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Trade secret trolls could be the new patent trolls

A new bill could make workers into pawns in intellectual property disputes

Uber has a Winklevoss situation on its hands. In May, a taxi-hailing service called Celluride took Uber to court, alleging Travis Kalanick had stolen the idea for the company. Celluride had pitched itself to dozens of venture capital firms, and partners from Founders Collective, Benchmark, and First Round Capital are named alongside Uber founder Travis Kalanick in the suit. "The plaintiff is informed and believes," the complaint alleges, "that Defendants conspired to convert, and did convert, through deception, Halpern's work and intellectual property."

As you might expect, the case is shaky, with serious questions about the statute of limitations and whether Kalanick or the funders actually agreed to keep the information secret. But that hasn't kept the case from swallowing up months and untold billable hours. As with any case of this size, legal fees quickly outweigh the cost of an early settlement. If Uber weren't so legally pugnacious, they would likely have saved money by paying off the plaintiffs before the case reached trial.

Legal fees quickly outweigh the cost of an early settlement

Of course, frivolous lawsuits are nothing new, but recent shifts have made trade secrets a particularly attractive claim for anyone looking to go after a deep-pocketed tech company. As courts weaken patent protection to counteract trolls, companies have been keeping more of their intellectual property as unregistered trade secrets. That means more legitimate claims as companies choose to keep their tools as trade secrets rather than patents, but it also gives potential trolls more cover if they want to puff up a shaky claim into a quick settlement.

A new bill currently facing Congress could make the problem even worse, arming plaintiffs with a federal cause of action and dire consequences for anyone that loses a suit. After kicking around Congress for more than a year, experts say it’s likely to be taken up in the coming months, driven by growing concerns over cybersecurity. But while supporters say it's a necessary protection for companies facing unprecedented security threats, critics say it will give trade secret trolls an even heavier club to use against their targets.

The legal power of secrets

Trade secrets occupy a strange place in the IP landscape, more limited than copyrights or patents but far more powerful when they do apply. In most states, the information has to be protected by an explicit contract — typically either an employment contract or non-disclosure agreement. As soon as that information escapes from the scope of the agreement, it's a crime, punishable by fines, injunctions or even prison.

The tech world's atmosphere of free-floating ideas has made it particularly susceptible to those suits. When the Winklevoss twins sued Mark Zuckerberg over his early involvement in their UConnect social network, one of the central charges was a trade secrets violation, based on Zuckerberg's brief stint as a UConnect contractor. It was an implausible claim — what did Zuckerberg take from UConnect that he couldn't have learned from watching Friendster? — but after years of litigation, it was enough to earn them a $65 million settlement.

Developer Jing Zeng was pulled off an international flight by federal agents, charged with stealing secrets

It's a common concern for contemporary tech companies. In June, Jawbone filed a trade secrets misappropriation case against the more successful Fitbit health tracker, after five employees moved from Jawbone to Fitbit. The case presents some evidence of employees downloading files on their last days, but it can be difficult to distinguish between routine email archiving and something more nefarious. Since nearly all the company information is proprietary in some way, it may not make a difference.

In extreme cases, trade secrets claims can even lead to criminal charges and jail time, as when Goldman Sachs pressed criminal charges against programmer Sergey Aleynikov for inappropriately accessing the company's high-frequency trading program. (After an initial conviction, Aleynikov successfully appealed the charges.) More recently, Machine Zone — the maker of Game of Warpressed charges against a former employee for a trade secret theft. After a bitter severance fight, developer Jing Zeng was pulled off an international flight by federal agents, and charged with improper access to the company's user list.

In each case, the issue isn't whether a new company actually used the protected information, as with a copyright or patent. All that matters is if the subject broke their agreement to keep the information secret, which could be as simple as copying work files to a personal computer. If the secret is something more abstract, like Jawbone's strategy for building a better health tracker, it can be hard to say what keeping the secret would even mean. That makes it difficult to prevent a case from being launched, and hard to predict the outcome once the case is underway.

Making secrets stronger

The Defend Trade Secrets Act, currently facing Congress, would make those cases easier to mount and even scarier for defendants. The act would let civil cases like the one against Uber move to federal court, where the scale of the ruling can be far greater. Even worse for defendants, the law would let courts seize any contested property while the case is being tried, the same way they might seize allegedly counterfeit goods. It's one of the scariest legal threats a company can get, and some scholars are already concerned that that power will give way to a new generation of legal bullying.

"That's a very powerful threat to make to a fledgling company or a startup," says David Levine, a law professor at Elon University. "I'm concerned that you could have demand letters going not just to competitors but to anyone else." Levine first made those arguments in an open letter to Congress when the bill was introduced last year, together with 30 other law professors. More recently, he paired with fellow legal scholar Sharon Sandeen for a law review article titled "Here come the Trade Secrets Trolls." "Like the existing problem of patent trolls," the article argues, "trade secret trolling has the potential to undermine the structure of trade secret law and create serious problems and costs for innovators across all industries."

"Today, you can take the entire company out on a USB flash drive."

The bill's proponents counter that the new powers are necessary to stem the growing trend of international trade secret thefts. Chinese companies have been particularly active, implicated in stealing everything from high-tech antennas to proprietary corn seeds. Since more and more of that information is digitally accessible, companies have had trouble protecting it with pre-electronic laws. "Today, you can take the entire company out on a USB flash drive," says R. Mark Halligan, a Fisher Boyles partner who has been a vocal proponent of the DTSA. Halligan says the seizure measures are necessary to stop thieves from moving digital evidence offshore once they've been charged. "As soon as defendants become aware that I sued them, they transfer the evidence to another part of the world," Halligan says. "We really need the full machinery of federal courts just like we have with patents and trademarks."

With Congress more concerned than ever about cyberespionage, it seems likely Halligan will get those powers. Still, as Uber and other companies fend off damaging legal fights, critics see the DTSA as opening one more front in an already damaging war. And while patents or copyright claims both focus on filings, trade secrets claims focus on individuals, making employees themselves into pawns in corporate IP fights. As Levine and Sandeen warn in the law review article, "the capabilities of trade secret trolls remain to be seen, but the risk is very real."

3:07PM ET: Updated to reflect Aleynikov's successful appeal of both federal and state charges.