Federal Court Denies Expedited Discovery In Defend Trade Secret Act Case

Trade-secret-misappropriation cases can move fast. Often, the plaintiff files a motion for temporary restraining order alongside its complaint. Sometimes, the plaintiff has enough evidence already to justify a TRO. Other times, the plaintiff needs to take discovery before the TRO hearing.

But the typical discovery deadlines in the rules of civil procedure are not well suited for these TRO proceedings. Thus, plaintiffs regularly seek expedited discovery. In my experience, the parties are often able to agree to an expedited discovery schedule, since defendants usually want to take discovery as well. But when the parties cannot agree, the court needs to get involved. A recent case out of the Middle District of Florida shows the importance of narrowly tailoring expedited discovery requests, particularly when asking a judge to permit this type of discovery.

In Digital Assurance Certification, LLC v. Pendolino, the plaintiff works with municipal bond issuers to comply with various SEC regulations. The plaintiff alleges that the defendant, a former employee, left to work for a competitor. And in his final week of work, according to the plaintiff, the defendant used a USB drive to access every document on the plaintiff’s shared drive. Thus, the plaintiff brought claims for violations of the Defend Trade Secret Act and the Florida Uniform Trade Secrets Act, among others, and filed a motion for a TRO.

In advance of the TRO hearing, the plaintiff filed a motion for expedited discovery. The court denied the motion. A copy of the order can be downloaded below.

The court first set forth the standard for determining whether the plaintiff had demonstrated good cause for expedited discovery:

Factors the Court considers in deciding whether a party has shown good cause include: (1) whether a motion for preliminary injunction is pending; (2) the breadth of the requested discovery; (3) the reason(s) for requesting expedited discovery; (4) the burden on the opponent to comply with the request for discovery; and (5) how far in advance of the typical discovery process the request is made.

Here, the court focused on the second factor, the breadth of the plaintiff’s requests. The court took issue with the scope of the plaintiff’s requests, noting that “while these matters may be relevant to the issues raised in DAC’s complaint, they go far beyond what is needed for the hearing on the motion for a temporary restraining order.”

Take away: When bringing a motion for a TRO, the plaintiff’s lawyers need to figure out quickly whether the parties will be able to agree to an expedited discovery schedule. If not, the plaintiff needs to draft discovery requests that are laser focused on the issues relevant to the TRO hearing. In my experience, judges will allow this type of discovery, as long as the requests are reasonable. Conversely, judges will protect defendants from overbroad discovery.

Digital Assurance Certification, LLC v. Pendolino

Federal Court: No Heightened Pleading Standard Under the Defend Trade Secrets Act

As more plaintiffs bring claims under the shiny new Defend Trade Secrets Act, we continue to learn about how courts are interpreting this statute. On Tuesday, the District of New Jersey answered an open question: whether the statute, in conjunction with Twombly/Iqbal, requires a heightened pleading standard for misappropriation. In Chubb INA Holdings, Inc. v. Chang, the DNJ declined to apply such a standard. A copy of the opinion can be downloaded below.

In this case, Chubb sued its former employee and its competitor Endurance, alleging that the former employee worked with Endurance to solicit a large number of employees from Chubb’s real estate and hospitality division. The goal was to hire enough Chubb employees to create a “turnkey” operation for Endurance. In the process, Chubb alleges, the former employees took Chubb’s confidential information. Chubb sued for, among other things, violations of the Defend Trade Secrets Act.

The defendants moved to dismiss, arguing that Chubb did not offer sufficient allegations of actual misappropriation, as opposed to inevitable disclosure. In denying this motion, the court found that Chubb alleged “more than the mere possibility of misconduct,” citing to Ashcroft v. Iqbal. The court also focused on the pleading standard:

Plaintiffs “need not make out specific allegations as to exactly how Defendants used or disclosed Plaintiff[s’] trade secrets; there is no heightened pleading standard for a misappropriation claim, and Plaintiff[s are] entitled to seek discovery to support [their] allegations setting forth a prima facie claim.”

The court was quoting from a case interpreting a New Jersey state-law claim for trade-secrets misappropriation.

This is obviously a plaintiff-friendly interpretation of the statute. It allows plaintiffs to plead misappropriation more generally, and then obtain discovery to sharpen the details.

Interestingly, the court’s approach here—relying on reasoning from a court in its state interpreting that state’s trade-secrets law—could result in state-by-state differences in how the DTSA is interpreted.

Chubb v. Chang MTD Order

“Just Doin Blow and Erasing Evidence”

As the Defend Trade Secrets Act—which would create a federal cause of action for trade-secrets theft—makes its way through Congress, critics have focused on the proposed statute’s ex parte seizure provision. In a nutshell, the statute would allow for the entry of ex parte orders to seize specifically identified repositories of evidence that are at risk of destruction.

I’ve responded to these criticisms multiple times before (see here, here, and here). The statutory protections (e.g., the party subject to the order is entitled to a hearing within 7 days) combined with federal judges’ reluctance to issue ex parte orders are, in my view, sufficient to prevent abuse.

Meanwhile, the threat of evidence destruction is real. A recent case shows how far defendants can go to allegedly destroy evidence of trade-secrets theft.

As described in Law360, a radio-controlled-vehicle company sued several former employees for violating restrictive covenants and misappropriating trade secrets, among other claims. The plaintiff filed a motion seeking sanctions against the defendants for destroying evidence.

According to the plaintiff, the defendants destroyed “scores of emails, texts, and documents that described their scheme to start at least one rival toy car and boat business.”

One of the defendants—who sounds like a real winner—apparently sent a text message talking about how he expected to get served with the complaint, saying “That’s what I’m trying to deal with now so I can’t go out, just doin blow and erasing evidence.”

In misappropriation cases, the evidence is almost always in electronic form. And it’s way too easy for defendants to destroy this evidence. While a plaintiff could seek sanctions (as the plaintiff here is seeking against the guy “doin blow”), a plaintiff would almost always rather have the actual smoking gun proving misappropriation.

The ex parte seizure provision is a powerful tool that may allow companies to preserve critical evidence.

Professors Invent Threat of “Trade Secret Trolls”

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.

Law Professors Oppose Federal Trade Secrets Acts, Ignore Their Benefits

I’ve written about the Defend Trade Secrets Act and the Trade Secrets Protection Act previously. I’ve expressed enthusiastic support for these laws, which have bipartisan and widespread corporate backing. Today, 31 law professors issued a letter opposing these proposed statutes. Their harsh critique ignores clear benefits and overstates the statutes’ risks.

These professors’ thesis is explained at the end of the letter: “[T]he Acts are dangerous because the many downsides explained above have no—not one—corresponding upside.”

This statement and attitude ruins the letter’s credibility. These statutes have real, concrete benefits. They provide for federal jurisdiction, allowing for federal magistrates—experts in e-discovery—to oversee the complicated e-discovery issues often attendant to trade-secrets-misappropriation cases. They would allow for a uniform national trade-secret-misappropriation standard, thereby providing companies with greater certainty regarding enforcement. And the provision creating the most controversy, the ex parte seizure provision, will reduce the real risk of deliberate evidence destruction.

If these professors are not able to acknowledge that these proposed statutes offer benefits to companies facing the threat of misappropriation, I find it hard to take their critique seriously. But let’s look at their five reasons to reject these statutes:

1. Effective and uniform state law already exists. True, most states have adopted the Uniform Trade Secrets Act, with slight variations. But the state-by-state patchwork of statutory interpretation is not uniform. For example, different states apply different standards to determine whether a customer list is a trade secret. And state courts are often overburdened. I have personally experienced difficulty getting expedited hearing dates for emergency temporary injunction motions in state courts. Federal courts are better equipped to hear these types of motions expeditiously.

2. The Acts will damage trade secret law and jurisprudence by weakening uniformity while simultaneously creating parallel, redundant and/or damaging law. Despite this heading, the professors do not explain how applying a uniform federal standard will weaken uniformity. Instead, the professors argue that the Acts do not preempt state law, but only apply to trade secrets used in interstate or foreign commerce. Apparently, they believe that giving companies a choice between filing a misappropriation action in federal or state court is a bad thing. If companies want to litigate in state court, based on state law, these Acts permit them to do so. But these statutes would provide a second option. Given the tremendous corporate support for these statutes, companies themselves seem to want this new option.

The professors also criticize the interstate commerce provision, calling it “unclear and unsettled.” But like all statutes, this provision will become settled once tested in the courts. And the concept of interstate commerce is certainly not a new one, since federal courts routinely apply this standard to many federal statutes.

The professors also criticize the ex parte seizure provisions. Of all their critiques, this one has the most merit. I responded to this issue here. Keep in mind that evidence destruction is a real threat. I believe that it occurs routinely, particularly in misappropriation cases. In the end, I have faith that the federal judiciary will limit these orders to those cases where they are justified.

3. The Acts are imbalanced and could be used for anti-competitive purposes. The professors next argue that the Acts do not explicitly limit the length of injunctive relief. But the proper length of an injunction can vary widely based on the circumstances of a case. The judge hearing the supporting evidence is in a much better position than Congress to determine its length.

The professors are also concerned that parties will misuse the ex parte seizure provisions for anticompetitive purposes. This ignores the fact that (1) the moving party will have to convince a federal judge that the ex parte seizure order is necessary, and (2) the defendant will have the opportunity to challenge the order very soon after its entry. Again, I believe that the benefits of this provision outweigh its risks, given the built-in protections.

4. The Acts increase the risk of accidental disclosure of trade secrets.  Here, the professors argue that because of possible jurisdictional challenges based on the interstate commerce provision, plaintiffs will face motions to dismiss for lack of subject-matter jurisdiction that will “require the plaintiff to identify and disclose its trade secrets early in the litigation.” It’s hard to reconcile the professors’ concern for anticompetitive uses of the Act (number 3 above) with their concern that plaintiffs will have to identify the trade secrets at issue. Regardless, in reality, defendants already seek more detailed information about the trade secrets at issue at the case’s outset as a matter of routine, either through a motion to dismiss/for more definite statement, or through discovery requests. This new statute will have a marginal effect, if any at all, on the timing for identifying the trade secrets at issue.

5. The Acts have potential ancillary negative impacts on access to information, collaboration among businesses and mobility of labor. The letter discusses how companies are able to label information as a trade secret to prevent public and regulatory access to important information. (Again, this is inconsistent with point 4, where the professors wanted to enable companies to delay disclosure of the trade secrets at issue.) But the professors don’t explain how the Acts would increase this practice, other than to mention the ex parte seizure provision. Yet any company (and its attorneys) that obtains an ex parte seizure order in bad faith will have to face the ire of a federal judge who they manipulated into entering the order. I think the risk is overblown.

Look, neither of the Acts are perfect. But the threat of misappropriation is real. Companies need stronger weapons in their arsenal to protect their proprietary information. These Acts accomplish that, with limited real—as opposed to academic—downside.

 

Congressmen Explain Why You Need to Be Proactive About Trade-Secret Theft

In today’s partisan political climate, it’s rare to see an issue that unites members of both parties. But trade-secrets theft has become such a significant threat to our economy that there is now a bipartisan effort to pass federal trade-secret legislation.

Last week, Congressmen Hakeem Jeffries (D-NY), Howard Coble (R-NC), John Conyers Jr. (D-MI), Steve Chabot (R-OH), Jerrold Nadler (D-NY), and George Holding (R-NC), all members of the House Judiciary Committee, published an article explaining why they introduced the “Trade Secrets Protection Act of 2014.”

The Congressmen’s article does a great job detailing the threat that companies face.

They start off with a sobering statistic: “The devastating reality is that theft of trade secrets costs the American economy billions of dollars per year.” They cite to a 2013 study by the Executive Office of the President that found that “the pace of economic espionage and trade secret theft against U.S. corporations is accelerating.” That study gave examples of large-scale trade-secret theft, including stolen trade secrets from Dupont and Goldman Sachs valued at $400 million and $500 million, respectively.

They close by making the point that the current scheme, under which each state has its own trade-secret-misappropriation laws, is inadequate to confront the threat:

The current patchwork is simply not enough to combat organized trade secret theft. All other forms of intellectual property – patents, copyrights, and trademarks – are afforded a civil cause of action in federal law. It is time we confer trade secrets with a similar level of protection to substantially mitigate the billions of dollars lost annually through theft of our intellectual property.

Hopefully, either this or the similar Defend Trade Secrets Act (discussed here and here) will pass. But regardless, companies must be proactive about protecting their trade secrets. State and federal laws creating causes of action for trade-secret theft are great, but litigation is never ideal. You should consult with an attorney with expertise in this area to make sure you are taking all reasonable steps to protect your proprietary information. Doing so will help you avoid the need for expensive and time-consuming litigation.

In Defense of the Defend Trade Secrets Act

In my last post, I discussed the recently proposed, bipartisan Defend Trade Secrets Act that would create a federal cause of action for trade-secret misappropriation. I wrote favorably about the statute’s mechanism allowing a judge to enter an ex parte order to preserve evidence. Since then, I’ve discussed this provision with several people who have concerns about it. This post responds to these criticisms.

To start, I want to explain why this provision is so important. Trade-secret theft is overwhelmingly accomplished by electronic means, such as through email, downloading to portable media, or via remote access to IT systems. Companies suspecting trade-secret theft can often determine where and how the information was stolen. For example, forensic techniques can identify that certain documents were saved to a flash drive on a specific date.

The Defend Trade Secrets Act permits the company, armed with this information, to seek an order requiring seizure or preservation of the media/computer/etc to which the information was downloaded. As a result, critical evidence that could otherwise easily be destroyed would be preserved. Without a statutory provision specifically authorizing this remedy, most litigants find it very difficult to convince a judge to enter this type of order.

I’ve heard concerns about the risk that judges will improvidently grant ex parte seizure orders brought in bad faith by unscrupulous litigants, potentially causing significant unjustified damage to defendants. This risk, while real, is present any time a judge hears an ex parte motion for temporary restraining order. The overwhelming majority of judges are reluctant to enter an ex parte injunction unless absolutely necessary. And this statute contains requirements that make it materially more difficult to get a seizure order as compared to a TRO.

In particular, the Defend Trade Secrets Act borrows from the Trademark Act’s procedure for seizing goods containing counterfeit trademarks. These requirements go beyond the typical TRO prerequisites. For example, the movant must show evidence that the item to be seized will be in a certain location. The court must also take measures to protect the defendant from publicity regarding the seizure. Further, the order directing seizure remains sealed until the defendant has an opportunity to contest it at a hearing that must occur within 15 days of entering the ex parte order. And as a final example, the statute provides for damages, including punitive damages, if the defendant is damaged by the wrongful entry of a seizure order.

These protections go a long way to minimize the likelihood that orders are improperly entered. In the end, the benefit of avoiding destruction of evidence—which happens all too frequently—outweighs the risk of unwarranted orders, particularly given the statute’s protections.

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