Elizabeth Rowe: does eBay apply to trade secret injunctions?

Elizabeth Rowe has a highly informative new empirical paper, called “eBay, Permanent Injunctions, & Trade Secrets,” forthcoming in Washington and Lee Law Review. Professor Rowe examines—through both high-level case coding and individual case analysis—when, and under what circumstances, courts are willing to grant permanent injunctions in trade secret cases. (So-called “permanent” injunctions are granted or denied after the trade secret plaintiff is victorious, as opposed to “preliminary” injunctions granted or denied prior to on-the-merits review. They need not actually last forever).

Rowe assesses cases spanning a fifteen-year period.  Rowe designed this study from her prior study on damages.  She assesses only federal court cases; only Uniform Trade Secrets Act  (UTSA) claims, no federal Defend Trade Secrets Act (DTSA) claims; and has 157 usable cases total. The cases run from around the years 2000 to 2015.  (pp. 16-17).

This is a really helpful review of injunction decisions in these cases for several reasons.  First, in trade secret cases, the key to the case is often the remedy, not necessarily the finding of trade secret misappropriation. For example, a plaintiff who wins an injunction asking someone to delete an email is really different from a plaintiff who gets the court to issue a 50-year world-wide prohibition on selling any kind of competing product. Second, as Rowe observes, courts do not always issue written opinions on injunctions or explain the reasoning behind them. (For instance, in 85% of Rowe’s assessed cases, courts issued written orders, but others did not do so, pp. 21-22).  So it’s very helpful to know, when they do write explanations, what they said.  Lastly, Rowe’ study allows her to tackle a central legal issue in remedies and IP law that has generated some confusion in the courts: whether and how eBay applies in trade secret cases.

Does eBay Apply in Trade Secret Cases?

In 2006, the Supreme Court held in eBay v. MercExchange that courts in patent cases may not presume an injunction is warranted, and must instead assess all four of the traditional equitable factors before enjoining a losing patent infringer. Those factors are: (1) did plaintiff suffered irreparable harm? (2) are money damages inadequate to compensate plaintiff? (3) do the balance of harms favor an injunction?, and (4) does the public interest weigh in favor of an injunction?

A background issue in Rowe’s study is whether eBay, which is a rule designed for patents, applies for trade secrets. That’s a big and important question. A similar question has been raised in trademark law. 

One impulse might be: yes, of course eBay applies in trade secret law, because trade secrets are property, and eBay applies in any property case. But another equally strong impulse might be: no, eBay does not apply in trade secret cases because trade secrets are really different from patents. Trade secret law fundamentally has to protect the integrity of the trade secret.  

But this assumption, that there must be an injunction in trade secret cases, is not always warranted. Certainly: if the secret is not yet disclosed to the public, an injunction seems like a no-brainer, in order to protect the integrity of the secret. But not all trade secret cases look that way. Sometimes the misappropriation or some other event destroyed the secret by disclosing it publicly. Sometimes, plaintiff isn’t using the secret in the business much anymore. Also, in trade secret cases, there are a lot of parties’ interests to consider.  Should the court prevent an employee, for example, who is found to have “threatened” to use or disclose trade secrets, from taking a new job?  These are some of the most crucial questions in the field. As a whole, they suggest to me that equity is actually more important in trade secret law, not less important.  

In sum, there is no easy answer to whether eBay should apply at all in trade secret cases, let alone how the factors should play out.

Eerie Erie

Another problem is that trade secret law, unlike patent law, raises a tricky Erie question. Under theRules of Decision Act (RDA) and the Supreme Court’s holding in Erie v. Tompkins, federal courts must apply state substantive law when deciding non-federal claims that enter federal court through diversity jurisdiction. The claims in Rowe’s study are all state law Uniform Trade Secrets Act (UTSA) cases that enter federal court through diversity jurisdiction. So why should courts apply federal remedial law (i.e. eBay’s four factor test) for assessing whether to grant a permanent injunction in state law trade secret cases? Shouldn’t states apply state rules for issuing injunctions?  I wrote a short response essay on this issue, building on Michael Morley’s argument that remedial law is “substance” for Erie purposes. His theory suggests courts in trade secret cases may be violating Erie if they apply federal standards in granting injunctions for UTSA claims.

Rowe’s Findings

Rowe finds, within her universe of cases, that there are indeed significant divisions among federal courts on whether eBay applies to state UTSA claims. She notes that some circuits do apply the eBay factors to assess whether a permanent injunction is warranted; but that others do not do so, or do so only in part. This is what I found as well, albeit assessing far fewer cases. Rowe cites significant case law from different circuits on pages 12-13, in which courts diverge on application of the eBay factors in this context.

However, at the same time, Rowe's big take-home is that, despite’ divisions on how to apply eBay, “irreparable harm” plays a big role. At least some courts in the cases she reviewed were willing to deny injunctions due to failure to prove plaintiff would suffer irreparable harm. (13-15). She cites, for example, Berry v. Dillon, 291 F.App’x 792 (9th Cir. 2008), where, she writes,

“the 9th Circuit analyzed permanent injunctive relief under the four factor test from eBay. Because the plaintiff was not able to show a threat of continuing infringement and that monetary damages would not be able to compensate for past injury, the court affirmed the denial of the permanent injunction.” 

That said, we are left a little unsure from this data precisely why injunctions were denied when they were. Here’s something weird. I would have thought a primary reason for denying an injunction under eBay would be that money is adequate to compensate plaintiff, because the secret has already been destroyed anyway, so an injunction would be moot. But Rowe instead found, mysteriously, that none of the situations in her study involve that scenario. She too appears flummoxed. (32) (“I did not seem to come across cases where the injunction was denied because the trade secret no longer existed.”).

What about practicing or non-practicing status? In patent law, a consistent post-eBay phenomenon is to deny permanent injunctions based on the non-practicing status of the patentee. But this was not the case here, or at least there was no observable pattern to that effect. Rowe finds the trade secret plaintiff in all cases she reviewed was making ongoing use of the trade secrets in its business. (31). This means we can’t draw lines between “practicing” entities who get injunctions, and “non-practicing” entities who don't. What about the public interest? Rowe says courts generally provided very little discussion of the public interest (35).

Details on Scope and Duration in Individual Cases

Along with higher level empirics, Rowe includes more detail on the scope and duration of the injunctions in individual cases: whether the injunctions were tailored or broad, whether they were mandatory (“do this”) or prohibitory (“don't do that”), and how long they lasted. This section shows just how tailored injunctions can be to the facts of the case. Compare: one court orders a 20-year worldwide injunction...while another court orders the defendant to cease selling products but allows defendant, after only 90 days, to start selling products defendant creates in a “clean room” not using plaintiff’s trade secrets.  Check out Rowe’s insightful discussion of individual cases and scenarios on pages 23-27.

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The upshot is that—as usual in trade secrets—it's sort of the Wild West. There aren’t enough published opinions. Courts are granting or denying injunctions based on sometimes unrevealed reasoning. There are divided rules across the different states and federal circuits. Entry of DTSA claims is unlikely to make this less of a mess. I am grateful for Rowe’s empirical work and clear writing to help shed some light.