Why We Need A Seizure Remedy in the Defend Trade Secrets Act

October 15, 2015

INTRODUCTION

In a recent essay published in the Washington and Lee Law Review Online,[1] Professor Eric Goldman of the Santa Clara University School of Law criticized the ex parte seizure provisions of the Defend Trade Secrets Act (“DTSA”), which is pending before Congress in identical Senate (S.1890) and House (H.R.3326)  bills. In his view, the legislation is unnecessary, unprecedented, and carries an unacceptably high risk of abuse and collateral damage.

 

I strongly disagree. Trade secrets face far different threats in the digital age, and having federal courts able to intervene immediately in cross-border cases is critical. In exceptional circumstances, impoundment of a secret by the court will do what this sort of remedy has always done: get the property out of the hands of someone who threatens to destroy it or flee the jurisdiction, so that the matter can be heard on notice before the harm occurs. The seizure provisions of the DTSA have been carefully constrained to prevent abuse, to minimize harm, and to discourage any but the most compelling applications.

 

SEIZURE PREVENTS TRADE SECRET LOSS BEFORE IT HAPPENS

Most trade secret theft can be adequately addressed with preventive orders entered after a noticed hearing. This is because most actors in these cases can be expected to follow the orders of a court, and because our legal tradition values notice and the higher quality of information that is produced by the adversarial process.

 

Notwithstanding that preference, as we all learned in civil procedure class, courts in extraordinary cases may act without giving notice because of an acute danger to someone or something. This has been true across the range of legal disciplines, including trade secrets, and the majority of state laws, as well as the Federal Rules, have acknowledged this by articulating the high bar that a plaintiff has to meet before any matter can be heard ex parte. While that bar is necessary to ensure the case is exceptional, the flip side of the coin is that the harm to be avoided is irreparable.

 

Professor Goldman argues that the DTSA will be useless against the thief who plans to hijack information over the Internet, or who is on his way to the airport with the secrets in his pocket. But these scenarios only prove the need for a federal remedy: when a trade secret owner discovers that such a thing is about to occur, he can’t waste time figuring out what some county court might do. If there is a chance that a surprise intervention by law enforcement can prevent the loss, it is a federal court that is in the best position to respond and to deliver process that works across state lines. Like a terrorist attack, we can only hope to be vigilant and discover it before the button is pushed. But when we do have that kind of information, we also should be able to deploy the most effective tools to prevent the harm. In the right circumstances, one of those tools should be law enforcement, acting under the guidance and supervision of a federal court, to take temporary possession of the trade secret. That is the focus of the DTSA seizure provisions.

 

EX PARTE SEIZURE FOR TRADE SECRETS IS NOT “UNPRECEDENTED”

In his essay, Professor Goldman asserts that the seizure provisions “would represent an unprecedented innovation. No state trade secret law has a trade secret-specific ex parte seizure process [that is] similar . . . .” This stretches the meaning of “unprecedented” pretty far. He gets away with it only because the second sentence is so narrowly drawn, claiming only that no state has a “trade secret-specific ” process. But that doesn’t mean that states have not used broadly applicable seizure procedures in trade secret cases. In fact they have, although they may call them by another name, such as sequestration, or attachment. Texas, for example, allows for ex parte sequestration in a variety of circumstances, and it has been applied in at least one case to software. See Glenn, Ex-Parte Seizure of Intellectual Property Goods, 9 Tex. Intell. Prop. L.J. 307 (2001) (discussing Tex. Civ. Prac. & Rem. Code §62.001, and Learn2.com, Inc. v. Bell, 2000 U.S. Dist. Lexis 14283 (N.D. Tex. July 20, 2000)).

 

Moreover, the UTSA itself includes § 2(a), which “authorizes mandatory injunctions requiring that a misappropriator return the fruits of misappropriation to an aggrieved person, e.g., the return of stolen blueprints or the surrender of surreptitious photographs or recordings.” Commissioners’ Comment, 14 U.L.A. at 451. While the Act doesn’t expressly authorize granting such injunctions ex parte, neither does it prohibit them. Again, the circumstances justifying issuance of an order without notice have traditionally been defined by local rules in state courts and by FRCP Rule 65 in federal courts.

 

Indeed, Professor Goldman acknowledges that trade secret owners “already may seek ex parte TROs, including impoundment,” under FRCP Rule 65, reinforcing this with the statement that “existing federal TRO procedures already provide for ex parte seizures for trade secret owners.” He finds this authority in the Committee Notes to the 2001 amendments, which explains that “impoundment may be ordered on an ex parte basis under subdivision (b) [of Rule 65] if the applicant makes a strong showing of the reasons why notice is likely to defeat effective relief.” While he uses this reference to argue that the DTSA seizure provisions are unnecessary, it directly contradicts his claim that they are “unprecedented.”

 

DTSA SEIZURE PROVISIONS ARE BUILT ON THE LANHAM ACT

Another reason why the “unprecedented” argument fails is that the DTSA seizure language was directly patterned on the Lanham Act, 15 U.S.C. §1116(d), expressly authorizing ex parte seizure and impoundment of counterfeit goods. As a condition of such an order, the statute requires that it clearly appear from specific facts sworn by the applicant that some other order would not be adequate, that the applicant is likely to succeed on the merits, that immediate and irreparable injury will occur without the order, and that the “matter to be seized” is located at a specific place. Execution of an order has to be by law enforcement, and seized materials must be held by the court in accordance with a protective order to prevent disclosure of confidential information. The plaintiff must be prohibited from publicizing the order or getting access to the defendant’s trade secrets in the course of the seizure. Finally, a hearing has to be held between ten and fifteen days later, at which the plaintiff will have the burden to demonstrate continuing justification for the order.

 

The DTSA imposes all of these same restrictions, but adds more. Only property “necessary to prevent propagation or dissemination of the trade secret” can be seized. This means, for example, that records and other evidence of the acts of misappropriation or misuse cannot be taken away, thereby reducing the risk of disruption to the defendant’s other business operations. In fact, the court is specifically required to order only “the narrowest seizure of property necessary” and to provide that the seizure “be conducted in a manner that . . . does not interrupt the legitimate business operations of the [defendant] that are unrelated to the trade secret that has allegedly been misappropriated.”

 

As with other predicate requirements, the plaintiff’s showing must “clearly” demonstrate “from specific facts” that the information is a trade secret, that the target of the seizure has the secret in their possession, and that if notice were given the target “would destroy, move, hide, or otherwise make such matter inaccessible to the court . . . .” (This latter requirement provides assurance to cloud vendors and others who might be holding information for someone accused of misappropriation.) And the merits hearing must be held no more than seven days later (not ten to fifteen as in the Lanham Act), during which time anyone affected by the order may move to modify or dissolve it.

 

THE RISK OF ABUSIVE SEIZURE IS LOW AND WELL MITIGATED BY DTSA

So it should be obvious – particularly to any practitioner that has tried to convince a federal judge to issue any sort of ex parte order – that getting relief under this section will be very, very difficult. And while making it hard to get is the first line of defense against abuse of any legal process, the legislation provides serious consequences in case it turns out that the plaintiff was wrong. In the first instance, the court has to require a bond adequate “for the payment of the damages that any person may be entitled to recover as a result of a wrongful or excessive seizure” or attempted seizure. But the amount of the bond is only a guarantee and “shall not limit the recovery” of damages for wrongful seizure. Those damages are expressly tied to the Lanham Act, 15 U.S.C. § 1116(d)(11), which includes lost profits, cost of materials, loss of good will, punitive damages where bad faith is shown, and attorneys fees.

 

In other words, the risk analysis that any litigant must do before requesting a seizure remedy is not just that it might try and fail – although in my experience that is a very likely outcome – but that if it succeeds in getting the order it may be found to have oversold its case. Federal judges are not known for suffering fools gladly, and in addition to the opportunity to impose liability for damages they have Rule 11 sanctions in their tool kit. Therefore we can reasonably assume that the vast majority of counsel will exercise good judgment in discouraging marginal applications, and that to the extent any abusive behavior occurs, appropriate consequences will be imposed, just as they have been in other areas of the law.

 

CONCLUSION

Professor Goldman envisions the future without giving sufficient weight to the past or present. Of course there is risk involved in this as in all other processes run by humans. The relevant questions are: how important is the goal, how serious are the risks, and what can be done — informed by our analogous experience — to mitigate those risks to an acceptable level? By any objective measure, the authors of the DTSA have done their job well, and we have reliable answers.

 

The goal — having a federal resource that matches the modern threat of irreparable harm to an essential industrial asset — is critically important, not just for the limited number of cases where the tool will be used, but also for those that will not mature into problems because it is there. The abstract risk of meritless, abusive applications to federal courts must of course be acknowledged, but our experience with similar procedures shows what it takes to discourage such behavior. And the measures written into the seizure provisions of the DTSA — demanding the greatest care and judicial scrutiny possible and imposing very serious consequences for getting it wrong — provide a generous margin of comfort to conclude that seizures will happen only where necessary and where properly controlled to minimize harm.

 

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