The mentions that the State of Hawaii gets on this blog are, predictably, few and far between. However, in the span of just a few weeks, we have two significant legislative and judicial updates.
The first concerns Act 158, which Governor David Ige signed into law in June. The law is limited in scope and is industry-specific. The main thrust of the law is that it bans enforcement of non-compete agreements for employees of technology businesses. A technology business is defined as one which derives more than half of its gross sales from "sales or licensing of products or services resulting from software development or information technology development." The law further defines those terms.
The law also prohibits the use of non-solicitation covenants, which are defined exclusively as those restrictions that prohibit an employee from soliciting a former co-worker. It does not include any restrictions on contacting, servicing, or soliciting customers or clients of a former employer, meaning Act 158 expressly leaves open the question of whether this type of restrictive covenant in a technology business is prohibited. By omitting it, it is likely that such covenants will continue to be scrutinized for reasonableness under the common law.
Act 158 took effect on July 1, but the law has prospective effect only. For an excellent summary of Act 158, read Robert Milligan's analysis here.
While Act 158 is decidedly pro-employee, a Hawaii federal district court rendered a decidedly pro-employer decision in a non-compete case. The question presented in The Standard Register Co. v. Keala, 2014 U.S. Dist. LEXIS 73695 (D. Haw. June 8, 2015), was whether continued employment constitutes sufficient consideration to enforce a non-compete against an at-will employee. This issue continues to divide courts across the country. In the past year or so, some courts (Wisconsin) have veered towards a pro-enforcement stance when this type of consideration is at issue. Others (Illinois and Kentucky) continue to lean pro-employee and require additional consideration beyond employment itself. And we await a ruling from Pennsylvania on this same issue.
The district court in Standard Register noted that the Supreme Court of Hawaii never had addressed the question, so it surveyed the majority and minority rules across the United States. In following the majority rule, the court also relied on the forthcoming Restatement of Employment Law, Section 8.06, which appears to endorse the majority position - that forbearance of the right to discharge is itself sufficient consideration. The Restatement goes on to criticize the middle-ground approach taken by Illinois courts (as well as a handful of others) which examine whether the employment continues for a substantial period of time.
Monday, August 17, 2015
Wednesday, August 5, 2015
A Federal Trade Secrets Statute Appears Inevitable, Questions and Concerns Remain
Last week, the Defend Trade Secrets Act of 2015 was introduced in both the House of Representatives and the United States Senate. The text of the proposed legislation appears below. This is a bipartisan, bicameral bill that likely will become law in 2015.
The structure of the DTSA is very familiar to practitioners and to those who follow trade secrets developments. Currently, trade secrets law is the only branch of intellectual property that is regulated by state law. Since 1979, the Uniform Trade Secrets Act has been part of our state-law landscape, and over the years almost every state has adopted some form of the UTSA. (The variations by state are minor and generally relate to ancillary topics like the statute of limitations and preemption. New York and Massachusetts remain holdouts for reasons that are unknown.)
If Congress passes the DTSA, then this state-law regulatory framework will change dramatically. To be sure, it is unlikely to disappear; litigants still may be bring a state-law claim for trade secrets theft. The draft of the DTSA does not contain a broad preemption clause, but eventually state cases would run off into the remote reaches of the court system. And federal courts would bear the burden of hearing trade secrets disputes.
The structure of the proposed DTSA builds upon existing law, but not in a way that is seamless. It would amend the rarely-used Economic Espionage Act, which is contained in title 18 of the United States Code. The EEA criminalizes trade secret theft, but contains no private civil enforcement mechanism. In 2013, there were only 25 prosecutions under the EEA. The case law, which would aid a federal court in a DTSA claim, is almost non-existent.
The DTSA, to that end, adopts the EEA's definition of a "trade secret," which differs at the edges from the UTSA's definition. On this score, under the EEA, a trade secret must meet a two-part standard. The owner of the claimed secret must take reasonable measures to keep the information. And, substantively, the information must derive independent economic value from not being generally known to "the public." Under the UTSA, the second part of the definition is slightly different. The information must derive economic value from not being generally known "to other persons who can obtain economic value from its disclosure or use." Conceivably, under the DTSA, a plaintiff could bring two claims for trade secrets theft under two different statutes with two different definitions accorded the central issue in the case. Some lawyer somewhere is going to have a field day with that. (I happen to know of a few of those lawyers, who shall remain nameless.)
Another source of potential controversy is the DTSA's proposed process for enabling plaintiffs to obtain an ex parte seizure order. This would allow a court to authorize a seizure of trade-secret instrumentalities, such as computer hard-drives, thumb-drives, and even cell phones where purloined data may exist. In contrast to other branches of intellectual property law, these instrumentalities may have an entirely lawful purpose. On the other hand, think of counterfeit goods or pirated CDs, where the products themselves are infringing.
The seizure order is modeled after something called an "Anton Piller Order," which is fantastically named and derives from English law. This type of seizure order has a quaint, colorful, and interesting history in and of itself. Commentators are concerned that plaintiffs may abuse the process of seizing trade secret instrumentalities on an emergency, ex parte basis. However, I do not see this as a real issue for two reasons. First, federal judges would be inclined against issuing such orders, and a plaintiff who proceeds without caution faces the possibility of sanctions later in the case. Second, courts already have the authority, either under Rule 65 or the inherent authority power, to allow for seizure of items on a basis at least very similar to what the DTSA proposes. In light of the concerns, though, I expect the DTSA, when it's passed, to water down the seizure order provision or eliminate it entirely.
One final point: I feel that with the adoption of the DTSA, most non-compete disputes will now end up in federal court as a result of the courts' ability to exercise supplemental jurisdiction over state-law claims. Since trade secrets often comprise the legitimate business interest supporting a non-compete claim, a plaintiff will have every incentive to load into a non-compete dispute a corresponding trade secret claim just to get into federal court. This will complicate otherwise straightforward disputes, increase litigation costs, and tax the federal judiciary. By my estimation, if we assume that trade secrets cases are as common as patent and trademark suits, then the passage of the DTSA will result in an addition 10 to 14 new cases per district court judge per year. If there is an ancillary impact because of the desire to get non-compete cases in federal court, then the number would be higher.
I remain opposed, but not in a hand-wringing, teeth-gnashing sort of way. Two years ago, I conducted a podcast along with Russell Beck and John Marsh discussing the pros and cons of a federal trade secret statute. A link to the post and the podcast itself can be found here.
The structure of the DTSA is very familiar to practitioners and to those who follow trade secrets developments. Currently, trade secrets law is the only branch of intellectual property that is regulated by state law. Since 1979, the Uniform Trade Secrets Act has been part of our state-law landscape, and over the years almost every state has adopted some form of the UTSA. (The variations by state are minor and generally relate to ancillary topics like the statute of limitations and preemption. New York and Massachusetts remain holdouts for reasons that are unknown.)
If Congress passes the DTSA, then this state-law regulatory framework will change dramatically. To be sure, it is unlikely to disappear; litigants still may be bring a state-law claim for trade secrets theft. The draft of the DTSA does not contain a broad preemption clause, but eventually state cases would run off into the remote reaches of the court system. And federal courts would bear the burden of hearing trade secrets disputes.
The structure of the proposed DTSA builds upon existing law, but not in a way that is seamless. It would amend the rarely-used Economic Espionage Act, which is contained in title 18 of the United States Code. The EEA criminalizes trade secret theft, but contains no private civil enforcement mechanism. In 2013, there were only 25 prosecutions under the EEA. The case law, which would aid a federal court in a DTSA claim, is almost non-existent.
The DTSA, to that end, adopts the EEA's definition of a "trade secret," which differs at the edges from the UTSA's definition. On this score, under the EEA, a trade secret must meet a two-part standard. The owner of the claimed secret must take reasonable measures to keep the information. And, substantively, the information must derive independent economic value from not being generally known to "the public." Under the UTSA, the second part of the definition is slightly different. The information must derive economic value from not being generally known "to other persons who can obtain economic value from its disclosure or use." Conceivably, under the DTSA, a plaintiff could bring two claims for trade secrets theft under two different statutes with two different definitions accorded the central issue in the case. Some lawyer somewhere is going to have a field day with that. (I happen to know of a few of those lawyers, who shall remain nameless.)
Another source of potential controversy is the DTSA's proposed process for enabling plaintiffs to obtain an ex parte seizure order. This would allow a court to authorize a seizure of trade-secret instrumentalities, such as computer hard-drives, thumb-drives, and even cell phones where purloined data may exist. In contrast to other branches of intellectual property law, these instrumentalities may have an entirely lawful purpose. On the other hand, think of counterfeit goods or pirated CDs, where the products themselves are infringing.
The seizure order is modeled after something called an "Anton Piller Order," which is fantastically named and derives from English law. This type of seizure order has a quaint, colorful, and interesting history in and of itself. Commentators are concerned that plaintiffs may abuse the process of seizing trade secret instrumentalities on an emergency, ex parte basis. However, I do not see this as a real issue for two reasons. First, federal judges would be inclined against issuing such orders, and a plaintiff who proceeds without caution faces the possibility of sanctions later in the case. Second, courts already have the authority, either under Rule 65 or the inherent authority power, to allow for seizure of items on a basis at least very similar to what the DTSA proposes. In light of the concerns, though, I expect the DTSA, when it's passed, to water down the seizure order provision or eliminate it entirely.
One final point: I feel that with the adoption of the DTSA, most non-compete disputes will now end up in federal court as a result of the courts' ability to exercise supplemental jurisdiction over state-law claims. Since trade secrets often comprise the legitimate business interest supporting a non-compete claim, a plaintiff will have every incentive to load into a non-compete dispute a corresponding trade secret claim just to get into federal court. This will complicate otherwise straightforward disputes, increase litigation costs, and tax the federal judiciary. By my estimation, if we assume that trade secrets cases are as common as patent and trademark suits, then the passage of the DTSA will result in an addition 10 to 14 new cases per district court judge per year. If there is an ancillary impact because of the desire to get non-compete cases in federal court, then the number would be higher.
I remain opposed, but not in a hand-wringing, teeth-gnashing sort of way. Two years ago, I conducted a podcast along with Russell Beck and John Marsh discussing the pros and cons of a federal trade secret statute. A link to the post and the podcast itself can be found here.
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