The Defend Trade Secrets Act (“DTSA”), on its face, creates a private action in district court for misappropriation occurring abroad.  Filing a DTSA claim in district court may in certain circumstances provide the best remedy for foreign trade secret theft over other alternatives such as filing a complaint with the International Trade Commission.  But over a year-and-a- half after the enactment of the DTSA, are there any decisions applying the DTSA to foreign trade secret theft? Not so much.

The relevant hypothetical is one where a U.S. company’s business partner in China has stolen the U.S. company’s trade secrets, as shown in this animated video:

(This video was first presented at “Trade Secret Theft Occurring Overseas: The Long(er) Reach of the ITC,” Computer History Museum, Mountain View, CA, Oct. 10, 2017, a joint CLE by Merchant & Gould and Adduci, Mastriani and Schaumberg (hereafter referred to as  “Foreign Trade Secret Theft CLE”).

As proposed in the animation, bringing a claim in the International Trade Commission (“ITC”) to block imports that use the trade secrets is a viable and in some instances the best solution.  However, there are factors that favor bringing a misappropriation claim in district court.

An ITC remedy may not be available because, notwithstanding a bona fide threat that misappropriation will occur, misappropriation has not yet happened – it is threatened as opposed to actual, or, because the misappropriated  trade secret is source code or other intangible digital media that does not qualify as a “good” within the meaning of ITC rules.  Even if the ITC remedy is available, it does not allow recovery of money damages, requires intense and expensive factual development prior to filing the complaint, and imposes potentially difficult to prove domestic industry and injury requirements.

Foreign Trade Secret Theft CLE

Whether a district court action asserting the DTSA is a viable alternative hinges on the whether the DTSA has extraterritorial reach. There is a presumption that U.S. laws do not apply outside the U.S. unless Congress expresses a clear intent otherwise.  The language of the DTSA and its related legislative history manifest the requisite Congressional intent and therefore overcome the presumption.

Foreign Trade Secret Theft CLE

But so far there is little if any evidence in reported decisions of courts extending the DTSA to cover foreign conduct in reliance on the statute’s extraterritoriality provisions.

The DTSA was applied to extraterritorial conduct in T&S Brass and Bronze Works Inc v Slanina (D.S.C. 2017) because the defendants were citizens or permanent resident aliens of the U.S., thus satisfying section 1837 subpart (1).  Research has not disclosed any other case applying DTSA extraterritorially based upon the U.S. citizenship of the defendants.

Likewise, research has not disclosed any decision applying DTSA to conduct outside the U.S. because “an act in furtherance of the offense was committed in the United States” within the meaning of section 1837 subpart (2).  Nonetheless, there is compelling basis for arguing that where, as in the hypothetical, the misappropriation includes importing, marketing or selling in the U.S. goods made overseas using the stolen trade secrets, there is an “act in furtherance” justifying extension of the DTSA to reach the overseas theft and use of the trade secrets.  In VIA Technologies Inc v ASUS Computer International (N.D. Cal. 2015), the district court interpreted California’s version of the Uniform Trade Secret Act (“UTSA”) as allowing a claim for misappropriation based upon marketing in the U.S. goods made overseas that embody the trade secret.  Since the DTSA and state court statutes based on the UTSA are deemed coextensive, it is therefore highly likely that a district court would similarly interpret what is meant my misappropriation under the DTSA.

Foreign Trade Secret Theft CLE

(It is important to note that California’s version of the UTSA (“CUTSA”) was not given extraterritorial application in Cave Consulting Group Inc v Truven Health Analytics Inc, such that the actionable misappropriation under CUTSA like that alleged in VIA Techs. is limited to the misappropriation occurring in the U.S. (the marketing and selling of the goods in the U.S.) and excludes the misappropriation occurring outside the U.S. (the improper acquisition and use of the trade secrets by a foreign competitor). In comparison, under the DTSA, not just the misappropriation committed in the U.S. (importing and marketing of LETSA cars) but also the misappropriation occurring in China (the acquisition and exploitation of the ALSET trade secrets by LETSA), is actionable.  The U.S.-based misappropriation is “an act in furtherance” of LETSA’s overall misappropriation that supports the extraterritorial reach of the DTSA to the conduct occurring in China.)

There are instances where the comparative benefits of bringing a DTSA claim to address foreign trade secret theft in a district court as compared to the ITC favor bringing a DTSA claim – assuming a DTSA claim can overcome the presumption against extraterritorial application.  The language and legislative history of the DTSA are sufficient to overcome the presumption in certain instances (where the defendant is a U.S. citizen or where an act in furtherance of the offense has been committed in the U.S.).  Yet well over a year-and-a-half after enactment of the DTSA, there are few if any reported decisions recognizing the DTSA as a viable theory of recovery for foreign trade secret theft.

The U.S. Supreme Court’s May 22, 2017 decision in TC Heartland effectively shifts a significant number of patent litigations out of courts previously deemed acceptable to courts in other venues in which the defendant corporation is incorporated.  In reaching this decision, the Supreme Court relied upon its 1957 decision in Fourco Glass interpreting the patent venue statute.

Defendant corporations in Cobalt Boats v. Sea Ray Boats and Brunswick, a patent case scheduled to start trial in Virginia federal court on June 12, 2017, sought to take advantage of the new venue decision.  They moved to transfer venue back to Tennessee, citing TC Heartland for the proposition that venue is improper in Virginia.  In order to succeed on the motion, the defendants had to overcome the argument that they waived their venue challenge by not timely asserting it.  Defendants argued waiver did not apply because they reasonably relied on the Federal Circuit – an intermediary appellate court hearing all patent appeals — and its determination over 20 years ago that Fourco Glass was not good law.  Their motion was denied: Order dated June 2, 2017 denying motion to transfer.

The ruling is of special significance to the many pending patent cases that presumably qualify under TC Heartland for transfer to another venue.  It suggests that notwithstanding the Supreme Court’s decision these cases will not be transferred.

Similar to Sea Ray Boats and Brunswick, many of the defendants in these other cases have not timely challenged venue.  Under the Virginia court’s analysis, they have therefore waived any right to challenge venue — while their failure to timely interpose an objection may have been reasonable in view of long-standing Federal Circuit precedent, it is not a legitimate exception to waiver.

Based on the Supreme Court’s holding in TC Heartland, Fourco has continued to be binding law since it was decided in 1957, and thus, it has been available to every defendant since 1957. Accordingly, the Court FINDS that TC Heartland does not qualify for the intervening law exception to waiver because it merely affirms the viability of Fourco. Defendant Brunswick’s assumption that Fourco was no longer good law was reasonable but wrong, and it cannot be excused from its waiver by saying there was a change in the law.

 

Dave Bohrer’s recent post Extending US Trade Secret Law to Reach IP Theft in China discusses what to do when your company’s Chinese joint venture makes off with your trade secrets in China.  The post suggests it may be possible to bring an action in US court extending either federal or state trade secret law extraterritorially to reach the misconduct in China.

In response to Dave’s post, I suggest that there is another, complementary alternative to a US-based civil action: bring a complaint asserting trade secret theft and unfair competition to the U.S. International Trade Commission (“ITC”) under Section 337 of the Tariff Act.

The ITC, despite its name, is a U.S. federal agency that operates as U.S. district court with a twist – extraterritorial reach to address unfair acts that take place entirely oversees, and in rem jurisdiction over Chinese respondents based on the importation of goods into the United States.   The ITC cannot award damages but it can close the borders to goods from Chinese entities that steal trade secrets, effectively a national injunction.  Your aggrieved U.S. client at least won’t find itself competing with its own purloined knowhow in the U.S. market.   ITC cases are fast (18 months or less, soup to nuts) and furious (offering remedies with teeth that not only exclude unfairly traded goods, but which can bind U.S. distributors and retailers with cease and desist orders).

The ITC came into its own as a forum for litigating trade secrets with the TianRui case in 2008.  In that case, employees from a Chinese-U.S. railway equipment joint venture departed and started a new Chinese company, using the stolen trade secrets.  Soon the U.S. partner was facing U.S. imports of Chinese railways using the stolen technology.  The ITC found, and the Federal Circuit affirmed, that the Commission had authority under Section 337 of the Tariff Act to apply U.S. trade secret law to bad actors and unfair acts that took place entirely in China.  The Federal Circuit expressly held that “section 337 applies to imported goods produced through the exploitation of trade secrets in which the act of misappropriation occurs abroad.   In reaching this decision, the Federal Circuit effectively treated the Uniform Trade Secrets Act as federal common law and found the Commission’s determination to comply with basic trade secret principles.  ITC findings of fact and law in “unfair acts” cases are preclusive and bind the district court, giving Complainants the option of a rapid one-two punch of an ITC exclusion order sealing the U.S. border from infringing goods, and then the possibility of walking into the district court for damages without relitigating the merits of the case.

Of particular note is the ITC’s determination in TianRui that “[t]he presumption against extraterritoriality does not govern this case.”   In other words, a trade secret complaint investigated by the ITC avoids entirely what my colleague described in his earlier post as one of the more significant legal hurdles to extending US trade secret law to reach extraterritorial conduct. Continue Reading Extending US Trade Secret Law to Reach IP Theft in China: An ITC Lawyer’s Reply

Hidden Memory Card  (inspired by ABC's Designated Survivor, 1:9, "The Blueprint," aired Dec. 7, 2016)
Hidden Memory Card (inspired by ABC’s Designated Survivor, 1:9, “The Blueprint,” aired Dec. 7, 2016)

Engineers from your China subsidiary just joined a competing company which has begun using your trade secrets.  Can you sue in the US and avoid the uncertainty and expense of seeking relief in a Chinese court?  The answer is that both federal Defend Trade Secrets Act (DTSA) of 2016 and California’s version of the Uniform Trade Secrets Act (CUTSA), under the right circumstances, may be extended extraterritorially to reach misappropriation outside of the US.

Perhaps surprisingly, it may be harder to do this under the federal law, which expressly provides that it applies to conduct outside the US, than under the California law, which is silent on the subject.  Let’s break this down.

Extraterritorial theft of trade secrets by insider employees or business partners in China is a significant problem as evidenced by the investigation in International Trade Commission cases Amsted v. TianRui (disclosure and use of US company’s trade secrets in China) [the 2011 Federal Circuit decision on appeal] and In re Certain Rubber Resins (same) [the 2014 ITC determination].  The problem reflects the reality of the current business environment, which is global and digital; technology owned by US-based companies is often shared with employees or business partners located outside of the US and it is not unusual for them to move between competitors. Continue Reading Extending US Trade Secret Law to Reach IP Theft in China

Departing Employee imageAlarms sounded when John Absmeier, technical director of Delphi Automotive’s Silicon Valley autonomous vehicle project, announced he was leaving to join Samsung’s Silicon Valley innovation center where he would lead a self-driving car technology team.  They grew louder upon Delphi’s determination that Absmeier downloaded hundreds of thousands of company files and folders onto personal devices prior to giving notice, deleted tens of thousands of files of unknown subject matter on or before giving notice, and retained possession of tens if not hundreds of thousands of company files (contained on personal external hard drives or personal cloud accounts) after having left Delphi.

Delphi has thus far been able to identify some of what Absmeier downloaded—including over 100 gigabytes of data that appears to be the contents of his “My Documents” folder and his Outlook e-mail folder. These documents consist of many, if not all, of the work emails that Absmeier sent and received while a global executive. Those emails include confidential and sensitive information, and confidential and sensitive documents in the form of e-mail attachments. There was no legitimate reason for Absmeier to be downloading work-related documents and emails in the days and weeks before his resignation— and, in fact, there is no evidence that he had ever downloaded documents from his work computer onto external hard drives before October 15, 2015.

Delphi v Absmeier Am Cmplt

This conduct appeared to give Delphi a strong basis for asserting wrongful acquisition of its trade secrets and actionable trade secret misappropriation.  Delphi filed a lawsuit and moved for a preliminary injunction in federal court under the court’s diversity jurisdiction, but the court found that Delphi was unlikely to succeed on its trade secret misappropriation claims and denied injunctive relief on these grounds.

Luckily for Delphi, in addition to being able to assert trade secret misappropriation, it also had a signed non-compete agreement.  Doubly lucky for Delphi, choice-of-law rules dictated the application of Michigan law, which favored enforcement of the agreement over the competing policy favoring freedom of employees to seek new employment (recognized in other states like California).  Delphi was able to obtain an injunction enforcing the non-compete.

The game-changing combination of choice-of-law rules pointing to the law of jurisdictions enforcing non-competes is a subject for another day (and hopefully a separate post!).

For now, the interesting question is what was done by the departing Delphi engineer Absmeier and his counsel (no doubt in close coordination with new employer Samsung) to avoid trade secret misappropriation liability?  The answers provide something of a checklist for departing engineers and new employers on what they can do to mitigate the risk of liability for trade secret misappropriation.  In particular, in the Delphi case, the defense was able show:

#1 Departing employee was forthcoming about taking new job with potential competitor.

#2 Departing employee offered explanation for the challenged pre-departure downloads and  deletions, e.g., done as part of routine company file back-up, or to remove personal  documents and photos.

#3 Departing employee within approximately two weeks of notice returned all remaining  company devices (e.g., thumb drives) and company-related documents

#4 Departing employee and counsel retained a third-party forensic consultant to:

quarantine all personal storage devices that contained a mixture of company and personal information

sequester any personal cloud-based storage accounts (e.g. Dropbox) containing folders holding company information

sequester personal email (e.g., Gmail) and delete all emails relating to company as opposed to personal information

#5 Departing employee swore on oath that A) he no longer had any company information in  his possession and B) that he had not disclosed or used any Delphi data or documents in  course of his employment with Samsung.

#6 Defense counsel made available for inspection the data and devices sequestered with  third-party consultant.

These actions were described in detail in sworn declarations provided by the departing engineer, Absmeier (attached- Departing Enginner Absmeier Declaration), along with supporting declarations of his counsel and the forensic consultant.  Based on this evidence, Delphi was unable to meet its burden of showing “a significant lack of candor or willingness to misuse trade secrets,” and therefore Delphi was not entitled to enjoin Absmeier’s employment with Samsung based on alleged threatened misappropriation of Delphi trade secrets. (Preliminary Inj. Order attached-Delphi Automotive PLC v Absmeier)

The Delphi litigation falls within the category of cases holding that mere possession of company data subsequent to departure (absent additional evidence such as prior bad behavior, that the data was improperly acquired prior to departure, intent to disclose or use the data in the future, or refusal to return the data) will not be sufficient to establish liability for threatened trade secret misappropriation.  See, e.g., FLIR Sys., Inc. v. Parrish, 174 Cal. App. 4th 1270, 1279 (2009); Cent. Valley Gen. Hosp. v. Smith, 162 Cal. App. 4th 501, 528 (2008).

 

 

Although many may be asserted, quite often far less warrant protection
Although many may be asserted, quite often far less warrant protection

The question is whether it is possible to get a court to enter partial summary judgment before trial on some but not all of the trade secrets that the defendant is accused of stealing.

As discussed in the Sept 28 post, the answer is that this may not be possible if the lawsuit is filed in California state court.

But if the trade secret lawsuit is filed in federal court, the answer is yes.  In federal court, it is easier to weed out before trial alleged trade secrets that do not satisfy the legal requirements for protection.

Why should we care?  For each allegedly misappropriated trade secret that is allowed to be argued at trial, the costs incurred in either proving up or rebutting the claim run in the tens if not the hundreds of thousands of dollars spent on attorneys, experts and discovery, not to mention the significant time the court and the jury must devote to determining liability on each such claim.  In other words, the potential savings of time and money to all concerned (court, jurors, and parties) from taking fewer trade secrets to trial are huge. Also, settlement before trial is much more likely if the parties know in advance which trade secret claims will or will not be tried. Continue Reading You Can Get Partial SJ on Some But Not All Trade Secrets . . . In Federal Court

Not necessarily in California. The answer depends upon the unsettled issue whether California summary adjudication rules allow courts to dismiss some but not all of the asserted trade secrets before trial.

Trade secret claims brought by a technology company typically allege theft of not one but many trade secrets.  The law recognizes as separate and specific trade secrets not just a particular technology, but also the underlying research, study, tests or investigation relating to this technology.  For example, in Perlan Therapeutics, Inc. v. Superior Court, 178 Cal. App. 4th 1333, 1345 n.10 (2009), the court found that “Perlan’s eight purported trade secrets are: ‘(1) the Charles Invention, (2) Perlan’s Protein Multimerization Process, (3) Perlan’s novel idea [involving sialidase to] create a drug to combat the flu, and (4) all related research, (5) development, (6) advancements, (7) improvements and (8) processes related thereto.’”

Each of the numerous alleged trade secrets must satisfy certain requirements before they are deemed protectable in the eyes of the law.  A trade secret must be described with sufficient particularity and have independent economic value derived from having been kept secret.  And even if a particular trade secret is deemed legally protectable, there is no actionable theft (misappropriation) unless the trade secret has been improperly acquired, used or disclosed.

It is very rare that all trade secrets asserted at the beginning of a case satisfy all the requirements.   There often are many clunkers among the asserted secrets and this is sussed out through the development of the case leading up to the trial.   Furthermore, the identity of the bad trade secrets is or at least should be quite clear to the parties and the court following expert discovery, and in some cases even earlier in discovery.  Limiting trial to those trade secrets that have some basis in law or fact can save the parties hundreds of thousands of dollars in attorney and expert fees and costs otherwise incurred to prosecute or defend the bad trade secrets on top those that might have some merit.  Precious and scarce court resources are saved for resolving legitimately asserted trade secrets (and are not diluted or wasted on resolving the bad ones).

In California, it may not be possible to obtain partial judgment on some but not all asserted trade secrets.  Lawsuits brought in California court for misappropriation of trade secrets under California law (California Uniform Trade Secrets Act, Civ. Code, § 3426 et seq.) are governed by state procedural rules for summary judgement and summary adjudication.  Code Civ. Proc., § 437c subd. (a) (summary judgment) and (f) (summary adjudication).  Summary judgement terminates the entire action.  Summary adjudication is directed to some but not all “causes of action,” such that following entry of summary adjudication the case proceeds to trial on the remaining causes of action.  You therefore can’t get summary judgment on some but not all trade secret claims, but you might get summary adjudication if the challenged trade secret claim is deemed a “cause of action” within the meaning of the rule. Continue Reading Can You Get Partial SJ on Some But Not All Trade Secrets?

Jury trial on reasonable royalty? Courtesy Google Images
Right to jury trial on reasonable royalty damages differs depending on whether suit brought under DTSA or California version of UTSA

The new Defend Trade Secrets Act (DTSA) became law on May 11, 2016 and applies to any misappropriation that occurs on or after that date.

Although the DTSA creates a federal, civil remedy for trade secret misappropriation, it does not preempt state law.  This is going to encourage serious forum shopping, including, among other things, over the right to jury trial.

The federal law cedes to the jury the determination of all possible monetary damages claims.  In comparison, the version of the Uniform Trade Secrets Act (UTSA) adopted by California (CUTSA), while giving the jury the issues of lost profits and unjust enrichment, reserves for the trial judge the determination whether and to what extent to award reasonable royalty damages. Continue Reading Unlike California, New Federal Trade Secret Law Offers Right to Jury Trial on Reasonable Royalty Damages

Late yesterday, the House of Representatives joined the Senate in passing a sweeping new statute that creates a new federal civil cause of action for trade secret theft.  The new statute, called the Defense of Trade Secrets Act (DTSA), can be found here and is expected to be signed into law by the President within the next few days.

Where will we first see the effects of the new federal trade secret law?  Answer: in the hundreds (thousands?) of currently pending state court trade secret misappropriation cases.  Soon after the DTSA becomes effective there will be a significant increase in federal district court decisions being relied upon in state courts to explain and construe existing state trade secret statutes. Continue Reading Wave of Federal Trade Secret Decisions Soon to Hit State Courts

This post summarizes Proportionality Compels Early Disclosure of Patent Damages, found here, first published by the IP Law Section, State Bar of California in connection with the March 23, 2016 seminar “Patent Disputes for our Time: New Realities, New Approaches.” 

Patent litigation norm: bludgeon one another before determining case value
Patent litigation norm: bludgeon one another before determining case value

The Dec 2015 amendments to the Federal Rules of Civil Procedure call for greater effort on the part of the court and the parties to ensure that the time and expense invested in a case is proportional to value of the case.  The typical practice in patent litigation of bludgeoning first and valuing later presents a particularly compelling focus for the renewed emphasis on achieving proportionality.

Since there is a direct causal relationship between early disclosure of patent damages and achieving proportionality, the high likelihood is that courts, going forward, will strictly enforce the requirement that a patent plaintiff provide its damage computations in its Rule 26(a) initial disclosures.  To avoid prejudice to the patent plaintiff, any such early disclosures should be non-binding and subject to revision as the case proceeds. Continue Reading Amendments to Civil Procedure Rules: Ending Patent Practice of Bludgeoning First and Valuing Later