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Court’s Newest Member Has Trade Secret Protecting Track Record

Before the Defend Trade Secrets Act (“DTSA”) became federal law in the spring of 2016, Supreme Court watchers would likely care little about prospective justices’ approach to trade secrets matters.  Such matters were the province of state law, and the phrase “trade secret” might be avoided, even in passing, in the opinions of the Supreme Court for entire terms or more.  But with DTSA cases being reported with increasing regularity, differences in interpretation are beginning to emerge.  Supreme Court attention may follow.

Because DTSA says that “misappropriation of a trade secret” can involve unlawful acquisition of a trade secret, or improper disclosure of a trade secret, or unauthorized use of a trade secret, the impact of the statute’s May 11, 2016 “effective date” has been the subject of some debate.  For instance, should the act apply to a trade secret unlawfully acquired on May 10, 2016 but improperly used or disclosed on May 12, 2016 or thereafter?  Likewise, what if a trade secret unlawfully acquired and used before May 10, 2016 is used again after May 11, 2016?  These issues have come up in cases in March and January 2017 in the Northern District of California, in March 2017 in the Eastern District of Pennsylvania, and earlier in the Middle District of Florida.  The answers and analysis found in these opinions is not always entirely consistent, which suggests that this issue under DTSA  as well as others will continue to be litigated.

Should differences arise between circuits, the Supreme Court might be called upon to interpret the reach of DTSA. In that vein, one might wish to look at the Court’s newest member, Neil Gorsuch, and his opinions while a 10th Circuit judge in Storagecraft Technology Corp. v. Kirby, 744 F. 3d 1183 (10th Circuit 2014), and in Russo v. Ballard Medical Products, 550 F. 3d 1004 (10th Circuit 2008). Each reveal interesting elements of Judge — now Justice — Gorsuch’s approach to trade secrets matters.

Storagecraft proves interesting opinion on several levels.  That case involved the Utah trade secrets act in a case coming to the 10th Circuit after being brought in the federal district court as a matter of diversity jurisdiction.  In addressing one of the appealing defendant’s arguments, the Gorsuch opinion rejected the notion that one need show that a defendant facilitated another’s commercial gain to recover under the statute:

the jury’s $2.92 million trade secret misappropriation award is still too much. Too much, Mr. Kirby says, because he never used the secret for his own personal profit. And too much because StorageCraft never sought to prove at trial that NetJapan made commercial use of its trade secret either. Maybe he was angry about how his former colleagues had treated him, maybe he disclosed the trade secret to a rival out of vengeance. But without firmer proof that someone profited from his misdeed Mr. Kirby insists the jury’s verdict should be overturned.

The trouble is Utah law doesn’t distinguish between a misappropriator’s venial motives. When someone steals a trade secret and discloses it to a competitor he effectively assumes for himself an unrestricted license in the trade secret. And that bears its costs. After all, what value does a trade secret hold when it’s no longer a secret from the trade? The misappropriator may act with a wish to line his pockets or satisfy a vendetta or for some other purpose still. All the same Utah’s trade secret statute holds him to account for the full value of the license he arrogated to himself. Just as the district court held.

DTSA also does not seem to make such a distinction, and incorporating this sort of analysis into DTSA would surely liberate the ability of those seeking civil verdicts and criminal convictions in trade secrets case to avoid the “But I did not do anything with it after I took it” rationalizations that employees or ex-employees sometimes trot out when caught when their misappropriation is discovered early on, or where post-misappropriation disclosures are hard to track.

The Gorsuch opinion in Storagecraft further proves interesting in its damages analysis by acknowledging that a reasonable royalty measure of damages is an appropriate one even in the absence of commercial use:

But however the argument is dressed, underneath lies the same problem: Utah’s trade secret statute, the law governing Mr. Kirby’s case, expressly allows a reasonable royalty measure of damages when the misappropriator uses or discloses the trade secret. And no one disputes that Mr. Kirby did at least that—disclosing the secret to NetJapan.

Utah’s Uniform Trade Secrets Act provides three possible measures of damages for misappropriation—the defendant’s unjust enrichment, the plaintiff’s “actual loss,” or “a reasonable royalty.” Utah Code Ann. § 13-24-4(1). This last option is sometimes described as “the price that would be set by a willing buyer and a willing seller” for a license in the trade secret, a measure of damages that seeks to recreate “an actual market transaction … [in] which both parties gain from the transaction.” Restatement (Third) of Unfair Competition § 45 cmt. g (1995). At trial, the district court allowed StorageCraft to present evidence premised on a reasonable royalty damages theory. The company argued that its source code was its lawful trade secret; that Mr. Kirby stole it; that he disclosed it to a rival; that in doing so he effectively assumed for himself a license to reveal the trade secret to StorageCraft’s competitor; that this diminished the value of its intellectual property and the products depending on it; and that Mr. Kirby should pay a royalty reflecting that much, whether or not he or NetJapan have to date made commercial use of that intellectual property in products of their own. …

Beyond these definitional difficulties, where (as here) a defendant discloses a trade secret to a rival company in a fit of retaliatory pique without any desire for personal riches, the other two measures of damages may not always be entirely fit for the task. An award based on unjust enrichment risks undercompensating the plaintiff when the defendant has no gains of his own to disgorge. See Restatement (Third) of Unfair Competition § 45 cmt. g (commending use of reasonable royalty measure of damages “when the plaintiff’s loss … is … greater than any gain acquired by the defendant”). Though what the Utah statute calls the “actual loss” measure of damages doesn’t suffer from this particular problem, it may invite practical difficulties of its own. In cases like ours the best evidence about the extent of the plaintiff’s lost sales isn’t readily available from the defendant before the court but resides instead in the hands of farflung third parties like NetJapan. Proving a causal connection between the plaintiff’s claimed lost profits and the defendant’s conduct might be difficult, too, in these circumstances. Complexities like these may be surmountable, but the cost of doing so may be enough to explain why a state would wish to make reasonable royalty awards generally available to misappropriation plaintiffs. After all, it is hardly unknown for the law to resolve ambiguities about the appropriate quantity of damages against the proven wrongdoer rather than his victim. See, e.g., Russo v. Ballard Med. Prods., 550 F.3d 1004, 1021 (10th Cir.2008).

Understanding the real world difficulties a victimized plaintiff, albeit a business, has in proving actual harm would be a welcome addition to the emerging DTSA canon. Such an addition has a practical impact because it allows for monetary remedies in matters where actual use may have been frustrated by early detection or may have continued in places where it is difficult to detect or stop.

Russo also illustrates some considerations that could become important under DTSA. Russo involved an individual plaintiff making trade secret claim under Utah law against a company that allegedly took his confidential design elements and built them into an invention that the company patented, all without compensating Russo.  The defendants there argued that the state law trade secrets claims were pre-empted by the federal patent law.  But the Gorsuch opinion said expressly that no preemption existed because “traditional trade secret claims can peacefully coexist with patent law,” a perhaps even more important concept now that a federal common law of trade secrets under DTSA may emerge.  Further, Russo made clear, as some commentators have noted, that patent filings and related development work can be used as evidence of trade secret misappropriation without necessarily creating a risk of raising issues of patent law for resolution.  This too, like in Storagecraft, shows a willingness to accord trade secret holders rights as protectable as those holding other forms of intellectual property.

While neither Russo nor Storagecraft provide any direct indication of how now-Justice Gorsuch might rule on the effective date related to the issues noted above, each expresses at least implicitly a receptiveness to according trade secret holders a full range of means and methods to enforce their rights

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About this Author

James P. Flynn, Epstein Becker Green, Corporate Counseling Lawyer, complex commercial matters attorney,
General Counsel

JAMES P. FLYNN is a Member of the Firm in the Litigation and Labor and Employment practices. He serves as the General Counsel of Epstein Becker Green and the Managing Shareholder of the firm's Newark office, where he is based. His practice focuses on civil litigation and corporate counseling, including trial and appellate work in the area of intellectual property, complex commercial matters, and employment law. Mr. Flynn represents businesses in a broad spectrum of industries, including health care, pharmaceuticals, and financial services.

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