Two recent cases may make it more difficult for companies to prevent their trade secrets from being publicly disclosed after they are obtained by third parties. In DVD Copy Control Association v. Bunner1 and Ford Motor Company v. Lane,2 a California Court of Appeal and a federal district court in Michigan denied trade secret holders injunctive relief that would have required website operators to remove postings of trade secrets on their websites. In both cases, the courts held that First Amendment interests in avoiding prior restraints on speech outweigh the trade secret holder's commercial interests in its trade secrets. Trade secret holders may have to seek other remedies once their trade secrets have been published. This update will summarize the two recent cases and discuss some avenues trade secret holders can pursue to remedy lost property rights.
DVD Copy Control Association v. Bunner
The case arose from an action brought pursuant to the California Uniform Trade Secrets Act3 by plaintiff DVD Copy Control Association (DVD CCA) against Andrew Bunner and numerous other website operators. The DVD CCA licenses the Content Scrambling System (CSS), which is an encryption scheme that restricts the playback of encrypted DVDs to CSS-equipped DVD players. A Norwegian teenager developed code known as "DeCSS" that allows users to play CSS-protected DVDs on any machine. Bunner posted DeCSS on his website, as did many other website operators around the world. The DVD CCA sued Bunner and other defendants, claiming that they misappropriated the DVD CCA's trade secrets by posting the DeCSS program on their websites. The Superior Court issued an order preventing the defendants from continuing to post the DeCSS on their sites, and Bunner appealed.
The Court of Appeal accepted the allegation that Bunner had misappropriated DVD CCA's trade secrets. Nonetheless, the court found that the First Amendment protects Bunner's publication as an exercise of free speech. The court noted that it was not disputed that "computer code is speech," and it concluded that the Superior Court's preliminary injunction could be characterized as a prohibition of "pure" speech. It then held that the Superior Court's order was a prior restraint on speech, which is not allowed under the First Amendment.
The appellate court said that the fact that DeCSS may improperly use or disclose trade secrets does not defeat Bunner's First Amendment free speech rights. The court specifically rejected DVD CCA's argument that courts routinely enjoin trade secret misappropriation, even over a First Amendment defense. The court suggested that injunctive relief may be available only when the person publishing the information has a contractual or fiduciary duty to the trade secret holder to keep the information confidential, since a voluntary agreement not to disclose a trade secret will ordinarily waive any First Amendment defense for disclosures. In this case Bunner apparently obtained the DeCSS code from third parties, and he did not have any relationship with the DVD CCA.
Ford Motor Company v. Lane
This case came before the court on plaintiff Ford Motor Company's ("Ford") motion for a preliminary injunction for violations of the Michigan Uniform Trade Secrets Act.4 Defendant Robert Lane maintained a website with the domain name "fordworldnews.com," where he published information that he received from Ford's press release website about Ford and its products. Upon learning that Lane's domain name incorporated the word "ford," Ford blocked Lane's access to the press release website. In response, Lane changed his domain name to "blueovalnews.com" and posted an article on the site that discussed and quoted confidential information that Lane received from an anonymous source. Lane subsequently published additional confidential documents, including many with high competitive sensitivity. Lane was aware of the confidential nature of the Ford documents. As such, Ford filed for injunctive relief, alleging that Lane misappropriated trade secrets.
Although the district court found that Ford provided sufficient evidence to conclude that Lane likely violated the Michigan Trade Secrets Act, the court nevertheless held that issuance of the requested injunction would run afoul of the First Amendment. The court concluded, "in the absence of a confidentiality agreement or fiduciary duty between the parties, Ford's commercial interest in its trade secrets and Lane's alleged improper conduct in obtaining the trade secrets are not grounds for issuing a prior restraint." The court did not foreclose the possibility of a legal remedy for Ford due to Lane's unauthorized dissemination of confidential materials.
What Can Trade Secret Holders Do To Remedy Lost Property Rights?
In light of the cases mentioned above, the following are some remedies that a trade secret holder can seek once such information is published over the Internet:
- Injunctive relief. The cases above suggest that a trade secret holder's ability to get preliminary injunctive relief may be limited by the First Amendment. However, the cases imply that where parties voluntarily expose themselves to trade secret law through agreement, trade secret holders seeking enjoinment can make a strong argument that the First Amendment should not apply to the case. In both cases listed above, the courts were careful to note that trade secret law may allow enjoinder where the defendant has signed a confidentiality agreement or entered into a relationship with the trade secret holder that created duties by law (fiduciary relationship).
Absent a duty, it is difficult for a trade secret holder to obtain a preliminary injunction. However, the case law is unclear as to whether a permanent injunction, in contrast to a preliminary injunction, constitutes a prior restraint. Additionally, a trade secret holder may be successful in an action for injunctive relief against anyone who violates the trade secret laws by conduct rather than speech.
- Damages. A trade secret holder may seek damages where secret information has become public knowledge. The courts will utilize one of three methods to calculate the award: (1) the trade secret holder's losses; (2) the misappropriator's gain; or (3) a reasonable royalty. The trade secret holder generally has the burden of proving his or her damages. In cases where the defendant claims protection by the First Amendment, the trade secret holder has the added burden of proving his or her damages with some degree of certainty; this is to circumvent the overbreadth doctrine.
- Criminal sanctions. Trade secret holders may seek criminal prosecution when a trade secret has been made known without authorization. All fifty states have enacted criminal statutes for trade secret theft, and there are a number of applicable federal statutes, including the Trade Secrets Act,5 the Economic Espionage Act,6 and mail and wire fraud statutes.7 The courts addressing such claims inquire into whether the trade secret publisher had the intent to deprive the trade secret holder of his or her exclusive property rights. The courts do not analyze how the secret was acquired. Punishments for violations of these acts can be severe. The Economic Espionage Act, for example, authorizes imprisonment for up to fifteen years and fines up to $500,000. Many of these statutes have survived First Amendment overbreadth challenges.
- Copyright Act. The First Amendment defense has not seen the same success in the context of copyright law as it has with regard to trade secret protection. Because both the First Amendment and the constitutional authority underlying the Copyright Act8 are contained in the United States Constitution, the resolution of a conflict between free speech and copyright involves careful balancing of two constitutional protections. In contrast, the trade secret laws lack any constitutional foundation. Additionally, there are a number of significant distinctions between copyrights and trade secrets that explain why courts have concluded that the First Amendment is not a barrier to injunctive relief in copyright infringement cases. These include the fact that copyright protection is limited in time and there is a "fair use" exception to copyright infringement. Therefore, where copyrights are also at issue, plaintiffs may pursue actions under copyright law.
The policies behind trade secrets and free speech are directly in conflict with one another. The recent cases suggest that the First Amendment may trump trade secret protection in many instances and prevent trade secret holders from obtaining preliminary injunctions. However, courts have upheld such injunctions where First Amendment rights have been waived by contract or legal relationship. Finally, trade secret holders may bring actions for damages, criminal sanctions, or assert violations of other intellectual property rights.
1/ 2001 Cal. App. LEXIS 1179, *; 113 Cal. Rptr. 2d 338; 2001 Cal. Daily Op. Service 9406; 201 Daily Journal DAR 11709.
2/ 67 F. Supp. 2d 745 (E.D. Mich. 1999).
3/ Cal. Civ. Code § 3426.1 et seq. (2001).
4/ Mich. Comp. Law Ann. § 445.1901-1910 (2001).
5/ 18 U.S.C. § 1905 (2001).
6/ 18 U.S.C. § 1831-1839 (2001).
7/ 18 U.S.C. § 1341 (2001).
8/ 17 U.S.C. § 101 et seq. (2001).