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.