The team is joined by Guest Kats Rosie Burbidge, Stephen Jones, Mathilde Parvis, and Eibhlin Vardy, and by InternKats Verónica Rodríguez Arguijo, Hayleigh Bosher, Tian Lu and Cecilia Sbrolli.

Wednesday, 16 March 2016

The U.S. Defend Trade Secrets Act of 2015: Will It Result in Enforcement Abuse? [Part 1]

Who spilled the beans?
In the United States, trade secrecy law is often not given the scholarly attention that it is due compared to other areas of intellectual property law.  For example, most U.S. law schools do not have a stand-alone trade secrecy class.  However, trade secrets are vital to businesses and there is quite a lot of trade secret litigation (see also, here).  Recently, a new federal trade secret law has been proposed in Congress and will likely become law.  One question that has arisen is whether that law will result in more enforcement abuse (particularly enforcement abuse that outweighs the countervailing benefits of the law).  We may not know the answer to that question until after its passage.  Even then, we may not have great evidence because of the nature of trade secrecy actions.  This post provides an overview of potential problems with enforcement abuse and some of the main features of the new federal law.  A second post will discuss the rationales for the new federal law in the scholarship.

Importantly, enforcement abuse can occur in state law in various circumstances.  Trade secret litigation can be used in questionable cases on the merits for the purpose or effect of harassing competitors by forcing them to spend time and money defending the suit, instead of productive activities such as innovating.  Such suits can disrupt third party relationships, slow market entry of products and services of a competitor, and increase the risk of improper disclosure or the loss of the trade secret to the public.  Of course, there is usually some factual basis for the claim, so it is unlikely the litigation is obviously baseless.  There is likely a spectrum on the merits of the claims that will vary based on the facts.

While trade secret defendants are often denounced as thieves, trade secret plaintiffs are often accused of going on a fishing expedition to discover another's trade secret. (metaphor, metaphor) Notably, two professors, Sharon Sandeen and David Levine, recently argued that the new proposed trade secret legislation, Defend Trade Secrets Act of 2015 (DTSA), which creates a federal private right of action for trade secret misappropriation--mostly already covered by state law--will increase the likelihood of the development of a trade secret problem.  A trade secret troll is defined by Professors Sandeen and Levine as "an entity that uses broad trade secret law to exact rents via dubious threats of litigation at unsuspecting defendants."  The AmeriKat has provided excellent coverage of the DTSA, here and here (particularly on the Congressional hearings concerning the law).  Notably, the DTSA has been greatly improved by the advocacy of Professor Sandeen and others, which has made a substantial difference in the quality of the law.  (This Guest Kat is grateful for Professor Sandeen's comments on this subject.)  The scholarly debate boils down to two interesting propositions: 1) we do not need the DTSA because it changes everything; and 2) we need the DTSA because it does not change anything.

Some of the main features of the legislation include:
1) creating a new federal private right of action for trade secret misappropriation that can be brought in federal court;
2) allowing an ex parte temporary restraining order available in limited circumstances;
3) requiring proof of actual or threatened misappropriation on an injunction placing conditions on employment;
4) making available punitive damages that are two times the amount of compensatory damages and attorney fees for wilful and malicious misappropriation;
5) rejecting preemption of state trade secret laws.

How the changes will impact enforcement and litigation behaviour remains to be seen. In my next post, I will discuss the rationales for the law and scholarly debate in more detail.


Michael Factor said...

Doesn't litigation result in explaining the trade secret and defining it so it is no longer secret, and henceforth is in public domain?

Mike Mireles said...

Dear Mr. Factor,

That it is a very good and interesting question. I suppose it depends. Under US law often a trade secret is guarded relatively well during litigation, perhaps through in camera hearings, subject to protective orders, attorney eyes only review, use of special masters/experts, keeping matters under seal etc. Of course, the danger is always there that it will be disclosed--either the trade secrets of the alleged misappropriator or the party alleging misappropriation. Indeed in California, there is protection against initiating discovery against an alleged misappropriator until the party asserting the trade secret discloses that trade secret to the court with reasonable particularity. We often attempt to keep that statement secret and sometimes attorney eyes only (maybe with an expert depending on the nature of the secret). I believe, when cases or orders are published, usually the trade secret is not disclosed in much detail. Again, the danger always exists, but through procedure we attempt to keep it secret. There is always risk of disclosure. One advantage of the DTSA is channeling more trade secret cases to federal courts, particularly savvy federal judges who may be more sensitized to the confidential nature of the action. This is especially important because of the ex parte order where the court is essentially protecting the alleged misappropriator's trade secrets. Thank you again for your comment. Warm regards, Mike

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