislation and legislative process in several posts here.
On May 17 the European Council is expected to formally adopt the Trade Secrets Directive, requiring all Member States to provide certain minimum standards for trade secret protection. Member States will have two years to implement the provisions of the Directive into their own national laws.
How do the US and EU positions on trade secrets compare? Below are the key similarities and differences between the DTSA and the European Trade Secrets Directive.
What has led to these Legislative Changes?
The desire for harmonization of trade secret protection has spurred these movements both in the US and the EU. According to the European Commission, the lack of a uniform European approach has resulted in a “fragmentation of the internal market” and “weakening of the overall deterrent effect of the relevant rules.” The EU Directive seeks to harmonize the laws of the various member states by providing a consistent definition of what qualifies as a “trade secret.” Additionally, the Directive addresses the remedies available to trade secret holders and the measures courts can use to prevent the disclosure of trade secrets in legal proceedings.
In the U.S., the DTSA arose from a desire to federalize trade secret protection, which had thus far been dominated by state law (although most states had previously adopted the Uniform Trade Secrets Act (UTSA), published by the Uniform Law Commission in 1979). While certain federal protection previously existed in the form of the Economic Espionage Act of 1996, the DTSA provides an individual right sue in federal court, thus obviating the need to bring private actions in various state courts where procedures differ greatly.
How is “Trade Secret” Defined?
Under both the EU Trade Secrets Directive and the DTSA, to qualify as a trade secret the information at issue must be kept confidential and must derive economic value from being kept confidential.
This definition tracks the definition for “undisclosed information” provided in article 39(2) of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), which requires all signatories to afford some level of protection for confidential information.
As seen, whether in Europe or in the U.S., to be considered a trade secret the information must be kept confidential and derive an economic value from the fact that it is confidential. Both the EU Directive and the DTSA are aimed at protecting commercial confidential information. What is not required is that the information be entirely novel, a distinction from other forms of intellectual property. Further, the EU Directive makes explicit that combinations of otherwise publicly available information can be protected provided they are not readily accessible or generally known.
The EU Directive and DTSA have similar provisions for the preservation of confidentiality during legal proceedings for trade secret misappropriation. In the U.S. the ability to file confidential documents under seal to maintain secrecy has long been an option open to litigants. The DTSA specifically sets out that a court may not authorize or direct the disclosure of information unless the owner is first given the opportunity to file a submission under seal describing the interest in keeping the information confidential. The DTSA therefore extends the option of filing briefs under seal to include disclosure at trial and in court opinions, and also allows non-parties to request that certain information be kept confidential.
The EU Directive similarly addresses preserving confidentiality during legal proceedings. The Directive sets out that an applicant must first supply a “duly reasoned” application as to why certain information should be kept confidential. The maintenance of secrecy is therefore not the default position, and requires court approval. It remains to be seen how the national laws of the Member States will implement the Directive and how courts will interpret what qualifies as a “duly reasoned” application. In some countries this will require minimum changes (for instance, in the U.K. no change will be required), while in others it will be a more significant cultural and legal shift.
The measures, procedures and remedies provided for in this Directive should not restrict whistleblowing activity. Therefore, the protection of trade secrets should not extend to cases in which disclosure of a trade secret serves the public interest, insofar as directly relevant misconduct, wrongdoing or illegal activity is revealed. This should not be seen as preventing the competent judicial authorities from allowing an exception to the application of measures, procedures and remedies in a case where the respondent had every reason to believe in good faith that his or her conduct satisfied the appropriate criteria set out in this Directive.
This exception for whistle-blower activity is much broader than that provided by the DTSA. The DTSA provides immunity from liability for disclosing a trade secret only when the disclosure is confidential and made to the government or in a court filing (under seal). There is no specified exception for journalists or other public good-doers, although arguably the First Amendment provides protection. The DTSA does include a provision by which employers must notify their employees of the protection available under the new law, a notice requirement which is not present in the EU Directive. Employee is defined broadly by the DTSA to include those working as contractors or consultants.
The most controversial part of the DTSA has been the introduction of an ex parte seizure order as a federal measure. Under the DTSA, a court can issue an order for the seizure of property “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” Additional remedies include injunctions and damages, where an injunction is deemed most appropriate for any continuing harm. For previous harm, a court may award damages for actual loss or any unjust enrichment. A court can also choose to award damages measured by a reasonable royalty for the unauthorized use of the trade secret. As with other protection of intellectual property, violation of the DTSA done wilfully or maliciously may result in a court awarding enhanced damages as well as attorneys’ fees.
The EU Directive similarly allows for injunctions, damages measured as lost profits, account of profits, or a reasonable royalty for the trade secret use (paid as a lump sum). The Directive also allows for provisional and precautionary measures, and says that Member States can provide for more far reaching protection, so long as the safeguards in the Directive are met.
The EU Directive does not call for enhanced damages for malicious activity, but rather approaches damages from the opposite viewpoint, specifying that Member States may limit the liability for damages of employees for misappropriating trade secrets if the employee acted without intent.
In the sensitive area of employee mobility and competition, the Directive specifically states that it shall not offer any ground for restricting the mobility of employees. However, the Directive does not include any requirement to harmonize the laws in relation to post-termination restrictions or non-compete clauses, meaning that national laws will continue to apply.
The DTSA addresses employee mobility in requiring that an injunction against a former employee be “based on evidence of threatened misappropriation” of trade secret information and not simply on the fact that the person may know certain information. The DTSA also states that any injunction preventing or limiting future employment cannot conflict with applicable state laws protecting employee mobility. Shortly before the DTSA took effect, the White House released a report that criticizes non-compete agreements and state laws that offer too much protection for such agreements. While no immediate action is expected following the report, it is offered as a discussion point in considering what is necessary in non-compete agreements and how states should treat them.
In the U.S., the limitation period for a company to bring an action under the DTSA is three years after the date on which the misappropriation is discovered or could have been discovered with reasonable diligence. The EU Directive gives the Member States the freedom to set the limitation period for their respective national laws, but sets the maximum period at six years (albeit Member States have discretion as to when the clock starts to run).
It is obviously desirable that trade secret protection be consistent across borders, whether state or national, as protection is only as strong as its weakest link. In the U.S., the DTSA specifically sets out a requirement that the Attorney General provide a report on the threats of trade secret theft outside the U.S. and the protection of trade secrets afforded by U.S. trading partners. How the EU Directive and DTSA play out as Member States implement the Directive and courts interpret the laws will help shape trade secret protection around the globe.
President Obama has signed the Defend Trade Secrets Act of 2016 (DTSA) into law. The new law creates a private cause of action for trade secret misappropriation that can be brought in Federal Courts and with international implications. I have created a mark-up (with commentary) of the new law that shows how the DTSA’s amendments to the Economic Espionage Act (EEA).
(A) is made (i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.
The statute is clear that the immunity extends to protect against both state and federal law; both civil and criminal allegations. A statute also (unnecessarily in my view) includes a provision that allows someone “who files a lawsuit for retaliation by an employer for reporting a suspected violation of law” to disclose trade secrets to his attorney and “use the trade secret information in the court proceeding” so long as documents containing the trade secrets are filed under seal and are not disclosed except by court order.
Under these rules, it seems that the party planning to disclose another’s trade secret in open court should first seek an order of permission from the judge. And, at that point, the court will be required to allow the third party to explain the importance of the trade secret.
Required Notice to Employees and Independent Contractors: Under the provision, employers are required to provide notice of the immunity “in any contract or agreement with an employee [or independent contractor] that governs the use of a trade secret or other confidential information.” The statute suggests that this may be done via reference to a policy document rather than restating the entire immunity provisions in each agreement. The statute does not appear to have any small-business exception to the notice requirement.
Failure to Comply with the Notice Requirement has a fairly small penalty: If the employer later sues the employee (or independent contractor) for trade secret misappropriation under the DTSA, the employer will not be able to collect exemplary double-damages or attorney fees. No other specific penalties are provided, but neither does the statute indicate that these are the sole potential penalties. I could imagine the FTC pursuing employers who fail to provide the notice (but likely only as part of a larger enforcement campaign). In addition, you might imagine a class action suit against major employers who fail to provide the notice. Finally, since this is a requirement of all contracts involving trade secret or confidential information, failure to provide the notice in a particular instance could be seen as evidence that either (1) there was no agreement or (2) the agreement did not involve trade secrets.
Who Needs the Notice?: The notice requirement applies to employees as well as “any individual performing work as a contractor or consultant for an employer.” Although the statute does not define ‘individual,’ I believe that the best interpretation is that individuals include only humans and not business entities. This conclusion is based upon the statute’s implicit distinction between “entities” and “individuals.” A common situation might be a start-up company contracting with a cleaning company to do the janitorial work. Do the people doing the actual vacuuming and cleaning need to have received the notice? The statutory answer to that will depend upon how a court construes the language “performing work as a contractor or consultant for an employer.” At this point, a cautious trade secret holder who wants the benefits of notice would ensure that those individuals are also provided notice.
Timing: The DTSA will be effective once enacted and apply to “any act” that “occurs on or after the date of enactment.” I expect that President Obama will sign the DTSA on May 11, 2016 and that will be its enactment date. The notice requirement will “apply to contracts and agreements that are entered into or updated after the date of enactment of this subsection.” Thus, as of May 12, 2016 employers must begin providing notice under the law.
Earlier this week, the White House issued a new white paper on the problems created by the existence of so-many covenants not-to-compete binding low-skilled workers. Of course, this new notice requirement will mean that more employer HR departments will now be considering if it is time to add those contracts (along with the notice requirement).
 A potential hole in the provisions involves arbitration proceedings (that are common in employee disputes) since, immunity applies to court disclosures and disclosures to government officials, but not expressly to private arbitrators.
 This process is outlined in the newly added 18 U.S.C. § 1835(b).
[T]he U.S. economy faces a number of longer-run challenges, some of which go back several decades. In at least part of the economy, evidence suggests that competition for consumers and workers is declining, and the number of new firms each year is experiencing a downward trend. In addition to this trend, there has been a decrease in ‘business dynamism’—the so-called churn of firms and who is working for whom in the labor market— since the 1970s. One factor driving these issues may be institutional changes in labor markets, such as greater restrictions on a worker’s ability to move between jobs. To address these and other issues that limit competition in the marketplace, the President has directed executive departments and agencies to propose new ways of promoting competition and providing consumers and workers with information they need to make informed choices, in an effort to improve competitive markets and empower consumers’ and workers’ voices across the country. Building on these efforts, this document provides a starting place for further investigation of the problematic usage of one institutional factor that has the potential to hold back wages—noncompete agreements. These agreements currently impact nearly a fifth of U.S. workers, including a large number of low-wage workers. . . .
The main economically and societally beneficial uses of non-competes are to protect trade secrets, which can promote innovation, and to incentivize employers to invest in worker training because of reduced probability of exit from the firm. However, evidence indicates that non-competes are also being used in instances where the benefit is likely to be low (e.g., where workers report they do not have trade secrets), but the cost is still high to the worker.
The White House is not expected to take any immediate action but rather is offering discussion points and will likely have further comments at the signing of the Defend Trade Secrets Act later this week.
Guest Post By Maxwell Goss. Dr. Goss is a business litigation attorney with McDonald Hopkins PLC in Bloomfield Hills, Michigan. His practice focuses on trade secret, noncompete, patent, trademark, and shareholder litigation.
The Defend Trade Secrets Act of 2016 (DTSA)—arguably the most sweeping change to the nation’s intellectual property laws in a generation or more—is about to become law. The bill recently passed both houses of Congress with overwhelming bipartisan support. President Obama is certain to sign the bill into law.
Much has already been written about the powerful new tools the DTSA gives to businesses looking to protect their trade secrets. Dennis Crouch, who has been covering the DTSA extensively, recently commented on those tools here, and I have written about them here. Most notably, the DTSA allows a trade secret owner to seek to have law enforcement officials seize property—without advance notice to the accused—to prevent dissemination of the trade secrets at issue.
But how do defendants fare under the DTSA? For example, suppose a business accuses its former employee of taking a confidential customer list or technical information when the employee left the company, and files suit under the DTSA. Or suppose another company hires someone accused of trade secret theft, and the person’s former employer sues the company for conspiracy under the DTSA. What does the DTSA mean for the accused?
Without a doubt, the DTSA gives some advantages to trade secret owners. But it also contains protections that defendants should take advantage of. These include a process for challenging an improper seizure of property, employment protections in the event of an injunction, and recovery of attorney’s fees for actions brought in bad faith. In the right circumstances, these provisions could give a trade secret defendant the upper hand.
Under the DTSA, a person may have a laptop, server, storage device, papers, or other property forcibly taken into custody without advance notice. Litigants must keep in mind that this is an extraordinary remedy. Before seizure can be ordered, the applicant must show, among other things, that the accused person would evade an ordinary injunction and that the accused person would destroy or hide the property if given advance notice.
A key aspect of the DTSA for defendants is its requirement that a hearing be held within seven days of a seizure order, unless otherwise agreed by the parties. At the hearing, the trade secret owner will have to prove the facts and law necessary to support the order. This hearing can provide a chance for the defendant to set the tone of the case by attacking the trade secret owner’s position and possibly getting the seizure order dissolved. The DTSA also expressly permits modification of the usual time limits for discovery “to prevent the frustration of the purposes” of the seizure hearing. For the defendant who acts quickly, this may mean that expedited document production or even a helpful deposition could be obtained in advance of the seizure hearing.
Injunctions sought in trade secret cases frequently involve restrictions on employment. For example, where a former employee is accused of misappropriating trade secrets, the former employer may try to obtain an order enjoining the person from disclosing the trade secrets to a competitor, using the trade secrets in service of a competitor, or even working for a competitor at all. Under the DTSA, an injunction to prevent actual or threatened misappropriation may not “prevent a person from entering into an employment relationship.” Moreover, any conditions that an injunction may place on a person’s employment may not be based “merely on information the person knows.” Instead, there must be evidence that the trade secret information at issue will actually be misappropriated. Counsel for the accused will of course seek to avoid any injunction. But where one is entered, counsel should ensure that these requirements are strictly followed.
Finally, the DTSA provides that the accused may recover his or her reasonable attorney’s fees from the plaintiff if (among other things) the claim of misappropriation was made in bad faith. While existing state laws generally contain similar provisions, the DTSA is unique in adding expressly that bad faith “may be established by circumstantial evidence.” This is significant given that direct evidence of bad faith—say, an admission by the plaintiff that the claim was without merit—can be exceedingly difficult to obtain. One place to look for evidence of bad faith would be the affidavits submitted by the plaintiff in connection with an application for ex parte seizure.
In short, while the DTSA tightens the screws for those accused of trade secret misappropriation, it also contains important provisions allowing defendants to challenge improper claims and to limit their impact even where relief may be granted.
In a provocative new article called “Taking Patents,” 72 Wash & Lee L. Rev. (forthcoming 2016), Gregory Dolin (Baltimore) and Irina Manta (Hofstra) argue that the Federal Government effectuated a taking through its creation and implementation of the inter partes review mechanism. Below, Camilla Hrdy and Ben Picozzi summarize the main points of their recent response to Dolin and Manta, “The AIA Is Not a Taking: A Response to Dolin & Manta,” 72 Wash. & Lee L. Rev. Online 472 (2016).
Gregory Dolin and Irina Manta argue in a forthcoming article that the Leahy-Smith America Invents Act (AIA) effectuated a Fifth Amendment “taking” by enhancing the mechanisms for challenging issued patents in administrative proceedings. Initial data do indicate that patents are more likely to be found invalid in the new inter partes review (IPR) and covered business method review (CBMR) proceedings than in district court actions or through the IPR and CBMR’s administrative predecessors. Patentees’ have even complained that the filing of individual IPR petitions has affected their stock prices.
Has the AIA made it too easy to invalidate a patent? Have patentees been treated unfairly? Maybe. Maybe not. But one things is clear: Dolin and Manta’s argument that the AIA is a taking faces serious legal hurdles.
First, Dolin and Manta’s premise that patents are property rights protected by the Takings Clause is far less clear than they contend. While the Supreme Court has recently suggested that patents, like land, “cannot be appropriated or used by the government itself, without just compensation,” see Horne v. Department of Agriculture, 135 S. Ct. 2419 (2015) (quoting James v. Campbell, 104 U.S. 356, 358 (1882)), both that statement, and the statement it quotes, are dicta. More recent decisions express greater ambivalence regarding patents’ status under the Takings Clause.
In contrast with trade secrets, the Supreme Court has never held that patents are property under the Takings Clause. In Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank, 527 U.S. 627 (1999), the Court held that Congress can’t abrogate states’ sovereign immunity from patent infringement claims. In reaching this conclusion, the Court stated that patents are “surely included within the ‘property’ of which no person may be deprived by a State without due process of law.” Id. at 642. But the Court declined to rule on patents’ status under the Takings Clause. See id. at 642.
Most recently, in Zoltek Corp. v. United States, 442 F.3d 1345 (Fed. Cir. 2006) (per curiam), vacated on other grounds, 672 F.3d 1309, 1314–22 (Fed. Cir. 2012) (en banc), the Federal Circuit held (rightly or wrongly) that 28 U.S.C. § 1498 is the only means of recovery for patentees whose patents are infringed by the U.S. government. Patentees can’t bring claims for compensation under the Takings Clause. Although the court eventually vacated that decision, the court never repudiated the reasoning behind its constitutional holding.
Dolin and Manta try to get around Zoltek by arguing that, unlike government infringement—which is like a forced permit and leaves all the rights of a patent intact—the AIA “changed the scope of patent rights themselves” by subjecting issued patents to more stringent post-issuance review. However, courts have not endorsed that argument, and analogs are difficult to find.
Second, even if we accept the argument that government can potentially take patents by altering their scope retroactively, courts are unlikely to view post-issuance review proceedings as the kinds of government actions regulated by the Takings Clause. Courts assessing constitutional challenges under the Fifth or Fourteenth Amendment tend to distinguish actions intended to “cure” defects in government administrative systems from incursions on property rights. In Patlex Corp. v. Mossinghoff, 758 F.2d 594 (Fed. Cir. 1985), the Federal Circuit rejected a very similar challenge to IPR’s predecessor based partly on this distinction, noting that reexamination statute belonged to “the class of ‘curative’ statutes, designed to cure defects in an administrative system[,]” and that such statutes are treated more favorably for Fifth Amendment purposes even when they devalue property rights. We see little reason that a court would reach a different conclusion today.
Lastly, even if a court decides it is possible for the government to take patents by subjecting them to more stringent post-issuance review, Dolin and Manta’s argument almost certainly loses as a matter of takings doctrine. To determine whether a particular governmental action effectuates a taking, courts assess “the character of the governmental action, its economic impact, and its interference with reasonable investment-backed expectations.” See Penn. Cent. Transp. Co. v. City of New York, 438 U.S. 104, 124 (1978). Thus, even assuming we accept that the AIA significantly devalued all patents (a big “if”), whether this constitutes a taking depends on whether patentees should have anticipated that Congress would amp up administrative review, given the existing regulatory background.
Dolin and Manta argue the AIA’s enhanced IPR and CBMR proceedings interfered with patentees’ “reasonable investment-backed expectations” by increasing the likelihood that their patents would be found invalid in administrative proceedings utilizing patentee-unfriendly rules such as “preponderance of the evidence” standard for invalidation and “broadest reasonable construction” with limited opportunity to amend. But, as Dolin and Manta concede, the AIA was enacted against a background of federal statutes and regulations that authorize challenges to patent validity. IPR and CBMR review are only the latest in a series of administrative procedures authorizing parties to offensively challenge the validity of issued patents. To us, it seems highly unlikely that the question of whether the Takings Clause applies to the creation of new IPR and CBMR review could turn on such small differences as whether or not patentees have a full opportunity to amend their claims during review.
Also, it is worth noting that beyond third party challenges to patent validity, numerous federal regulatory statutes limit patentees’ ability to exploit their inventions for purposes of health and safety. For example, various regulatory review statutes, such as the Food, Drug, and Cosmetic Act (FDCA), the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), and the Toxic Substances Control Act (TSCA), practically reduce effective patent lifetimes by prohibiting patentees from commercially marketing or using protected products prior to regulatory approval. Yet none of these statutes fully compensate patentees for their losses.
Are these actions all takings as well? This conclusion has troubling consequences. Does Congress really need to compensate patentees every time it passes a statute that significantly affects the value of issued patents? Could Congress pass regulations for the purpose of restraining bad-faith enforcement of patents that have already been granted? What about judicial actions that reduce the value of patents? Do they intend for Congress to compensate patentees in these cases or to take fewer actions limiting patent rights, simply due to the fear of effectuating a taking? This seems like a dangerous basis on which to formulate patent policy.
Together, these arguments persuade us that the AIA is not a taking. Nevertheless, the authors’ article is a thought-provoking and educational analysis of the constitutional implications of Congress’s recent efforts to reform the patent system. We thank them for reopening the door on this area of scholarship.
By longstanding tradition, US courts are open, transparent in proceedings, and transparent in judgment. The FISA courts that I cover in my internet law course are so controversial because they are so contrary to that tradition. Courts are also sensitive to the disclosure of trade secrets and, in the past, have liberally allowed parties to file documents under seal to avoid destroying those rights. Most recently, for instance, the Supreme Court permitted Shukh to file redacted public briefs to avoid discussing secret information regarding his invention rights. See Supreme Court Rule 5.2.
(b) Rights Of Trade Secret Owners.—The court may not authorize or direct the disclosure of any information the owner asserts to be a trade secret unless the court allows the owner the opportunity to file a submission under seal that describes the interest of the owner in keeping the information confidential. . . .
Courts already liberally allow parties to file documents under seal – so that doesn’t provide the entire impact of the provision. Rather, the provision’s importance is that it extends beyond briefs being filed by parties and instead reaches disclosures at trial and court opinions. Thus, the statute presumably prevents a court from disclosing a trade-secret in its opinion without first providing the trade-secret owner with the opportunity to brief the issue of disclosure. In addition, it provides non-parties with a right to request (under seal) non-disclosure of their trade secret rights.
Unlike other provisions in EEA/DTSA, this “right” is not expressly limited to actions arising from the EEA/DTSA. Rather, it may be read broadly as a provision providing procedural rights of trade secret owners in all federal cases. If so, it will effectively serve as a form of trade secret privilege and will end-up being the most cited aspect of the new law.
The DTSA was presented to President Obama for his signature on April 29, 2016 and should become law within the week.
Jacob Gershman: Congress May Be About To Shake Up Trade Secret Law: Is That A Good Thing?
The DTSA provides federal district courts with original jurisdiction of the new federal claim of trade secret misappropriation. Once a federal cause of action is established, the court will also “have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution.” 28 U.S.C. § 1367(a). Where, as above, the breach of contract or employment duty wrapped into the factual tale of trade secret misappropriation then a court would likely find the supplemental jurisdiction requirements met. The statute goes on to give district courts deference to “decline to exercise supplemental jurisdiction” in certain situation. 28 U.S.C. § 1367(c).
As we move toward more contract cases in Federal Courts, it will be interesting to see the extent that large corporations next push for federalizing of contract law.
With today’s 410-2 House vote, the Defend Trade Secrets Act (DTSA) has now passed both the House and Senate and is headed to President Obama for his expected signature. The DTSA amends the Economic Espionage Act to create a private civil cause of action for trade secret misappropriation based upon the Congressional sense that trade secret theft exists and is harmful. Trade secret misappropriation (as a civil matter) has previously been purely a matter of state law. Although there is substantial uniformity between the states, there are also a number of differences and perceived procedural weaknesses. The DTSA would not eliminate or preempt the various state trade secret rights but rather would operate as an additional layer of potential protection. The law is designed to go into effect on its day of enactment and apply to any misappropriation that occurs on or after that date.
On March 10, 2017, the University of Missouri’s Center for Intellectual Property and Entrepreneurship (CIPE) along with our new Business, Entrepreneurship, and Tax Law Review (BETR) will host a symposium on Implementing and Interpreting the Defend Trade Secrets Act. I expect that we will live-stream the event and will also publish speaker articles in BETR. There is a lot to figure out. Contact me if you are interested in sponsorship opportunities (dcrouch@patentlyo.com).
An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.
Defining Trade Secret: The DTSA broadly defines the term “trade secret” to mean “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the another person who can obtain economic value from the disclosure or use of the information.” Although this definition is broad and certainly includes abstract ideas and laws of nature, it might not encompass information that is only stored in the human mind.
Defining Misappropriation of a Trade Secret: The statute also defines “misappropriation” in detail. My rough approximation is as follows: without permission (A) obtaining a trade secret that was knowingly obtained through improper means or (B) disclosing or using a trade secret without knowing either (1) that it is a trade secret or (2) that it was obtained through improper means. These “improper means” include “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.” However, misappropriation does not include “reverse engineering, independent derivation, or any other lawful means of acquisition.” The DTSA does not otherwise include a more general fair-use or news-reporting exception. However, the First Amendment will certainly serve as a backstop. Further, these definitions do not include any express territorial limit – it will be very interesting to see the extent that these limits will be implied into the law. Thus, if a U.S. company is holding trade-secrets in India that are stolen in India, could the U.S. company bring action against the Indian entity that caused the injury (presuming personal jurisdiction over the defendant)?
Remedies Civil Seizure: A key procedural benefit of the DTSA is to offer a mechanism for Civil Seizure ordered by courts and enforced by Federal, State, and/or local law enforcement as a preventive measure (akin to a temporary restraining order).
Remedies: Once misappropriation is found, the court will be authorized to grant injunctive relief as “reasonable.” If “exceptional circumstances” render injunctive relief is “inequitable” then a court may order a reasonable royalty for the misappropriator’s continued use of the trade secret. Depending upon how the statute is interpreted, this setup appears to create a presumption of injunctive relief – a stark difference from contemporary patent law doctrine under eBay v. MercExcange. The statute also provides for compensatory damages for either (i): (I) “actual loss of the trade secret” and, in addition (II) “any unjust enrichment” not compensated in (I); or (ii) a reasonable royalty for the use. Willful misappropriation can double damages. In these calculations, I suspect that courts will take into account both the market-value of the trade secret as well as the “expenses for research and design and other costs of reproducing the trade secret” that were avoided by the misappropriation. The provision also includes an attorney fee shifting provision limited to cases involving bad-faith or willful-misappropriation.
Remedy against Former Employees: Most trade secret cases involve former employees moving (or starting-up) to a competitor. A major concern raised against early versions of the bill was that the DTSA would empower employers to prevent such movement. As amended, the bill now indicates that injunctive relief that would “prevent (or place conditions on) a person from entering into an employment relationship” must be “based on evidence of threatened misappropriation and not merely on the information the person knows.” Of course, such “threat” does not necessarily mean that the employee expressly threatened misappropriation but rather will likely be based upon circumstantial evidence regarding likelihood of misappropriation (i.e., ‘threat level’). In addition, the injunction preventing or limiting employment cannot “otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.” This bit appears to be directed toward giving credence to non-compete and other limits in various states. However, of key importance is that it only limits injunctive relief and does not appear to limit any cause of action against former employees. As a consequence, this sets the likelihood of a fight between certain state employment laws that favor employee rights against the new federal trade secret law.
Whistle Blowers: Professor Peter Menell was instrumental in proposing a public policy immunity provision that is included in the DTSA. The provision would offer immunity from liability (whistle blower protection) for confidential disclosure of a trade secret to the Government or in a Court Filing (made under seal). The provision includes a notification requirement that employers should immediately implement.
 Defend Trade Secrets Act of 2016, S. 1890.
 Consider the popularity of the Uniform Trade Secrets Act in the various states.
 Jury trial should still apply to the extent it has in state cases.
 The Economic Espionage Act already includes a rule of construction that the statute “shall not be construed to preempt or displace any other remedies, whether civil or criminal, provided by United States Federal, State, commonwealth, possession, or territory law for the misappropriation of a trade secret, or to affect the otherwise lawful disclosure of information by any Government employee under section 552 of title 5(commonly known as the Freedom of Information Act).” The DTSA reaffirms this principle by stating that “[n]othing in the amendments made by this section shall be construed to modify the rule of construction under section 1838 of title 18, United States Code, or to preempt any other provision of law.” The bill provides for original jurisdiction of these trade secret cases in federal district court. However, it does not create exclusive jurisdiction – as such it would be proper for a party to bring such a claim in state court (when permitted by the state court). However, in that case, the other party may attempt to remove the case to Federal Court. You might also query as to whether the federal claim is a ‘compulsory claim’ under the law such that if someone brings a state-law claim and loses they would later be estopped from bringing the federal claim.
 There may also be constitutional limitations on a company owning and controlling that information.
 This provision suggests by implication that misappropriation may be non-willful despite the fact that the misappropriation definition includes a mens rea element.
 My understanding is that Jim Pooley and Mark Lemley were instrumental in suggesting the addition of this provision that has now put the Bill in form where it is broadly supported by the politicians.
 Improperly obtaining a trade secret is a form of misappropriation – this creates some potential confusing situations in the interpretation of the provision.

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