Letter from AmeriKat: US Senate vote awaited for trade secrets seizure legislation as experts chime in (again)

Socks was the only friend the
AmeriKat had in Washington.  Since then
politics has gone to the dogs...

The AmeriKat can barely concentrate she is so excited.  What with the Unified Patent Court on its way in and trade secrets reform speeding up, 2016 promises to be an exciting year for intellectual property.  For those readers who were rightly downing tools before the holidays, you may have missed the AmeriKat's reports on the US Senate Committee on the Judiciary's hearing on the proposed Defend Trade Secrets Act (DTSA) (see posts here, here and here).  The main provision of the DTSA is a federal ex parte seizure order (think Anton Piller).  From the tone of the questioning, it was clear to the AmeriKat that the Senate is eager to pass the bill.  Nevertheless, the allocated time did not permit for responses to all questions from its members.  The witnesses - Tom Beall (Corning), Professor Sharon Sandeen (Hamline University School of Law), Karen Cochran (DuPont) and James Pooley - were thus asked to spend their holidays responding to various questions from the Committee.

Courtesy of Kat friend James Pooley, comes news that the witnesses' responses to questions from Senator Grassley, Senator Klobuchar and Senator Whitehouse are now public.  All responses can be found at the Committee's hearing page here.

As previously reported, the questioning from Senator Whitehouse was the most interesting for the AmeriKat given its distinct, slightly aggressive lawyerly tone.  The AmeriKat summarizes the witnesses' responses to these questions as follows:

In response to a question about the degree of force used by law enforcement in executing civil seizure orders under the DTSA....

Pooley, Cochran and Beall all agreed that the execution of seizure warrants would seldom require force. As Pooley stated in his response:

Senator Whitehouse

"In my experience with execution of search warrants in criminal trade secret cases, the party in possession of the specific matter to be seized (e.g., a storage drive or computer) readily complies with law enforcement officials’ requests for access to the identified information. The person accused of trade secret theft typically is not a violent criminal and does not otherwise have any criminal record, and thus force is not needed. In addition, although the court issuing the seizure order cannot be expected to anticipate all issues that might arise in its execution, the DTSA requires that the court “direct that the seizure be conducted in a manner that minimizes any interruption of the business operations of third parties” or of the defendant’s operations “that are unrelated to the trade secret that has allegedly been misappropriated.” 

Cochran and Beall echoed these points and reiterated that DTSA seizures will be "used rarely and in narrow circumstances" in light of its stringent requirements. Professor Sandeen, on the other hand, was not so sure that the use of force would not be wielded stating that without further clarification in how the DTSA's powers will be executed 

"... this undoubtedly means that a team of uniformed officers will descend upon the target individual’s home or business and effectively shut down business operations while the physical premises and electronic equipment can be searched. The draft legislation does not specify what will happen in the case of a recalcitrant defendant that refuses to grant access to the premises or computer systems."

In response to a question on who would be responsible for sorting through the data on electronic devices seized pursuant to a DTSA civil seizure order...

Pooley explained that the search would be carried out by government officials. The court then takes the property into its possession and protects “the seized property from disclosure by restricting the access of the applicant, including during the seizure...”  Accordingly, allowing the applicant to rifle through the defendant's material would be improper.  However, noted Pooley, the DTSA allows for the applicant to petition the court for access to the seized trade secrets. The court may permit access only once both parties have been given the opportunity to make submissions to the court.  Both Cochran and Beall were confident that the court would "tailor the review of the seized material based on the specific facts, similar to the manner in which a court would restrict discovery involving confidential information. In some instances, this may involve a third-party appointed by the court."

Professor Sandeen also suggested the use of a third-party to review material, but her biggest concern was the provision of the DTSA that provides that a court may "issue an order providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action."  This, she said, may trigger the seizure of property that could be used for the propagation and dissemination of information (e.g., computer or smartphone) unconnected to the actual trade secrets theft.

In response to a question about the ability to seize information stored in the cloud insofar as data stored there is not in the defendant's "possession" and whether the DTSA could be used against cloud providers... 

Karen Cochran (DuPont)

Beall and Cochran explained that the DTSA's provisions were negotiated and drafted with the input from cloud providers.  The provisions therefore protect them from the DTSA's proposed seizure order.   For example,  a DTSA seizure order can only be ordered against the party that used “improper means” (theft or bribery, not mere knowledge) to misappropriate the trade secret. Cloud providers would not fall within this definition by the mere fact that a cloud user stole and stored a trade secret on its platform.  The cloud provider would also have to be shown to "destroy, move, hide, or otherwise make such matter inaccessible to the court" for an order to be granted - which would be unlikely.  Further, as Pooley explained, in the cloud context

"a traditional Rule 65 order issued to the provider would be adequate to secure the trade secret held by the third party provider. Therefore, no seizure application could meet the threshold condition that a Rule 65 order “would be inadequate” because the person would “evade, avoid or otherwise not comply."

Professor Sandeen argued that the language of the DTSA was not that clear, stating that:

"There is nothing in the DTSA that specifically insulates service providers that store information on behalf of a defendant (including cloud storage providers and hard-copy document storage facilities) from being subjected to a seizure order. There is no indication of exactly how electronically stored information will be seized or what it means to be in “possession” of such information. Does “seizing” information that exists in digital form require that it be permanently erased from the computer servers of the person or company against whom a seizure order is issued? What if the information is also stored with a third-party cloud storage provider for backup purposes; will all copies be seized by law enforcement and stored and sorted by the courts?"

In response to a question about the DTSA's protections against the abuse of its seizure powers... 

James Pooley

All witnesses, save for Professor Sandeen, felt that the DTSA provided ample safeguards in the event that the order turns out to be wrong.  Under the DTSA, the terms of the order must be the "narrowest seizure of property necessary" and must minimize third party business interruptions.  Further, as stated during oral testimony, the witnesses were confident that applicants would take all precautions to ensure that the facts they were putting before the court were accurate.  This was because no applicant would want the ire of the federal court if they got it wrong. As Pooley explained:

"In my many years’ experience dealing with judges – in both federal and state courts – on ex parte applications, they all react with a natural reticence and scepticism, knowing that they must rely on the applicant to establish a compelling reason to allow this very unusual form of relief. Frequently they will closely question counsel about the nature and quality of the evidence. If they later discover that they have been misled in any way, they likely will impose substantial sanctions, and certainly will entertain proceedings to enforce the right of the wrongfully accused to be made whole."

Cochran echoed the seriousness of the applicant's duty to ensure the facts were correct on application, not least because the person applying for a seizure order must swear, under penalty of perjury, written submissions to the federal court judge that what they say about their application meeting the threshold requirements is true.

Professor Sandeen argued that the question raised the distinction about what the law says and how it will be implemented in practice.  In particular, Professor Sandeen, expressed concern about the practical utility of the provision in the DTSA that allows defendants the ability to seek damages and costs in the event of a wrongful or excessive seizure.  She explained:

"Significantly, neither the attorney’s fees provision of the DTSA nor the damages provision of the seizure remedy provide defendants with relief based upon the simple fact that they prevailed on the merits in court. Rather, a successful damage claim can only be brought under the seizure provision if it can be shown that the defendant suffered damages “by reason of a wrongful or excessive seizure.” A successful claim for attorney’s fees requires a showing of “bad faith” on the part of the plaintiff with respect to either: (1) plaintiff’s claim of misappropriation; or (2) plaintiff’s opposition to a motion to terminate an injunction. It is unclear whether the damage claim for a wrongful or excessive seizure could include attorney’s fees and, if so, whether the necessary standard of proof is “bad faith” or “wrongful or excessive." 

Finally, in response to a question about whether the DTSA civil seizure orders should be limited only to instances where the defendant is a flight risk and/or should be redrafted to exclude routine employer-employee disputes...

Cochran stated that irrespective of whether trade secret theft came from employees or a foreign entity seeking to sell their information to the highest bidder, immediate seizure powers are "necessary to prevent trade secrets being destroyed."  Beall echoed this in his response by emphasizing that the ability to act quickly is "critical".  Cochran commented that:

"Because the DTSA is focused on intentional misappropriation, seizures may only issue when a court finds that the secret will be imminently moved, hidden, or destroyed if notice is given, and that the subject would not comply with a court order. The legislation is therefore drafted in a way that will not capture ordinary employment matters. But it will provide a critical tool for trade secret owners who face the possibility of losing the value of years of hard work and innovation."

Pooley agreed, stating that if an applicant meets the requirements for a DTSA seizure order in respect of an alleged employee theft, the situation is not "routine".  Beall agreed.  Instead, as Pooley explained, such a situation is:

"...fraught with the likelihood of irreparable damage. And although proof of intent to flee the United States represents a heightened degree of this risk, it is by no means the only risk that the seizure provision is designed to mitigate. For example, if a trade secret becomes known beyond the circle of those who are authorized, it could lose its entire value. Electronic transmission out of the jurisdiction is one way such a loss could be realized, and seizure before the transmission happens could prevent the loss."

Professor Sandeen
(Hamline)

Professor Sandeen took a more extreme view arguing that the seizure remedy should be eliminated all together due to its:

"...potential for abuse and because the number of cases of egregious trade secret misappropriation involving alleged spies and other acts of wrongful acquisition are small in comparison to the number of cases involving former employees and alleged breaches of a duty of confidence. In this regard, it is interesting to note that at the time that the Economic Espionage Act of 1996 (the EEA) was debated, numerous concerns were expressed about the potential of exposing reputable businesses to criminal prosecution for trade secret misappropriation. At that time, it was agreed by the Clinton Administration that no EEA prosecutions would be brought unless they were first reviewed by the Attorney General of the United States. There should be similar concerns with respect to the use of the seizure provisions of the DTSA against reputable U.S. businesses and employees, particularly where the criminal enforcement tools of the U.S. government can (and should) be brought to bear against the most egregious forms of trade secret misappropriation.  

The vast majority of trade secret misappropriation cases in the U.S. do not involve individuals fleeing overseas. A large percentage of them do not even involve legitimate trade secrets or provable acts of misappropriation. Often they involve former employees taking information from a former employer that they were given access to, did not know or have reason to know were trade secrets, or have no intention to disclose or use. These cases can typically be resolved through self-help and education, including informing former employees of their ongoing duties of confidentiality, if any." 

Senator Hatch

What's next?

Following the hearing, Senator Hatch announced that in light of the:

"overwhelming, bipartisan committee support and backing of key industry leaders shows that the bill is ready to be voted out of the Judiciary Committee and considered on the Senate floor."

Since then has been little public news on the progress of the legislation.  However, once 2016 is in full swing the AmeriKat doubts that either house will delay in pushing to pass the DTSA.  That is the beauty of bipartisan legislation - if passed, all parties can give themselves a pat on the back.  In the meantime, if readers want to relive the hearing, you can watch the proceedings online at this link.