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Monday, 7 December 2015

Are the DTSA's ex parte seizure powers the Anton Piller Order's evil American cousin?

After a walk around the block, the AmeriKat has returned
to report on the second part of last week's Senate
trade secrets hearing
After a bit of a break from the intensity of the trade secret session last week, the AmeriKat has returned to summarize the second part of last week's Senate Judiciary Committee hearing on trade secrets (see previous AmeriKat post here).  The second part of the hearing saw the Committee senators ask some, to be honest, less than probing questions of the witnesses ("And are we surprised given that they want to pass the bill?", chides Merpel).  The AmeriKat summarizes the main questions and responses as follows:
1. What is the importance of trade secrets protection? 

Answering one of the first questions about the importance of trade secrets, Cochran stated that trade secrets have always been important to her industry and to DuPont.  To get Kevlar® to the industry standard to which it is today, required 50 years of know-how and skill.  It was only by the grace of trade secrets that DuPont could ensure supreme quality and continue to attract collaborators and customers to the table, while staying competitive.

Beall responded by stating that trade secrets were also critical to his business, citing an example from his company who are a market leader in the manufacture of LCD glass for television screens. He stated that the glass had to be manufactured to such a high level that there couldn't be any degree of wave on the surface of the glass otherwise they had to start again.  Corning's LCD glass performs to such a high standard because of the manufacturing process that is protected by trade secrets.  Does that save American jobs?  Yes, answered Beall, because those jobs would not exist unless Corning had the trade secrets that protected that manufacturing process.

2.  Does the US need a federal trade secrets law? 

Yes, said Pooley.  Existing state remedies are too varied and unpredictable to address the problem.  Years ago, when trade secret theft was mainly a local problem, state trade secrets law was adequate as the theft was between state borders.  However, now, the transportation of confidential information only requires an email or a USB to cross state or national boundaries.  This requires a different set of remedies.  State law provisions used to work years go, but they do not today - we therefore need a common remedy through federal law.   However, state law would not preempted, but would continue as a valuable protection for trade secret theft.  
3.  Will small businesses be harmed?

Pooley stated that, from his observations, small businesses need as effective trade secret protection at least as much, and often more, than large business.  "They depend on it", he said, "at least in an existential way for the existence of their business. It is their business.  They need a remedy that will work for them.  When you have an business in Vermont that has leading technologies but markets across the country, they cannot afford to hire lawyers in different states and run after trade secret thieves before they leave the country.   They need relief in federal court that can stop the propagation and destruction of trade secrets.  Federal court [and the provisions of the DTSA] will provide that remedy." 
4. Are the ex parte seizure powers in the DTSA curtailed enough to prevent abuse?
Tom Beall, with Corning's fibre optic cable 
 
Beall stated that the ex parte seizure provision in the DTSA was intended only in narrow and limited circumstances.  The main intent of the DTSA is to address rogue employees who misappropriate trade secrets.  The concern that companies, who are recipients of information (i.e. cloud storage companies who store customer's information and data, including potentially misappropriated trade secrets) is not well founded.  The seizure provisions only apply, namely, where the individual who misappropriated the trade secret is a flight risk and/or the court order is unlikely to be complied with. From his perspective, Beall stated that parties will not want to risk the ire of district court judge for bringing an application for a seizure order that had no merit.  He believes that parties are likely to comply with the restrictions set out in the provisions.  
Further, as Pooley stated, small businesses would not be harmed by the ex parte seizure provisions. Similarly to Beall, Pooley reinforced the position that the provisions were carefully limited to provide safeguards for abuse, including the kind of property that could be subject to a seizure and the consequence for making an improper application.  From Pooley's perspective, small businesses had nothing to be concerned about becau
se the seizure provisions would only apply to certain information. Should the seizure application be improperly filed, then the federal court would have "very adequate" remedies to punish the applicant.  SMEs therefore had nothing to fear.  Indeed, SMEs
needed this order to obtain protection for the property they depend on.  
The DTSA provides that an ex parte seizure order may not be granted unless the court finds that it "clearly appears" from the specific facts that
  • immediate and irreparable injury will occur if the order is not granted
  • the harm to the applicant in denying the application substantially outweighs that of the respondent
  • the applicant is likely to succeed in showing that the information is a trade secret, the respondent misappropriated the trade secret by improper means or conspired to use improper means to misappropriate the trade secret and the respondent has possession of the trade secret 
  •  the application is reasonably particular as to the identity and location of the matters to be seized.   
  • that the respondent (or those in concert with the respondent) would destroy, hide or make inaccessible the materials 
  • the applicant has not publicized the requested seizure.
If the conditions are met for an order, then the order must:  
  • summarize the court's findings of fact and conclusions of law
  • provide the narrowest seizure of property necessary  
  • direct that the seizure be conducted in a manner that minimizes any interruption of the business of third parties and the legitimate business of the respondent
  • protect the seized property from disclosure to the applicant until the parties have an opportunity to be heard in court no later than 7 days after issuance of the order, with any subsequent access limited as above
  • require the applicant to provide security
  • and that the court shall take appropriate action to protect the respondent from publicity  
When asked whether she had any further concerns in respect of the ex parte order, in light of the safeguards that were put in place between the 113th and the 114th Congress, Professor Sandeen stated that this ex parte seizure remedy had origins in the UK by virtue of the Anton Piller order.  She said that the judge who created the order has since declared that the Anton Piller order was overused (to which the AmeriKat assumes Professor Sandeen is referring to the late Sir Hugh Laddie who was actually counsel in the case).  Accordingly, Professor Sandeen stated that the existing preliminary injunction relief under state law is sufficient without an extraordinarily intrusive remedy such as the ex parte seizure order provided for under the DTSA.  
The AmeriKat considers that Professor Sandeen's comment about the Anton Piller order should be clarified.  In the early 1990's there was concern in the UK that Anton Piller orders were overused and subject to abuse.  Indeed, the practice of obtaining and executing Anton Piller orders was subject to a critical review by Mr Justice Scott in Columbia Picture Industries v Robinson [1986] (and see also the article "Piller problems"(1990) 106 LQR 601 by Professor Dockray and, as he then was, Hugh Laddie QC).  However, these issues were mostly resolved, in part by the Vice-Chancellor's suggestions in 1992, and a corrective practice direction and standard form order which sets out safeguards to the order.  Although the AmeriKat has been unable to find up-to-date statistics on the frequency of Anton Piller orders being issued now, in her experience they are not frequently ordered because the court does consider them to be intrusive remedies and will only order them if the facts dictate that it is necessary to preserve the destruction and, together with a normal preliminary injunction, the onward dissemination of confidential information (in the context of trade secrets).  The order's heyday is long gone and you would be foolish to advise a client that they could walk down to their local court and obtain one unless they have an extremely strong case against the respondent, that the damage was/could be very serious and that they had clear evidence that the respondents were in possession of the relevant information and there was a strong possibility they would destroy the material should they be put on notice of the application (see Lord Justice Ormrod in Anton Piller v Manufacturing Processes Limited [1975] EWCA Civ 12).
Save for comments about the potential use of a supervising solicitor role (see Senator Whitehouse's questions below), the AmeriKat considers there are strong in-built protections in the ex parte seizure provisions.  If there is a concern that the tool could be used for abuse, then perhaps, as what was the experience in the UK, a review could take place 5 years after implementation to consider if the legislature needs to consider additional safeguards .  Any potential abuse in the meantime, should be remedied by the damages provisions already embodied in the legislation.   
 5.  Is there such thing as the trade secret troll?
As canvassed in the AmeriKat's previous post, Pooley's answer to this question was an emphatic "no".  He stated that what makes a troll is the ability for the troll to demand a toll.  This may work in the field of patents - by virtue of their "no fault liability" - but not under trade secret law where liability only arises where there is a confidential relationship or the actor has used deliberate means to gain improper access to information.  It makes no sense to apply the "patent troll" metaphor to trades secrets.  Indeed, Pooley continued, there has never been a trade secret troll problem via the state trade secret laws.  
Senator Tills concerned about foreign trade secret abuse
In response, Sandeen clarified that her use of the phrase "trade secret troll" was to refer to a general proposition that "troll" in the patent context was to refer to general abusive IP litigation.  Small business could be and are sued for a whole manner of IP infractions which are not necessarily strong claims.  They will then have to incur significant time and resources to defend such claims which often disrupts, if not destroys, their business.  "It is therefore not a surprise that a lot of potential [opponents to the DTSA] are not speaking out as their business will have already been destroyed", stated Sandeen. 
Pooley stated that although it was certainly possible that individual plaintiffs may bring a weak case, since the UTSA's enactment and the possibility of fee-shifting in certain cases, the experience of such abusive litigation has been limited. "We have not seen", said Pooley, "anything that looks like a general problem of abusive trade secrets litigation."   
 6.  How great is the challenge with overseas trade secrets theft?
Beall stated that although they focus on domestic trade secret protection, some of their greatest challenges for trade secret protection remains overseas (he later clarified that it was a split of 60/40 between international and domestic trade secret theft).  This is because it remains very challenging for them to obtain discovery about what has occurred in facilities outside of the US.  This therefore creates in impetus on the US to create a "gold standard" of trade secret law in the US. 
Sheldon Whitehouse 2010.jpg
Senator Whitehouse is concerned about
the cloud and the DTSA
The most interesting series of questions for the AmeriKat were the questions from Senator Whitehouse who asked the following questions (and trust a lawyer to ask such questions...):
  • What about the recalcitrants who will not obey the lawful injunction?  What is the remedy then?
  • Search and seizure is a violent action (doors broken in, cabinets opened, employees sequestered, etc?).  How are search and seizure orders under the DTSA monitored?
  • If you seize entire parties' computer systems, then somebody has a task to sort through seized information to isolate information subject to the order (as opposed to wholly unrelated).  What about privacy concerns?  Who does the sorting?  In the Anton Piller context, this would be a supervising solicitor.  "Should such a regime be embodied in the DTSA?" wonders the AmeriKat.  
  • What happens if the trade secrets end up in cloud storage?  Now you are executing search and seizure orders in a third party space - a very high complex data environment.  How do you deal with the problem of over-seizure and personal information that you have to deal with, but which is not subject to the order?
  • How realistic is it that any seizure will be deemed wrongful or excessive after a court order has been obtained?  Is that ever realistic? 
  • If our main concern is about data going overseas, shouldn't we focus on those people not the people in this jurisdiction? 
There were no answers to these questions in the hearing due to time, but the record has been left open for a week for the witnesses and senators to put in additional questions and answers.  The AmeriKat waits with  baited breath what the answers to Senator Whitehouse's questions will be and she may have a special guest report on these questions in due course...wait and see!

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