This is the next in a multi-part discussion of measuring the accounting period for trade secret damages. The common theme across these discussions is the need to untether the liability requirement of secrecy from the damages goal of awarding as much as necessary (but no more than) to eliminate unfair competition. Similar versions of the first and second parts of this series can also be found on the LinkedIn.

Our previous article posed the question as to when it was appropriate to cut-off money damages for trade secret misappropriation. Answer: damages for trade secret misappropriation should last as long as (and no longer than) necessary to eliminate commercial advantage due to misappropriation. This answer justifies extending the damages accounting period beyond the time a trade secret is no longer protected because it has lost its secrecy.

As explained in this article, the opposite is also true. There are circumstances where damages accounting period runs before the loss of secrecy. Why? Because the end of the commercial advantage period — the end of the time necessary to deprive the defendant of a head start or other unfair commercial advantage that is attributable to misappropriation – occurs before the trade secret loses its secrecy.

Practically speaking, the primary consideration in determining the cut-off date for damages is the end date for eliminating the unfair commercial advantage attributable to the misappropriation. This cut-off date may pre-date or post-date the loss of secrecy depending upon the facts in a particular case. Continue Reading Ending Damages for Trade Secret Misappropriation before the Loss of Secrecy

This is first in multi-part discussion of measuring the accounting period for trade secret damages. First up: untethering the liability requirement of secrecy from the damages goal of awarding as much as necessary (but no more than) to eliminate unfair competition.

Trade secrets qualify for protection only so long as they are not generally known or ascertainable through “proper means” such as independent invention, reverse-engineering, observing them in public use or obtaining them from public literature. See Uniform Trade Secrets Act (UTSA) § 1(4); id., cmt. Extending the protection of a trade secrets beyond this point contravenes the public interest in avoiding unnecessary restraints on exploitation of valuable information. Restatement 3d Unfair Competition, § 39 cmt. f.

One might conclude then that the cut-off for damages for trade secret misappropriation should be the end of the secrecy period (i.e., the period the trade secrets were not known or knowable through proper means). And there are some cases that taken this position, including the recent decision of the Delaware district court in Liqwd, Inc. and Olaplex v. L’Oreal USA, Inc., 1:17-cv-14, D.I. 1078 at 3 (D. Del. Aug. 20, 2019) (Memorandum and Judgement following entry of jury verdict). See also id. D.I. 1162 at 9, 2019 U.S. Dist. LEXIS 215668, at *12-13 (D. Del. Dec. 16, 2019) (Order denying plaintiffs’ motion to alter judgment); id. D.I. a1184 at 2 (D. Del. Mar. 24, 2020) (entry of final judgment).

However, the Liqwd decision to cut off damages as of the loss of secrecy may contravene the guiding principle that damages should last as long as necessary to deprive the defendant of a head start or other unfair commercial advantage that is attributable to misappropriation. Continue Reading Extending Damages for Trade Secret Misappropriation beyond the Loss of Secrecy

There is a lack of consensus among Federal Circuit judges whether a jury should determine the amount of restitution or unjust enrichment damages. The three judges that decided TAOS v. Renesas (Fed. Cir. 2018) did not believe a jury should decide restitution for trade secret misappropriation. A different three-judge panel in TCL v. Ericsson (Fed. Cir. 2019) took a contrary position, holding that a jury should decide restitution for defendant’s past unlicensed sales of products infringing plaintiff’s patents. The different resolutions of the jury right question cannot be reconciled as dealing with different wrongful conduct – trade secret misappropriation in TAOS and patent infringement in TCL. Instead, they reflect a difference of opinion within the Federal Circuit on whether the same or substantially similar restitution remedy is legal or equitable in nature.

These Federal Circuit decisions are material to the continued development of guidelines for measuring monetary relief for trade secret misappropriation. In addition to actual losses, the trade secret owner is entitled to obtain the amount by which the misappropriator has been unjustly enriched (not otherwise accounted for in the award of actual losses). Relief in the form of actual loss is a damages-type remedy having the goal of compensating the trade secret owner for its losses. Relief in the form of unjust enrichment is a restitution-type remedy having the goal of preventing the misappropriator from unjustly benefiting at the trade secret owner’s expense. Whether future cases hold that a jury should decide unjust enrichment may well turn on which of TAOS’s or TCL’s views of restitution is adopted; if TAOS, this is equitable relief for which there is no jury right, or, if TCL, this is legal relief for which there is a jury right.

Continue Reading Is There a Right to Jury Trial on Unjust Enrichment Damages for Trade Secret Theft

The Defend Trade Secrets Act (DTSA) provides a private right of action under federal law for trade secret misappropriation. It extends to reach a foreign corporation’s conduct occurring outside the United States “if . . . an act in furtherance of the offense was committed in the United States.” 18 U.S.C. § 1837(2). However, the DTSA does not define “an act in furtherance” and until recently there was no case law addressing the question; absent such guidance there is uncertainty about the DTSA’s extraterritorial reach. This may be changing.

Luminati Networks, Ltd. v. BIScience, Inc. 2019 U.S. Dist. LEXIS 79843, at *21-22 (E.D. Tex. May 13, 2019) and Micron Tech., Inc. v. United Microelectronics Corp., 2019 U.S. Dist. LEXIS 74527, at *11 (N.D. Cal. May 2, 2019) appear to be among the earliest if not the first cases to define an “an act in furtherance” and their definitions support the broad extension of the DTSA to cover extraterritorial misappropriation.

Continue Reading Extending Defend Trade Secrets Act to Reach Overseas Theft of Trade Secrets

Judge Davila’s treatment of trade secrets in his exemplary damages award in BladeRoom v. Emerson echoes substantially similar if not the same themes as Professor Lemley in his “IP Rights” theory of trade secrets

In addition to $30 million in compensatory damages, Judge Davila has awarded $30 million in exemplary damages to BladeRoom and against Emerson for willful and malicious misappropriation of BladeRoom trade secrets.

The misconduct that compelled the court to award exemplary damages was that Emerson had undermined the confidence of market participants in being able to safely share trade secrets with potential business partners, thereby stifling competition and innovation to the ultimate detriment of consumers.

Judge Davila’s discussion of the importance of trade secret rights is substantially similar to the observations that Prof. Mark Lemley made over ten years ago in an article introducing his theory that trade secrets should be regarded as intellectual property rights. “I suggest that trade secrets can be justified as a form, not of traditional property, but of intellectual property (IP),” he says in The Surprising Virtues of Treating Trade Secrets as IP Rights (“IP Rights”), 61 Stan. L. Rev. 311, 313 (2008). “Trade secrets are best understood not as applications or extensions of existing common law principles [referring to tort, contract, property theories] . . . but as IP rights.” (Id. at 329.)

Mapping Judge Davila’s thoughtful characterization of trade secret rights to similar features attributed to trade secrets by Professor Lemley suggests the court’s ruling, whether intended or not, is rooted in and supported by the compelling theory that trade secrets are properly understood as an IP right separate and distinct from other legal theories that have been used to justify the protection of trade secrets.

The exemplary damages ruling:

In awarding exemplary damages, Judge Davila stated in pertinent part:

While the trial evidence was extensive, the conduct relevant to exemplary damages can be condensed down to the following statement: after Facebook expressed to Emerson the desire for a data center consistent with BladeRoom’s technology, employees from Emerson (and Facebook) lured BladeRoom into revealing its trade secrets under the guise of a possible data center contract or corporate acquisition, and then used the information it obtained to surreptitiously design and build Facebook’s data center at Lulea 2. . . .

[T]he evidence does not support a series of minor errors in judgment or mistakes which can be remedied with an apology, and Emerson fails to grapple with the broader effects of its misconduct. From a commercial ethics perspective, the misconduct certainly falls within the category of reprehensible; it undermines the confidence market participants can place in confidentiality agreements and causes those who possess trade secrets to seriously question the motivations of those who superficially appear to be interested in legitimate acquisition. The consumer loses as a result, as innovation and competition are stifled while trade secrets are kept buried in the proverbial vault.

Given its effects on the marketplace, society has a genuine interest in deterring similar misconduct.

(Case 5:15-CV-01370-EJD, Dkt. 956, filed 03/11/19 at 3:21-4:10.)

Judge Davila apparently developed this rationale independent of the parties, whose written briefs on exemplary damages do not discuss the nature of trade secret rights or society’s interest in protecting them. There are no citations in Judge Davila’s findings to the precedent or trade secret theories that he may have been relying upon.

The point in making these observations is not to call out the court for deciding not to reveal the underpinnings of its analysis. To the contrary, the point is that the court’s ruling echoes Prof. Lemley’s IP Rights and therefore is further supported and better understood by  tapping into the connections between the two.

What are the trade secret rights that are protected in BladeRoom?

In describing the trade secret rights at issue, Judge Davila emphasizes the right to safely share valuable business secrets with a potential business partner. He says that Emerson’s misconduct “undermines the confidence market participants can place in confidentiality agreements and causes those who possess trade secrets to seriously question the motivations of those who superficially appear to be interested in legitimate acquisition.”

Likewise in IP Rights, Prof. Lemley says:

The “property,” then, is not merely a right to exclude others from something in the sole possession of the plaintiff, but a right to restrict the access, use, and disclosure of information that is actually or potentially in the possession of others, often through the action of the secret owner herself.

(61 Stan. L. Rev. 311, 325 (emphasis added).)

Prof. Lemley goes on to say that a trade secret protects a person’s right to disclose a potentially valuable secret idea in the course of a business negotiation “secure in the knowledge that the other side is not free to take the idea without compensating me.” (Id. at 336.) “The law, by giving certain rights to the holder of the secret, allows him to disclose information he would otherwise have been unwilling to share . . .” (Id. at 336-337.)

Why is it important to protect these rights?

Judge Davila also emphasizes that protecting trade secret rights serves important societal interests in promoting innovation and competition. He says that without this protection “innovation and competition are stifled while trade secrets are kept buried in the proverbial vault,” and “[t]he consumer loses as a result . . . .” “Given its effects on the marketplace, society has a genuine interest in deterring similar misconduct.”

IP Rights similarly observes that protecting trade secrets serves the core societal value of promoting innovation. Prof. Lemley’s analysis breaks this core value into two specific functions served by IP rights: 1) promoting inventive activity; and 2) promoting disclosure of those inventions. “There is decent evidence to support the idea that at least one function of an IP right is not just to encourage new invention, but to encourage the dissemination of those new ideas.” (Id. at 333.) Trade secrets share these “two critical features” with the other IP rights like patents and copyrights:

-Trade secrets promote inventive activity

Although not absolute, trade secret law gives the developer of an idea the right to exclude its use by others, which rewards and therefore encourages innovation. As explained by Prof. Lemley:

Trade secret law confers an exclusive right on the possessor of valuable information not generally known to or readily ascertainable by competitors.

[T]he grant of that legal control encourages the development of new and valuable information by offering the prospect of supracompetitive returns, returns possible only if the developer does not face competition by others who use the same idea.

(Id. at 329-330.)

Trade secrets promote disclosure of those inventions.

Another function of trade secrets is encouraging dissemination of new ideas notwithstanding the secrecy requirement. Prof. Lemley:

At first blush, trade secret law seems to push in the opposite direction. After all, protection under trade secret laws is conditioned on secrecy, and so it seems to encourage secrecy, or at least the development of inventions that can be kept secret.  Paradoxically, however, trade secret law actually encourages broader disclosure and use of information, not secrecy.

(Id. at 333.)

First, trade secret protection substitutes for the overinvestment in physical secrecy and other inefficient limits on the disclosure of information that companies might otherwise make.

Trade secret law developed as a substitute for the physical and contractual restrictions those companies would otherwise impose in an effort to prevent a competitor from acquiring their information. In so doing, it encourages disclosure of information that companies might otherwise be reluctant to share for fear of losing the competitive advantage it provides.

(Id. at 335-336.)

Second, trade secret law solves what Prof. Lemley describes as “Arrow’s Information Paradox.”

The paradox is this: In the absence of any legal protection, the developer of a potentially valuable but secret idea will have a difficult time selling that idea to someone who could make more efficient use of it. In order to sell the idea he will have to disclose it to allow the buyer to evaluate it, but disclosing it destroys the value inherent in its secrecy. To see this, imagine that I tell you I have a great idea, and I’ll share it with you for $ 1 million. Should you take the deal? You can’t know the answer to that question unless I tell you what the idea is. But in the absence of legal protection, if I tell you what my idea is, you no longer need to pay me $ 1 million.

(Id. at 336.)

The law, by giving certain rights to the  holder of the secret, allows him to disclose information he would otherwise have been unwilling to share, and therefore permits business negotiations that can lead to commercialization of the invention or sale of the idea, serving both the disclosure and incentive functions of IP law.

(Id. at 336-337.)

The BladeRoom exemplary damage award as explained by IP Rights

The BladeRoom trade secrets misappropriated by Emerson are intellectual property rights. The function of intellectual property rights is promoting innovation (which, per Prof. Lemley, includes not just encouraging new invention, but also encouraging dissemination of those new ideas). Emerson’s misconduct prevented BladeRoom’s intellectual property rights from functioning as intended, which harms competition, markets and ultimately consumers. It therefore had to be deterred through the award of exemplary damages to BladeRoom and against Emerson.

Postscript

While Judge Davila’s ruling relies on the same characterization of trade secret rights and their societal importance as made by Prof. Lemley in IP Rights, it is going too far to say that Judge Davila implicitly adopts Prof. Lemley’s proposal to treat trade secrets as IP rights and not as applications or extensions of existing tort, contract, property or commercial ethics principles. Perhaps Judge Davila would be willing to take this next step given his characterization of trade secrets, but perhaps not. There are references in his ruling to commercial ethics, contract, theft of property and punishing unreasonable behavior which echo traditional trade secret theory. In addition, a key element of Prof. Lemley’s proposal is the primacy of the secrecy requirement in deciding whether to protect trade secrets, which is not part of Judge Davila’s analysis.

All caveats aside, the appeal of BladeRoom judgment and rulings most likely will present issues regarding the interplay of contract and trade secret claims, apportionment between trade secret claims and non-trade secret claims, the interplay between lost profit damages under contract and trade secret claims, the interplay between lost profits and unjust enrichment on trade secret claims, joint and several liability of settling (Facebook) and non-settling (Emerson) parties and related claims for offsets in damages, not to mention awarding exemplary damages based upon the need to deter conduct undermining IP rights. The resolution of these issues on appeal will require the application of trade secret law solidly grounded in legal theory. Understanding trade secrets as “IP rights” residing in “the pantheon of social policy designed to encourage innovation” as espoused by Prof. Lemley would seem to be the right doctrine for the job and it would not be surprising to see it applied in the course of appellate review.

The inspiration for this article came from my colleague Vicki Cundiff, Partner, Paul Hastings, who sent me a note observing that the BladeRoom exemplary damages decision “is interesting from the standpoint of emphasizing that [trade secret] law permits safe sharing of information.” I leave it to others to decide whether this discussion is of the same quality and significance as Vicki’s keen insight.

“No,” says the court in BladeRoom v Facebook et al.  “Yes,” says the court in O2 Micro v. Monolithic Power.

Can these different results be reconciled and can a rule for apportioning damages between trade secrets be derived from the inquiry? Yes and yes.

BladeRoom v. Facebook et al.

BladeRoom is ND of California case in which plaintiff BladeRoom asserted misappropriation of trade secrets under California’s version of the Uniform Trade Secret Act (CUTSA). The plaintiff’s damage expert’s opinion was that plaintiff should be awarded over $200 million lost profits and unjust enrichment damages resulting from defendant Emerson’s trade secret misappropriation. The defendant moved to exclude the opinion due to the expert’s failure to apportion damages on a trade secret-by-trade secret basis. The court denied the motion and allowed plaintiff to introduce the opinion at trial, stating:

It is true that under CUTSA, damages claimed for actual loss or unjust enrichment must be caused by the misappropriation alleged. Cal. Civ. Code § 3426.3. This portion of CUTSA does not require, however, that an expert assign damages amongst the trade secrets for his or her opinion to be admissible.

(Order, 5:15-cv-1370, Dkt. 745 at 14:1-4.)

Consistent with this ruling, the court rejected defendant Emerson’s proposed jury instruction that “[d]amages for misappropriation must be tied to each specific trade secret and to each specific combination of trade secrets.” (Dkts. 798 at 162:5-6 and 829 at 8:1-17.) Likewise, the verdict form given to the jury (which they ultimately returned in favor of plaintiff) did not require the jury to apportion damages between trade secrets.

(Jury Verdict, 5:15-cv-1370, Dkt. 867 at 3:12-16.)

O2 Micro v. Monolithic Power

O2 Micro is also a ND of California case in which plaintiff O2 Micro asserted misappropriation of trade secrets under CUTSA. The court granted a post-trial motion to vacate the jury’s award of $12 million unjust enrichment damages for trade secret misappropriation. In reaching this decision, the court cited the failure of plaintiff’s damage expert to assign damages between the 12 asserted trade secrets:

After the jury concluded that [defendant] did not misappropriate all of 02 Micro’s trade secrets, [O2 Micro’s damages] expert testimony regarding damages for misappropriation of all trade secret was useless to the jury.

O2 Micro Int’l Ltd. v. Monolithic Power Sys., Inc., 399 F. Supp. 2d 1064, 1077 (N.D. Cal. 2005) (emphasis added).

O2 Micro’s analysis is consistent with the comments to California’s model jury instructions, which state “[i]n cases involving more than one trade secret, the jury must answer all of the questions in the verdict form separately for each trade secret at issue.” CACI VF-4400 (Verdict Form for Misappropriation of Trade Secrets).

Can these two apparently opposing interpretations of trade secret damages be reconciled?

Yes. A damage expert is not required in every case to determine damages on a trade secret-by-trade secret basis. Whether they should be excused from doing so depends upon whether they are able to assume (i.e. rely on the jury finding) that misappropriation of any one or more of multiple asserted trade secrets could result in the same total amount of damages.

In BladeRoom, the damage expert based his opinion on the assumption that each of the asserted trade secrets was a “lock on the door” to defendant getting (and plaintiff losing) the construction deal at issue. Plaintiff’s counsel described the methodology in its brief as follows:

The technical experts have thus opined that each of these individual and combination Trade Secrets was a technical “lock on the door” to Emerson being awarded the Lulea 2 contract. Just as there can be multiple locks on a door, any one of which prevents the door from opening, there are multiple BladeRoom Trade Secrets or Combination Trade Secrets, any one (or more) of which would have prevented Emerson from entering into the Lulea 2 business with Facebook absent misappropriation. . . .

[M]isappropriation of any one or more of these “locks on the door” Trade Secrets by Defendants entitles BladeRoom to the full amount of damages flowing from that award of business to Emerson instead of to BladeRoom.

(Pl. Opp. Br., 5:15-cv-1370, Dkt. 559 at 10:16-11:4 (emphasis added).)

The court in BladeRoom allowed the damage expert’s testimony to go to the jury with the warning that plaintiff would be required to prove the hypotheses upon which the damage expert was relying. Based on the favorable jury verdict, the jury found that each of the asserted trade secrets served as a “lock on the door.” Whether the court deems the proofs sufficient to support these findings is yet to be determined – defendant Emerson has a pending JMOL motion challenging among other things the sufficiency of the evidence to support the damages award. (Def. Mot for JMOL, 5:15-cv-1370, Dkt 898 at 31.)

In comparison, in O2 Micro, the damage expert did not employ a “lock on the door” methodology. He did not assume that misappropriation of any one of the 12 trade secrets asserted in the case was a “lock” that would have prevented the “door” to defendant’s enrichment from “opening” absent misappropriation. He testified to a unitary sum for unjust enrichment damages in reliance on the jury finding misappropriation of all 12 trade secrets. When the jury found only 5 trade secrets to have been misappropriated, there was no evidence upon which the damage award could have been based.

The damage expert’s testimony in O2 Micro was rendered “useless” by his failure to assign damages on a trade secret-by-secret basis. But this does not mean O2 Micro is inconsistent with BladeRoom. Unlike his counterpart in BladeRoom, the damage expert In O2 Micro did not rely on foundational testimony showing that misappropriation of any one or more of multiple asserted trade secrets could result in the same total amount of damages. O2 Micro teaches that absent foundational testimony like that relied upon in BladeRoom, a damage expert will be required to apportion damages amongst trade secrets.

Yesterday evening, the district court in the trade secret litigation Waymo v. Uber et al [3:17-cv-939-WHA] issued revised jury instructions on trade secret misappropriation and proposed special verdict form (Dkt. #2499). The revised instructions retain the requirement in earlier drafts of the instructions that Waymo must show Uber actually used the improperly acquired trade secrets in order to recover unjust enrichment damages.

With due respect to the very hard work of the court and the parties, and recognizing full well that the district court has the final say on such matters, the current draft instructions do not incorporate — perhaps intentionally, perhaps not — the lessons learned by the Western District of Wisconsin in Epic Systems v. Tata Consultancy Services [3:14-cv-748-WMC] in the course of instructing a jury on awarding unjust enrichment damages on an acquisition-based misappropriation theory.

Epic Systems and its relevance to the “use” issues in the Waymo litigation is the subject of my earlier post Acquisition-based misappropriation depends upon how “use” is “used” (LinkedIn Dec. 22, 2017). The key rulings in Epic Systems:

Of particular relevance to the Waymo litigation is that the district court in Epic Systems initially instructed the jury that recovery of unjust enrichment damages is contingent upon showing actual use of the trade secrets. There was little or no explanation in these initial instructions of what is meant by “use.”  Upon listening to testimony on damages, however, the district court in Epic Systems decided it needed to issue a supplemental damage instruction to clarify that “use” does not require showing the trade secret was used to develop a successful competing product. (Dkt. #898 at 92:18-93:1)

The point is that the law makes clear that you don’t necessarily have to be successful in order to have used and be entitled to — and to be deemed to have been benefited by the development, market or sale of a competitive product. You don’t have to be successful if you’ve used it to develop, market or sell a competitive product. That’s enough. You don’t have to be — you don’t have to prove that it was successfully developed, marketed or sold.

This important clarification is missing from the current Waymo instructions. Without it, a defendant could avoid unjust enrichment damages on the grounds that there is no evidence that it “used” the trade secret to successfully develop, market or sell a competing product.

True enough, the district court in Waymo added new instruction XVI (Dkt. #2449 at 8), which cautions that “use” is not limited to “direct copying but can include studying and consulting” and “studying may constitute use even though the two designs differed.”  The underlying intent may have been the same as that which motivated the district court in Epic Systems to issue a supplemental instruction.  However motivated, the Waymo instruction falls  short of sufficiently warding off argument or evidence designed to narrow “use” to successful competition.

It may help to break down in chronological fashion how the district court in Epic Systems came to believe further explanation was necessary.

The district court started out by rejecting the plaintiff’s offer of proof of compensatory damages as not sufficiently anchored in evidence of use by defendant, stating in Epic Systems, Order on Offer of Proof Damages, at *5:

In other words, while the court is open to a “use” theory which is broader than specific evidence that Epic’s “confidential and trade secret information was incorporated into TCS’s Med Mantra product” [], plaintiff must tie its damages theory to that use. Otherwise, all the jury has is Britven’s assessment of the total value to TCS of Epic’ confidential information without any way to discount that total value to reflect TCS’s actual benefit.

The district court also described to counsel what it wanted to see in a sidebar outside the presence of the jury:

The jury was then instructed about the evidence of “use” required to award unjust enrichment damages:

In the course of introducing their evidence and testimony on damages, counsel advanced different interpretations of “use,” compelling the court to issue a supplemental instruction:

The jury then received (and ultimately rendered) a special verdict on damages that called out specific benefits anchored in use by the defendant:

In post-trial motions, defendant challenged the verdict as lacking sufficient evidence, but plaintiff successfully characterized the challenge as erroneously trying read back into “use” the requirement “that Epic had to prove that TCS then ‘used’ the comparative analysis either to improve or market its medical software products. But that is not the standard required under the law, and it is not the standard on which the jury was instructed.” (Pl. Opp. to Post-Trial Mot., Dkt. #926 at 56.)  The district court agreed (but did reduce the compensatory award by $100 million on other grounds), see Epic Systems, Order on Post-Trial Motions, at *4-5.

Bringing this back to Waymo litigation, Epic Systems is on point in that it awarded significant unjust enrichment damages on what for all practical purposes was an acquisition-based theory of misappropriation.  It rejected the argument by the plaintiff that “use” should not be a required to show unjust enrichment damages — which may be the approach Waymo is taking in its litigation.  It also rejects the idea that “use’ requires a showing that the trade secret or confidential information was used by defendant to develop a successful competitive product — which may be the approach Uber is taking in its defense of Waymo’s unjust enrichment claims. It therefore might be worth it for the parties and the court in Waymo to borrow the “use” instructions ultimately issued in Epic Systems.

 

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