Charles Tait Graves: Idea Submission Cases, Desny Claims, and Trade Secret Law

I thoroughly enjoyed Charles Tait Graves new article: Should California’s Film Script Cases Be Merged into Trade Secret Law?, which was recently published in The Columbia Journal of Law & the Arts.  Graves is a partner at Wilson Sonsini and teaches trade secret law at UC Hastings Law.   

The article deals with so-called "idea submission" cases. The fact pattern is as follows. Plaintiff, who is sometimes called the "idea man" in older cases, shares an idea with Defendant, hoping for monetary compensation even though there's no express contract stating terms of payment. Defendant subsequently takes the idea and commercializes it without paying Plaintiff. (There's an excellent discussion of the idea submission cases in Chapter 4 of Elizabeth Rowe and Sharon Sandeen's Trade Secret Law casebook). 

At least in California, the Plaintiff-idea person will likely have two distinct types of legal claims in this scenario: (1) a claim for breach of an implied-in-fact contract, which in California is called a Desny claim; and (2) a claim for civil trade secret misappropriation, which since 2016 can be brought under both state law (e.g. under the California Uniform Trade Secret Act) and federal law via the Defend Trade Secrets Act (DTSA). Graves recounts in tremendous detail how these two different legal regimes developed on separate ends of the map of California, in Southern and Northern California, respectively. Graves' thesis is that, even though these two areas of law have been historically addressed separately, they have a lot in common and can learn a lot from one another.   

I interviewed Graves about the article, transcribed below.

CAH: What is an idea submissions case?

CHARLES TAIT GRAVES: We need to be very careful in defining this.  The term "idea submission case" has very different meanings in different states. In California, we typically mean a Desny claim, and that is what I talk about in the article. The Desny version of the idea submission claim, which arises most often in the Hollywood/entertainment context, is a very tightly controlled implied-in-fact contract claim that can arise when someone submits an idea (typically a film script, a screen play, or a fleshed-out idea for a film), and there is offer for payment and an acceptance, followed by use without payment.

I will also note that I define idea submission cases in the article to include only contract-based claims like Desny claims, because I am intentionally not including the penumbra of tort and other common law claims that are likely preempted by trade secret or copyright law.  

CAH: So you might have told a national tale. Trade secret law is obviously now federal even if state claims are still available. But you choose to limit this to California. Why?

CHARLES TAIT GRAVES: The states differ in how they treat idea submissions. For example, in California, the "idea man" (now we would say "idea person") can have an implied-in-fact contract claim based on submission of an idea conditioned on payment, even if the idea was not novel. However, in New York, for example, the law is different: novelty would be required.  So the idea submission law is very different state to state.  This is why this is a state-specific story.

CAH: OK, so in the universe of your article we have two different legal claims to address the idea submission situation in California. Readers know a lot about trade secret claims and what is required for a trade secret claim. But we are less familiar with this other kind of claim you discuss: the Desny claim. What is a Desny claim and how did it come about? How do the Desny claim and the trade secret claim differ? 

CHARLES TAIT GRAVES: The Desny claim is an implied-in-fact contract claim. It takes its name from the famous case, Desny v. Wilder (Cal. Sup. Ct. 1956), in which the California Supreme Court created the elements that plaintiffs must satisfy to win on this kind of claim. 

Desny emerged out of many years of bewildering California case law. At that time, in the 1950s, courts were struggling to figure out what to do with the idea submission cases coming out of Hollywood. These usually involved screen plays or concepts for films, and usually the plaintiff believed they were entitled to compensation after the film was made based on their script or ideas. There was a lot of confusion and multiple sorts of approaches in the common law. The situation was even more confusing because, prior to Desny, there used to be "common law copyright" protection for ideas in California.  Under that regime, ideas could be claimed as property rights and litigated under a "plagiarism" approach without involving contract law at all.  But in 1947, California’s legislature amended, and significantly narrowed, the state statute governing common law copyright protection, Civil Code Section 980. The 1947 amendment to California law left a gap in the law.

So then in 1956, the California Supreme Court confronted this fact pattern in the Desny case, and had to decide how to fill the gap and address confusion in the case law. The plaintiff in Desny (Victor Desny) came up with a story for a film based on a media frenzy that had happened in the real world over a man trapped in a cave, and Desny was trying to get in touch with the well-known director Billy Wilder through Wilder's assistant, so that Wilder could make the film and (Desny hoped) compensate him. Desny claimed he told Wilder's assistant that use of his film idea was conditioned on payment, and that the assistant told him that if Wilder used the submission, he would be paid. [For a somewhat light-hearted take on the facts of this case, check out this piece in Variety].

So with these facts in the background, the court had to decide what kind of claim could be brought to get compensation for idea submissions, and what would be the elements of such a claim? The court put together a test that said: (1) if you submit an idea (like a screenplay or a synopsis) for sale, and (2) its use is conditioned on payment, and (3) the defendant knew or should have known there was a payment condition, yet (4) still voluntarily accepted the idea, and (5) the defendant actually used it, and (6) it had some value (even if it was not novel)...there can be a claim for breach of implied-in-fact contract. 

But it is a very complex, difficult claim to bring. There are a lot of elements to prove. It can be hard to bring these claims, and there are situations where plaintiff can't win them. For example, courts have held if the idea was previously published, or even if it was shown earlier to the defendant without the same condition of payment for use, then there is no viable Desny claim. Also, these claims cannot be based on merely inchoate discussions with no plausible promise of payment. There has to be a tight nexus between disclosure of the idea or screen play to the defendant and conditioning payment. 

CAH: If the director, Billy Wilder, had done what he did today, and Desny had brought a trade secret claim instead of breach of (implied) contract, how would this have gone?

CHARLES TAIT GRAVES: I suspect that if this came up in 2021, the courts would just see this as a trade secret case and apply trade secret law in the usual way.  They would decide whether this met the requirements of a trade secret, including whether it was sufficiently secret (this could be doubted, since the film idea centered around the public facts of the real-life cave rescue effort); whether it derived sufficient independent economic value from secrecy; and whether reasonable secrecy efforts were taken. 

But at the time of Desny, California trade secret law was very primitive. Almost all the cases were in the employee mobility/customer list context, not necessarily the high tech sphere like today. Hollywood was more the powerhouse at that time, not Silicon Valley. And these film script cases had previously been seen in a statutory context that was now gone post-1947.  So in a sense, I think it is a historical accident that the California Supreme Court came up with this strange, non-trade-secret, California-specific claim to deal with what might now look like a trade secret claim. Today, I think the courts would have applied the elements of trade secret law that we are familiar with, they wouldn't struggle to craft this new kind of implied-in-fact contract claim.  

But nonetheless, the Desny claim is how the Supreme Court of California decided to deal with the situation. And very interestingly, the courts have stuck with the Desny claim and its elements all the way from the 1950s until today. The Ninth Circuit and the California courts use this very same test in dealing with idea submission scenarios like Desny. It took them a while to get there, but it stuck. 

CAH: So let's talk about independent derivation. A big part of your article focuses on the independent derivation "defense" to misappropriation. The trade secret statutes say that misappropriation of a trade secret does not include, among other things, "...independent derivation..."  How do the Desny implied-in-fact contract cases, and trade secret cases, deal with independent derivation, and what can they learn from each other?

CHARLES TAIT GRAVES: Independent derivation was the original impetus for the article. I noticed that courts on the Desny idea submission side had been publishing these very interesting opinions finding that certain claims were not actionable because there was an independent source for the film script or idea, other than the plaintiff.  Courts would find that, even though plaintiff gave defendant an idea for a film, the evidence showed defendant already had the same idea before defendant even met plaintiff, or even that third parties, maybe even other studios, gave the idea to the defendant, and the people who worked on the production never even saw the plaintiff's materials. There are very detailed discussions of these issues in the Desny line of cases coming out of Hollywood, and decades of published cases that deeply analyze the independent development situation.  

In contrast, on the trade secret side there is little development of independent derivation, and not much of a structure for assessing it, at least in California. There is case law on who bears the burden to prove independent derivation, but not much on how to prove it, like what evidence is needed and what factors really matter. So one of the insights for this article was that we have all this law coming out of Southern California, involving movies and tv, and can't we look at this law on the trade secret side, where we are trying to get at the same question: Did the defendant independently derive the information that the plaintiff says was misappropriated? Why not look at these cases about tv shows and movies, and see how they assess independent derivation, and use that for trade secret cases?

CAH: What are some key lessons you see in the Desny line of cases' approach to independent derivation that trade secret law could use?  And would these apply anywhere, or only in California trade secret cases?

CHARLES TAIT GRAVES:  I think there are lessons that can work anywhere. Even though the Desny claim is California-specific, the way the Desny idea submission courts adjudicate the issue and assess the evidence is broad, and would work in the trade secret context, even outside California. I am somewhat surprised others have not connected the two lines of cases before on this point.

Going back to the 1950s, courts in Desny idea submission cases look at two things when assessing an independent derivation argument. First: the temporal structure. That is, when did defendant claim to have conceived of the information? Was it before or after defendant got any information from the plaintiff?  If it's after, the burden is higher for defendant to satisfy the court that this didn't actually come from the plaintiff. Second: who was the source of the independent derivation? Was it the direct recipient of the idea, so for example, Billy Wilder himself or his assistant? Or was it others within the same large studio, or even people at a different company? If it's the same individual who received the trade secret, or someone closely connected to them, it will be tougher to prove independent derivation. On the other hand, when defendant can point to an independent source like another movie studio or a company in another country, that is a better defense. 

It is easier to swallow an independent development argument when the defendant has evidence that they were already in development with a third party when the plaintiff came along.  For example imagine a company hires a new employee in a three-hundred person company, and the former employer sues for trade secret misappropriation. Imagine the defendant argues, "we were developing this first, before the employee was hired," and second, "it was our team over in Singapore that gave us this idea, it wasn't even anyone in the new hire's group."  Thinking about things this way, in terms of when did the independent development occur in relation to when the idea was received, and who was the independent source of the idea, can help courts tackle the under-developed issue of independent derivation in trade secret law.  

CAH: So you go into a lot of detail in the paper about preemption. But you come out concluding that, for a variety of reasons, Desny claims aren't preempted by the California Uniform Trade Secrets Act, just as they aren't preempted by copyright law. So as a matter of policy, do you think there's anything wrong with having multiple legal regimes to address this kind of a wrong? Or is there a room for both of them?

CHARLES TAIT GRAVES:  I don't think these claims are necessarily in conflict. There is a policy sameness here. On the one hand, the Desny claims were clearly created by the courts to protect the idea person, the individual who goes to a powerful studio to submit their idea, and just gets steam-rolled.  California courts created the Desny claim out of whole cloth precisely to protect the idea person, the weaker party, in the idea submissions context. Meanwhile, trade secret law is also guided, at least in California, by a strong policy of favoring the interests of the departing employee who is accused of taking their employer's trade secrets. The interests of the departing employee are paramount. So in this sense, there is a policy sameness, not a policy conflict. Both claims have an underlying policy of respecting the interests of the weaker party, whether it's the idea person-as-plaintiff or the departing employee-as-defendant. That said, you could certainly imagine scenarios where there would be a collision, for instance if a plaintiff manages to squeeze a Desny claim out of a situation for which it wasn't designed in order to get a windfall.

CAH: In concluding, do you have any observations on what these legal claims say about the difference between Southern California, the source of entertainment law and the Desny claim, and Northern California, where trade secret law tends to take center stage?

CHARLES TAIT GRAVES: One thing I can say is that you will notice the two sides almost never meet. There are almost never conferences on the intersection between trade secret law and entertainment law, even though you see conferences on the intersection between patent and trade secret law, things that are a bit more obvious.  I don't know why we have these two separate legal cultures. I can only speculate, but it's possible that it has to do with the fact that Southern California/Hollywood arose as a separate economy, and then Northern California/Silicon Valley arose as a separate economy.  Only now in the past twenty years are they sort of joining together. So my guess is that the people who do entertainment law and the people who do trade secret law just grew up at different law firms, worked in different practice areas, went to different symposia at law schools, read different treatises... It's like two ships passing in the night. So maybe this is why we don't often think about the fact that, actually, these two areas of law are really very similar. 

CAH: It is in a sense the fact pattern that joins them. Someone is stealing an idea without payment. It doesn't strictly matter if it's a technical prototype for a backpack or an idea for a film script.  When we have legal regimes addressing that kind of scenario, it's virtually inevitable they would have similarities.  

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We also talked at length about the intricacies of preemption. For that, you'll have to read the article!    Again, Charles Tait Graves' article, Should California’s Film Script Cases Be Merged into Trade Secret Law? is now published and available online at The Columbia Journal of Law & the Arts.    

 

Deepa Varadarajan on Trade Secret Injunctions and Trade Secret "Trolls"

I wrote some previous posts about eBay in trade secret law, and in particular Elizabeth Rowe's empirical work. Rowe found not all trade secret plaintiffs actually ask for injunctions, even after prevailing at trial, along with many other fascinating findings. I would be remiss if I did not flag a characteristically excellent discussion of this issue by Deepa Varadarajan, in a piece that may have flown under readers' radars.

In Trade Secrecy Injunctions, Disclosure Risks, and eBay's Influence, Varadarajan provides a conceptually clean way to apply eBay in trade secret law that I had not consciously considered before. Now that I hear it, it makes sense and I'm grateful that Varadarajan spells it out. In short, the crux question is whether there's a risk of public disclosure or widespread dissemination of the trade secrets.

Trade Secret Injunctions

For those who missed my prior post, the "eBay-meets-trade-secret-law" issue is: should a court grant an injunction as a matter of course in trade secret cases, or should it require plaintiff to prove it suffered irreparable harm; that damages would be inadequate to compensate that harm; and that plaintiff's future harm isn't outweighed by the costs an injunction would impose on others like competitors or employees, who'd be prevented from engaging in market activity or from pursuing a new job, or by considerations of the "public interest." 

Varadarajan explains that the the Tenth Circuit has "explicitly" rejected a presumption of irreparable harm and that other circuits like the Third and Ninth have moved in a similar direction. (This reflects Rowe's observations as well). Meanwhile, some other circuits have behaved differently, with the Second, Fifth, and Federal Circuits presuming irreparable harm and appropriateness of an injunction. The Second Circuit, Varadarajan points out, stresses, in particular, circumstances where there's a risk of disclosure or widespread dissemination of the trade secret.  (15-17). 

The Second Circuit stated in Faiveley Transport Malmo AB v. Wabtec Corp, 559 F.3d 110, 118-119 (2d Cir. 2009) that

"A rebuttable presumption of irreparable harm might be warranted in cases where there is a danger that, unless enjoined, a misappropriator of trade secrets will disseminate those secrets to a wider audience or otherwise irreparably impair the value of those secrets. 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." 

Varadarajan's normative take is that the Second Circuit is onto something: trade secret misappropriations that threaten to result in disclosure or dissemination of the trade secret pose a qualitatively different risk from those that involve only "use" of the trade secret without dissemination.  (23-24).  "Absent empirical data," Varadarajan concludes, "it is hard to know with certainty when a presumption of irreparable harm is optimal—helping to limit opportunistic behavior without chilling legitimate design-around activity." (24). But sometimes, presuming at the outset that plaintiff would suffer irreparable harm just makes too much sense to risk not doing so. “ 'Disclosure' cases likely fall into this category, as acts of dissemination often pose significant and incalculable harm to the plaintiff." (24).  

Accordingly, Varadarajan thinks courts should follow the Second Circuit's lead, in cases like Faiveley, applying a presumption of irreparable harm if there's a risk of dissemination, but not if the only concern is someone else using the trade secret without disclosing it. (24).  

The broader suggestion here, that eBay isn't one-size-fits all, is compelling, and reminiscent of Mark Lemley's concerns in the trademark context. For the most part, I agree with Varadarajan's specific conclusion that disclosure or widespread dissemination is the key risk that justifies a presumption. The need for secrecy is what makes trade secrets different from any other form of IP; keeping that secrecy should be a pivotal consideration in crafting the remedy.

That said, elsewhere I've critiqued Varadarajan's and Joseph Fishman's somewhat liberal distinction between "use" and "disclosure" cases. I argued that "use" of a trade secret by anyone other than plaintiff or a licensee almost always involves a risk of disclosure, not least because another's "use" places the trade secret in the hands of someone who's not necessarily employing the same "reasonable measures" to preserve secrecy as plaintiff.  So we should be cautious in letting even non-competing uses of live trade secrets get off Scot-Free.

Still, in this context, I think I agree with Varadarajan's proposed distinction between "use" and "disclosure," to the extent it's applied at the remedy stage, not the liability stage. In these cases, plaintiff has won on the relevant evidentiary standard: likelihood of success on the merits for a preliminary injunction or preponderance of the evidence for a permanent injunction. The court has found there was a trade secret at the time of the misappropriation, and that misappropriation occurred or is at least "threatened." So the court should be able to presume "irreparable harm" when the record shows (again, on the relevant evidentiary standard) that there's a risk of a very public disclosure or of widespread dissemination even absent a very public disclosure. This would likely be more administratively efficient and would avoid rendering trade secret law obsolete--which I think might be the case if we had a rule that said: "maybe you get an injunction to protect secrecy, but maybe not."

Importantly, this would not mean injunctions are not available in "use" cases. The Second Circuit itself, in the quoted passage above, made this clear.  "Irreparable harm" should be presumed when defendant's actions would cause plaintiff's trade secrets to be disseminated to a wider audience "or otherwise irreparably impair the value of those secrets." If defendant is about to directly compete in a way that impairs plaintiff's market position, diverting sales or the like, then this would be bad too.  I don't think Varadarajan would necessarily disagree with that, because I think she's focused here, like in her article with Fishman, mostly on non-competing uses.

Trade Secret Trolls

Back to the trolls. Varadarajan has a very nice discussion at the end of her article about the need to get beyond seeing eBay as just a case about "trolling." That is, in patent law, what eBay is known for is Justice Kennedy's concurrence: the new wisdom that non-practicing entities don't necessarily get an injunction because it's money they want anyway.  Ryan Holte has argued this is wrong, by the way, that eBay should be cited "for what it held" — i.e. apply the equitable factors, don't presume injunctions are warranted in all cases— not for what Kennedy said in dicta about non-practicing entities.

Varadarajan, I think, would agree that viewing eBay as all about the trolls is narrow-minded, especially outside patent law.  Trolling, Varadarajan observes, is not present in trade secret law in the same way as in patent law. "[T]rade secrecy," she writes, "does not have a much-publicized bogeyman akin to a 'patent troll.' ” (22).  But eBay's cautionary note —i don't just presume plaintiff is going to suffer harm here that cannot be compensated through money damages —is still applicable.

"[T]the underlying concerns relating to ambiguous IP boundaries—including inadequate notice, high search costs, and strategic hold-up behavior—that animate the post-eBay patent calculus, are nonetheless relevant to trade secrecy." (22).  

In particular, as I have written along with many others, the potential harmful effects for employees in trade secret and in non-compete-style contract cases is more prominent here than in patent infringement cases, so there is more need than ever to balance the harm to plaintiff against the costs to people like departing employees.

But returning to the troll point... I agree the term "trade secret trolls" is a bit of a misnomer, since strangers can't plausibly accuse strangers, and send out mass cease and desist campaigns like they can in patent law. The misappropriator has to be someone with a connection to the plaintiff that might plausibly give rise to a duty of confidentiality, or have engaged in bad acts to obtain the secret. Otherwise, there isn't a plausible trade secret claim that has a hope of surviving a motion to dismiss or, worse, a characterization as "frivolous." (Jim Pooley has an article making out this important conceptual distinction, which he wrote in response to Dave Levine and Sharon Sandeen's provocative article opposing federalization, "Here Come the Trade Secret Trolls.")

At the same time, though, trade secret law, similar to patent law, does not require plaintiffs to be literally using the trade secret in the business. So in that sense, the trolling possibilities here might be a real issue. Varadarajan to some degree flags this, arguing that, post-eBay "courts should be more scrutinizing of injunctive relief—as they have been in the patent context[,]" and specifically pinpointing, inter alia, cases where "the plaintiff is not itself commercially utilizing the trade secret..."  (22). 

I would go further here and actually re-frame this a bit. Yes, in cases where the plaintiff is not itself "commercially utilizing" the trade secret in some way, courts should probably be less likely to grant an injunction, for the same reasons as in the patent context. You aren't using it, so it must be money you're after.

However, as Mark Lemley and I stress in our recent paper, Abandoning Trade Secrets, in trade secret law, unlike in patent law, "use" is not necessarily the benchmark of a trade secret's value to its owner. The legal standard under federal law and (outside New York) state law, is that the trade secret must derive "independent economic value" from remaining a trade secret. So a non-using trade secret owner that is nonetheless deriving value from maintaining secrecy could actually be just as scared of competing uses as a trade secret owner who is not actively using the information in the business.

For example, if the trade secret owner (say Coca Cola) has strategically shelved a trade secret (the formula for "New Coke") to preserve its own market in a stronger product line (e.g., original Coke, Diet Coke), then Coca Cola would deserve an injunction to avoid disclosure of the shelved information, or to avoid direct competition from a product they intentionally chose not to develop -- irrespective of the fact that Coca Cola here is technically a "non-practicing entity."

On the flip side, in Abandoning Trade Secrets, Lemley and I argue it is possible to abandon a trade secret due to failure to derive "independent economic value" from maintaining secrecy, such as by completely exiting the market in which the information used to derive value. When this happens, there is not even a trade secret at all, because, like in the — wait for it — trademark law context, the trade secret has been legally abandoned. So forget about an injunction. In fact, plaintiff shouldn't be winning the case at all because, if the secret truly no longer derives "independent economic value" from its secrecy (which, as we explain, is judged from the time of the act of misappropriation), then there's no trade secret and no claim under trade secret law.  Contract law, maybe, but not trade secret law.

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In sum, I generally agree with Varadarajan that "risk of disclosure" cases are most problematic and should warrant automatic presumption of an injunction.  My only addition is that I am not sure that "risk of use" cases are all that much less scary for plaintiffs (for the reasons I've said elsewhere).

I also think we may need to entirely re-frame the distinction between "practicing" versus "non-practicing" entities in trade secret law.  In trade secret law, use in the business — "practicing" — isn't the crux of the issue. A trade secret plaintiff has to be deriving independent economic value from the information remaining a secret. Plaintiff can be deriving that value even if it's not actively "practicing" the trade secret.  I suspect Varadarajan would agree with this point; she uses the phrase "commercially utilizing" the trade secret, which I assume she'd take to include strategic shelving.  She and I might still disagree a bit on whether the risk of a competing use is less scary for trade secret owners than a direct threat of disclosure. But in sum, I think her overall take — presume irreparable harm when risk of disclosure is at issue — makes a lot of sense. I love the paper, and all of her work.

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.

*** 

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.

Response to Similar Secrets by Fishman & Varadarajan

Professors Joseph Fishman and Deepa Varadarajan have argued trade secret law should be more like copyright law. Specifically, they argue trade secret law should not prevent people (especially departing employees who obtained the trade secret lawfully within the scope of their employment) from making new end uses of trade secret information, so long as it's not a foreseeable use of the underlying information and is generally outside of the plaintiff's market. The authors made this controversial argument at last year's IP Scholars conference at Berkeley Law, and in their new article in University of Pennsylvania Law Review, called "Similar Secrets."

My full response to Similar Secrets is now published in the University of Pennsylvania Law Review Online. It is called: "Should Dissimilar Uses Of Trade Secrets Be Actionable?" The response explains in detail why I think the answer is, as a general matter, YES. It can be downloaded at: https://www.pennlawreview.com/online/168-U-Pa-L-Rev-Online-78.pdf

There is lots to like here. Pam Samuelson has written a rave review on JOTWELL, writing that she finds the article's thesis "surprisingly persuasive," and noting that "[t]he adaptations recommended [in Similar Secrets] may not impact trade secrecy law as much as some practitioners might fear[.]"  Like Samuelson, I agree that a close read of the authors' proposal shows that it would not actually condone most conceivable uses of trade secrets. In particular, the authors make clear that end uses that destroy the secrecy of valid trade secrets, even if totally dissimilar, would still be illegal. However, unlike Samuelson, I disagree with the authors' underlying premise. Allowing people to use valid, non-expired trade secrets, whether for directly competing uses or for completely dissimilar, non-competitive end uses, fundamentally conflicts with the idea that the goal of trade secret law, as distinguished from the goal of copyright law, is to preserve the secrecy of information.

Like the authors, I too worry that trade secret owners have incentives to over-claim. Employers can use the threat of an injunction to turn trade secrets into "hot potatoes," and effectively into shackles, that prevent workers from doing great things when they leave. But trade secret law already has other doctrines designed to limit what can be protected as a trade secret in the first instance. The big one is the law's exclusion from protection of "general knowledge, skill, and experience." I don't think we should try to tweak the infringement standard to cover fewer uses of information. That would allow former employees to reveal too much of their employers' valuable, secret information, and would risk undermining the one of the biggest reasons we have trade secret law in the first place: encouraging employers to share secrets with their workers.  Instead, if information is deemed protectable as a trade secret, and that is a big if, the full scope of the remedy needs to be available, subject to eBay and equitable considerations. On eBay's impact on trade secret law, see Elizabeth Rowe's new empirical article, "eBay, Permanent Injunctions, and Trade Secrets, forthcoming in Washington & Lee Law Review."

My full response to Similar Secrets is now published in the University of Pennsylvania Law Review Online. It is called: "Should Dissimilar Uses Of Trade Secrets Be Actionable?" The response explains in detail why I think the answer is, as a general matter, YES. It can be downloaded at: https://www.pennlawreview.com/online/168-U-Pa-L-Rev-Online-78.pdf

Anthony Levandowski: Is Being a Jerk a Crime?

Former Google employee Anthony Levandowski was recently indicted on federal criminal charges of trade secret theft. As reported in the Los Angeles Times, the indictment was filed by the U.S. attorney’s office in San Jose and is based on the same facts as the civil trade secrets lawsuit that Waymo (formerly Google’s self-driving car project) settled with Uber last year. It is even assigned to the same judge. The gist of the indictment is that, at the time of his resignation from Waymo, and just before taking a new job at Uber, Levandowski downloaded approximately 14,000 files from a server hosted on Google's network. These files allegedly contained "critical engineering information about the hardware used on [Google's] self-driving vehicles …" Each of the 33 counts with which Levandowski is charged carries a penalty of up to 10 years in prison and a $250,000 fine.

This is a crucial time to remember that being disloyal to your employer, on its own, is not illegal. Employees like Levandowski have a clear duty of secrecy with respect to certain information they receive through their employment. But if none of this information constitutes trade secrets, there is no civil trade secret claim. In other words, for a civil trade secrets misappropriation claim, if there is no trade secret, there is no cause of action. 

For criminal cases like Levandowski's, the situation is more complicated. The federal criminal trade secret statute shares the same definition of "trade secret" as the federal civil trade secret statute. See 18 U.S.C. § 1839(3). However, unlike in civil trade secret cases, attempt and conspiracy can be actionable. 18 U.S.C. § 1832(a)(4)-(5). This means that even if the crime was not successful—because the information the employee took wasn't actually a trade secret—the employee can still go to jail. See U.S. v. Hsu, 155 F. 3d 189 (3rd Cir. 1998); U.S. v. Martin, 228 F.3d 1 (2000).  

The Levandoski indictment brings counts of criminal theft and attempted theft of trade secrets. (There is no conspiracy charge, which perhaps suggests the government will not argue Uber was knowingly involved.) But the inclusion of an "attempt" crime means the key question is not just whether Levandowski stole actual trade secrets. It is whether he attempted to do so while having the appropriate state of mind. The criminal provisions under which Levandowski is charged, codified in18 U.S.C. §§ 1832(a)(1), (2), (3) and (4), provide that "[w]hoever, with intent to convert a trade secret ... to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will, injure any owner of that trade secret, knowingly—steals...obtains... possesses...[etcetera]" a trade secret, or "attempts to" do any of those things, "shall... be fined under this title or imprisoned not more than 10 years, or both…" 

This means Levandowski can be found guilty of attempting to steal trade secrets that never actually existed. This seems odd. It contradicts fundamental ideas behind why we protect trade secrets. As law professor, Mark Lemley, observed in his oft-cited Stanford Law Review article, modern trade secret law is not a free-ranging license for judges to punish any acts they perceive as disloyal or immoral. It is a special form of property regime. Charles Tait Graves, a partner at Wilson, Sonsini, Goodrich & Rosati, who teaches trade secrets at U.C. Hastings College of Law, echoes this conclusion. Treating trade secrets as an employer’s property, Graves writes, counterintuitively "offers better protection for employees who change jobs” than the alternatives, because it means courts must carefully "define the boundaries" of the right, and may require the court to rule in the end "that not all valuable information learned on the job is protectable.” See Charles Tait Graves, Trade Secrets As Property: Theory and Consequences, 15 J. Intell. Prop. L. 39 (2007). 

So where does that leave Levandowski? In Google/Waymo’s civil case against Uber, Uber got off with a settlement deal, presumably in part because Google recognized the difficulty in proving key pieces of its civil case. Despite initial appearances, Google’s civil action was not actually a slam dunk. It was not clear Uber actually received the specific files Levandowski took or that the information contained in those files constituted trade secrets, versus generally known information or Levandonwki's own "general knowledge, skill, and experience.” (I discuss this latter issue in my recent article, The General Knowledge, Skill, and Experience Paradox, forthcoming in the Boston College Law Review). 

But thanks to criminal remedies under 18 U.S.C. §1832, and that pesky "attempt" charge, Levandowsi is left holding the blame and facing millions in fines, and many decades in jail. 

Maybe being a jerk is illegal after all.

Inevitable Disclosure Injunctions Under the DTSA: Much Ado About § 1836(b)(3)(A)(i)(1)(I)

When trade secret law was federalized in 2016, some commentators and legislators expressed concern that federalization of trade secret law would make so-called "inevitable disclosure" injunctions against departing employees a federal remedy, and negatively impact employee mobility on a national scale.

In response to such concerns, the Defend Trade Secrets Act (DTSA) included a provision that is ostensibly designed to limit availability of inevitable disclosure injunctions under the DTSA. The limiting provision is codified in 18 U.S.C. 1836(b)(3)(A)(i)(1)(I), discussed further below.

The DTSA has been in effect for just over three years. My preliminary observation is that courts do not appear to view Section 1836(b)(3)(A)(i)(1)(I) as placing novel limitations on employment injunctions in trade secret cases. They also do not seem to be wary of "inevitable disclosure" language.

Inevitable Disclosure, Generally

Trade secret law's so-called inevitable disclosure doctrine permits a controversial type of injunction in trade secret cases. The doctrine permits a trade secret plaintiff to prevent or limit an employee's ability to take on a new job, even if the employee has not yet used or disclosed any of the employer's trade secrets. The employee acquired the trade secrets lawfully, under an obligation of secrecy and confidentiality, in the course of her employment. But the plaintiff is able to successfully argue that the employee will at some point in the near future use or disclose the trade secrets in violation of that obligation.  See 18 U.S.C. § 1839(5) (defining "misappropriation" of trade secrets).  (For more on the relationship between trade secret law and employees, generally, and other doctrines that limit employment injunctions see my new article The General Knowledge, Skill, and Experience Paradox).

The inevitable disclosure doctrine is a fancy name for what is basically a special type of employment injunction. As one California court put it, before purporting to reject the doctrine, “[t]he inevitable disclosure doctrine results in an injunction prohibiting employment, not just use of trade secrets.” See Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443, 1458 (2002) (rejecting inevitable disclosure doctrine as creating an “after-the-fact” non-compete agreement).

The idea is that the employee just won't be able to help it, despite her best intentions, because she knows such specific and sensitive information; is about to switch jobs, and loyalties, to work for a direct competitor; is doing precisely the same work as she did before; and she's maybe not all that trustworthy to begin with. Factors that make the remedy possible are direct, intense competition; that the prospective employer is in a position to benefit; that the employee will have similar job duties at the new company; and that the employee has engaged in suspicious acts, leading his trustworthiness to be questioned.

For example, in one case, an employee worked at Bimbo Bakeries and knew the recipe for Thomas' English muffins. The court preliminarily enjoined him from leaving to work for Hostess in the same position, even though he alleged to have no intention to disclose the recipe for the muffins and reveal how Thomas' gets its "nooks and crannies." The employee was about to take on a similar position while in possession of specific information that would be of high value to Hostess, and also he was not forthcoming in depositions about why he did things like download files before departure, suggesting he could not necessarily be trusted to keep mum. See Bimbo Bakeries USA, Inc. v. Botticella, 613 F.3d 102, 114 (3d Cir. 2010); see also PepsiCo, Inc. v. Redmond, 54 F. 3d 1262 (7th Cir. 1995) (limiting ability of Pepsi employee, involved in marketing Pepsi sports drink All-Sport, to work at Quaker Oats on marketing of Gatorade).

Limitation on Employment Injunctions Under DTSA § 1836(b)(3)(A)(i)(1)(I)

I am not going to talk about whether the inevitable disclosure doctrine is good or bad. My personal view is the doctrine is a misnomer and really stems from the notion of "threatened" misappropriation, which was already actionable in the vast majority of states.  Instead, I am going to argue that the DTSA's supposed limitation on inevitable disclosure injunctions does not have any effect.

Section 1836(b)(3)(A)(i)(1)(I) of the DTSA states as follows

(3) Remedies.—In a civil action brought under this subsection with respect to the misappropriation of a trade secret, a court may— 

(A) grant an injunction— (i) to prevent any actual or threatened misappropriation described in paragraph (1) on such terms as the court deems reasonable, provided the order does not— (I) prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows; or (II) otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business[.]

On its face, Section 1836(b)(3)(A)(i)(1)(I) provides three rules with respect to employment injunctions under the DTSA.

Rule 1. An injunction under the DTSA cannot “prevent” a person from taking new employment and must be based on evidence of "threatened" misappropriation. If an injunction limits someone’s new employment, this requires “evidence of threatened misappropriation,” not merely evidence that the employee “knows” trade secrets.  This means a court cannot say to a departing employee "you cannot ever work at Company X, under any circumstances." But a court can place restrictions on employment, like ordering the employee to wait a few months until a particular deal is over or prohibit the employee from working on a specific project, but only so long as the plaintiff brings forward evidence of a "threat" that the employee will use or disclose the trade secrets. The naked argument that the employee knows and will "inevitably" use or disclose the information in a new job should not be enough.

Rule 2. An injunction under the DTSA cannot place more restraints on an employee than “an applicable State law" would allow.  Applicable state law presumably includes both state statutes like bans on non-competes, as well the state’s trade secret case law on issues like appropriateness of employment injunctions and whether "general knowledge, skill, and experience" can be a trade secret. So in California, a DTSA claim must bow to California UTSA case law stating that California courts allegedly do not grant such injunctions. The federal claim cannot get you a more employee-restrictive remedy than the California one.

Rule 3. State law remedies against employment may give a plaintiff more than a federal DTSA claim would allow. This is the reverse of what was just said in Rule 2. Both the Senate and House Reports make clear that if a state's law authorizes a sweeping employment injunction, this can still be obtained under state law. There is a state ceiling on federal relief. But there is no federal ceiling on state relief. See S. REP. 114-220, S. Rep. No. 220, 114th Cong., March 7, 2016 ("However... if a State's trade secrets law authorizes additional remedies, those State-law remedies will still be available."). So even if the plaintiff can't get the employment injunction he wants with his DTSA claim, he might get it with a Pennsylvania or Ohio trade secret claim.

Much Ado About § 1836(b)(3)(A)(i)(1)(I)

Here is the thing. The three rules stated above do not materially change the state of the law.  In almost no situations did courts prior to the DTSA grant "pure" inevitable disclosure injunctions pre-DTSA. Rather, as trade secret litigators such as Victoria Cundiff have long known, courts did not do this lightly and limited remedies when they could. As Cundiff put it in a report for the Sedona Conference, under the Uniform Trade Secrets Act (UTSA) and  the common law, some courts would accept "inevitable disclosure" arguments and grant preliminary or even permanent injunctions prohibiting former employees who were not bound by non-compete agreements from accepting new jobs. However, Cundiff wrote,

"many of these 'inevitable disclosure' injunctions were entered only after a showing that the employee has engaged in “bad acts” found to threaten misappropriation of trade secrets[.]" 

Cundiff conceded that "a few rare cases prohibited employees from accepting any employment within a particular division of a specific competing organization for a limited period of time solely based on the sensitivity of the information the individual knew." But these cases involved only limitations on employment, and they were the exception rather than the rule. Indeed, a close reading of the most oft-cited "inevitable disclosure" case, PepsiCo, Inc. v. Redmond, 54 F. 3d 1262 (7th Cir. 1995), shows that the court didn't even fully prevent Mr. Redmond from working at Quaker Oats. The court only delayed his start date and prevented him from working on a particular task. Id. at 1267 ("... the district court issued an order enjoining Redmond from assuming his position at Quaker through May, 1995, and permanently from using or disclosing any PCNA trade secrets or confidential information.").

My own research suggests a similar state of the law. Since the early days of trade secret law in America, courts have tried to limit the negative impacts of trade secret law on employees' ability to pursue work.

Post-DTSA, the landscape does not seem to have changed from what Cundiff described pre-DTSA.   Some courts have used the statute's reference to "threatened" misappropriation (drawn directly from preexisting law) in order to get around Section 1836(b)(3)(A)(i)(1)(I)'s language. And courts seem completely willing to entertain and use "inevitability" language, even when assessing DTSA claims.

An early DTSA case that got some press for its treatment of inevitable disclosure is a case in point. In Molon Motor and Coil Corp. v. Nidec Motor Corp., No. 16 C 03545 2017 WL 1954531 (N.D. Ill. May 11, 2017), an Illinois federal district court denied defendant Nidec Motor Corp's motion to dismiss plaintiff Molon Motor and Coil Corp.'s trade secret lawsuit against its former employee, Desai. Just prior to leaving his job at Molon, Desai "allegedly copied dozens of Molon's engineering, design, and quality control files onto a personal Kingston portable data drive."

Citing to pre-DTSA Illinois case law on the inevitable disclosure doctrine, the court concluded that Molon’s allegations, including contentions of pre-departure downloading, "direct competition between the parties, as well as the allegations on the employment breadth and similarity of [former employee] Desai’s quality control work at the two companies, are enough to trigger the circumstantial inference that the trade secrets inevitably would be disclosed by Desai to Nidec.” The court also noted in a footnote, I think astutely, that "[a]t bottom, whether a trade secret would be inevitably disclosed is really a question of circumstantial evidence, and those types of questions defy straitjacket formulas."

Other DTSA cases seem similarly open to limited injunctions against employment and also to "inevitable disclosure" language, when presented with the right facts. See also Fres-co Sys. USA, Inc. v. Hawkins, 690 F. App'x 72, 76 (3d Cir. 2017) (upholding a limited injunction on employment activity under the DTSA and PUTSA, using “inevitable disclosure” analysis and case law); Jazz Pharm., Inc. v. Synchrony Grp., LLC, 343 F. Supp. 3d 434, 445–46 (E.D. Pa. 2018) (denying motion to dismiss under DTSA and PUTSA because record “plausibly suggests the threatened misappropriation of Jazz's trade secrets,” and analogizing to the “inevitable disclosure” scenario for support).

  

The upshot is that, to get an employment injunction under the DTSA before an employee has actually used or disclosed the trade secrets, the plaintiff has to do basically the same thing the plaintiff had to do pre-DTSA: prove that the employee is threatening to use or disclose the trade secrets.

This state of the law has earned "red flags" from scholars such as Orly Lobel and others who think inevitable disclosure doctrine should have been abolished. I don't see this state of the law as surprising given how Section 1836(b)(3)(A)(i)(1)(I) was drafted, and given the scope of what was previously permitted under the UTSA. 

Recent Advances in Biologics Manufacturing Diminish the Importance of Trade Secrets: A Response to Price and Rai

Guest post by Rebecca Weires, a 2L in the J.D./M.S. Bioengineering program at Stanford

In their 2016 paper, Manufacturing Barriers to Biologics Competition and Innovation, Price and Rai argue the use of trade secrets to protect biologics manufacturing processes is a social detriment. They go on to argue policymakers should demand more enabling disclosure of biologics manufacturing processes, either in patents or biologics license applications (BLAs). The authors premise their arguments on an assessment that (1) variations in the synthesis process can unpredictably affect the structure of a biological product; (2) variations in the structure of a biological product can unpredictably affect the physiological effects of the product, including immunogenicity; and (3) analytical techniques are inadequate to characterize the structure of a biological product. I am more optimistic than Price and Rai that researchers will soon overcome all three challenges. Where private-sector funding may fall short, grant-funded research has already led to tremendous advances in biologics development technology. Rather than requiring more specific disclosure of synthesis processes, as Price and Rai recommend, FDA could and should require more specific disclosure of structure, harmonizing biologics regulation with small molecule regulation. FDA should also incentivize development of industrial scale cell-free protein synthesis processes.

In the past few years, researchers have made rapid progress developing techniques for synthesizing, assessing the physiological effects of, and characterizing the structure of biologics. Researchers have been developing cell-free protein synthesis systems to make biologics synthesis more predictable and less path-dependent. Historically, cell-free synthesis systems have been application-specific and difficult to scale. Cell-based systems have dominated because cells maintain their own internal environments, including necessary components for protein synthesis. But cell-based systems are not perfect. For example, as Price and Rai explain at p. 1035, the pattern of carbohydrates attached to a protein is particularly challenging to replicate across different cell lines and is important for efficacy and immune response. Recently, researchers have created more flexible, generalizable platforms for cell-free synthesis. Some are developing industrial-scale cell-free synthesis processes. Others have demonstrated cell-free production of increasingly complex, proteins with attached carbohydrates. These cell-free synthesis techniques are more predictable than current cell-based synthesis, eliminating variations that arise from differences between cell lines.

Researchers have developed improved models of the immune system to improve preclinical assessment of biologics. Traditional preclinical toxicity assays and animal models have been insufficient for biologics, which are often not directly cytotoxic but instead trigger species- and patient-specific immune reactions. As the biologics industry has grown, researchers have developed sensitive in silico methods, 2D in vitro assays, and 3D in vitro models of immune response. For example, computer models can now provide good estimations of the ability of immune cells to bind with a biologics, which a sponsor can use to predict whether a product with a slightly different structure than its reference product has the same immunogenicity. If the two products are likely to be biosimilar, the sponsor can validate immunogenicity in vitro before investing in a clinical trial. The sponsor may use 2D assays to measure the response of immune cell cultures directly exposed the biologic, or the sponsor may introduce the biologic into 3D artificial lymph nodes, which model flow and other mechanical forces that affect immune cell response. With these tools, the variations arising from different synthesis processes become less of an obstacle to biosimilar development.

Technology for characterizing the structure of biologics has come especially far in the past decade, enabling high-resolution characterization of protein folding and glycosylation for increasingly large biologics. Structural characterization has been limited in the past because protein sequencing does not provide folding or glycosylation information, X-ray crystallography requires prohibitively complex sample preparation, and nuclear magnetic resonance (NMR) spectroscopy is ambiguous and computationally expensive for large molecules. In the past few years, though, researchers have developed 2D NMR methods for characterizing products as large as monoclonal antibodies. Cryogenic electron microscopy (CryoEM) is a newer technique suitable for characterizing larger biologics. CryoEM can be used to image large glycosylated structures such as viral coat proteins, and even whole cells, at near-atomic resolution. Though 2D NMR and CryoEM may be too time-consuming or expensive for rapid prototyping, computational methods for predicting protein structure and function are now adequate for prototyping new biologics.

Price and Rai theorize that the private sector underinvests in these three areas of research, but total funding may be sufficient. The above-cited advances were largely grant-funded. Defense department funding for synthetic biology has skyrocketed in the past decade, accounting for 67% of U.S. public-sector research investments in synthetic biology in 2014. Public sector investment has made technologically feasible what was once nearly impossible: reverse engineering biologics.

Price and Rai argue the costs of trade secrecy in biologics manufacturing likely outweigh the benefits, but research advances may soon reverse that assessment. As reverse engineering biologics becomes easier, the private value of keeping manufacturing methods trade secrets will decline, and we can expect biologics makers to reduce their reliance on trade secrets. Furthermore, tools for assessing immunogenicity function in silico and in vitro will eliminate some expense of failed clinical trials. Thus, the social value of disclosing synthesis processes will also decline.

Overall, these scientific advancements reduce the urgency and importance of Price and Rai’s policy prescriptions but do not render them irrelevant. Policymakers should consider the regulatory levers the paper describes at pages 1050-56 to incentivize full and specific disclosure; however, full disclosure of structure, rather than synthesis process, should be the focus. Biologics sponsors should be required to define their exact formulations. Heightened patent disclosure requirements are an option, but as Price and Rai suggest, the FDA may be in a better position to enforce heightened disclosure requirements. In fact, detailed structural characterization, to the extent it is technologically feasible, is already required to prove biosimilarity. With improved characterization and deterministic, cell-free manufacturing, it will become possible to make true generic biologics. Heightened disclosure requirements could take the form of harmonized generics and biosimilars regulation.

Policymakers should supplement disclosure requirements with incentives for the private sector to further develop cell-free synthesis processes. Reverse engineering requires both structural information and deterministic synthesis processes. Biologics sponsors may not have sufficient incentives to invest in cell-free synthesis because it facilitates biosimilars development. Fortunately, current research provides a basis for FDA to set a reasonable timeline for biologics makers to develop and adopt cell-free synthesis. Now is an appropriate time for the FDA to announce cell-free synthesis requirements, along with immunogenicity assay requirements, for biologics license applications. As escalating fuel efficiency standards have done for the auto industry, escalating application requirements would stimulate private-sector research and development to meet requirements.

Price and Rai highlight legitimate concerns with the current use of trade secrets to inhibit the development of biosimilars. However, biologics manufacturing technology has advanced enough that an end to these practices is in sight. New scientific developments will enable FDA to treat biosimilars more like generic small-molecule drugs, which would simplify the approval pathway for biosimilars and enable more effective product inspections. Though this course of action would not immediately accommodate new and complex biologics such as whole cell therapies, it does suggest a model for regulating them. For new types of biologics, FDA can start with a flexible regulatory scheme allowing approval based on manufacturing process information. Then, as deterministic synthesis processes, preclinical assays, and structural characterization techniques advance, it can transition to more rigid disclosure requirements.

IP and the Right to Repair

I ran across an interesting article last week that I thought I would share. It's called Intellectual Property Law and the Right to Repair, by Leah Chan Grinvald (Suffolk Law) and Ofer Tur-Sinai (Ono Academic College). A draft is on SSRN and the abstract is here:

In recent years, there has been a growing push in different U.S. states towards legislation that would provide consumers with a “right to repair” their products. Currently 18 states have pending legislation that would require product manufacturers to make available replacement parts and repair manuals. This grassroots movement has been triggered by a combination of related factors. One such factor is the ubiquity of microchips and software in an increasing number of consumer products, from smartphones to cars, which makes the repair of such products more complicated and dependent upon the availability of information supplied by the manufacturers. Another factor is the unscrupulous practices of large, multinational corporations designed to force consumers to repair their products only through their own offered services, and ultimately, to manipulate consumers into buying newer products instead of repairing them. These factors have rallied repair shops, e-recyclers, and other do-it-yourselfers to push forward, demanding a right to repair.

Unfortunately, though, this legislation has stalled in many of the states. Manufacturers have been lobbying the legislatures to stop the enactment of the right to repair laws based on different concerns, including how these laws may impinge on their intellectual property rights. Indeed, a right to repair may not be easily reconcilable with the United States’ far-reaching intellectual property rights regime. For example, requiring manufacturers to release repair manuals could implicate a whole host of intellectual property laws, including trade secret. Similarly, employing measures undercutting a manufacturer's control of the market for replacement parts might conflict with patent exclusivity. Nonetheless, this Article’s thesis holds that intellectual property laws should not be used to inhibit the right to repair from being fully implemented.

In support of this claim, this Article develops a theoretical framework that enables justifying the right to repair in a manner that is consistent with intellectual property protection. In short, the analysis demonstrates that a right to repair can be justified by the very same rationales that have been used traditionally to justify intellectual property rights. Based on this theoretical foundation, this Article then explores, for the first time, the various intellectual property rules and doctrines that may be implicated in the context of the current repair movement. As part of this overview, this Article identifies those areas where intellectual property rights could prevent repair laws from being fully realized, even if some of the states pass the legislation, and recommends certain reforms that are necessary to accommodate the need for a right to repair and enable it to take hold.

I thought this was an interesting and provocative paper, even if I am skeptical of the central thesis. I should note that the first half of the paper or so makes the normative case, and the authors do a good job of laying out the case.

Many of the topics are those you see in the news, like how laws that forbid breaking DRM stop others from repairing their stuff (which now all has a computer) or how patent law can make it difficult to make patented repair parts.

The treatment of trade secrets, in particular, was a useful addition to the literature. As I wrote on the economics of trade secret many years ago, my view is that trade secrecy doesn't serve as an independent driver of innovation because people will keep their information secret anyway. Thus, any innovation effects are secondary, in the sense that savings made from not having to protect secrets so carefully can be channeled to R&D. But there was always a big caveat: this assumes that firms can "keep their information secret anyway," and that there's no forced disclosure rule.

So, when this article's hypothesized right to repair extended to disclosure of manuals, schematics, and other information necessary to repair, it caught my eye. On the one hand, as someone who has been frustrated by lack of manuals and reverse engineered repair of certain things, I love it. On the other hand, I wonder how requiring disclosure of such information would change the incentive to dynamics. With respect to schematics, companies would probably continue to create them, but perhaps they might make a second, less detailed schematic. Or, maybe nothing would happen because that information is required anyway. But with respect to manuals, I wonder whether companies would lose the incentive to keep detailed records of customer service incidents if they could not profit from it. Keeping such records is costly, and if repairs are charged to customers, it might be better to reinvent the wheel every time than to pay to maintain an information system that others will use. I doubt it, though, as there is still value in having others repair your goods, and if people can repair their own, then the market becomes even more competitive.

While the paper discusses the effect on the incentive to innovate with respect to other forms of IP, it does not do so for trade secrets.

With respect to other IP, the paper seems to take two primary positions on the effect of immunizing IP infringement for repair. The first is that the right to repair can also promote the progress, and thus it should be considered as part of the entire system. While I agree with the premise from a utilitarian point of view, I was not terribly convinced that the right to repair would somehow create incentives for more development that would outweigh initial design IP rights. It might, of course, but there's not a lot of nuanced argument (or evidence) in either direction.

The second position is that loosening IP rights will not weaken "core" incentives to develop the product in the first place, because manufacturers will still want to make the best/most innovative products possible. I think this argument is incomplete in two ways. Primarily, it assumes that manufacturers are monolithic. But the reality is that multiple companies design parts, and their incentive to do so (and frankly their ability to stay in business) may well depend on the ability to protect designs/copyright/etc. At the very least, it will affect pricing. For example, if a company charged for manuals, it may be because it had to pay a third party for each copy distributed. Knowing that such fees are not going to be paid, the original manual author will charge more up front, increasing the price of the product (indeed, the paper seems to assume very little effect on original prices to make up for lost repair revenue). Secondarily, downstream repairs may drive innovation in component parts. For example, how repairs are done might cause manufacturers to not improve parts for easy repair. The paper doesn't seem to grapple with this nuance.

This was an interesting paper, and worth a read. It's a long article - the authors worked hard to cover a large number of bases, and it certainly made me think harder about the right to repair.