The Defend Trade Secrets Act Giveth…But Very Little

If you jump to PatentlyO, you’ll read a great column by Dr. Maxwell Goss – a business litigator like me. He offers his thoughts on the scope of “inevitable disclosure” injunctions under the Defend Trade Secrets Act of 2016 (DTSA) and argues that the theory “lives on under the DTSA, albeit in a diminished form.”

This is a pretty hot topic in the area of trade secrets law. Congress passed the DTSA last year and limited the circumstances in which courts could enjoin activity that impacts one’s ability to enter into or maintain an employment relationship.

Dr. Goss outlines this limitation in his discussion, so I won’t repeat it. The upshot is this: under the DTSA, a court can enjoin an employee’s work conduct, or even her ability to work for a competitor at all, if she has engaged in actual or threatened trade secret misappropriation. But it cannot impose limitations on that person’s job merely because she may know of, or have been exposed to, particularly sensitive information.

With the DTSA having recently celebrated its one-year anniversary, we have seen just a trickle of cases to this point. None are all that earth-shattering. Dr. Goss discusses one of the more significant ones—if only because our pool of candidates is so shallow—and it’s the first to discuss the inevitable disclosure theory of misappropriation in some depth.

The case, Molon Motor and Coil Corp. v. Nidec Motor Corp., comes from the Northern District of Illinois (the leading jurisdiction for DTSA filings). Judge Edmond Chang allowed a DTSA claim to proceed based, at least in part, on the plaintiff’s contention that a corporate defendant would inevitably disclose Molon Motor’s trade secrets. Factually, the case follows a painfully familiar paradigm in trade secrets litigation: suspicious pre-termination activity by an ex-employee in accessing and copying sensitive data off a computer system. The complaint offered nothing more. Molon Motor alleged quite simply that, through its hiring of the ex-employee, “Nidec Motor’s use of the trade secrets can be inferred under the ‘inevitable disclosure doctrine.’” (Dkt. Entry 64, at ¶ 67).

In discussing the availability of injunctive relief under the DTSA, Dr. Goss states that “an injunction that does not impact employment may still be based on inevitable disclosure.” This may refer to central fact in the Molon Motor case and which it’s not going to upend anything in the DTSA’s textual limits: the employee isn’t a defendant. Molon Motor only sued its direct competitor.

True, it seeks injunctive relief, but not in a way that would limit the employee’s work with Nidec Motor or even in a manner that would impose stringent conditions on that work. Therefore, the DTSA’s limitations on injunctive relief do not apply at all given the relief Molon Motor seeks. Those limitations speak only of a court’s ability to either (a) “prevent a person from entering into an employment relationship,” or (b) limit the “conditions placed on such employment.”

Another way to look at it: the claim in Molon Motor is not really based on inevitable disclosure by the person with original access to the trade secrets, but rather inevitable use by those to whom he allegedly distributed them. Therein lies the problem with the inevitable disclosure theory under the DTSA: if there was disclosure, then the conduct amounts to actual misappropriation. The concept of “inevitability” then disappears from the equation when actual use is proven.

So what are we using inevitable disclosure for? A gateway to discovery? Apparently, yes. A suit based on suspicion. Troubling.

After one year, where do we stand with the DTSA? Inevitable disclosure injunctions are nominally available in one of three factual circumstances:

1. Where the plaintiff seeks to enjoin use of trade secrets in a way that does not independently restrain its former employee’s work activity;
2. Where an ex-employee is not joining another company but instead starts her own business, such that the relief would not prevent her from entering into an employment relationship;
3. Where the plaintiff claims inevitable use of trade secrets following a failed business transaction in which the putative acquirer learned of those secrets during due diligence.

At least as of now, plaintiffs can gain federal question jurisdiction under the DTSA and seek broader injunctive relief under a State-law UTSA claim (at least in venues like Illinois, which currently recognize inevitable disclosure injunctions). But in those States (like California or Maryland) that reject the inevitable disclosure doctrine, the DTSA offers no gateway to broader injunctive relief.

The Reading List (2017, No. 20): Are Prince's Unreleased Songs "Trade Secrets"?

Non-Compete and Trade Secrets News for the week ended May 26, 2017

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The Trade Secret Status of Prince's Unreleased Recordings

Prince's death last year unleashed an unfortunate - and somewhat predictable - wave of litigation in his home State of Minnesota.

One lawsuit involves a claim of trade secrets misappropriation. The nature of the action? A sound engineer's possession of five previously unrecorded Prince songs. Prince's estate sued to enjoin the promotion and distribution of those recordings. The engineer signed a Confidentiality Agreement providing that any recordings were the "sole and exclusive property" of Paisley Park Enterprises, a corporation Prince owned while he was alive. The five songs were recorded and edited between 2006 and 2008, long before Prince's death. Around this time, the engineer had stopped working with Prince.

After Prince's estate learned that the engineer was planning to release one of the recordings, it sued and sought both possession of all recordings and a temporary restraining order barring their release. The court ultimately issued a temporary restraining order in favor of Prince's estate and Paisley Park. But the claim to trade-secret protection over the recordings failed.

Though the recordings themselves were kept secret, that alone was not enough to vest them with trade-secret status under Minnesota law. The court stated that "[n]o other artist or record company could take market share from Paisley Park Enterprises by discovering the contents of the disputed recordings." Though the recordings unquestionably had economic value, that value did not derive from their secrecy; rather, the value came from Paisely Park's exclusive right to sell them to the public.

Here is a link to the district court's opinion.

Stryker Wins Sixth Circuit Appeal

Back in February, I noted the significance of Stone Surgical LLC v. Striker Corp., at least in the sense that the Sixth Circuit appeal from a jury verdict raised an interesting choice-of-law question. The dispute centered on a non-compete with a Michigan choice-of-law clause. But the relevant conduct involved a Louisiana salesman who had Louisiana contacts. Given that State's pro-employee stance towards non-compete agreements, the employee (Ridgeway) had a good argument that applying Michigan law would violate Louisiana public policy.

But the Sixth Circuit - though acknowledging it was a fairly close question - found that Louisiana's interest was not materially greater than Michigan's. In other words, though Louisiana had an interest in protecting its residents from unfair and overbroad non-compete agreements, the court had to weigh the employer's interest in protecting its economic rights against a breach. And on that score, it saw no error in the district court's conclusion that Louisiana's interest was not significantly greater. The Michigan choice-of-law clause applied, and the jury's verdict against Ridgeway was upheld.

Here is a link to the Stone Surgical opinion.

Baseless Suits as a "Deceptive Trade Practice"

Defense strategies for fighting frivolous lawsuits generally are fairly limited. Counsel always have the ability to seek fees under Rule 11 or state-law equivalents if the suit is groundless. Most trade-secret statutes have "bad faith" fee-shifting clauses. Those are a tough sell in most suits. In other cases, business corporation act indemnity provisions may give rise to broad fee-shifting. And, of course, prevailing-party clauses that allow for winners to obtain fees may provide relief.

But are there other grounds for prevailing defendants to seek legal costs? The options are out there. I was interested to read an Order out of the Eastern District of Louisiana in a case called Byram Healthcare Centers, Inc. v. Rauth, No. 16-16854. In that case, the court allowed a defendant to counterclaim against her ex-employer for seeking to prevent her from working for a competitor. The legal basis? The state's Unfair Trade Practices Act, which allows a person to bring an action if she suffers "any ascertainable loss of money or movable property, corporeal or incorporeal, as a result of the use or employment by another person of an unfair or deceptive method..."

The gist of the opinion is that misuse of the judicial process itself can be a deceptive trade practice. Some state-law interpretations of the abuse of process tort would say, in essence, the same thing. But state trade practices statutes often provide for mandatory fee-shifting. This is a very creative use of state law by the employee's counsel to gain leverage in a case where the employer, even on a flimsy case, holds all the leverage simply because it is able to bear the cost of litigation.

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It's pretty hard not to read the New York Times and the Washington Post these days, a journalistic battle that illustrates the profound benefits of competition. But the NYT has gone well past all things Russia and has published a series of pieces concerning non-competition agreements. The latest comes from Paul Krugman in an opinion piece tilted "The Unfreeing of American Workers." This article discusses the shackling of employees due to the unreasonable proliferation of non-competes and the irrational linkage of health care to employment. Krugman even manages to work in a reference to Russia - noting American workers are "yoked to corporate employers the way Russian peasants were once tied to their masters' land."

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The Waymo-Uber driverless car technology fight continues to dominate the news. Jonathan Pollard takes an in-depth look at the latest developments, including Waymo's "loss" at not obtaining a broader injunction to stop Uber from pursuing its competing technology. In his usual candid style, Jonathan thinks Uber's lawyers are getting the better of their counterparts at Waymo.

For background on the man at the center of the trade-secrets case of the year, I recommend the Wall Street Journal profile on Anthony Levandowski and his rather unconventional tenure at Google.

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Russell Beck's Fair Competition Law blog discusses an amendment to the Texas Uniform Trade Secrets Act. The amendment does not allow for a trade-secrets injunction that prohibits a person from using his general skill, knowledge, and experience acquired during employment. That language helps, but it still falls short of what is needed - a clear ban on so-called inevitable disclosure injunctions.

Eric Ostroff has an excellent practical piece for lawyers who represent clients in trade-secrets suits. The gist: as an ethical matter, they probably need to encrypt e-mails that refer to the trade secrets. The American Bar Association's opinion on encryption only formalizes what a lot of us have been discussing for sometime, particularly given law firms' obvious status as targets for hackers.

Dechert has a lengthy analysis, in case summary form, of the Ninth Circuit's opinion in United States v. Liew. This matter arose of the conviction of Walter Liew under the Economic Espionage Act arising out of his theft of certain trade secrets of DuPont and his apparent agreement with the Chinese government to supply it with certain technology for titanium dioxide. Confirming the correctness of my decision never to eat Oreo cookies, titanium dioxide is the pigment that makes the center of the Oreo white. Almost as troubling as what Liew did.

Michael Starr of Holland & Knight discusses the Molon Motor case, about which I wrote last week, and its preliminary ruling that an inevitable disclosure claim withstood a defense motion to dismiss. Despite some scuttlebutt, Molon Motor does nothing to pierce the DTSA's ban on inevitable disclosure claims in the employment context. We lawyers tend to overread cases from time to time. The upshot is this: inevitable disclosure claims, even in States that recognize the theory, are incredibly hard to pursue and by no means give an employer a clear path to injunctive relief. Without some evidence of bad-faith conduct giving rise to an actual threat, they almost always fail.

The Reading List (2017, No. 19): The NYT (Again), More Uber, and One Year of the Defend Trade Secrets Act

Non-Compete and Trade Secrets News for the week ended May 19, 2017

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After two weeks, a lot to catch up on...

Abuse of Non-Competes

The big newspaper story on non-competes came in the Saturday New York Times, which discussed the proliferation of non-compete agreements across a range of industries and job positions. The article highlights lawyers' seemingly insatiable appetite to pursue opportunistic litigation at the expense of workers' careers - presumably just to meet their own individual billable-hour budgets. Lawyers are not mouthpieces for their clients' irrational behavior. They have obligations to the court and their adversaries - even if 90 percent of the dolts out their practicing law believe it or not. I certainly hope many of my professional colleagues would read this article and then look at themselves in the mirror for a change.

On a related topic, Jason Shinn has a great post in his Michigan Employment Law Advisor that discusses the need to address non-compete overreaching through enhanced fee-shifting opportunities. Jason feels that a bad-faith fee-shifting clause, akin to what trade-secret law generally allows, would help deter opportunistic non-compete cases. I agree, but of course would like to see a more flexible standard that looks at the objective speciousness of the suit (or threat to sue) rather than one focused on the plaintiff's state of mind.

Waymo/Uber Trade Secrets Litigation

The big litigation story, once again, involves the trade-secrets suit between Google (really, its Waymo unit) and Uber over driver-less car technology. At the epicenter is Anthony Levandowski, who on his way out of Google downloaded 14,000 documents to his personal computer. That is the heart of Waymo's trade-secret claim, even though Levandowski himself is not a defendant in the case. Last Thursday, Judge Alsup issued an Order of Referral - a rare step in civil trade secrets cases - in which he referred the matter to the United States Attorney for possible criminal investigation.

Judge Alsup also entered an order on Waymo's application for interim relief. The order grants partial injunctive relief in Waymo's favor, but does not halt Uber's self-driving car operation. The trade secrets aspect of the order is a tough read, because much of the analysis is redacted. However, the court did bar Levandowski from working on the LiDAR technology. As the court notes, Uber had already removed Levandowski from this work so the balance of harms in granting the narrow(er) injunction tilted heavily in Waymo's favor.

The Defend Trade Secrets Act - Year 1 in Review

We recently passed the one-year anniversary of the Defend Trade Secrets Act's enactment. And predictably, there is no shortage of first-year developments. Greenberg Traurig published a lengthy piece which has some interesting commentary specific to California suits. It also provides a nice comparison of the DTSA and the state-law Uniform Trade Secrets Act.

Paul Mersino of Butzel Long in Detroit wrote a nice one-year summary piece in Crain's Detroit. Paul litigated and prevailed on one of the first applications for an ex parte seizure order -  the most noticeable feature of the DTSA.

A Latham & Watkins Client Alert outlines "5 Lessons Learned as the Defend Trade Secrets Act Turns One." This commentary focuses mainly on the activity to date concerning ex parte seizure order applications, as well as the litigation surrounding acts of misappropriation that pre-date the statute's enactment but continue on past it.

The most interesting anniversary post, though, comes from the PatentlyO Blog, which breaks down the analytics concerning one year of DTSA claims. Notably, the Northern District of California and the Northern District of Illinois have the highest concentration of DTSA suits. The author, Professor David Opderbeck, surmises the prevalence of financial institutions in Chicago may be the cause for Illinois' surprise appearance on the list. It certainly isn't our boom in population growth...

Illinois Inevitable Disclosure Opinion

Maxwell Goss published a guest column on PatentlyO about a new case in the Northern District of Illinois called Molon Motor and Coil Corp. v. Nidec Motor Corp., No. 16 C 03545. Goss concludes that Judge Chang's opinion in Molon Motor may open the door a bit for courts to recognize "inevitable disclosure" under the Defend Trade Secrets Act. That would appear to run counter to the text of the DTSA, which generally prohibits injunctive relief prohibiting a person from entering into an employment relationship and which bars limitations on employment based solely on what the person knows. Goss tries to reconcile Judge Chang's opinion with the DTSA's limitations on injunctive relief by claiming that the court did not deal with a motion for preliminary injunction and instead dealt with a motion to dismiss.

I think there's a danger of overreading the Molon Motor opinion. Rather than deconstructing the procedural posture of the case, it seems much more straightforward to just recognize that the plaintiff filed suit under both the DTSA and the Illinois Trade Secrets Act. At least as of now, a state-law claim can proceed under the inevitable disclosure theory. The court's commentary concerning the DTSA is limited to a separate issue in the case - whether the act of misappropriation occurred before the law went into effect. It simply never analyzes the limitation on the injunctive relief available under the federal claim.

Eventually, it will be interesting to see if Illinois courts re-evaluate the inevitable disclosure doctrine. If not, we'll have an odd mix of federal and state claims where inevitable disclosure injunctions are available under one type of claim but not under another - without any real meaningful distinction in the statutory language enabling such injunctions.

Trade Secrets and Anti-SLAPP Laws: A Surprising Texas Decision

In recent years, States across the country have enacted Citizen Participation Acts, or as they're commonly known, "anti-SLAPP" statutes. The term SLAPP refers to "strategic lawsuits against public participation." Generally, they are meant to provide a defendant with an expedient way to dismiss a meritless lawsuit brought because of some governmental petitioning activity or due to the exercise of free-speech rights. Crucially, the statutes shift the burden to the plaintiff to demonstrate some factual merit to the case and then, assuming the motion to dismiss is successful, mandate an award of attorneys' fees to a defendant.

Trade secrets lawsuits are not thought to be the foreground for anti-SLAPP suits. Still, they broadly implicate associational activity, in that individuals' rights to associate with co-workers or pursue an occupation can be impacted by frivolous lawsuits. In this regard, the interplay between the text of anti-SLAPP statutes and trade secrets claims can generate considerable tension.

Historically, courts have been reluctant to extend anti-SLAPP protection to defendants in trade secrets action. In California, for instance, the Court of Appeal has held that the State's anti-SLAPP law did not include a trade secrets claim because the conduct complained of did not implicate a person's rights of petition or free speech in connection with a public issue.

Illinois, in recent years, has limited its Citizen Participation Act. The Supreme Court, for instance, appeared to add words to the plain language of the statute, effectively requiring defendants to show that an action "solely" was brought in retaliation for protected speech. As a result, lower courts have not necessarily focused on the underlying conduct of the defendants - which should be the focus an anti-SLAPP inquiry - but rather whether the plaintiff had some legitimate intent in bringing the claim.

In that wake, the Texas Court of Appeals last week applied its Texas Citizens Participation Act ("TCPA") in a way that nominally affords trade secrets defendants with additional protection. In Elite Auto Body LLC v. Autocraft Bodywerks, Inc., the court held that the TCPA may enable a trade-secrets defendant to bring an early motion to dismiss. Crucial to the court's ruling was the protection afforded under the statute to individuals "exercise of the right of association." The TCPA defines that to include: "a communication between individuals who join together to collectively express, promote, pursue, or defend common interests."

The court rejected the plaintiff's argument that some constitutional gloss must be applied to the TCPA's definitions, with the opinion providing a fairly stark example of how textualist judges analyze statutory provisions. In other words, the "communications" that form an associational right (for TCPA purposes) need not touch a matter of public concern - because nothing in the statute says that.

The case may be jarring to some plaintiffs who seek redress for legitimately unfair competition. But the TCPA would allow for them to meet their burden of establishing the factual basis for the lawsuit, just at an earlier time than many plaintiffs would prefer. Conversely, it could provide wrongly sued defendants an early means by which to extricate themselves from suit - with a fee award in tow.

Props, of course, to defense counsel for their excellent advocacy here. It's yet another example of how defense attorneys must get creative in stopping opportunistic, competitive litigation by exploring ways to stop abusive discovery and shift legal fees.

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Next week, I'll summarize the Ninth Circuit's important decision in United States v. Liew. And then in a few weeks, I'll return with my weekly recap, The Reading List.

The Reading List (2017, No. 18): Orly Lobel's NYT Op-Ed

Non-Compete and Trade Secrets News for the week ended May 5, 2017

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The New York Times Op-Ed

Orly Lobel, the author of Talent Wants to be Free, had a lengthy op-ed published yesterday in the New York Times, titled "Companies compete but won't let their workers do the same." For the most part, the editorial sounds the same cautionary tale as does her terrific book. It updates its analysis with the 2016 White House Call to Action and some legislative efforts underway to curb the misuse of non-competes. But its conclusions are largely the same.

In this particular area, Professor Lobel is one of the foremost thought-leaders and influential scholars, along with Evan Starr, Matt Marx, and Norm Bishara. Although I highly recommend Professor Lobel's scholarship and writings to anyone who is interested in labor mobility, one particular point she made in Talent Wants to be Free stuck with me more than any other. It's the concept of "embedded knowledge" and how it can bridge the often confusing gap between protected trade secrets that belong to the company and unprotected skills that belong to an employee.

For more on this topic, see my post from March of 2014.

Waymo v. Uber Update

Every day sees a new twist and turn in the self-driving car dispute between Waymo (an Alphabet affiliate) and Uber. Reuters reports on the court's remarks that Waymo lacks a "smoking gun" concerning Uber's supposed use of any documents taken by Anthony Levandowski. But he apparently is still considering an injunction against Uber. The article also notes Levandowski invoked the Fifth Amendment privilege against self-incrimination during his deposition, which his earlier motions suggested would happen.

On that score, the New York Times reported late last week the Levandowski is taking a hiatus from working on certain technology while the lawsuit remains pending.