shapiro

As the law’s first anniversary approaches, federal courts continue to adjudicate claims arising under the Defend Trade Secrets Act (“DTSA”).  Enacted on May 11, 2016, DTSA provides the first private federal cause of action for trade secret misappropriation, allowing parties to sue in federal court for trade secret misappropriation.  Although the law is in its infancy, employers and legal practitioners filing complaints that assert DTSA claims must nevertheless adhere to longstanding rules of pleading set forth by the Supreme Court and the Federal Rules of Civil Procedure (“FRCP”).  Two recent decisions address this fundamental concept and serve as reminders that all complaints must follow basic pleading precepts.

Rules of Pleading Under DTSA

Rule 8(a)(2) of the FRCP requires a pleading to contain a “short and plain statement of the claim showing facts that the pleader is entitled to relief.” A complaint must contain sufficient factual matter, accepted as true, “to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).  A claim becomes plausible if its “factual content . . . allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”  Should the well-pleaded facts support no “more than the mere possibility of misconduct,” then dismissal pursuant to FRCP 12(b)(6) is warranted.  Applying these standards to claims brought under the DTSA, a plaintiff must allege facts demonstrating that it is the owner of a trade secret that was misappropriated.  18 U.S.C. § 1836(b)(1).  Generally speaking, a “trade secret” is information that the owner “has taken reasonable measures to keep . . . secret” and that “derives independent economic value . . . from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.” Id. § 1839(3).  Thus, a plaintiff asserting a DTSA claim bears the burden of alleging sufficient facts to demonstrate that it took reasonable steps to maintain the secrecy of the protected information.

Two Recent DTSA Decisions Reach Opposite Results

In Raben Tire Co. v. Dennis McFarland, Case No. 16-CV-00141, 2017 U.S. Dist. LEXIS 26051 (W.D. Ky. Feb. 24, 2017), a Kentucky federal court dismissed with prejudice a claim for misappropriation of trade secrets under DTSA for failure to state a claim. The plaintiff Raben Tire (a seller and installer of tires for commercial vehicles and construction equipment) sued two of its former employees and their new employer because, prior to resigning, the former employees allegedly transferred “confidential and proprietary information” to their new employer, including sales commission reports and the names of the individuals responsible for tire purchases.  Other than labeling that information as “confidential” in its complaint, Raben Tire did not allege any facts showing that it took any steps to protect the information from disclosure.  This omission was fatal to Raben Tire’s claim for misappropriation of trade secrets under the DTSA.

By contrast, a North Dakota federal court denied a motion to dismiss such a DTSA claim in Aggreko, LLC v. Guillermo Barreto & Elite Power, LLC, Case No. 16-cv-00353, 2017 U.S. Dist. LEXIS 35573 (D.N.D. Mar. 13, 2017), finding that the complaint satisfied the pleading standards. Just like in Raben Tire, the plaintiff Aggreko (a company that rents generators to customers) sued a former employee and his new employer because, prior to resigning, the employee allegedly downloaded Aggreko’s trade secrets and confidential information relating to Aggreko’s operations, customers, business proposals, and pricing strategies onto his personal hard drive for the benefit of his new employer. Aggreko’s complaint included one critical allegation missing from the complaint in Raben Tire:  the former employee was bound by confidentiality and employment agreements intended to protect Aggreko’s confidential information and to ensure that the information was not removed from the workplace or used by former employees and competitors.  In light of these allegations, the court denied the former employee’s motion seeking dismissal of Aggreko’s trade secret claim because it was “certainly plausible.”

Raben Tire and Aggreko confirm that claims brought under DTSA must be pleaded with the longstanding federal pleading principles in mind.  Employers and practitioners must take care to allege facts asserting plausible claims that not only describe the trade secrets at issue but also detail what measures the employer took to protect them.  Otherwise, like the plaintiff in Raben Tire, the complaint may be subject to dismissal on a motion to dismiss pursuant to Rule 12(b)(6).

Trade secret misappropriation cases turn on details. Accordingly, it is always interesting to see the particular details which tilt a court’s decision one way or the other.

In Lincoln Chemical Corp. and Dole v. Dubois Chemicals, Inc. and Galaxy Associates, Inc., Judge Miller of the Northern District of Indiana was faced with a motion for a preliminary injunction in a case involving, among other things, an alleged misappropriation of trade secrets by a former employee, Edward Dole. According to Judge Miller’s decision, when Dole switched employers, he “retained on his personal computer considerable proprietary information” of his former employer. Dole stated that he “retained it simply because [his former employer] never asked for its return or destruction,” and this raised an issue of whether Dole’s continued possession of this information was sufficient to support a misappropriation claim.

On this question, Judge Miller noted that Dole’s employment agreement contained a clause requiring him “to turn over all confidential information (including trade secrets) to his employer when his employment ended.” Because he did not do so, irrespective of whether the former employer ever specifically asked for the information’s return or destruction, Judge Miller held that Dole “misappropriated the information because he possesses it through improper means.”

Judge Miller’s ruling on this issue illustrates that when drafting an employment agreement or assessing the viability of a misappropriation claim, contractual clauses requiring the return of all company property and confidential information at termination should be given serious consideration.
 

A new study of federal court trade secret litigation confirms that the number of lawsuits involving alleged trade secret misappropriation continues to grow exponentially. According to the study, which was published in the Gonzaga Law Review on March 17, 2010, the number of federal court “trade secret cases doubled in the seven years from 1988 to 1995, and doubled again in the nine years from 1995 to 2004.”

Other interesting findings in the study include the following:

• “In over 85% of trade secret cases, the alleged misappropriator was someone the trade secret owner knew – either an employee or a business partner.”

• The usage of confidentiality agreements significantly increases the likelihood that a court will find that a trade secret owner took reasonable measures to protect the purported trade secrets.

• The Northern District of Illinois (i.e., Chicago) handles the largest number of trade secret lawsuits, and “Courts applied the laws of Illinois, California, or New York in almost 30% of trade secret cases.”

• When seeking injunctive relief, owners of trade secrets had a much higher rate of success against employees (about whom extensive pre-filing investigations can be done) than against a business partner (with respect to which the trade secret owner may have only limited information).

• Similarly, trade secret litigation against employees is “much more likely to conclude early in the litigation” than is trade secret litigation against a business partner.

For anyone interested in this area of the law, the study is well worth reading.
 

Although issues involving misappropriation of trade secrets are frequently litigated, they rarely result in criminal charges. However, according to recent stories in The Chicago Tribune, Reuters.com, and other media outlets, a former employee of Goldman Sachs was recently arrested by the FBI for allegedly stealing trade secrets (software code regarding a proprietary trading system) worth millions of dollars.

In this high technology era, where a company’s most valuable assets are frequently its people and information and where the equivalent of thousands of pages of documents can be copied and moved with a few keystrokes, attorneys are increasingly being asked to stop the misappropriation of confidential information and trade secrets by employees and rival businesses. While there is no magic wand that will prevent a theft or stop a thief in his tracks, a company can substantially lower the risk of trade secret misappropriation through proactive policies and procedures. An article that I recently published in the Labor & Employment Law newsletter of the Illinois State Bar Association, which can be accessed by clicking here, explains how employers can do so.

This article originally appeared in the April 27, 2009 Connecticut Law Tribune. 

The Economic Espionage Act ("EEA"), 18 U.S.C. §§ 1831-39, gives companies another tool in the fight against misappropriation of trade secrets to "adopt a national scheme to protect U.S. proprietary economic information" and to combat the rising tide of espionage against and threats to corporate trade secrets. It criminalizes misappropriation of trade secrets.

The EEA creates a crime for the misappropriation of a trade secret to the economic benefit of anyone other than the trade secret owner generally, or specifically a foreign government. For example, in June 2008, a former Chinese national who admitted he tried to sell fighter pilot training software to the Chinese navy was sentenced to two years in prison. See United States v. Meng, No. 04-CR-20216, slip. op. (N.D. Cal. June 18, 2008). The EEA also prohibits "attempts" and "conspiracies" to commit economic espionage.

The standard definitions of trade secrets apply, as do the rules that the owner must have taken measures to keep the information secret, and the information must derive independent economic value from not being known and not being readily ascertainable through proper means.

The penalties that may be imposed under the EEA are severe. An individual convicted of theft of a trade secret under this statute for economic espionage with a foreign government, instrumentality or agent faces a maximum sentence of 15 years in prison and/or a fine up to $500,000. A corporation or other organization held in violation of foreign espionage is subject to a maximum fine of $10 million. In cases of trade secret conversion in interstate or foreign commerce for economic benefit, a person faces a fine and/or 10 years in prison, and a corporation can be fined up to $5 million.

Special Features

The EEA requires the court to enter orders to preserve the confidentiality of the trade secret in any proceeding under the act. Without that, the owner of a trade secret may be reluctant to cooperate in an EEA prosecution for fear of exposing the trade secret to public view.

Additionally, the EEA provides for criminal forfeiture of "any property constituting, or derived from, any proceeds the person obtained, directly or indirectly," from the theft of the trade secret. Additionally, "any of the person’s [or organization’s] property used . . . to commit or facilitate the commission [of the offense]" may also be forfeited. Although the property is forfeited to the United States, the victim should seek restitution from the proceeds of the forfeiture.

If a party resides in the United States, but commits the act of espionage in a foreign country, that act of espionage is subject to the EEA . Also, if a foreign corporation sells a product containing a trade secret in the United States, it may be prosecuted under the EEA as long as the misappropriation occurred in the United States.

The trade secret owner must weigh the benefits and risks of a prosecution before requesting the government to commence a case. For example, a prosecution shows competitors that the owner of the trade secret is serious about protecting its proprietary and confidential information. Conversely, in an EEA prosecution, the owner of the trade secret loses control of the case to the government, which may not have the same interests. Additionally, the criminal defendant may be entitled to production of the trade secret as part of discovery, subject to a court protective order preserving confidentiality.

Because the trade secret owner relies on the U.S. attorney’s office’s willingness to prosecute, it is important to consider the questions that the government may ask in deciding whether to commence a case under the EEA. First, what was the adequacy of the security measures? Second, what kind of information was misappropriated? It is likely that the government will be more interested in pursuing a case involving scientific or research information because it may have longer lasting value. (A marketing plan may have no value by the time a case proceeds to trial.)

Third, is there hard evidence of misappropriation, particularly physical evidence or admissions? Fourth, is the trade secret owner willing to cooperate fully with the government? Fifth, does the defendant have a strong defense to the action? Sixth, what is the timing of the referral? In some cases, it may be better to report the theft immediately, while in other instances it may be wise to conduct a full, private investigation before contacting the U.S. attorney’s office. Seventh, does the trade secret have value and can it be documented? Finally, does the victim have the resources to pursue a civil remedy?

Defenses

A defendant to an action brought under the EEA has the three traditional defenses used in trade secret actions: (1) independent parallel development of the trade secret; (2) reverse engineering; and (3) general knowledge, skills or experience. See United States v. Hsu, 155 F.3d 189, 196-97 (3d Cir. 1998).

Representative Cases

In United States v. Lange, 312 F.3d 263 (7th Cir. 2002), the defendant’s conviction under the EEA was upheld over his denial that the computer data he stole from his former employer and attempted to sell to a competitor met the statutory definition of "trade secret." The court held that the former employer took reasonable measures to keep the computer data secret, including storing all of the data in a room protected by a special lock, alarm system, motion detector; keeping the number of copies and employees’ access thereto limited; and dividing its work among several vendors to ensure that no vendor could replicate the product. See also United States v. Four Pillars Enterprise Co., No. 06-3297, 2007 WL 3244034 (6th Cir. Oct. 30, 2007) (The defendant was convicted of attempt and conspiracy to commit theft of trade secrets in violation of the EEA for scheme to obtain confidential and proprietary information from employer).

Many New York attorneys, when seeking a preliminary injunction against a party that has misappropriated their clients’ trade secrets, will argue that a presumption of irreparable harm to their clients automatically arises upon the determination that a trade secret has been misappropriated, citing Ivy Mar Co. v. C.R. Seasons, Ltd., 907 F. Supp. 2d 547, 567 (E.D.N.Y. 1995). A recent decision of the U.S. Court of Appeals for the Second Circuit, however, holds that misappropriation of trade secrets does not automatically lead to irreparable harm. The aggrieved party only faces irreparable harm if the misappropriator will disseminate the secrets to a wider audience or otherwise irreparably impair the value of the secrets.

In Faiveley Transport Malmo AB v. Wabtec Corporation, __ F.3d __, 2009 WL 636020 (2d Cir. March 9, 2009), Wabtec had manufactured subway brakes under a contract with Faiveley and its predecessor from 1993 through 2005. Faiveley alleges that after expiration of the contract, Wabtec impermissibly continued to use Faiveley’s proprietary information (including various technical specifications, designs, plans, and patents) to produce subway brakes for the New York City Transit Authority. The District Court granted an preliminary injunction enjoining Wabtec from disclosing Faiveley’s proprietary information to the Transit Authority.

On appeal, the Second Circuit vacated the injunction because Faiveley had not demonstrated that it faced irreparable injury. Although the Second Circuit agreed that Wabtec had misappropriated trade secrets, it held that misappropriation alone does not give rise to a presumption of irreparable harm, noting:

Where a misappropriator seeks only to use those secrets – without further dissemination or irreparable impairment of value – in pursuit of profit, no such presumption is warranted because an award of damages will often provide a complete remedy for such an injury. Indeed, once a trade secret is misappropriated, the misappropriator will often have the same incentive as the originator to maintain the confidentiality of the secret in order to profit from the proprietary knowledge.

The Court went on to note in dicta that even where irreparable injury has been shown, only a narrowly drawn preliminary injunction that protects the trade secret from further disclosure or use may be appropriate, and admonished courts in all cases to strive to avoid unnecessary burdens on lawful commercial activity.