Review of Key 2019 Trade Secret Decisions and Trends (Part II)

“A 2019 case confirmed that, under the Economic Espionage Act, the government does not have to prove that a trade secret exists, so long as the defendant believed that the information is a trade secret. This is noteworthy because it allows the government to charge a criminal violation even where a civil claim may not exist.” I of this series covered (1) Food Marketing Institute v. Argus Leader Media, 139  S.Ct. 2356 (2020) in which the Supreme Court held that commercial or financial information that is customarily and actually treated as private by its owner and provided to the government under an assurance of privacy is “confidential” under exemption 4 to the Freedom of Information Act and is therefore shielded from disclosure; (2) trade secret cases dismissed on the statute of limitations; (3) improper acts for unclean hands doctrine must be related to the misappropriation claim; (4) the Department of Justice’s continued and increasing focus on theft of trade secrets involving a Chinese connection; and (5) award of “head start” damages.

In Part II, we will look at some additional important 2019 trade secret decisions and trends.

1. Attempted Theft of Trade Secrets

One of the most important differences between civil misappropriation of trade secrets and criminal misappropriation under the Economic Espionage Act (EEA), indeed perhaps the most important, is that the latter provides that a criminal defendant can be convicted for the attempted theft of trade secrets By itself, this is not that noteworthy because nearly all federal criminal statutes penalize attempts. However, with regard to the theft of trade secrets this may be critically important because a 2019 case confirmed that under the EEA, the government does not have to prove that a trade secret exists, so long as the defendant believed that the information is a trade secret. This is noteworthy because it allows the government to charge a criminal violation even where a civil claim may not exist.

In United States v. O’Rourke (N.D. Ill., October 9, 2019), the defendant informed co-workers that he was planning to leave his current employment and had taken a job with a competitor in China. Law enforcement was contacted, and O’Rourke was stopped and searched by U.S. Customs at O’Hare airport as he was about to board a flight to China. Customs found a hard drive with documents from his former employer. In July 2017, a grand jury returned a 13-count indictment charging O’Rourke with stealing, downloading and possessing (and attempting to do the same) of his former employer in violation of 18 U.S.C. § 1832. At trial, O’Rourke did not contest that he took information belonging to his former employer but claimed that the information he took did not qualify as trade secrets and he did not believe that information was a trade secret. However, the jury convicted him on the attempt counts. Thereafter, O’Rourke sought a new trial based on, among other grounds, that the government failed to prove that the information constituted trade secrets.

Relying on United States v. Hsu, 155 F.3d 189, 198 (3d Cir. 1998) (holding that “Congress could not have intended EEA attempt crimes to be subject to the somewhat obscure and rarely used common law defense of legal impossibility”), the O’Rourke court held “an attempt charge thus allows the government to charge not only individuals who are unsuccessful in stealing actual trade secrets, but also those who successfully steal information that they believe to contain trade secrets but in fact do not.” The court compared this situation to one involving attempted distribution of illegal drugs, explaining that “a would-be cocaine buyer cannot avoid criminal responsibility even if the only substances he managed to purchase were fakes planted by police officers.” “Therefore, if the jury concluded that O’Rourke believed a document was a trade secret when he took it, he is guilty of attempted theft even if the document ultimately was not a trade secret….” Opinion at 6-7.

2. Extraterritorial Reach of the EEA

Congress was aware of the threat posed by foreign companies to U.S. companies involving the theft of trade secrets when it enacted the EEA in 1996, and included in the EEA 18 U.S.C. § 1837 (“Applicability to conduct outside the United States”) that provides that the EEA (1) covers criminal offenses when the offender is a citizen or permanent resident alien of the U.S. or an organization under U.S. laws or (2) “an act of furtherance of the offense was committed in the United States.” Congress left this section unchanged when it enacted the Defendant Trade Secrets Act of 2016 and made it part of the EEA. Commentators have suggested that Section 1837 does not apply to civil violations because Section 1837 uses the terms “offender” and “offense” which usually refer to criminal violations. While somewhat ambiguous the “Sense of Congress” section in the legislative history arguably supports this understanding. Despite that the DTSA has existed since July of 2016, and the importance of the extraterritorial application of the statute, decisions in 2019, marked the first time that courts have considered this issue, and even these decisions provide very little guidance on the issue.

In Luminati Networks Ltd. v. BIScience, Inc. (E.D.Tex. May 13, 2019), the defendant moved to dismiss a complaint for theft of trade secrets under the Defend Trade Secrets Act (DTSA) because the acts of misappropriation took place outside the United States. The court stated that while the parties had not identified any cases addressing Section 1837, the language “’an act in furtherance of the offense’” is “regularly used in the area of conspiracy law,” and, accordingly the court found “that the act in furtherance of the offense of trade secret misappropriation need not be the offense, but it must ‘manifest that the [offense] is at work’ and is not simply ‘a project in the minds of the’ offenders or a ‘fully completed operation.’ Put another way, an act that occurs before the operation is underway or after it is fully completed is not an act ‘in furtherance of’ the offense.” Id. at *10. The court held that, while harm caused by the alleged misappropriation is relevant to damages, it is not enough to state a DTSA claim. Thus, plaintiff’s lost sales resulting from defendant’s alleged trade secret misappropriation were not part of the offense and could not be an act in furtherance of it, as they were consequences of a fully act of misappropriation. Id. at *10-11. However, the court found that plaintiff’s complaint stated a plausible DTSA claim by alleging that defendant “has committed acts in the State of Texas and the United States by “using plaintiff’s trade secrets in the United States. Id. at *11.

In contrast, the court in ProV International Inc. v. Lucca, ( M.D., Fl., October 29, 2019),  found that, unlike Luminati, “[t] he amended complaint contains no allegation suggesting that the defendants attempted to recruit an employee from the United States, that the defendants acquired in the United States the defendants’ ‘trade secrets,’ or that the defendants used the trade secrets in the United States.” Id. at *3. The court also concluded that while a U.S. company allegedly lost revenue as a result of the trade secret misappropriation, “the damages resulting from the misappropriation ‘do not constitute part of the offense itself’ but constitute the effects of a ‘fully completed operation.’” Id. (quoting Luminati).

In Micron Technology, Inc. v. United Microelectronics Corp. (N.D.Cal. May 2, 2019), found that the court had jurisdiction over defendant because plaintiff’s DTSA claims arose out of actions by defendant’s employees in the United States, which were not themselves misappropriation, but constituted acts that were in furtherance of later misappropriation alleged to have occurred entirely outside the United States. The court thus applied the language of Section 1837, but without analysis. Id. at *4. In contrast, the court dismissed plaintiff’s claim under the California Uniform Trade Secrets Act (CUTSA), because that statute “does not have extraterritorial application.” Id. at *12.

3. How High Can You Go?

The DSTA defines the term “trade secret,” in general, to mean almost any kind of information so long as the owner has taken “reasonable measures to keep such information and the information derives independent economic value from not being by others. During the past year or so, a number of parties have sought to take full advantage of this very broad definition. For example, a medical marijuana company in Arizona sued its departed CEO under the DTSA for the alleged theft of trade secrets from a cloud storage account. AZ DP Holdings LLC, et al. v. Gullickson, (D.Ar. – DATE). In another “weed” case, a state court in Pennsylvania found that news organizations should not receive unredacted copies of applications for state licenses to grow and process medical marijuana because the applications include applicants proprietary information on things like fertilizer, pesticides and cannabis processing, all of which are included in the “trade secrets” exemption to Pennsylvania’s Right-to-Know law. Pennsylvania Dept. of Health v. McKelvey et al., 189 CD 2018, Commonwealth Ct of Pa. In a case from November 2018, a New England craft beer brewer sued another brewer for theft of trade secrets, among other claims, under the DTSA and Massachusetts trade secret law for publicly posting secret beer formulas on a public job recruitment forum. Other types of trade secret information being litigated in 2019 included, methods for bleaching hair and repairing hair damage, process of adding aromas to beverage bottles to enhance the perceived taste, the design of fracking sand shipping containers, designs and manufacturing processes for drones, and the recipes for popcorn.

4. A Violation of the DTSA as a Predicate Act Under Civil RICO

 The DTSA makes trade secret theft a predicate act sufficient to show racketeering activity under the Racketeer Influence and Corrupt Organizations Act (RICO), which provides for treble damages and attorney’s fees if a violation is found. To state a civil RICO claim, a plaintiff must allege: (1) the existence of an enterprise affecting interstate commerce; (2) that the defendant was employed by or associated with the enterprise; (3) that the defendant participated, either directly or indirectly, in the conduct or the affairs of the enterprise; and (4) that the defendant participated through a pattern of racketeering activity that included at least two acts.

The issue that arose under Magnesita Refractories Co. v. Tianjin New Century Refractories Co., (M.D.Pa. Feb. 28, 2019), but ultimately was not definitely answered, is whether each type of act listed in the DTSA that includes stealing and copying trade secret without authorization, but also receiving, buying, or possessing such information knowing it to have been obtained without authorization is a separate predicate act for the purposes of RICO. In certain situations, this may be an important issue because RICO requires two or more predicate acts.

The Magnesita defendant, who previously held level technical positions with the plaintiff, allegedly downloaded and emailed to himself numerous trade secrets before going to work for a Chinese competitor. Defendant moved to dismiss the RICO claim on the ground that plaintiff failed to plead more than one predicate act, arguing that “the amended complaint sets forth a single scheme to allegedly misappropriate [p]laintiff’s trade secrets, constituting only one predicate act.” Id. at *10. The court noted on one hand that adopting the defendant’s position would “severely limits the reach of the DTSA, which sets forth multiple, distinct ways one can commit theft of trade secrets, including (1) outright theft, (2) use or disclosure, and (3) knowing receipt of a stolen or wrongfully obtained trade secret.” Id. However, on the other hand, the court found that it is not “persuaded by plaintiff’s view that each occurrence of “use activity”—e.g., “copying, downloading, uploading, sending, communicating, conveying, and possessing”—constitutes a separate predicate act, … [because] this reading would transform nearly every DTSA case into a RICO matter, often involving an infinite number of predicate acts premised on each item manufactured or sale made using another’s trade secret.” Id. Ultimately, the court punted finding “that a more fundamental deficiency requires dismissal under 12(b)(6), …” and there was no need to resolve the RICO issue. Id.

5. Trade Secret Theft in the International Trade Commission

Although not often used by litigants, the International Trade Commission (ITC) is an option for victims to litigate where the acts of misappropriation occurred outside the United States and an infringing product is imported into the United States as seen from two investigations that the ITC opened during 2019. Trade Secret claims can be brought under Section 337(a)(1)(A) that provides ITC jurisdiction for “unfair methods of competition and unfair acts in the importation of articles,” commonly referred to as “non-statutory claims. Remedies include barring the entry of the offending products into the United States or preventing their commercialization to the extent already imported. The Federal Circuit in TianRui Grp. Co. v. Int’l Trade Comm’n, 661 F.3d 1322, 1332 (Fed. Cir. 2011) held that the ITC has jurisdiction even where the acts constituting the alleged misappropriation occurred entirely outside the United States.On February 28, 2019, the ITC instituted an investigation into the botulinum toxin products manufactured by Korean Daewoong Pharmaceuticals Company Limited (Daewoong) and its California licensee, Evolus, Inc. (Evolus), after two courts in the United States dismissed theft of trade secrets cases filed by Medytox Inc. and Allergan entities. Investigation of Certain Botulinum Toxin Products, Processes for Manufacturing or Relating to Same and Certain Products Containing Same, Inv. No. 337TA-1145. The complaint alleges violations of section 337 for the importation into the United States and sale of certain botulinum toxin products, processes for manufacturing or relating to the same and certain products containing the same that misappropriate trade secrets used by the complainants. The complaint further alleges that the stolen trade secrets allowed Daewoong to save years years of research. Medytox pursued its trade secrets claims at the ITC after the claims in its actions filed in Indiana and California were dismissed on forum non conveniens grounds and stayed pending the outcomes of litigation pending in South Korea. Moreover, the Indiana court found that because certain conduct related to the theft occurred in Korea, the court was without jurisdiction.

On June 27, 2019, the ITC opened an investigation based on a complaint filed by Illinois Tool Works Inc that employees of the company’s Chinese subsidiary left the company to form a new Chinese based company using the trade secrets of Illinois Tool Works. Investigation of Certain Foodserving Equipment and Components Thereof, Inv. No. 337-TA-1166. The alleged trade secrets include technical information, relating to the materials components, schematics, and tooling used to create complainant’s foodservice equipment products, and commercial, such as complainant’s customer lists, supplier list, and commercial agreement terms.

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