I’ve written several times in the past about the proposed legislation to create a federal cause of action for trade-secrets misappropriation (see herehere, and here). I also wrote a response to a letter signed by a number of professors who opposed this legislation. Now, Professors David S. Levine and Sharon K. Sandeen have written a law review article titled “Here Come the Trade Secret Trolls.” This article misses the mark by a mile.

Here is the article’s core argument:

The [proposed federal] Acts are most likely to spawn a new intellectual property predator: the heretofore unknown “trade secret troll,” an alleged trade secret owning entity that uses broad trade secret law to exact rents via dubious threats of litigation directed at unsuspecting defendants.

The use of the term “troll” is meant to evoke patent trolls, who have been the subject of much scorn. But the so-called “trade secret troll” is far different than a patent troll. The latter actually own patent rights, which they wield to seek licensing fees. The article’s mythical trade-secret troll is simply someone willing to bring a frivolous lawsuit to extort an undeserved settlement. I suspect the authors chose this term to piggyback on the negative attention heaped on patent trolls, thereby arming the legislation’s opponents with a pejorative term that may scare legislators or their constituents.

Putting titles aside, the article can’t reconcile its core argument with the fact that, as the authors acknowledge, “trade secrecy has been generally free of similar trolling behavior.” In other words, there is no epidemic of frivolous trade-secret lawsuits under the current state-law framework. (Certainly, there are weak misappropriation cases, just like with any cause of action. But I haven’t seen any evidence to suggest that such cases are disproportionately filed.)

The authors try to make the point that the proposed federal acts would transform trade-secrets law such that threatening and filing frivolous lawsuits would become commonplace. Yet the article does not really explain why this is so. It gets closest when discussing the proposed ex parte seizure provisions. But as I mentioned in my response to the professors’ letter, this risk is highly overblown. Convincing a federal judge to enter ex parte relief is no simple matter. And the defendant will have the right to challenge any seizure order very soon after its entry. Federal judges will not be amused if they have been manipulated into entering unnecessary ex parte orders.

The article fears that “trolls” will be able to threaten an ex parte seizure, which will be sufficient to scare a defendant into paying up before the suit is filed. Yet any innocent defendant will know that the likelihood of such an order being entered is slim. Further, simply sending the letter would undermine an attempt to get an ex parte seizure order. If the plaintiff was able to send a demand letter, thereby putting the defendant on notice of the possible claim, then a judge would be highly skeptical of a claimed need for an ex parte order.

The article also argues that unsettled interpretative questions relating to the acts will fuel frivolous lawsuits. But the article forgets that creating a federal cause of action will quickly lead to a much more robust body of published caselaw interpreting the statute. While there are very few published trial-court-level decisions in state courts, U.S. district court orders are widely available.

Frankly, state courts are much more susceptible to frivolous trade-secrets suits than federal courts. Take Florida, for example. Here, state court judges have to deal with remarkably bloated dockets. In fact, I’ve had multiple cases where it took months to get an emergency injunction hearing. State-court judges generally don’t have law clerks. And in Florida, judges often rotate between civil, criminal, family, and dependency divisions. This latter point is critical: judges often don’t spend enough time in the civil division to develop a familiarity with trade-secrets law. All of these issues lead to uncertainty, which would seemingly aid the unscrupulous litigant looking to extort a settlement. Yet, as the authors themselves acknowledge, we simply have not seen this so-called trolling.

There’s no question that frivolous lawsuits would be filed under the proposed federal legislation, just as like every other cause of action. But there is absolutely no credible reason to believe that such suits can’t be remedied with the typical mechanisms deigned to ferret out meritless claims, like Rule 11 motions.

As I’ve argued in the past, the proposed legislation has tangible benefits that aid trade-secrets owners in protecting their critical proprietary information. The arguments lobbed up in opposition—including the manufactured risk of “trolling”—don’t hold up to careful scrutiny.

8 Comments

  1. Dear Mr, Ostroff,

    Thank you for highlighting the article I wrote with David Levine. We share the same interests, to make sure that legitimate trade secret owners can effectively and efficiently protect their trade secrets. But, there is another issue that deserves equal attention, one that I learned about during 15 years of practice as a litigator. We also do not want trade secret laws to be so stringent that they can be used in anti-competitive ways by companies with weak or non-existent trade secrets. If you have ever represented a defendant in a trade secret misappropriation action, I am sure you will know what I mean.

    IP (including trade secrets) is great when you own it; it is not so great when it is being used against you to shut down your business. In our article, we were not saying that this sort of behavior (asserting weak or non-existent trade secret claims) does not already exist; we were arguing that it is bound to get worse if the federal law (as introduced last year) is enacted. Among other things, plaintiff’s will be given new powers that will allow them to exact early settlements, perhaps before even filing a lawsuit. As we used it, the “troll’ label refers to situations where the traditional balance that IP laws seek to achieve between protecting legitimate rights and preventing anti-competitive behavior gets out of balance in ways that hamper competition.

    It is interesting to me that when I speak of this debate among business lawyers and their clients, they understand the need for balance and the risks of putting too much power in putative trade secret owners. Thus, I encourage everyone to look at this issue not just from the perspective of the putative trade secret owner but also through the lens of a small business or entrepreneur who might be accused of trade secret misappropriation when the alleged trade secrets are weak or non-existent. I believe, as the drafters of the UTSA did, that as much harm is done to U.S. innovation and entrepreneurship by the over-assertion of IP rights as by the under-protection. What I like about existing trade secret jurisprudence in the U.S. is that is has such balance; the proposed federal law is currently missing it.

    Sincerely,

    Sharon K. Sandeen
    Professor of Law
    Hamline University School of Law

  2. Professor Sandeen, thanks for reading and for your comment. I regularly represent defendants in trade-secrets litigation (though not as frequently as plaintiffs), so I do understand that perspective. But I don’t agree that the proposed legislation would affect the balance between rights holders vs. competition.

    Trade-secrets issues are actually less susceptible to frivolous litigation as compared to other causes of action. That’s because most cases reach a “trial” very early on, at a preliminary injunction hearing. A plaintiff needs to be willing to spend a good deal of money up front, knowing that its claims are likely to be tested right away.

    As a result, we don’t see many truly frivolous cases filed. In the rare case when that happens, a defendant has a variety of options, be it the state-law equivalent of Rule 11, or the provision in the UTSA allowing for attorney’s fees if the claim was brought in bad faith. Both of these remedies would be available under the federal legislation.

    I just don’t see how the federal legislation moves the needle towards anti-competitive behavior. In fact, I think it goes the other way. As I mentioned in my post, state courts are more susceptible to frivolous suits. Moving to federal court will decrease bad-faith, anti-competitive lawsuits. There, judges will have the time, subject matter experience, and, eventually, a more robust body of case law to rely on.

    I know there is discomfort with the ex parte seizure provision, but as I mention above, the combination of judges’ discomfort with ex parte relief combined with the defendant’s ability to immediately challenge any order adequately protects against abuse.

    In the end, the proposed legislation will allow for more consistent and efficient protection of real trade secret rights, at a time when the risks to those rights are increasing rapidly. And defendants will still have plenty of weapons at their disposal to combat frivolous suits.

    Thanks again for the comment.

  3. As we explain in our earlier Professors’ letter, the problem is that there is no existing federal jurisprudence that has developed the robust exceptions and limitations that are recognized under state law. This is due to the Erie Doctrine and the fact that there is no such thing as federal common law with respect to the application of state law. In this regard, federal courts (although likely to look at state common law) are not required to apply state common law principles with respect to a federal statute. Even if they do so, which state’s law will they apply?

    Without express exceptions built into the proposed federal trade secret law (akin to what the EU has done in the proposed EU Trade Secret Directive), we do not know which limitations and exceptions that are recognized under state common law and in the commentary to the UTSA (which currently provides the needed balance) will be recognized under the new federal law. Until this is sorted out through years of litigation and appellate decisions, I think it is predictable that trade secret owners will push the envelope as far as they can, urging the federal courts to adopt more limited exceptions and limitations. I am particularly concerned about whether and to what extent the defenses of reverse engineering and independent development will be recognized and the extent to which the inevitable disclosure doctrine (aka the implied non-compete doctrine) will be applied.

    In short: We cannot assume that the trade secret jurisprudence that has developed over one-hundred and fifty years at the state level will magically be adopted at the federal level, unless the proposed legislation is amended to explicitly include such limitations and exceptions.

  4. I should add that versions of the legislation introduced in the past did have some limitations built in, but not all.

  5. Any time a new law is passed, there is a period of some uncertainty as the gaps become filled in by the courts. This process will occur much faster in the federal courts as compared to state-by-state adoption of the UTSA, since we will get district court orders instead of having to wait for appellate court opinions.

    I find it very hard to believe that a federal cause of action will result in a wholesale change in what is defined as a trade secret. For example, I see it as incredibly unlikely that courts will disregard the defense of reverse engineering. Any such decision would be in contravention of the Supreme Court’s holding that trade-secrets laws are not preempted by the patent system, since they do not protect against reverse engineering.

  6. I started my legal career in 1976 defending IBM from charges by Xerox that IBM’s use of the experience it gained from a previous joint effort to use Chester Carlson’s “xerographic” photoelectric toner offset printing for “computer cards” and “hard copy” of microfiche was a misappropriation of trade secrets. At the same time (the change from the industrial age of the 1939 Restatement of Torts to the research era of the space age and the birth of the digital and bioengineering world), the Uniform Trade Secrets Act was being vetted to recognize protection for ideas with potential use, as well as the salutary role of reverse engineering. This was at a time of active antitrust enforcement and the marginalization of patents (the preamble to the UTSA recites the preference for trade secrecy by American industry). It was also the time of the abandonment of the constitutional quid-pro-quo (publish in return for a limited monopoly) tor copyrights.

    The proposed federal private right of action based on UTSA “misappropriation” is in my view a rash and unnecessary challenge to our federalist system of state-based agency, contract, tort, property, privacy and restitution law. It may also have profound, unwitting (at least by most) effects on state-based concepts — based on the success of early litigants to establish national meanings for “improper means”, “duty to maintain secrecy”, “accident or mistake” in the context of data mining and privacy policies and terms of service.

    Why is it that Congress and “business” frown upon federal private rights of action and seek to do away with the American Rule in the name of tort reform and punishing “patent trolls” but is content to expand federal jurisdiction to trade secrets “related to a product or service used or intended to be used in interstate or foreign commerce” with only a Rule 11 safeguard?

    A frequent trade secret litigant (possibly a “troll” by the “non-practicing”) claims that his or her motion picture (intended for interstate and international commerce) has been misappropriated. This is would be a federal cause of action. (Or it may be anyone with the grand intention that his or her product or service will succeed across state lines.)

    The early defendant may convince a federal district court that such an idea may not merit trade secret protection because it is not “novel and concrete” or because it was taken from an email or social media site where there was no expectation of privacy or the terms of service declared a license or even ownership. Another early defendant may establish the same as the new national uniform trade secret law.

    Although internationalist techies have little use for state contract (or other) law, I happen to believe in our federalist system and believe that the conservative — prudent — approach is to let parameters of contract, privacy, restitution, etc. be worked out in the “laboratories of democracy” rather than to hastily give power to early litigants in a statute rushed to enactment without working through the scenarios (just as Congress in 2012 amended the jurisdiction under 18 USC 1832 as a knee-jerk reaction to the reversal of Mr. Aleynikov’s conviction with no thought of the ramifications of “related to . . . intended [use].”

    As a 20-year Uniform Law Commissioner (and proposer of the ill-fated UCC Article 2B), I’d rather see state-based rights — including privacy — vetted much more thoroughly.

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