Patent Docs

Palworld: Friend or Foe?

By Andrew Velzen --

On January 19, 2024, Palworld launched into early access on Xbox and Windows.  To say it was an overnight success is an understatement.  By only a month in, Palworld had been played by over 25 million players.[1]  To put this in perspective, monumental success stories like The Legend of Zelda: Tears of the Kingdom and Hogwarts Legacy (both released in 2023) have sold in the ballpark of 20-25 million copies.[2]  It is not surprising that Palworld's meteoric rise has generated a lot of buzz in the industry.

What is Palworld

Palworld is a survival game developed and published by Pocket Pair that is "set in an open world populated with animal-like creatures called 'Pals,' which players can battle and capture to use for base building, traversal, and combat.  Players may also assign the 'Pals' to bases where they will automatically complete tasks for the player.  Palworld can be played either solo or online with up to 32 players on one server."[3]  Most saliently for this discussion, though, is the fact that the "Pals" bear a not-so-subtle resemblance to Pokémon (e.g., in name and/or likeness).[4]  As just one of countless examples, compare the following image of the Pal Grizzbolt (left) with the Pokémon Electabuzz (right):[5]

In fact, given the visual overlap, gamers have started colloquially referring to Palworld as "Pokémon with Guns."

Accusations of Infringement

Given the striking resemblance, it isn't surprising that many in the industry have wondered whether any of Game Freak Inc. / The Pokémon Company / Nintendo Co., Ltd. (collectively referred to herein as the "Pokémon Owners") would initiate action for copyright infringement against Pocket Pair, especially given Nintendo's notoriously litigious reputation.[6],[7]  Interestingly, Pocket Pair has a history of making games that appear, at least facially, to be clones of other games.[8]  As far as I'm aware, none of the Pokémon Owners have yet to take any legal action against Palworld.  That isn't to say that the Pokémon Owners aren't seriously considering such action, though.  In fact, regarding Palworld, The Pokémon Company issued the following statement:[9]

We have received many inquiries regarding another company's game released in January 2024.  We have not granted any permission for the use of Pokémon intellectual property or assets in that game.  We intend to investigate and take appropriate measures to address any acts that infringe on intellectual property rights related to the Pokémon.  We will continue to cherish and nurture each and every Pokémon and its world, and work to bring the world together through Pokémon in the future.

I have heard 3 main allegations levied regarding the creation of the Pals vis-a-vis Pokémon.  Namely, that Pocket Pair: (a) generally copied many concepts of Pokémon in a creatively bankrupt fashion, (b) obtained three-dimensional (3D) models of Pokémon and only made slight modifications to those models before pushing them out the door, and/or (c) trained a generative artificial intelligence (AI) using 3D models of Pokémon and then had that AI produce 3D models for Pals.[10]  To my knowledge, there has been no publicly accessible discovery thus far, so we can't, with absolute confidence, ascertain which of these three allegations (if any) are true.  Still, I plan to discuss the potential merits of a copyright infringement suit in the United States against Pocket Pair under each of these hypothetical copying regimes.[11]

What Would the Complaint Allege?

A successful copyright infringement suit requires that plaintiff has a registered copyright on an underlying copyrightable work (or an exclusive license thereto), that defendant infringed on an exclusive right conferred by the copyright (without a license), and that no defenses apply (e.g., there is no fair use defense).  The primary questions in a hypothetical Pokémon Owners v. Pocket Pair case are: (i) which aspects of Pokémon are covered by the Pokémon Owners' copyrights (i.e., which aspects are copyrightable) and (ii) would Pocket Pair have a reasonable fair use defense.  I will analyze both of these questions for each of the three sets of potential facts.

First – What if Pocket Pair simply copied some or most of the general concepts that make Pokémon successful?

As a first consideration, does the fact that Palworld is a game that involves catching monsters and using them in combat mean that Pocket Pair has infringed a copyright?  I think most people would inherently understand that this fact, taken alone, would be insufficient to constitute copyright infringement, but let's briefly discuss why.

As a general rule, "ideas" aren't copyrightable (rather, only expressions are).  This is, unsurprisingly, typically referred to as the "idea-expression dichotomy," and is codified in 17 U.S.C. § 102(b).[12]  One tenant of the idea-expression dichotomy is that certain concepts are so common / ubiquitous to a given medium or genre that such concepts are not copyrightable (these concepts are sometimes referred to as scènes-à-faire).  In the video game world, this could include things like user interface menus or combat or character creation, but can extend even further to the entire underlying genre of a game (e.g., the general concept of a "fighting game" is not protectable by copyright).  I won't get into it here, but for a good illustration of where the line is between what is a scène-à-faire and what is protectable by copyright, contrasting Atari v. Amusement World with Tetris v. Xio is instructive.[13]

Here, the idea of monsters fighting with one another or against a player is probably not something that could be covered by a copyright.  For example, the concept of monsters that take forms that are subtly or directly inspired by various animals, people, or forces of nature (as many Pokémon are), is something that has been present in the culture of Japan for thousands of years in the form of the Yōkai.[14]  As a specific example in the context of Pokémon / Palworld, the general concept of a fox (kitsune) with some magical powers is well-known, so it cannot be the subject of a copyright.  In fact, both games include multiple fox creatures (one of the Pals even being named "kitsun"):[15]

Given all this, it is unsurprising that, historically, the Pokémon Owners have not pursued litigation against games that are far more similar to Pokémon (at least in terms of gameplay) than Palworld is (e.g., Digimon World, Temtem, etc.).[16]

Second – What if Pocket Pair copied underlying Pokémon models?

So, while the general concepts employed in Pokémon aren't likely protectable by copyrights, what about the 3D character models, themselves?  While it is only conjecture at this point whether actual Pokémon models were copied in the production of Palworld, there are some in the industry that have promulgated what they believe to be strong evidence of such copying.[17]  This narrative has unsurprisingly been opposed by Pocket Pair.[18]  Regardless, for the sake of argument, let's assume that Pocket Pair did in fact have access to the underlying 3D Pokémon models and only made minor tweaks (e.g., slight modifications to limb-shape, face-shape, hair-shape, or hair color; remeshing; reskinning; modifying relative proportions; etc.) to arrive at the Palworld models.  Would this be copyright infringement?

3D models are protectable by copyright, so long as the 3D model isn't merely an exact one-to-one digital rendering of something that exists in the physical world (i.e., so long as some originality / creativity was present in the development of the model).[19]  Further, to my knowledge, no Pokémon are exact replicas of any naturally occurring creature (i.e., while there may be cow Pokémon, a 3D scan of an actual bovine was not merely replicated to generate Miltank).[20]  Given this, the 3D models of Pokémon could be subject to copyright protection.  Thus, if the 3D models of Pokémon were directly imported into Palworld, the Pokémon Owners would have a strong case for infringement.  In fact, this isn't so far off from something that almost happened (not as a result of the actions of Pocket Pair, but as a result of the actions of a Palworld modder).  The modder uploaded a YouTube video and a tweet that previewed a mod that imported Pokémon directly into Palworld.[21]  Nintendo, unsurprisingly, swiftly issued a Digital Millennium Copyright Act (DMCA) strike against both the video and the tweet.  Even further, in an abundance of caution, the popular modding site Nexus Mods preemptively banned the uploading of any Palworld mods related to Pokémon.[22]

So, we know that it would not be okay for Pocket Pair to directly import / use Pokémon models in Palworld, but, assuming Pocket Pair had lawful access to the Pokémon models (e.g., could reverse engineer them in a lawful way), would it be okay if Pocket Pair modified the models and put them into Palworld.  This is where the typical lawyer answer of "it depends" comes into play.

One of the rights that a copyright holder has (e.g., that the Pokémon Owners have here in relation to the 3D Pokémon models) is the right to prepare derivative works.[23]  The U.S. Copyright Office lists the right to prepare derivative works as including "[a] revision of a website" and "[a] new version of an existing computer program."[24]  As such, the Pokémon Owners own the right to prepare a "new version" of the original 3D Pokémon models.

This right only protects the Pokémon Owners to the extent that a resulting 3D model is derivative of the original work, though.  In some cases, the resulting work is so transformative that the producer of the resulting work has a fair use defense.  Hence, the question here becomes whether the modifications to the underlying Pokémon models is sufficiently transformative (and, therefore, subject to the fair use defense).

In order to determine what is and is not transformative, we can look to the 4 fair use factors: (i) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (ii) the nature of the copyrighted work; (iii) the amount and substantiality of the portion used in relation to the copyright work as a whole; and (iv) the effect of the use upon the potential market for or value of the copyrighted work.

The above factors are obviously debatable and fact-specific.  However, if the Palworld models are, in fact, only minor modifications to the Pokémon models, I believe at least 3 of the 4 factors would weigh against a finding of fair use.  Under these assumed facts, the following considerations are likely relevant to the factors recited above:

i.  The Palworld models are being used commercially, in bad faith (e.g., without permission from the Pokémon Owners and without public admission), and for essentially the same purpose as the Pokémon models (weighing against a finding of fair use);

ii.  The creation of the original Pokémon models was a highly creative endeavor (weighing against a finding of fair use);

iii.  Only a few dozen or so of the plethora of Pokémon models have been replicated in Palworld (weighing in favor of a finding of fair use); and

iv.  Palworld and Pokémon are both video games competing in the same market for gamers to purchase their games and, even if they have yet to do so, the Pokémon Owners could make a similar game to Palworld (hence, it was a market that the Pokémon Owners would've been able to exploit) (weighing against a finding of fair use).

One final note regarding fair use.  One of the stronger ways to demonstrate fair use is to show that a work is a parody.  One could clearly argue that "Pokémon with Guns" is a parody of Pokémon.  Palworld includes many aspects that are not only opposite of Pokémon, but clearly meant to poke fun at Pokémon.  For example, rather than petting a Pokémon, you can butcher a Pal or rather than an animal/trainer relationship between players and Pokémon, there can be a master/slave relationship between players and Pals.[25]  Thus, there is at least a colorable argument that Palworld exists to ridicule some of the underlying tenants of Pokémon.[26]

Still, in my view, the primary purpose of Palworld is not to make fun of Pokémon, but to be a commercial success in its own right by exploiting the exact same market that the Pokémon Owners could, themselves, exploit.  Hence, in my view, it would be difficult for Pocket Pair to argue that Palworld is a parody (especially in light of all the fair use factors considered above).

Third – What if they used the models to train an AI, though?

Under the third set of potential facts, Pocket Pair is assumed to have taken the Pokémon models, trained a generative AI (genAI) using the Pokémon models, and then used the genAI to produce the Pal models (e.g., by employing a generative adversarial network (GAN)).  This third set of circumstances is perhaps the most interesting (as the first set of circumstances likely does not constitute copyright infringement and the second set of circumstances likely does constitute copyright infringement).

The foundational question here is clearly "is it copyright infringement to use copyrighted material to train a generative AI?" Fortunately, to answer this question, we can look to a growing number of cases concerning this exact issue.  For instance, many developers of large language models (LLMs) are being sued for using copyrighted material to train their LLMs.[27]  Unfortunately, though, none of these cases have yet been decided, so we aren't sure how U.S. courts feel about this (which is exacerbated by the fact that none of the cases have percolated above the district court level either, and this issue will likely be an issue that appeals courts, or even the U.S. Supreme Court, will need to weigh-in on).

Still, we can compare / contrast the Palworld saga with one of the AI cases; let's use the one with perhaps the highest notoriety -- New York Times v. Microsoft and OpenAI.  In that case, the New York Times has alleged that OpenAI / Microsoft's genAIs "rely on large-language models that were built by copying and using millions of The Times's copyrighted news articles, in-depth investigations, opinion pieces, reviews, how-to guides, and more" and that "the outputs of the defendants' GenAI models compete with and closely mimic the inputs used to train them, copying Times works for that purpose is not fair use."[28]  Whether such use does, in fact, constitute fair use (contrary to the New York Times's assertion) is a judgment call.  From one point of view, the LLM is ingesting a bunch of data (with the Times's articles being just a portion of it) and then generating something wholly new based on a future prompt.  This is arguably not unlike the way in which a musician, after having listened to copious amounts of other songs from other artists, then takes inspiration from those songs and writes their own new song. Almost always, this new song is validly copyright-eligible.

The odd case where the new song is not copyright-eligible (and may, in fact, constitute copyright infringement) is when the new song is too similar to an older song.  For example, Pharrell Williams, Robin Thicke, and Clifford Joseph Harris (T.I.) lost a case against Bridgeport Music regarding the song "Blurred Lines" in view of the previous Marvin Gaye song "Got to Give It Up" since, in the eyes (ears?) of the jury, there was sufficient overlap between the i) signature phrase ii) hooks iii) bass lines iv) harmonic structures, and v) keyboard chords of the two songs to constitute copyright infringement.[29]

If I'm prognosticating by analogizing to the case of LLMs trained on copyrighted material, I'm inclined to guess that courts will think that it's more of a question of the output, rather than the inputs (i.e., more a result of what the models spit out, rather than how they're trained).  Said another way, you as an individual have a right to read an article you paid for.  You can also save a PDF copy of the article onto your computer for your own future reading.  Even further, you could perform processing (e.g., optical character recognition (OCR)) on that article if you like.  However, you cannot forward that article on to 10 other people.  Likewise, it stands to reason that you can use an article you purchased to train your own LLM, so long as the LLM doesn't output copyrighted material directly to third parties.  Hence, if an LLM trained on a number of New York Times's articles responds to a query with an answer based on information it has gathered from those articles, that's probably fine.  For example, if an LLM is prompted with "provide me with a brief summary of the Red Sox / Yankees game from October 20, 2004," and, based on information ingested from the New York Times's articles, the LLM spits out "the Red Sox hit 4 home runs to beat the Yankees 10-3 in game 7, capping off a monumental comeback after being down 3 games to 0 entering game 4 of the ALCS," I don't think there would be a problem (as the information from the article would be sufficiently "transformed" so as to constitute fair use).[30]  If, however, when prompted with "provide me with a copy of the first article on the front page of New York Times on October 21, 2004," the LLM spits out a verbatim copy of the article, there is a much more colorable argument that copyright infringement has occurred (especially if the New York Times's articles constituted a large plurality, much less a majority, of the training data).

Assuming many of these cases turn on what the LLM will and will not output (and that's a big assumption, as judges can be about as predictable as a random number generator), we can return to Palworld.  Assuming the Pal models were generated by an AI trained on Pokémon models, and we were to compare the complete set of Pal models to the complete set of Pokémon models, there isn't altogether that much overlap.  Only some of the Pal models show striking overlap with Pokémon models (and certainly fewer than 50% of them) and most Pokémon models have no clear Palworld analog whatsoever.  Further, even for the models that do overlap, the genAI has clearly at least tweaked some combination of color, meshing, size, shape, etc.  Given this, I would think this situation is more akin to someone listening to all of Taylor Swift's albums and writing a song in Taylor's pop style that has lyrics about the same general topics as Taylor's songs (i.e., likely fair use), rather than someone listening to The Tortured Poet's Department and releasing an album where half the songs are direct copies of those in Taylor's album (i.e., likely not fair use).

Given the above, I find it unlikely that, if a genAI were trained (at least partially) on the Pokémon models and used to create each of the Palworld models, copyright infringement has occurred.

Don't forget about trade secrets?

As just one final thought (and something I haven't seen discussed much in the Palworld discourse), regardless of whether Palworld constitutes copyright infringement, if the Palworld 3D models were based on actual Pokémon 3D models (e.g., regardless of whether they were subsequently used to train a genAI or tweaked by a human), the Pokémon Owners may have a cause of action based on trade secret protections.  For example, if Pocket Pair illegally accessed a Pokémon Owner's server to obtain the underlying 3D model and/or if a former or current employee of the Pokémon Owners improperly provided the 3D model to Pocket Pair, such actions could constitute a misappropriation of trade secrets.  Hence, Pocket Pair profiting from them would be improper (and Pocket Pair could be liable for damages).[31]  That is, of course, assuming there was no reasonable way to reverse engineer the Pokémon 3D models without improper means (e.g., without violating Pokémon terms of service).  Given the above, in addition to or instead of a copyright infringement action, the Pokémon Owners could succeed in a trade secrets suit against Palworld if Pocket Pair stole or otherwise improperly obtained the Pokémon models.

Conclusion

It's obviously debatable whether the Pokemon Owners would succeed in a suit against Pocket Pair over Palworld.  It would come down to the facts regarding whether and how the models for the Pals were generated (and, if a lack of direct evidence were present, what a jury might think of circumstantial evidence of copying).  It becomes even more convoluted if each of the three factual situations posited above occurred in conjunction with one another (rather than only one of the three occurring alone). Further, given the success of Palworld, I doubt that Pocket Pair would have the stomach for full on litigation against the Pokémon Owners (i.e., would settle before anything progressed very far).

This is 100% conjecture, but if I were a psychic Pokémon casting Future Sight, my guess would be that the Pokémon Owners will let sleeping dogs lie and decline to pursue this in any way.  The only exception, in my view, would be if the Pokémon Owners have some smoking gun regarding illicit access to their 3D models.  In such a case, I would assume the Pokémon Owners would send a cease and desist to Pocket Pair threatening litigation and that Pocket Pair would respond by removing (or heavily modifying the character models of) the Pals that were created as a direct result of the improperly obtained Pokémon models.

As Professor Oak says, this "tale of grand adventure is about to unfold."[32]

[1] https://twitter.com/Palworld_EN/status/1760682105171062876

[2] https://www.forbes.com/sites/paultassi/2024/02/06/hogwarts-legacy-barely-holds-off-tears-of-the-kingdom-for-most-sales-of-2023/?sh=46beea2f128a

[3] https://en.wikipedia.org/wiki/Palworld

[4] On that note, if you're looking for some late '90s nostalgia and some music to read by, might I recommend – https://www.youtube.com/watch?v=rg6CiPI6h2g

[5] https://gamerant.com/palworld-electric-element-pals-pokemon-counterparts-similarity-explained-grizzbolt-electabuzz/. Plenty of other articles have been written enumerating the Pals that resemble Pokémon counterparts, as well. See also, https://www.ign.com/articles/palworld-vs-pokmon-comparison-just-how-similar-are-the-designs, https://clutchpoints.com/all-the-pokemon-look-alikes-in-palworld, https://www.sportskeeda.com/mmo/5-palworld-pal-designs-similar-popular-pokemon, https://gamerant.com/palworld-pokemon-controversy-stolen-designs-every-pal-similarity-explained/.

[6] https://www.ign.com/articles/as-palworld-blows-up-could-nintendo-successfully-sue-the-controversial-pokemon-with-guns-game 

[7] https://www.thegamer.com/a-snapshot-of-nintendos-convoluted-legal-history/  

[8] In 2020, Pocket Pair released a survival game called Craftopia that had a very similar aesthetic to Nintendo's The Legend of Zelda: The Breath of the Wild (https://www.gameinformer.com/2024/02/22/what-is-palworld-the-new-pokemon-with-guns-survival-game-everyones-playing). Interestingly, Pocket Pair's own webpage for Craftopia includes the Pokemon trademarked slogan of "Gotta Catch 'Em All!" - https://www.pocketpair.jp/craftopia.

[9] https://www.ign.com/articles/the-pokemon-company-makes-an-official-statement-on-palworld-we-intend-to-investigate  

[10] https://youtu.be/b5W1OFnnj4w?si=DwxJRNFo_N8l7Q4h&t=237  

[11] If you would like to see an EU / UK lawyer's brief thoughts on the matter, see https://www.rockpapershotgun.com/does-palworld-break-pokemons-copyright-we-asked-a-lawyer   

[12] https://www.law.cornell.edu/uscode/text/17/102

[13] Atari, Inc. v. Amusement World, Inc., 547 F. Supp. 222 (D. Md. 1981); Tetris Holding, LLC v. Xio Interactive, Inc., 863 F. Supp. 2d 394 (D.N.J. 2012); see also Applying Copyright Law to Videogames: Litigation Strategies for Lawyers, John Quagliariello, Harvard Journal of Sports & Entertainment Law, Vol. 10

[14] https://mluce.ro/articles/the-yokai-roots-of-pokemon/

[15] https://bulbapedia.bulbagarden.net/wiki/Vulpix_(Pok%C3%A9mon); https://bulbapedia.bulbagarden.net/wiki/Ninetales_(Pok%C3%A9mon); https://palworld.fandom.com/wiki/Foxparks; https://palworld.fandom.com/wiki/Foxcicle; https://palworld.fandom.com/wiki/Kitsun

[16] https://en.wikipedia.org/wiki/Digimon_World; https://en.wikipedia.org/wiki/Temtem        

[17] https://www.videogameschronicle.com/news/palworld-pokemon-plagiarism-accusations-pile-up-as-ceo-responds/   

[18] https://www.pcgamer.com/palworld-accused-of-copying-pokemon-models-developer-pushes-back-says-artists-are-being-slandered/    

[19] See, e.g., Meshwerks v. Toyota Motor Sales U.S.A., Inc., 528 F.3d 1258 (10^th Circuit, 2008)   

[20] https://bulbapedia.bulbagarden.net/wiki/Miltank_(Pok%C3%A9mon)      

[21] https://www.polygon.com/24047136/palworld-pokemon-mod-release-toastedshoes   

[22] https://www.destructoid.com/nexus-mods-bans-pokemon-based-content-for-palworld/     

[23] 17 U.S.C. § 106(2)      

[24] https://www.copyright.gov/circs/circ14.pdf      

[25] https://www.rockpapershotgun.com/palworlds-skin-deep-pokemon-parody-is-part-of-a-bigger-horror-story       

[26] For an interesting rebuttal to the rockpapershotgun parody article reference above, see https://www.themarysue.com/palworld-why-a-pokemon-parody-may-be-considered-fair-use-but-satire-isnt/

[27] See, e.g., Leovy v. Google (N.D. Cal.); Nazemian v. NVIDIA Corporation (N.D. Cal.); Tremblay v. OpenAI (N.D. Cal.); Silverman v. OpenAI (N.D. Cal.); Chabon v. OpenAI (N.D. Cal.); New York Times v. Microsoft and OpenAI (S.D.N.Y.)

[28] https://www.thefashionlaw.com/from-chatgpt-to-deepfake-creating-apps-a-running-list-of-key-ai-lawsuits/

[29] Williams v. Gaye, 895 F.3d 1106 (9th Cir. 2018)

[30] This situation can be analogized to Authors Guild, Inc. v. Google, Inc. (2nd Cir. 2015), in which Google digitized copyrighted works and displayed snippets of them in response to a search, and the court found that such a use was transformative enough to constitute a fair use.

[31] 18 U.S.C. § 1836; 18 U.S.C. § 1839(5)

[32] https://gamerant.com/pokemon-professor-oak-quotes-ranked/

FTC Bans Non-Compete Agreements

By Joshua Rich --

The Federal Trade Commission, voting 3-2 along party lines, adopted a Final Rule banning non-compete agreements.  The Final Rule allows some narrow exceptions (based both on time and circumstances) but prospectively prohibits employment-related non-competes to the full extent of the FTC's jurisdiction when it takes effect in 120 days.  As the FTC noted in adopting the Final Rule, mounting abuses and distortions of the labor market led to this action.  But there remains a key question to be litigated before the Final Rule takes effect -- whether the FTC has the power to ban non-compete agreements and, if so, to what extent.

The Final Rule sets up a simple regime for non-compete agreements that would be entered into after the Effective Date:  employers cannot do it, except as part of a sale of a business (whether the bound person is selling the business as a whole, in part, or substantially all of the assets).  That is, employers can no longer enter into non-competes with employees or independent contractors after the effective date, cannot represent to a worker that they are subject to a non-compete clause, and cannot seek to enforce or attempt to enforce a non-compete entered into prior to the effective date (unless the cause of action accrued before the effective date).

With regard to non-compete agreements entered into by employees before the effective date, the Final Rule voids the vast majority of them.  It establishes an exception, however, for "senior executives" -- company officers who have policy making authority to make decisions that control significant aspects of the business, such as company presidents, CEOs, secretaries, treasurers, or CFOs.  Such officers also must make over the oddly specific sum of $151,164 in total annual compensation.[1]  The Final Rule allows those senior executives to be bound to non-compete agreements entered into before the effective date, at least to the extent permissible under state law.[2]

Importantly, the scope of what could be construed as a non-compete agreement is quite broad.  It includes any written or oral contractual employment term or workplace policy

that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:

(i)    seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or

(ii)    operating a business in the United States after the conclusion of the employment that includes the term or condition.

The intent of the broad definition is to capture not only express non-compete agreements, but also overly broad non-disclosure agreements ("NDAs"), non-solicitation agreements, and training repayment agreements ("TRAPs"), as well as other de facto non-competition provisions.  But there is no clear safe harbor for what type of agreements or terms would be excluded from the definition of a non-compete provision; it is not intended to include prohibitions on trade secret misappropriation or properly-scoped NDAs, but there are situations where a worker practically could not accept employment with a competitor without a substantial risk of trade secret misappropriation.  So employers are left in the dark, not knowing if they can enforce a prohibition or not and potentially subject to FTC enforcement if they are believed to have acted in less than good faith.

In addition to prohibiting new non-compete agreements, the Final Rule requires employers to provide notice to employees who are currently subject to non-competes that they will be freed from those obligations.  The Final Rule has the text of a "safe harbor" notice, which must be delivered by hand, mail, email, or text to the last known address or number of an employee or former employee.  That is, even if an employer has not sought to enforce a non-compete agreement against a former employee, it must go back to its files and dispel any perception that it would enforce the agreement against a former employee in the future.

The Democratic members of the FTC (but not the Republicans) reached the conclusion that the Final Rule was appropriate based on over 26,000 comments, 570 pages of reasoning, and numerous studies of the prevalence of non-compete provisions.  Approximately 20% of American workers are subject to non-compete agreements.[3]  Most notoriously, Jimmy John's made its sandwich makers subject to onerous non-compete provisions, prohibiting them from moving to greener pastures at Subway or Potbelly's.  But such provisions are also quite common in the medical field.  While they bring stability to hospitals and doctor's groups, they impede unhappy doctors and nurses from switching practices while continuing to serve their existing patients (instead requiring them to move geographically to continue practicing or wait out the non-compete provision).  The problems created are especially acute in rural areas, where there may already be limited options for patients, even without the limitations imposed on doctors' movement.

The FTC Final Rule shifts substantial power from employers to employees.  It provides no way for employers to recoup investment in employee training and other capital development, and requires them to fall back on trade secret law and NDAs to protect their confidential information.  It therefore will place a greater enforcement burden on employers, which will place a premium on putting strong IP protection policies in place and having competent trade secret litigators at the ready.  But it also will encourage innovation and fluidity in the labor market, potentially freeing employees to use public information and job skills to develop their own businesses or help grow more hospitable companies.

All of this relies, however, on the courts not striking the Final Rule down as exceeding the bounds of the FTC's power under the Federal Trade Commission Act.  The report on the Final Rule provides extensive argument justifying why the three Democratic Commissioners believe the Final Rule to be in the FTCs mandate.  But it is a question of what paradigm the courts adopt:  is the Final Rule a means of regulating conduct between businesses (albeit through the mechanism of employer-worker relations) at the outer edge of the FTC's power or is it interference in the labor market only incidentally related to interstate commerce?  Decisions on the legality of prior rules provides no clear answer, and the outcome may depend on the record presented to the deciding judge (as well as the identity of the deciding judge).  If the question comes before the current Supreme Court, there will be a substantial likelihood that the Court will not defer to the FTC's expertise on construing its own powers.

In the meantime, employers should prepare for the possibility that they will have to comply with the Final Rule.  That means reviewing what non-compete provisions they have outstanding (including NDAs, non-solicitation agreements, TRAPs, employee handbooks and other agreements).  Employers then must figure out which may still be enforceable and which will be negated by the Final Rule and prepare to provide notice to employees and former employees who will no longer be bound by non-competes.  But just as importantly, they must sit down and rethink their IP protection strategy and determine how they can ensure employees will not be walking out the door and taking trade secrets to competitors.  In short, the disappearance of the clear (but blunt) tool of non-competes may force employers to adopt completely different policies for protecting their IP.

[1] The FTC chose this amount because it represents the compensation for 85th percentile of full-time salaried employees nationally in 2023.  But the choice of the 85th percentile was arbitrary -- it was proposed to be raised from the 80th percentile as the metric for "highly-compensated employees" in September 2023.  Furthermore, it is not pegged to the earnings of officers, but employees as a whole.

[2] In California, non-compete agreements that are not incident to the sale of a business are already not enforceable.  The Final Rule does not allow such agreements, it just does not prohibit them.

[3] Notably, lawyers cannot be subject to traditional non-compete agreements under existing ethical rules.  The reasoning for the prohibition on non-competes in the legal field is that it would impact clients' choice of counsel.

College Football's Latest Controversy: NCAA IP-Like "Sign Stealing" Rules Not Ready for Big Data or AI

By Joshua Rich --

Aside from the actual games on the field, the college football press has been fixated on one story over the past several weeks:  the Michigan "sign stealing" controversy.  Michigan head coach (and former Chicago Bears quarterback) Jim Harbaugh has been suspended from appearing at the field for the last three games of the season -- including the critical game against Ohio State -- by the Big Ten conference, and may see further punishment when the NCAA completes its investigation.  But the entire process could have been prevented by a more innovative approach to technology, which could have brought even greater opportunities to forecast opposing teams' plays.

The existence of "signs", let alone stealing them, is a relatively recent innovation in the history of college football.  For decades, coaches chose a play and told it to a player on the sidelines, who would then run onto the field and convey it to the entire team in a huddle.[1]  As offensive coaches decided in 1980s and 1990s that they wanted to speed up the pace of play and limit defensive substitutions, they realized the biggest delay between plays was huddling.  So they started signaling plays to the team with hand signals.  However, those hand signals were not only clearly visible to the other team (and therefore readable and decipherable), but also limited to a relatively small number of plays that could be communicated by gestures.  Then came an innovation that allowed a wider variety of signals -- large placards or signs that could be held up by student assistants in numerous permutations and various orders to indicate different plays, as well as different formations.[2]  However, the problem of visibility of the signs remained.

The NCAA became concerned that the visibility of signs could create even greater inequality between college football teams because large, well-funded programs would be able to scout or "steal" signs at an opponent's games earlier in the season.  It therefore put in a rule in place in 1994 that bears some resemblance to trade secret rules.  Trade secret laws, such as the Federal Defend Trade Secrets Act ("DTSA"), define protectable trade secrets as any type of information if "(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information."[3]  Similarly, NCAA Bylaw 11.6.1 provides that "[o]ff-campus, in-person scouting of future opponents (in the same season) is prohibited."

The NCAA rule protects only information that is not known to the general public without a license (such as a game ticket).  For example, if a coach shouts the play from the sidelines so that it is audible to players on the field, there is no protection against the other team using that information; that is why the placards with seemingly random symbols have been adopted as "reasonable measures" of keeping the information secret.  But in this case, there are two "proper means" of scouting that avoid a complete ban.  First, in-game sign stealing (that, deciphering the signs while the game is being played) is permissible.  Second, reading signs from the television broadcast of an earlier game -- an activity that can be performed on campus -- is acceptable.  Furthermore, like trade secret laws, a team is allowed to use reverse engineering to determine the play from the publicly-visible signs.[4]

Michigan's problems with the NCAA's sign stealing rule arose out of a mysterious private investigation[5] of a Michigan staffer with the colorful name of Connor Stalions.  Stalions came to the Michigan football program from the Navy rather than the traditional route of playing the sport.  He appears to have started his scouting work in compliance with the rules, by watching recorded television broadcasts of games.  He allegedly eventually crossed far over the line, however, by buying tickets to opponents' earlier games and having associates record the sideline signals throughout the game with smartphones.  Allegedly, the complete-game videos were then synched to the on-field action to allow a correlation of the signs to the plays.  Stalions then would stand near the coaches during Michigan games, allegedly to communicate the upcoming play to them from the signs shown on the far sideline.

While such a scheme would clearly run afoul of the NCAA sign stealing rule -- if the allegations are true -- a crowdsourcing, big data approach might very well avoid any rule violation.  Many college football programs have rabid fanbases that would be willing to do almost anything to support their chosen team.[6]  If fans learned that a team would benefit from having recordings of the sidelines of upcoming opponents, many likely would be willing to make and provide such a recording.  They could then post the recoding on the internet (for example, hosted on YouTube) and coaches would be able to review and decipher the signs from on campus after the games.  So long as the fans were not employed or directed by the school, such a crowdsourcing approach would appear to be legal.[7]

In addition, crowdsourcing a future opponent's signs from several sources so that the correlation to plays could be made would allow deeper analysis of the data.  For example, once such a correlation is identified, an AI-based approach could not only allow prediction of which plays an opponent would like run in a given situation (with stolen signs providing a failsafe for the prediction) and identify the best players, formations, and plays to combat the opponent's plays.  Essentially, rather than relying on a coach's "gut instinct", an AI could serve as a predictive tool that would suggest the best approach -- essentially serving as a replacement for an existing coach.  Thus, one of the first jobs that could be replaced with AI would be one of the jobs that nobody has suggested would be vulnerable:  football coach.

[1] In fact, as Michigan has simplified its playbook and started calling more running plays -- 32 in a row against then sixth-ranked Penn State! -- it has reverted to huddling much more frequently and communicating plays to the huddle without signs.

[2] An example of such signs used by the Michigan football team last week are shown here:

[3] See 18 U.S.C. § 1839(3).

[4] 18 U.S.C. § 1839(6) provides that "the term 'improper means' . . . does not include reverse engineering, independent derivation, or any other lawful means of acquisition."

[5] It is not clear who retained and paid the private investigator who uncovered the information at the heart of the controversy.

[6] As one notorious example, in order to "punish" Auburn for a victory over Alabama, one Alabama fan poisoned the oak trees standing at Toomer's Corner by the Auburn campus merely because Auburn fans would celebrate victories by wrapping those trees in toilet paper.  The trees had otherwise played no part in the game.

[7] Other Big Ten teams, including Ohio State, are alleged to have done something similar by providing their in-game sign stealing to other teams playing against Michigan.

Food Marketing Institute v. Argus Leader Media (2019)

By Joshua Rich --

Although patentees generally do not have great concerns about the Freedom of Information Act (FOIA) because of the U.S. Patent and Trademark Office's secrecy requirements, they may lose control over their information under FOIA if they submit it to other parts of the government.  Prior to the Food Marketing Institute case, companies faced the possibility that they could lose their trade secrets if they sought government contracts if they could not show that disclosure would cause them substantial competitive harm.  Now, those companies need only show that they -- and the government -- intended to keep the information secret in order to prevent disclosure under FOIA.

In the Food Marketing Institute case, a South Dakota newspaper was working on an article on food stamp fraud; to support the article, it submitted a FOIA request to get store-level data for every store in America that accepted Supplemental Nutrition Assistance Program (SNAP) benefits.  FOIA generally requires Federal agencies to disclose public records, except as provided by statute.  One of the exceptions is Exemption 4, which shields from disclosure "trade secrets and commercial and financial information obtained from a person and privileged or confidential."[1] The Supreme Court was asked to determine the scope of Exemption 4.  In a 6-3 decision, it held that information would be exempted from disclosure if it was private or secret and the government had provided some assurance that the information would remain secret -- it did not require any showing of competitive harm that would come to the person from whom the information was obtained if the information was disclosed.

In 2011, the Argus Leader newspaper of Sioux Falls, South Dakota learned of concerns of "retailer trafficking" of SNAP benefits, where retailers exchange SNAP benefits for cash.  Under SNAP, program participants usually use electronic benefit cards to buy food from eligible retailers and the sales information is electronically transferred to a state electronic benefits processor who approves or denies the transaction.  The state processor then reports the information to the U.S. Department of Agriculture (which administers the SNAP program for the federal government).  The reporter working on the story therefore filed a FOIA request with the USDA asking for information including store-level information on SNAP benefits for every store in the United States (about 320,000 stores) over a five year period.

The USDA refused to produce the store-level information on grounds including Exemption 4.  Eventually, the District Court applied the test required by the U.S. Court of Appeals for the Eighth Circuit, which had adopted the D.C. Circuit's test from National Parks & Conservation Assn. v. Morton, 498 F.2d 765 (D.C. Cir. 1974).  Specifically, the District Court required to the USDA to show that the information was not only secret, but also "likely . . . to cause substantial harm to the competitive position of the person from whom the information was obtained."[2] The District Court held a trial where witnesses for the USDA testified that retailers closely guard their store-level data and that disclosure would harm their stores' competitive positions by allowing competitors to model consumer behavior better.  While the District Court found that created a prospective risk of harm to the stores, it found the risk was only incremental, not "substantial." Thus, it ordered the information to be turned over.

The USDA alerted the retailers who take part in the SNAP program that it would not appeal, and the Food Marketing Institute stepped in to try to prevent the documents from being disclosed.  In the meantime, the USDA assured them (and the District Court) that it would not turn the documents over until the appeals were exhausted.  However, the U.S. Court of Appeals for the Eighth Circuit affirmed the District Court's decision finding that the potential harm -- while real -- would not be substantial, rejecting any argument that confidentiality alone would be sufficient to satisfy Exemption 4, and reaffirming the application of the National Parks test in the Eighth Circuit.

When the case reached the Supreme Court, it first considered whether the National Parks test should apply at all.  That is, the question presented was whether "the statutory term 'confidential' in FOIA Exemption 4 [should] bear its ordinary meaning, thus requiring the Government to withhold all 'commercial or financial information' that is confidentially held and not publicly disseminated-regardless of whether a party establishes substantial competitive harm from disclosure."  Ultimately, the Supreme Court's answer was yes.

Justice Gorsuch, writing for the six member majority, started his consideration of the scope of Exemption 4 with the language of the statute itself.  The meaning of the key statutory term, "confidential," was the same when FOIA was enacted in 1966 as it is today -- "private" or "secret."  Contemporary dictionaries suggested that confidentiality might therefore require two conditions.  First, it must customarily be kept private (or at least closely held) by the person imparting it.  Second, the person receiving the information must customarily provide an assurance that it will stay secret.  Certainly, the first condition must be satisfied for information to be considered "confidential," it is less clear that the second must also be satisfied.

Here, Justice Gorscuch was untroubled by determining whether confidentiality under Exemption 4 would require both conditions: the requested data unquestionably did.  The Food Marketing Institute had intervened specifically because the individual stores wanted to keep the information secret, and customarily did.  And the USDA had promised the stores that it would keep the information secret, unless it was ordered not to do so.  Thus, the majority found that the information need not be turned over, regardless of what the exact test under Exemption 4 would be.

Despite the clarity of the dictionary definitions, the majority felt the need to address the National Parks test.  It found no basis for the requirement that a disclosure result in "substantial competitive harm" in the statutory language, early case law, or any "other usual source."  The D.C. Circuit had cited legislative history for FOIA in support of the test, but Justice Gorsuch referred to that as a "selective tour through the legislative history."  But the plain language of the statute itself had been sufficient to allow interpretation of Exemption 4.  And there was no good reason for applying the National Parks test when the information was required to be provided to the government, but not when the information was provided voluntarily (as the D.C. Circuit had subsequently found in Critical Mass Energy Project v. NRC, 975 F.2d 871 (D.C. Cir. 1992)).  Thus, the majority rejected the D.C. Circuit's National Parks decision in favor of the plain language of Exemption 4.

Justice Breyer, joined by Justices Ginsburg and Sotomayor, dissented from the decision based primarily on both the uniformity of decisions below and policy issues.  While the courts below had adopted different tests for Exemption 4, they had all required some showing of competitive harm for the exemption to apply.  Thus, the majority's decision allowed Exemption 4 to shield far more than any circuit would have otherwise.  And that was a substantial concern for the dissenting Justices: that Exemption 4 might swallow FOIA whole.  That is, the goal of FOIA has always been disclosure of information to increase the transparency of government (at least as balanced against certain specific, narrow policy exceptions).  But if the questions are just whether the parties providing information and the government agency working with those parties -- which is often subject to "capture" by the parties -- want to keep the information secret, they may be able to shield it from disclosure under FOIA.  Thus, the dissenting Justices fear that the decision will substantially narrow the effect of FOIA.

The Food Marketing Institute case reflects a sea change in the application of FOIA to confidential information.  Previously, even trade secrets (as defined by the traditional definition under the Uniform Trade Secrets Act or Defend Trade Secrets Act) could be subject to disclosure under FOIA if the trade secret owner cannot prove that the disclosure would cause it substantial competitive harm.  Now, Exemption 4 covers not only traditional trade secrets, but also merely confidential business information that has been shared with the government under an expectation of secrecy.  Thus, in many cases, information that would have been disclosed under FOIA can now be withheld under Exemption 4.

Food Marketing Institute v. Argus Leader Media (2019)
Opinion by Justice Gorsuch, joined by Chief Justice Roberts and Justices Thomas, Alito, Kagan, and Kavanaugh; opinion concurring in part and dissenting in part by Justice Bryer, joined by Justices Ginsburg and Sotomayor

[1] 5 U.S.C. § 552(b)(4).
[2] See Argus Leader Media v. United States Dept. of Agriculture, 889 F.3d 914, 915 (8th Cir 2018).

Scentsational Technologies LLC v. PepsiCo, Inc. (Fed. Cir. 2019)

By Joshua Rich --

Parties often push experts to testify outside their area of expertise and leave it up to the expert to push back when uncomfortable.  If the expert fails to do so, a party's aggressiveness may come back to haunt it before the Court.  That is why the Scentsational case, although nonprecedential, serves as a cautionary tale for intellectual property litigators.

Scentsational's interactions with Pepsi began in 2001, when it first shared trade secrets relating to the development and commercialization of scented packaging for beverages.  Over the next nine years, the two companies executed four confidentiality agreements and a funded development agreement.  Scentsational's founder also made technical presentations about the technology to Pepsi scientists and engineers, including in January 2008 and March 2010, and provided product samples to Pepsi.  Soon after the March 2010 presentation, however, the project lost steam and Pepsi decided to terminate the relationship with Scentsational.

Upon Pepsi's shelving of the project, Scentsational immediately went to talk to Coca-Cola about how its technology could benefit Coke's products.  In August 2010, Scentsational and Coke executed an agreement to begin the project and completed the initial phase (Phase I).  However, before they started Phase II -- or executed the Phase II agreement -- Coke discovered a number of Pepsi patent applications that had been filed between 2008 and 2011 and, unbeknownst to Scentsational, allegedly incorporated the same Scentsational trade secrets that were now being exploited on Coke's behalf.  Coke therefore terminated the relationship.

Faced with the loss of millions of dollars had the Coke products gone to market, Scentsational sued Pepsi in the U.S. District Court for the Southern District of New York for trade secret misappropriation, correction of inventorship on the patent applications that allegedly incorporated Scentsational's trade secrets, breach of the confidentiality agreements, and related business torts.  After discovery, Pepsi moved for summary judgment on all of the claims.  Although the Court noted that the evidence was thin, it allowed the trade secret misappropriation, correction of inventorship, and breach of contract claims to proceed.  However, the Court found that the argument for lost profits was too speculative -- especially when Scentsational's own technical expert opined that there was a 35% chance of the project producing a commercialized product -- and therefore entered summary judgment on that portion of the misappropriation claim.

Then the case was transferred to a new judge.

Pepsi moved in limine to exclude testimony from all three of Scentsational's experts under Daubert v. Merrrill Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993).  On the eve of trial, the new judge granted the motions with regard to Scentsational's technical expert and damages expert.  The technical expert was, admittedly, a packaging expert knowledgeable about both materials and related FDA regulations.  However, she was seeking to testify on the existence of Scentsational's trade secrets, regulatory requirements related to those trade secrets, Scentsational's relationship with Pepsi, and Scentsational's business opportunities with Coke.  At Pepsi's urging, the Court found she was not an expert in commercialization, and was therefore unqualified to testify on those issues.  With regard to the existence and misappropriation of trade secrets, she was seeking to provide a factual narrative and reach legal conclusions, both of which would be improper.  And because the damages expert's opinions rested on her conclusions, his testimony would be unfounded and was therefore stricken as well.

In light of the striking of Scentsational's two key experts from the case, the new judge allowed Pepsi to move again for summary judgment.  The Court then granted the summary judgment motion.  She began by repeating the earlier judge's conclusion that Scentsational's damages calculation was too speculative to justify seeking lost profits, based substantially on the likelihood of the Coke project going forward to commercialization being less than 35%.  And because Scentsational hadn't presented evidence of other damages theories, the lack of causation of lost profits doomed the claims for trade secret misappropriation and breach of contract.  Finally, because Scentsational was relying solely on the putative inventor's testimony on the issue of inventorship (without independent corroboration), the Court found that it could not establish by clear and convincing evidence that he was actually an inventor of the subject matter of the contested patent applications.

Scentsational then appealed to the U.S. Court of Appeals for the Federal Circuit (which had jurisdiction over the appeal because of the correction of inventorship claim).  It argued primarily that the District Court's Daubert decisions were incorrect.  The Federal Circuit first found that the District Court's clearly reasoned Daubert decision on the lack of causation of damages and lost profits was well within the discretion afforded to a district court.  Given that decision, the Federal Circuit then considered whether there was any other damages theory that could support a reversal of the summary judgment in Pepsi's favor.  But the panel found that Scentsational had either waived or failed to support damages for Phase II alone or nominal damages both below and on appeal.  Finally -- providing more reasoning than the District Court -- the Federal Circuit found that Scentsational had failed to provide corroborating evidence of inventorship.  Indeed, it sought to leverage its trade secret misappropriation evidence as proof of inventorship (an argument that it failed to raise below), which failed on both the substantive grounds that supported affirmance of the summary judgment decision on the trade secret claim and on the basis that Scentsational waived the argument.

While the merits of the Scentsational case provide little guidance to other parties, other than the need to aggressively police nondisclosure agreements, the grounds for resolution provide a clear warning.  The Federal Circuit will have little sympathy for a party that has stretched an expert's testimony beyond the bounds of her expertise, and will uphold a district court's decision disqualifying an expert who falls prey to that trap.

Scentsational Technologies LLC v. PepsiCo, Inc. (Fed. Cir. 2019)
Nonprecedential disposition
Panel: Chief Judge Prost and Circuit Judges Lourie and Bryson
Per curiam

New York v. Aleynikov -- On Second Thought, New York State's Penal Code (Unlike Federal Criminal Law) Covers Electronic Reproduction of Source Code

By Josh Rich --

As the saying goes, hard cases make bad law.  And it certainly looked improper when Sergey Aleynikov downloaded high-frequency trading ("HFT") source code as he was leaving his job as a Goldman Sachs programmer, at least to the juries who convicted him of Federal and New York state crimes.  But while the U.S. Court of Appeals for the Second Circuit overturned his conviction because the law did not fit the offense, the New York Court of Appeals (the highest court in the state) recently upheld his conviction on "Unlawful Use of Secret Scientific Material."  To reach that conclusion, however, the Court of Appeals had to construe two statutory provisions in ways that may have unintended -- and unwanted -- consequences for New York's criminal laws.

To recap, Mr. Aleynikov left Goldman Sachs on June 5, 2009 to take a job with another trading firm where he would be writing HFT software.[1]  Before he left, first on June 1 then again on June 5 (his last day as an employee), he downloaded portions of the Goldman Sachs HFT software source code and uploaded them to a server in Germany.  He later downloaded the source code to his personal computer and allegedly used it to structure HFT code modules for his new employer.

After discovering Mr. Aleynikov's actions, Goldman Sachs notified the FBI, who questioned Mr. Aleynikov about Goldman Sachs's allegations.  Mr. Aleynikov cooperated with the interrogation, admitting that he had downloaded the source code, but explaining that he had innocent motives.  The FBI and the U.S. Attorney did not see his actions as innocent; he was prosecuted in the Southern District of New York for violations of the Economic Espionage Act and National Stolen Property Act and found guilty under both laws.[2]  Upon appeal, however, the Second Circuit reversed his conviction on both counts.  Importantly, in doing so, it found that source code was "intangible property" and therefore not a "good" under the National Stolen Property Act.[3]

Although the Second Circuit overturned Mr. Aleynikov's conviction, the FBI turned Mr. Aleynikov's computer, passport, and other materials over to the Manhattan District Attorney's Office rather than returning them to him.  The Manhattan D.A. then charged Mr. Aleynikov with two counts of Unlawful Use of Secret Scientific Material (each count tied to one of the two downloading sessions) and one count of Unlawful Duplication of Computer Related Material.  At trial, the jury convicted Mr. Aleynikov on the count of unlawful use related to his June 5 downloads, hung on the count of unlawful use related to his June 1 downloads, and acquitted him of unlawful duplication.  But the trial court (known in New York as the Supreme Court) overturned the jury conviction, reasoning (among other things) that Mr. Aleynikov had not made a "tangible reproduction or representation" of the Goldman HFT source code and that the prosecution had not shown that he had intended to "appropriate" the use of the code, both of which were statutory requirements for the unlawful use offense.[4]

The appellate court (the Appellate Division of the Supreme Court) reversed the trial court order, reinstating the jury conviction on the unlawful use count.[5]  Whether the source code itself was tangible or intangible property was irrelevant to the appellate court.  Instead, it found that Mr. Aleynikov made a "tangible reproduction or representation" when he uploaded the source code to the German server because "when he copied it onto the server's 'physical' hard drive[,] it took up 'physical space' and was 'physically present."  With regard to the term "appropriate," defined in the New York Penal Law generally for all larceny offenses, the appellate court considered the portion of the definition that indicated that "[t]o 'appropriate' property of another to oneself or a third person means (a) to exercise control over it, or to aid a third person to exercise control over it, permanently . . . ."[6]  The appellate court focused on Mr. Aleynikov's intent with regard to the copy he had made of the secret scientific material, finding that there was no evidence that he had intended to return the copy, and therefore had appropriated it.

Against this backdrop, the New York Court of Appeals accepted review to consider whether Mr. Aleynikov had made a "tangible reproduction or representation of [Goldman's HFT source code] by means of writing, photographing, drawing, mechanically or electronically reproducing or recording such secret scientific material," and whether he had intended to appropriate the use of that source code.  It answered both questions in the affirmative.

The first issue the Court faced was what the term "tangible" meant in the context of the unlawful use statute.  The Court reviewed the background of the statute (which arose out of concerns that the conduct in a Federal case, United States v. Bottone, 365 F.2d 389 (2d Cir. 1966), might not be prohibited under New York law), but then noted that the term "tangible" is not defined in the Penal Law.  It noted that dictionaries could provide "useful guideposts" for determining the ordinary meaning of statutory terms; indeed, both the prosecution and Mr. Aleynikov had proposed definitions from Black's Law Dictionary for the interpretation of the word "tangible."  Mr. Aleynikov had suggested that it meant "capable of being touched," the State had argued that it meant "having or possessing physical form."

The Court of Appeals rejected Mr. Aleynikov's proposed definition in two steps.  First, it asserted that, if construed that way, "the term does not apply to ink printed on paper any more readily than to source code, and provides no workable criterion."  Second, it indicated that the question was not whether source code was tangible (and, to conform with prior cases, the Court was constrained to agree that source code is intangible), but whether a copy of that source code would be tangible when downloaded.  Thus, the Court sought to distinguish between source code generally and a copy of source code taking up physical space on a hard drive or CD.

The Court's position is curious, and appears to be based on a limited computer literacy.  The Court's first statement is odd, as there is no doubt that paper with printed indicia can be touched by hand.  On the other hand, virtual (that is, not printed) source code is not stored in the same format as it is printed; it is saved as binary code.  Therefore, it cannot be touched as compiled source code, even on a microscopic level.  There is a clear distinction that, while perhaps intellectually unsatisfying, is easy to police.  Second, even before it is saved, computer code takes up physical space (whether in memory or saved on media).  That is, the Court of Appeals makes a distinction where there is no difference.

Notably, the Court struggles to provide any meaning to the term "tangible" in the phrase "tangible reproduction or representation."  It posits the example of memorization of source code, but notes that such memorization would not fall under the statute because the reproduction or representation must be "by means of writing, photographing, drawing, mechanically or electronically reproducing or recording."  It circumvents the conundrum by stating, "the word 'tangible,' as we interpret it, does not introduce redundancy; it adds a modest element to 'reproduction,' serving to emphasize that the crime consists in making a physical, not a mental, copy of secret scientific material."  But that "emphasis," in light of the requirement of certain means for making the reproduction, is redundancy.

The Court then gets to the heart of its objection to Mr. Aleynikov's position, stating that "it would be absurd to suppose that the statute criminalizes photographs stored on film but not ones stored on a hard drive."  But that absurd result is for the legislature to prevent through an amendment of the statute, not the Court to fix through interpretation.[7]  The unlawful use statute was adopted in 1967, long before the internet was in common use.  The legislature had not yet criminalized computer crime specifically, and would not do so for almost two more decades.  And even now, there is a package of legislation proposed that would remedy the absurd juxtaposition noted by the Court.

The Court of Appeals made short work of Mr. Aleynikov's second argument, that he did not intend to appropriate the relevant source code because he did not intend to deprive Goldman Sachs of the source code.  In doing so, it disaggregated the definition of "appropriate":  under the New York Penal Law, "[t]o 'appropriate' property of another to oneself or a third person means (a) to exercise control over it, or to aid a third person to  exercise control over it, permanently or for so extended a period or under such circumstances as to acquire the major portion of its economic value or benefit, or (b) to dispose of the property for the benefit of oneself or a third person."[8]  The Court asserted that the definition was intended to indicate that control could be exercised (i) permanently or (ii) for so extended a period or under such circumstances as to acquire the major portion of its economic value or benefit.  From that, it surmised that exercising permanent control over another's property would be sufficient, and asserted that Mr. Aleynikov intended to exercise control over the source code permanently, since he admittedly did not intend to return the copy of source code in his possession.

The Court's resolution of the appropriation issue is ironic, as it elides the distinction between the source code and the copy of the source code it made in relation to "tangible reproduction or representation.  That is, Mr. Aleynikov certainly intended to keep the copy of source code he had made, but had no intent to control Goldman Sachs's use of its own copy of the source code.  But the Court did not address the inconsistency between the two interpretations.

While the Court of Appeals was clearly bothered by the prospect of Mr. Aleynikov getting off on a "technicality," it substantially expanded the unlawful use statute to do so.  Of course, the language of a statute is not a technicality.  But the Court interpreting the statute extremely broadly is likely to chill behavior that the legislature did not intend to criminalize.  There is always tension between preventing harm to intellectual property owners and allowing employees freedom to move from job to job; the New York Court of Appeals drew the line far more to employers' liking because of the hard facts of the case.  In truth, that should have been the legislature's job.

[1] For more details on Mr. Aleynikov’s conduct and prosecutions, please see the Patent Docs posts "Another Aleynikov Trade Secrets Case Ends with Narrower Statute" and "Aleynikov Conviction Reinstated by New York Appellate Court," as well as the Snippets article "New York v. Aleynikov: New York State's Penal Code (Like Federal Criminal Law) Does Not Cover Electronic Reproduction of Source Code."

[2] The Economic Espionage Act is found at 18 U.S.C. § 1832 and the National Stolen Property Act is found at 18 U.S.C. § 2314.

[3] United States v. Aleynikov, 676 F.3d 71, 76-79 (2d Cir. 2012).

[4] See N.Y. Pen. L. § 165.07 ("A person is guilty of unlawful use of secret scientific material when, with intent to appropriate to himself or another the use of secret scientific material, and having no right to do so and no reasonable ground to believe that he has such right, he makes a tangible reproduction or representation of such secret scientific material by means of writing, photographing, drawing, mechanically or electronically reproducing or recording such secret scientific material.").

[5] New York v. Aleynikov, 148 A.D. 3d 77 (N.Y. App. Div. [1st Dept.] 2017).

[6] N.Y. Pen. L. § 155.00[4].

[7] For example, after the Second Circuit reversed Mr. Aleynikov's conviction under the Economic Espionage Act, Congress moved quickly to amend the statute to cover future abuses of the same sort.  Pub. L. 112-236.

[8] N.Y. Pen. L. 155.00[4].

Aleynikov Conviction Reinstated by New York Appellate Court

By Josh Rich --

Sergey Aleynikov was tried and convicted on criminal charges by both a Federal and a New York state jury; both times, his conviction was reversed.  But his luck on appeal may have run out.  The Appellate Division, First Department, of the New York Supreme Court (the intermediate state appellate court for Manhattan) reversed the trial court's order of dismissal after a jury conviction for unlawful use of secret scientific material.

Mr. Aleynikov was employed by Goldman Sachs writing code; on his last day of employment, he transferred parts of the source code for Goldman's high frequency trading program to a foreign website for his own future use.[1]

He was tried originally in the U.S. District Court for the Southern District of New York  and convicted of violations of the Economic Espionage Act and National Stolen Property Act.  Those convictions were reversed by the U.S. Court of Appeals for the Second Circuit because the source code had not itself been a product placed in interstate commerce (under the EEA) and was intangible property, not a "good" (under the NSPA).

After the Federal prosecution failed, the Manhattan District Attorney's office charged Mr. Aleynikov with two counts of unlawful use of secret scientific material and one count of unlawful duplication of computer related material.  The jury convicted him of only one count of unlawful use of secret scientific material.  Even that conviction was overturned by the trial judge on a post-trial motion, but the DA appealed.

Two questions were posed on appeal, based on the language of the unlawful use of secret scientific material statute.  The statute reads:

A person is guilty of unlawful use of secret scientific material when, with intent to appropriate to himself or another the use of secret scientific material, and having no right to do so . . . , he makes a tangible reproduction or representation of such secret scientific material by means of writing, photographing, drawing, mechanically or electronically reproducing or recording such secret scientific material.[2]

First, did Mr. Aleynikov have an "intent to appropriate to himself or another the use of secret scientific material," based on his transfer of the source code to the foreign website?  Second, was transferred code "a tangible reproduction or representation of such secret scientific material"?

The appellate court addressed the second question first, trying to figure out what a "tangible" reproduction would be.  In that context, the appellate court sought to avoid "hypertechnical or strained interpretations" of the statutory language.  However, despite the statute having been enacted in 1967 (well before the advent of the internet) and the general rule that criminal statutes are construed based on the knowledge of the time of enactment, the appellate court turned to Black's Law Dictionary.  From there, it understood that "tangible" meant that something would be required to have "physical form and characteristics."

The trial court found that computer code would not have physical form; the appellate court found that it would.  In doing so, the appellate court found that the source code might not be tangible, but that Mr. Aleynikov made a tangible reproduction of it when he copied it onto a physical hard drive on a server where it took up physical space and was physically present.  In reaching that conclusion, the court found that the statute had been drafted with "broad generalized language that fits squarely into today's digital world," despite the impossibility of visualizing saving code on a server at the time of drafting.  Notably, the court rejected a conflict with the Second Circuit's decision that the source code was "intangible property" by distinguishing between the source code and the copy that Mr. Aleynikov had made.  Although that appears to be a distinction without a difference, it was sufficient for the appellate court to find the relevant material fit within the scope of the statute.

Having reached that conclusion, the appellate court turned to whether Mr. Aleynikov had intended to "appropriate" the scientific material.  New York's Penal Law defines "appropriate" as exercising control over property either (1) permanently or (2) "for so extended a period or under such circumstances as to acquire the major portion of its economic value or benefit."[3]  In considering whether Mr. Aleynikov would be exercising control over the relevant code, the trial court focused on the effect on Goldman Sachs's use of the code and found that it would have had none.  But the appellate court created a sharp distinction between the two subsets of control, focusing on only Mr. Aleynikov for permanent control and only Goldman Sachs for the second definition.  It thus found that Mr. Aleynikov's conduct fell within the scope of the statutory offense because he had no intent to return the code.  Notably, however, the definition of "appropriate" is not specific to the secret scientific material offense; the appellate court was seemingly making new law for the entirety of the New York Penal Code.

Mr. Aleynikov has already signaled that he intends to seek review in New York's highest court.  There, the battle will be between narrowly construing the criminal statute to preserve its original intent and the overall integrity of the Penal Code and broadly construing it to cover clearly improper conduct.  As has happened in all of Mr. Aleynikov's trials and appeals, the court will have to consider what to do when the pace of technology far outstrips the development of the criminal law.

[1] More details on Mr. Aleynikov’s actions and the prior cases can be found in a Summer 2015 snippets article and a July 6, 2015 Patent Docs post.
[2] N.Y. Pen. L. § 165.07.
[3] N.Y. Pen. L. § 155.00[4].

For additional information regarding this topic, please see:
• "Another Aleynikov Trade Secrets Case Ends with Narrower Statute," July 6, 2015

Top Stories of 2016: #16 to #20

By Donald Zuhn –-

After reflecting upon the events of the past twelve months, Patent Docs presents its tenth annual list of top patent stories.  For 2016, we identified twenty stories that were covered on Patent Docs last year that we believe had (or are likely to have) a significant impact on patent practitioners and applicants.  Today, we count down stories #20 to #16, and then in the coming week, we will work our way towards the top stories of 2016.  As with our other lists (2015, 2014, 2013, 2012, 2011, 2010, 2009, 2008, and 2007), links to our coverage of these stories (as well as a few links to articles on related topics) have been provided in case you missed the articles the first time around or wish to go back and have another look.  As always, we love to hear from Patent Docs readers, so if you think we left something off the list or disagree with anything we included, please let us know.  In addition, we will be offering a live webinar on the "Top Patent Law Stories of 2016" on January 18, 2017 from 10:00 am to 11:15 am (CT).  Details regarding the webinar, which will focus on a handful of the most important stories on this year's list, can be found here.

20.  Mailing of Corrected Restriction Requirement Did Not Reset PTA Clock

In February, the Federal Circuit affirmed the finding by the District Court for the Eastern District of Virginia that the U.S. Patent and Trademark Office properly calculated the Patent Term Adjustment of Pfizer's U.S. Patent No. 8,153,768.  In calculating the PTA, the USPTO denied Pfizer 197 days between the time the Examiner issued a first restriction requirement and then, after the applicant noted that the Examiner had omitted claims 75, 76, and 103-106, issued a corrected restriction requirement.  Noting that the applicant "could have taken direction for the[] classification [of the six omitted claims] from the fact that their respective independent claims were each included in the initial restriction requirement," the panel majority sided with the District Court and USPTO.  Writing in dissent, Judge Newman countered that "[t]he panel majority erroneously holds that term adjustment is not available because the applicant, not the PTO, spotted the PTO's error," stating that "[w]hether the examiner's actions 'were outside the normal 'give-and-take process' of patent prosecution,' should not turn on who recognized the error."

For information regarding this and other related topics, please see:

• "Pfizer, Inc. v. Lee (Fed. Cir. 2016)," February 15, 2016

19.  USPTO Continues Efforts to Enhance Patent Quality

In 2015, the U.S. Patent and Trademark Office announced the launch of a comprehensive and enhanced patent quality initiative, indicating that its efforts would be aimed at improving patent operations and procedures, enhancing the customer experience, and improving existing quality metrics.  In 2016, the Office continued its efforts to improve patent quality through the Office's Enhanced Patent Quality Initiative.  In response to an invitation to stakeholders to submit patent quality-related topics that could be used as case studies, the Office selected six topics for the case study pilot program in May.  In April, the Office announced that it was in the process of designing new patent quality metrics for use in FY2017 and requested comments from stakeholders regarding the new metrics.  The Office also held a Patent Quality Community Symposium at its headquarters in Alexandria, VA in April, and offered several webinars in its patent quality chat webinar series.  In November, the Office issued a request for public feedback regarding its reevaluation of examination time goals, and announced that it would be holding five roundtables on examination time goals (the last of which will be held on January 11 in San Jose, CA).

For information regarding this and other related topics, please see:

• "USPTO Seeks Comments and Will Hold Roundtables on Examination Time," November 3, 2016
• "USPTO Selects Topics for Quality Case Study Pilot Program," May 31, 2016
• "USPTO Holds Patent Quality Symposium," May 4, 2016
• "USPTO Seeks Comments on New Patent Quality Metrics," May 1, 2016
• "IPO Responds to USPTO Call for Case Study Topics," March 15, 2016

18.  CRISPR Patent Battle Begins

CRISPR (an acronym for Clustered Regularly lnterspaced Short Palindromic Repeats), which is part of a system for altering chromosomal sequences in situ in a cell in combination with a bacterially derived protein called Cas9, was hailed as a "Breakthrough of the Year" for 2015.  CRISPR provides a mechanism for inserting or deleting specific DNA sequences using CRISPR-associate targeting RNAs and the Cas9 RNA-guided DNA endonuclease enzyme.  Given the commercial potential of this method, patenting is an obvious concern and, as it turned out, more than one group of inventors has filed patent applications on the reagents, methods, and cells produced or used to produce CRISPR modifications.  Because these applications were filed prior to March 16, 2013, the dispute regarding who was the first to invent will be resolved in an interference.  On January 11, 2016, the USPTO declared Interference No. 106,048, naming Feng Zhang and his colleagues, the named inventor of the Broad Institute/MIT's patents, as the Junior Party, and Jennifer Doudna and her colleagues at UC/Berkeley as Senior Party.  Oral argument in the interference was held last month, so the dispute could reach a resolution in 2017 and make a return trip to our list of top stories next year.

For information regarding this and other related topics, please see:

• "The Patient Side of the CRISPR Patent Battle," December 19, 2016
• "CRISPR Interference Motions Set," March 23, 2016
• "CRISPR Interference Declared," January 28, 2016

17.  AbbVie Engages Amgen in BPCIA Dispute over HUMIRA^®

Earlier this year, we noted that Amgen has been the reference product sponsor for many biosimilar applications, and as a result has been the Plaintiff in many of the litigations that have been based on the provisions of the Biosimilar Price Competition and Innovation Act ("BPCIA").  It was therefore noteworthy that Amgen once again became involved in a BPCIA litigation -- but this time as the aBLA filer.  In August, AbbVie sued Amgen pursuant to the BPCIA and 35 U.S.C. § 271(e)(2)(C) because Amgen submitted an application to the FDA to market a biosimilar version of adalimumab, AbbVie's anti-TNFα therapeutic antibody, HUMIRA^®.  Prior to the filing of AbbVie's complaint, it was not known whether the parties had been engaging in the BPCIA's "patent dance," because the process consists of various disclosures and exchanges, none of which are meant to be publicly available.  In September, the FDA approved Amgen's application to market Amjevita (adalimumab-atto) -- which marked the fourth biosimilar approved by the FDA pursuant to the BPCIA.  Notwithstanding the approval, Amgen indicated in its counterclaims and answer to AbbVie's complaint that it would not begin commercial marketing of its biosimilar before at least one of the patents identified by AbbVie had expired on December 31, 2016. 

For information regarding this and other related topics, please see:

• "FDA Approves Amjevita -- Amgen's HUMIRA® Biosimilar," September 25, 2016
• "AbbVie v. Amgen: The Litigation Phase for a HUMIRA® Biosimilar Begins," August 9, 2016

16.  Defend Trade Secrets Act Signed into Law

In May, President Obama signed the Defend Trade Secrets Act of 2016 ("DTSA") into law, creating a new Federal cause of action for misappropriation of trade secrets.  The new law is a significant expansion of Federal intellectual property law, and brings with it significant benefits -- but also new responsibilities -- for intellectual property owners and employers.  And in this era of narrowed subject matter eligibility for patenting, the DTSA may provide enough of an incentive for intellectual property owners to keep more information as trade secrets.  Prior to the enactment of the DTSA, trade secret owners could protect their rights under state law or a patchwork of Federal laws that provided criminal and civil sanctions for interstate trade secret misappropriation or misuse of computerized data, such as the Economic Espionage Act ("EEA") and the Computer Fraud and Abuse Act ("CFAA").  The DTSA includes three key provisions that intellectual property owners should know about:  (1) the Federal civil cause of action for misappropriation of trade secrets; (2) an ex parte seizure provision that can be invoked in extraordinary circumstances; and (3) whistleblower protections that preempt criminal and civil liability under either Federal or state law, and place certain new obligations upon employers.

For information regarding this and other related topics, please see:

• "President Obama Signs Defend Trade Secrets Act," May 11, 2016
• "Defend Trade Secrets Act Passes House, Moves to President for Signature," April 27, 2016
• "House Judiciary Committee Unanimously Reports Defend Trade Secrets Act of 2016," April 20, 2016

President Obama Signs Defend Trade Secrets Act

By Josh Rich --

This afternoon, President Obama signed the Defend Trade Secrets Act of 2016 ("DTSA") into law, creating a new Federal cause of action for misappropriation of trade secrets.  The new law is the most significant expansion of Federal intellectual property law in a generation, and brings with it significant benefits -- but also new responsibilities -- for intellectual property owners and employers.  And in this era of narrowed subject matter eligibility for patenting, the DTSA may provide enough of an incentive for intellectual property owners to keep more information as trade secrets.

Prior to the enactment of the DTSA, trade secret owners could protect their rights under state law or a patchwork of Federal laws that provided criminal and civil sanctions for interstate trade secret misappropriation or misuse of computerized data, such as the Economic Espionage Act ("EEA") and the Computer Fraud and Abuse Act ("CFAA").  However, although most states -- all except Massachusetts and New York -- have adopted a version of the Uniform Trade Secrets Act ("UTSA"), those enactments have actually not been uniform, and the variations have proved to be important to trade secret owners seeking relief.  Furthermore, the state law nature of UTSA claims has made it difficult to chase misappropriators across state law and collect evidence from third parties located out-of-state or overseas.  Prior Federal laws did not provide much more help, relegating aggrieved parties to seeking criminal sanctions under the EEA or twisting their civil claims into the ill-fitting paradigm of the CFAA.  Against this backdrop, Congress worked for several years to build a strong bipartisan consensus for a Federal civil cause of action for misappropriation of trade secrets, resulting in the DTSA.

The DTSA includes three key provisions that intellectual property owners should know about.  First, the Federal civil cause of action for misappropriation of trade secrets.  Second, an ex parte seizure provision that can be invoked in extraordinary circumstances.  Third, whistleblower protections that preempt criminal and civil liability under either Federal or state law, and place certain new obligations upon employers.

First, the DTSA allows a trade secret owner (whether the assignee or a licensee) to bring a civil action against a misappropriator if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.  The definition of a trade secret is intentionally broad and based on the definition in the UTSA, which requires (i) the owner to have taken reasonable measures to keep the information secret and (ii) the information to derive independent economic value from not being generally known or readily ascertainable through proper means to another person who can obtain economic value from the information.  The acts that constitute misappropriation are also taken from the UTSA, and essentially require the misappropriator to have used improper means to have obtained the trade secrets, or been the beneficiary of someone else who used improper means and know that the information was improperly obtained.  Notably, the DTSA specifically states that reverse engineering, independent derivation, or any other lawful means of acquisition do not constitute improper means.

Second, unlike the UTSA, the DTSA provides a means for a trade secret owner to have a court seize stolen trade secrets, without notice to the misappropriator, if the misapropriator is seeking to flee the country, planning to disclose the trade secret to a third party immediately, planning to destroy evidence of the misappropriation, or is otherwise not amenable to enforcement of the court's orders.  There are strict requirements for the initial ex parte seizure petition, the scope of the court's seizure order, and the post-seizure treatment of the evidence.  Further, the DTSA requires a hearing within one week to allow a defendant to argue that the ex parte seizure was improper.  And if the seizure proves to be wrongful or excessive, the aggrieved subject of the seizure can bring a cause of action against the trade secret owner (and the damages are not limited by any seizure bond set by the court).

Third, the DTSA insulates whistleblowers against liability under any Federal or state trade secret law (either criminal or civil), so long as the whistleblower discloses any trade secrets in confidence either in a lawsuit filed under seal or to government officials, if the purpose is reporting a suspected violation of the law.  Furthermore, employers must provide notice of the whistleblower protections in all future contracts with employees (which can include disclosure in the form of an employee handbook).  In that context, the DTSA indicates that the term "employees" includes contractors as well.  If an employer fails to make the disclosure, it is barred from obtaining exemplary damages or attorney's fees in an action against an employee under the DTSA.

All in all, the DTSA is a powerful new tool that intellectual property owners now have at their disposal.  It strengthens trade secret rights, and makes them easier to enforce.  Given that patent rights have been chipped away in certain contexts (especially through lack of subject matter eligibility for certain types of inventions), it may be enough incentive for intellectual property owners to keep their inventions secret.  It certainly merits greater consideration of secrecy, given its strengthening of owners' rights; on the other hand, it also requires employers to start taking steps to ensure notice of whistleblower rights.  So, in the end, it is likely to be a boon to both innovators and employees.

Defend Trade Secrets Act Passes House, Moves to President for Signature

By Josh Rich --

One week after the House Judiciary Committee unanimously reported the Defend Trade Secrets Act of 2016 to the House floor, the full House approved the bill, 410-2.  The two no votes were from tea party Republicans, Rep. Justin Amash (R-MI) and Rep. Thomas Massey (R-KY).  Oddly, Rep. Massey is himself an inventor and former technology business owner who holds numerous patents and has two engineering degrees.  Regardless, the bill now moves to the President for his signature, which the White House has already indicated the President will provide.  As a result, there will soon be -- for the first time -- a Federal private right of action for trade secret misappropriation.

The provisions of the Defend Trade Secrets Act were written against the backdrop of the Uniform Trade Secrets Act, which governs trade secret law in most of the states.  Despite its name, the Uniform Trade Secrets Act has been enacted in various forms in the states, with different definitions of trade secrets and burdens of proof on showing whether information has been misappropriated.  In addition, state law has been found onerous to enforce when the misappropriating party is out of the state or out of the country, especially when the misappropriating party is likely to flee or destroy evidence.

The Defend Trade Secrets Act adds three critical new elements.  First, a private right of action for trade secret misappropriation that can be brought in the Federal courts.  Second, an ex parte seizure provision that allows a trade secret owner to ensure trade secrets are not further disseminated and evidence is not destroyed.  Third, whistleblower protection provisions that prevent retribution against whistleblowers who reveal trade secrets to the government or in litigation claims, as long as the revelation is done under seal.  All three elements are intended to address concerns with the Uniform Trade Secrets Act.

First, the new Federal claim for trade secret misappropriation brings with it a single definition of trade secrets, a definition of "improper means" of obtaining trade secrets, and the certainty and ease of the Federal Rules of Civil Procedure.  The definition of trade secrets amends what has previously been used in Federal criminal cases, applying to information (1) for which an owner has taken reasonable measures to maintain secrecy and (2) which derives independent economic value from not being known and not being readily ascertainable through proper means by another person who can obtain economic value from the disclosure or use of the information.  The definition of "improper means" expressly excludes reverse engineering and independent derivation, which are not expressly excluded from the definition in all states.  And the Federal Rules of Civil Procedure provide a clear, simple path for obtaining evidence from other states.

Second, an unprecedented provision allows for the ex parte seizure of trade secrets from an accused misappropriator in extraordinary circumstances.  "Extraordinary circumstances" is not intended to be an independent hurdle, but establish that there must be some exigency (such as a fleeing person or threat of destruction of evidence) to invoke the ex parte seizure provision rather than traditional equitable procedures.  The bill has extensive rules, both procedural and substantive, for when the ex parte seizure provision can be invoked and how it should be applied.

Third, the bill frees a whistleblower from any potential criminal or civil liability under any trade secret law, Federal or state, for disclosing a trade secret confidentially.  The protections extend to both disclosure to government officials for the purpose of investigating a potential violation of the law and filing of a complaint under seal.  Furthermore, the bill requires employers to inform all new employees and contractors of the whistleblower protections.

In summary, we will soon see access to the Federal courts for claims of trade secret misappropriation on a par with other forms of intellectual property.  Thanks to Congress's bipartisan support of the Defend Trade Secrets Act, companies will have an additional weapon at their disposal to protect their trade secrets, and a much stronger way to prevent dissemination after they are first misappropriated.

House Judiciary Committee Unanimously Reports Defend Trade Secrets Act of 2016

By Josh Rich --

After a brief markup session in which no amendments to the bill were proposed, the House Judiciary Committee reported the Defend Trade Secrets Act of 2016 to the House floor by unanimous voice vote today.  The bill passed the Senate earlier this month by a vote of 87-0 and should receive quick approval by the full House.  President Obama has voiced support for the measure and should sign the bill into law in short order.  The bill is remarkable not only for its bipartisan support, but also because it would create a new Federal cause of action for intellectual property owners.

During the markup session, seven representatives spoke in favor of the bill including the Chairman (Rep. Goodlatte of Virginia), the ranking minority member (Rep. Conyers of Michigan), sponsors of the House's original version of the Defend Trade Secrets Act (Rep. Collins of Georgia and Reps. Nadler and Jeffries of New York), Rep. Lofgren of California, and Rep. Johnson of Georgia.  Other than Rep. Lofgren, all spoke only of the importance of the bill to American business and their appreciation for the efforts of all who helped draft and promote the bill.  Rep. Lofgren, whose district covers much of San Jose and Santa Clara, expressed concern over the venue for hearings after ex parte seizures.  Specifically, she was troubled that a start-up or small business might be forced to try to find counsel and prepare for a hearing across the country within a week of having had a seizure executed against it.  But, remarkably, rather than proposing an amendment to address the issue, Rep. Lofgren recognized that the bill is on a fast track to the President's desk and only expressed the hope that the concern could be dealt with later (either through a later law or some other mechanism).  Thus, no amendments were proposed and the bill was reported in the same form in which it passed the Senate.

The bill now goes to the House floor for debate.  Since it had over 150 cosponsors in its original House form and support from the White House, however, it is unlikely that there will be much dissent or controversy.  Indeed, the House Judiciary Committee took only one week to report the bill after it was passed by the Senate.  Thus, it is likely we will see the President signing the Defend Trade Secrets Act of 2016 into law this spring, creating a new Federal civil cause of action for trade secret misappropriation.

IPO Sends Letter to Senate Leaders in Support of Defend Trade Secrets Act

By Donald Zuhn –-

Yesterday, the Intellectual Property Owners Association (IPO) sent a letter to the Chairman and Ranking Member of the Senate Committee on the Judiciary expressing "strong support" for the Defend Trade Secrets Act of 2015 (S. 1890), which was introduced in the Senate in July.  A corresponding bill (H.R. 3326) was introduced in the House.

The Senate bill, which is sponsored by Sen. Orrin Hatch (R-UT) and which has received bipartisan support from more than a dozen co-sponsors, would amend Title 18 of the United States Code to provide Federal jurisdiction for trade secret theft.  In particular, the legislation would allow the owner of a trade secret to bring a civil action in U.S. district court for misappropriation of a trade secret that is related to a product or service used in, or intended for use in, interstate or foreign commerce.  The Defend Trade Secrets Act would allow trade secret owners to secure a court order providing for the seizure of property necessary to prevent the propagation or dissemination of a trade secret (if the court determines, inter alia, that a temporary restraining order under Rule 65 of the Federal Rules of Civil Procedure would be an inadequate remedy).  The bill would also require the court issuing the order to hold a seizure hearing within seven days of the issuance of the order in which the party obtaining the order would have the burden of proving that the facts supporting the order are still in effect.

Other remedies provided by the legislation for the misappropriation of a trade secret include an injunction to prevent any actual or threatened trade secret misappropriation, payment of a reasonable royalty for future use of the trade secret in exceptional circumstances that render an injunction inequitable, damages for actual loss caused by the misappropriation of the trade secret, damages for any unjust enrichment caused by the misappropriation of the trade secret, exemplary (treble) damages when a trade secret is willfully and maliciously misappropriated, and attorney's fees for willful and malicious misappropriation of a trade secret or a bad faith claim of misappropriation.  Actions under the Defend Trade Secrets Act would have to be commenced not later than five years after the date on which the misappropriation is discovered (or by exercise of reasonable diligence should have been discovered).

The legislation would also require the Attorney General, in consultation with the Intellectual Property Enforcement Coordinator, Director of the U.S. Patent and Trademark Office, and heads of other appropriate agencies, to submit to the Senate and House Judiciary Committees a report on:

(1) The scope and breadth of the theft of the trade secrets of United States companies occurring outside of the United States.
(2) The extent to which theft of trade secrets occurring outside of the United States is sponsored by foreign governments, foreign instrumentalities, or foreign agents.
(3) The threat posed by theft of trade secrets occurring outside of the United States.
(4) The ability and limitations of trade secret owners to prevent the misappropriation of trade secrets outside of the United States, to enforce any judgment against foreign entities for theft of trade secrets, and to prevent imports based on theft of trade secrets overseas.
(5) A breakdown of the trade secret protections afforded United States companies by each country that is a trading partner of the United States and enforcement efforts available and undertaken in each such country, including a list identifying specific countries where trade secret theft, laws, or enforcement is a significant problem for United States companies.
(6) Instances of the Federal Government working with foreign countries to investigate, arrest, and prosecute entities and individuals involved in the theft of trade secrets outside of the United States.
(7) Specific progress made under trade agreements and treaties, including any new remedies enacted by foreign countries, to protect against theft of trade secrets of United States companies outside of the United States.
(8) Recommendations of legislative and executive branch actions that may be undertaken to—
    (A) reduce the threat of and economic impact caused by the theft of the trade secrets of United States companies occurring outside of the United States;
    (B) educate United States companies regarding the threats to their trade secrets when taken outside of the United States;
    (C) provide assistance to United States companies to reduce the risk of loss of their trade secrets when taken outside of the United States; and
    (D) provide a mechanism for United States companies to confidentially or anonymously report the theft of trade secrets occurring outside of the United States.

Following introduction of the bills, S. 1890 was referred to the Senate Judiciary Committee and H.R. 3326 was referred to the House Judiciary Committee and the Subcommittee on Courts, Intellectual Property, and the Internet.

The IPO letter in support of the legislation contends that "current legal tools available to remedy trade secret theft are inefficient," and that "current federal law in this area has limitations."  While commending the FBI and Department of Justice for doing a good job enforcing the Economic Espionage Act, the IPO notes that both "have limited resources and numerous priorities and are not able to pursue all trade secret thefts."  The IPO points out that the Defend Trade Secrets Act would allow its members to protect their trade secrets.  In addition, the IPO argues that enactment of the legislation "will place the United States in a position to promote strong trade secrets protection globally, both by creating the “gold standard” by which countries can model their trade secrets laws and by placing the United States in a better position to negotiate trade agreements and other international treaties that provide strong trade secrets protection."

Another Aleynikov Trade Secrets Case Ends with Narrower Statute

By Josh Rich --

In 2009, Sergey Aleynikov was a computer programmer employed by Goldman Sachs to write high-frequency trading code.  He accepted an offer to join a new Chicago-based company, Teza Technologies.  Before he left Goldman Sachs, however, he sent portions of Goldman's high frequency trading code to a German website for his own future use.  After Goldman found out, it went to the FBI; Aleynikov was then arrested on a flight home from Chicago.  With that arrest began a circuitous journey through the U.S. legal system, governed by two different sovereigns and under two different legal regimes -- neither one of which was ultimately found to cover his actions.

Aleynikov was first tried in the U.S. District Court for the Southern District of New York on charges of violating the Federal Economic Espionage Act of 1996 ("EEA").[1]  At that time, the EEA's trade secret misappropriation provision established that "[w]hoever, with intent to convert a trade secret, that is related to or included in a product that is produced for or placed in interstate or foreign commerce, 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 . . . without authorization . . . downloads, uploads, . . . transmits, . . . or conveys such information" would be guilty of a criminal offense punishable with up to ten years in jail.  18 U.S.C. § 1832.  The parties disputed the application of the EEA to Aleynikov's behavior, Aleynikov's intent in uploading the code to the German website, and the importance of the uploaded code.  Eventually, however, the jury found Aleynikov guilty under the EEA.

The U.S. Court of Appeals for the Second Circuit interpreted the EEA differently from the construction applied by the trial court.  It stressed that the EEA had been adopted as a response to the Supreme Court's decision that the National Stolen Property Act (18 U.S.C. § 2314) did not apply to purely intangible property, as found in Dowling v. U.S., 473 U.S. 207 (1985).  676 F.3d 71, 78 (2d Cir. 2012).  It then considered the differences in language between the economic espionage provision of the EEA (18 U.S.C. § 1831) and the trade secrets provision (18 U.S.C. § 1832).  The former did not require that the information be "related to or included in a product that is produced for or placed in interstate or foreign commerce," while the latter did.  Id. at 79.  Given the statutory language, the Second Circuit found that Goldman's was intended to remain confidential (and not be related to any product placed in interstate commerce).  Id. at 82.  It therefore overturned Aleynikov's Federal conviction.

Remarkably, the Second Circuit's decision in the Federal Aleynikov case led to a change in the statute.  Although it cannot apply to the Aleynikov case (under both the Constitution's ex post facto clause and double jeopardy case law), § 1832 was amended to apply to any trade secret "that is related to a product or service used in or intended for use in interstate or foreign commerce."  Thus, in future cases, misappropriation of computer code that is intended to remain confidential, but used in relation to a service performed in interstate commerce, will be an offense under the EEA.

Rather than returning Aleynikov's computer, other evidence, and passport, however, the U.S. Attorney's Office turned it all over to the New York County (Manhattan) prosecutor's office.  Ultimately, that evidence was ruled to be illegally transferred and inadmissible as evidence against Aleynikov.  The prosecutor's office decided to prosecute Aleynikov nonetheless.[2]  The state court prosecution proceeded under two statutes:  two counts of Unlawful Use of Secret Scientific Material (N.Y. Pen. L. 165.07) and one count of Unlawful Duplication of Computer Related Material (N.Y. Pen. L. 156.30).  The former statute provides, "A person is guilty of unlawful use of secret scientific material when, with intent to appropriate to himself or another the use of secret scientific material, and having no right to do so and no reasonable ground to believe that he has such right, he makes a tangible reproduction or representation of such secret scientific material by means of writing, photographing, drawing, mechanically or electronically reproducing or recording such secret scientific material."  Aleynikov challenged his State indictment on numerous grounds, ranging from double jeopardy to the high-frequency trading code not being "secret scientific material" to not having made a "tangible reproduction or representation."  The trial court judge rejected those arguments and allowed the case to go forward to trial.

At trial in April 2015, Aleynikov argued that he had committed no crime, based both on his own lack of culpable intent and the technical language of the relevant statutes.  The jury returned with a split verdict:  guilty on one count of Unlawful Use of Secret Scientific Material, hung on the other count of Unlawful Use of Secret Scientific Material, and not guilty of Unlawful Duplication of Computer Related Material.

On July 6, 2015, however, the trial court judge entered an order overturning the jury's finding of guilt on the count of Unlawful Use of Secret Scientific Material.  The judge asserted that he had no doubt that Aleynikov's actions were wrongful, but also found that prosecutors "did not prove he committed this particular obscure crime."  His findings were based on two deficiencies by the prosecutors:  first, that they failed to prove that Aleynikov made a "tangible reproduction or representation of such secret scientific material" and, second, that they failed to prove that Aleynikov intended to take much of the value of the high-frequency trading code.  Thus, the trial court found, the prosecutors had not proven all of the elements of the charged offense and Aleynikov could not be convicted.

Under these circumstances, Sergey Aleynikov may finally be free from risk of criminal jeopardy from his actions at Goldman.  The Manhattan DA's office could still appeal, but it would be surprising to see an appellate court find that a virtual copy of information would constitute a "tangible reproduction," since the Supreme Court rejected that argument in Dowling.  But future defendants may not be so lucky:  the New York State Senate has already passed a bill that would criminalize the same sort of acts that Aleynikov undertook.  Thus, Aleynikov may end up with a unique position in legal history:  two vacated convictions based on the same acts and two laws changed because of those vacated jury decisions.

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[1] 18 U.S.C. §§ 1831-39.
[2] The Manhattan DA’s office offered Aleynikov a plea bargain: if he pled guilty to one of the counts, they would agree to drop the other charges and seek no time beyond the one year he had already served awaiting trial on the Federal charges.  Aleynikov rejected the plea deal.