IPSC 2008: "Other"

Trade Secrets, Counterfeits, False Advertising

The Suprising Virtues of Treating Trade Secrets As IP Rights
Abstract | Paper
Mark Lemley
Stanford Law School

Nobody seems to agree why we have trade secret law. The dominant theory in the 19^th century: tort theory. But if acts are independently wrongful, why do we need trade secret law? The remaining justification, free riding, is ultimately empty because it doesn’t tell us what is ok and what isn’t. Standards of commercial morality: ultimately no more helpful in giving us a standard of commercial morality. And it adds the layering problem of judicial anthropology. Contract, too, can only explain part of trade secret law—why do we need a secret to have a contractual issue? And it doesn’t explain why we treat trade secret as a crime.

What about property? Well, let’s ask what the justification is for the creation of new property rights. In the end, trade secret has a standard IP justification: it provides an incentive to innovate. That extends beyond contract, so you don’t need an agreement; it extends beyond patent, so you don’t need the subject matter; and it’s easier/faster to get than patents. For startups/fast-moving industries, trade secret is better.

But trade secret seems strange as IP. Why would we want to encourage secrecy? His answer: trade secret law discourages secrecy.

Law can substitute for what would otherwise be investment in secrecy. Without trade secret law, you’d still try to protect valuable secrets, but you might do so in inefficient ways: this is an explanation of the classic DuPont case, where we don’t want DuPont to have to invest in building a roof over the facility while it’s under construction. Evidence from countries that lack strong trade secret protection suggest inefficient investments in secrecy: they’re less likely to enter into business relations with strangers, and have a tendency to hire as employees people who are trustworthy but less competent, notably relatives. There’s also evidence in the breakfast cereal industry that, fearing ineffective protection, companies won’t outsource. (Raises the question: do people know about trade secret law? Why isn’t it working in breakfast cereal?)

Trade secret lets you spend money only in the circumstance in which misappropriation actually happens.

Arrow’s information paradox: you need to have a legal right over which to bargain if you want to enter into a transaction. How does a person evaluate whether an idea is worth $1 million without knowing the idea? Disclosing the idea destroys its value unless there is a legal ability to constrain the behavior of the person given the idea. Contract could do a lot of that, but all. Trade secret does.

If trade secret law encourages disclosure, then we ask: why require secrecy at all? Why not just a legal right over information? The answer: secrecy serves a channeling function, creating a legal right only when it’s needed. The wheel (the secret is that it’s round) v. the formula for Coca-Cola. Trade secret law won’t change people’s behavior w/r/t the wheel. If I want to make money from it, I have to sell it, and I disclose it to the world. W/r/t Coca-Cola, in the absence of trade secret law, people will invest too much in secrecy. So trade secret law creates incentives only in the case of non-self-disclosing information.

Implications: (1) Secrecy is an important, not an accidental, requirement in trade secret law. Tort-law cases regularly dispense with proof of secrecy when there’s a bad act. That’s backwards. But if the info could have come from public sources, then there isn’t property—the question IP forces you to ask is “what right do you have?” (2) Reminds us that balance is everything. Incentives aren’t pure goods. Creation of rights comes at a cost. Trade secret law should preempt and substitute for other state laws that would otherwise create freestanding rights without similar limits, such as unfair competition. We don’t want to protect the wheels of the world. Treating trade secret as IP doesn’t define the scope of preemption, but it at least allows us to tap into a doctrine that has been thinking about these questions in the right way for decades.

Ann Bartow: Look at how easy it is to get injunctions in IP cases, as you’ve written, Mark Lemley (with Volokh)—enjoining average people who work in the factory will become easier; enforcement of noncompete clauses will be made easier.

Lemley: Relative to what? He thinks the answer is the opposite. In a world without trade secrets, parties will have even more stringent employment agreements. He sees trade secret as a substitute for noncompete clauses. It’s true that treating it as IP v. tort might incline a court to an injunction rather than damages. But eBay helps moderate that—the move is to make injunctions less automatic. Also the availability of criminal relief for trade secret theft is important.

Q: At heart, trade secret is about competition; calling it IP might lose that mooring.

Lemley: If he believed that the alternative to IP was pro-competition, he’d agree, but he doesn’t. The trade secret cases talking about competition often restrict it in the name of “good” behavior. The more we rely on the general statement of bad acts in tort, the easier it is to treat unfair competition as redundant.

Q: What are the other implications of your approach?

Lemley: Dubious of the “reasonable efforts” requirement—if we care about disclosures, those efforts are largely wasted, though they may serve as proof of secrecy. Also, other IP rights have expiration dates. Maybe at some point we say your incentive has been realized.

Q: What about security-led innovation?

Lemley: Certainly, without legal protection, people would invest in TPMs. Innovation in secrecy has collateral consequences for the info kept secret, which swamps the innovation of TPMs.

Trade Secret Prices and High-Tech Devices: How Medical Device Manufacturers are Seeking to Sustain Profits by Propertizing Prices
Abstract | Paper
Annemarie Bridy
University of Idaho College of Law

Two lawsuits involving a medical device manufacturer: implantable devices for use in cardiology. First case: Guidant sued Aspen, a healthcare consultant, claiming trade secret for its strategic pricing process, its sales contracts with hospitals, and the prices and terms in each individual sales contract. The contracts all provided that the hospitals wouldn’t disclose the prices. ECRI, a database, then sued after threats by Guidant over ECRI’s database of prices paid by hospitals for Guidant devices. Guidant counterclaimed, seeking protection for the pricing process and also for the actual price paid for every device. This is an ambitious claim. The endgame: maintain negotiating leverage with customers by preventing benchmarking and other forms of price comparison, chilling discussion among hospitals and among healthcare consultants and other third parties.

Such a claim didn’t used to be viable, under the common law as expressed in Restatement §757. But it could be now under the Uniform Trade Secrets Act. There are good policy reasons for excluding prices paid for medical devices, and other goods, from the scope of trade secret.

Early evolution: protection was given for processes and formulae, also tools. Early days: courts said there was no protection for private but ordinary business information that was not the product of special ingenuity. The Restatement required that trade secret be information that was more than ephemeral and was in continuous use in the business. It preserved the separate treatment of trade secrets and private business information.

1970s: UTSA is drafted with no reference to the earlier limits. UTSA’s definition is information “including” all these things. The drafters thought they weren’t opening it up too much—they wanted to protect information that was generally but not presently in use by the plaintiff—but the words of the statute don’t reflect that.

Under the early common law cases and the Restatement, the price paid is not the product of special ingenuity, is ephemeral, and is not for continuous use, though the formula for determining the price might be protected. What would be a question of law under the common law becomes factual under UTSA—what measures were taken to keep it secret? Does it have economic value?

Both cases settled before trial, though Guidant avoided summary judgment in each. Neither opinion discusses any limits on subject matter. This shift from a bounded to unbounded definition is generally a challenge to the public domain. And markets need info, including comparative price info, to function efficiently. The medical device market in particular is highly inefficient in ways that hurt buyers.

Courts can read and some have read the UTSA as a codification of common law, rather than an expansion. Most courts continue to rely on §757 when interpreting the UTSA, and it was intended to codify the common law except in very limited circumstances.

Pam Samuelson: This is a regulatory issue!

A: There is a bill on transparency in medical devices, but the drafting was so leery of takings issues in light of Monsanto that it’s incredibly narrow.

Counterfeits, Copying, Class and Confusion
Abstract
Ann Bartow
University of South Carolina School of Law

Grew up in a working-class family, and when she was growing up designer jeans were coming into their own. She was a nonconformist, but that would have been more fun if she’d had a choice, and that experience left her very dubious about the value of TMs. TMs are manipulative, and coerce people into buying more and paying more than they need. Posner & Landes say people reap value from paying more, and she doesn’t believe that’s a conscious choice. Posner & Landes say it’s ok to pay more for branded laundry detergent. Michelin makes 20,000 types of tires, but they’re all the same tire, just priced and branded differently. But if most people knew it was all from the same factory, then they wouldn’t spend the extra money.

Counterfeiting and copying: everyone knows that high-end designers are looking for paracopyright. But plan B is to use TM, by conflating counterfeiting with knockoffs. Knockoffs are not counterfeits, and are not a TM violation. She won’t defend counterfeiting, but how do we think about it as a scholarly community?

Pharma counterfeiting ought to be a crime. But why is it with clothes and sneakers? We ask about crime in copyright law. Ask how many sales are lost? Very few people are actually fooled. The buyers are less likely to buy the real thing.

Who goes to jail? The person sitting on the blanket/at the flea market. The people making money may occasionally pay the fine, but poor people are the ones who get rounded up and taken to jail.

Is buying counterfeit goods worse than downloading? TM owners want to offload enforcement costs on other people, including swap meet owners. Microsoft: it can be hard to detect software counterfeits, even for experts. One of the amazing things about the eBay/Tiffany’s case was that even Tiffany’s had trouble telling whether 22% of the merchandise was real or counterfeit.

Why is imposing liability on intermediaries important? Because it makes second-hand items very difficult to have at swap meets. It’s great for Tiffany to kill the secondary market, but it’s terrible for people who like Tiffany and don’t have much money. The eBay approach should be applied to physical swap meets.

Copying is endemic in clothing—partly from the creative process and partly because the market requires it. If consumers are asking for it, don’t we need to take that into account in our balancing of interests and assessment of welfare effects?

TM owners denigrate copying and consumers who buy copies. They are tacky scumbags trying to fool people—an instrumental muddying of counterfeit and knockoff. The dominant discourse deploys class signifiers—you need to buy the “authentic” thing. But protecting design rather than TM is not a legitimate use of authenticity. If you like a dress but don’t have $6000, it’s not morally wrong for you to buy a similar dress at a lower price. Ultimate agenda: the designers want to sell the same clothes at lower price points under “stealth” TMs; they want exclusive rights in the lower-end market.

Any new legal regime should be unambiguously linked to either copyrights or design patents. Illegitimate prestige is not a TM problem. Judges have contempt for shoppers whose purchases are driven by style and not TM: they seem to think that if you aren’t paying attn to TM you are defective as a consumer. That’s wrong.

McKenna: You don’t like trade dress, but you’re willing to protect the Polo pony logo?

Bartow: Yes.

Lemley: If you buy a shirt with the Polo logo or a Chanel handbag, are those serving TM functions? You seem to draw a sharp distinction between depicting TM and not that doesn’t necessarily map to what consumers do. E.g., Burberry plaid.

B: When the TM is the design feature, she agrees that law should protect it as TM. But shape, color, rhinestones, fabrics—they should be excluded. She thinks the line is maintainable.

Pasquale: Think about the worries about domain names, the pressure of which was reduced by the rise of search engines. If you can verify provenance in the label, it’s less important what the overall design is. (This is the standard rationale for providing less protection for trade dress when house marks can distinguish the products.)

Lisa Ramsey: Is knockoff the right term? Some knockoffs do violate TM. Counterfeiting is where the mark is identical.

B: It’s the closest term; she wouldn’t advocate limiting protection to identical marks.

Some discussion by various commenters about functionality as another way to say this—if you can’t protect it with copyright or with patent, you can’t bar copying in itself.

Running the Gamut from A to B: Federal Trademark and False Advertising Law
Abstract
Rebecca Tushnet
Georgetown Law

TM was born as false advertising and remains tightly connected. For preliminary relief, remedies, and survey evidence, courts treat the cases interchangeably. Elsewhere, there’s been more divergence, and that’s bad. Today I focus on materiality.

In false advertising law, for a competitor to win a case, a falsehood must be material: it must be likely to affect the purchasing decisions of a substantial number of ordinary consumers. Older cases sometimes spoke of this in terms of the elements being (1) falsity plus (2) harm, because harm requires causation and materiality shows causation. A five-factor test breaking materiality out specifically also developed and now dominates, because law tends to become more elaborate over time.

False advertising law has some basic theories about materiality. We can presume materiality for (1) health claims, (2) safety claims, and (3) central ad/product claims. But there’s lots of room for specifics: a tax preparer’s claim to offer instant “refunds” and not “loans” was material given evidence of consumer fear of “loans” and desire for “refunds”; a representation of EPA approval was material because consumers care about the environment. False advertising law also recognizes immateriality: misstating the number of real estate transactions at issue by 4%; statements about technical aspects of a product which was consumed by people who didn’t care about the technical aspects; statements that sports scores were updated “from the arena” when they were really updated from the radio; etc.

In false advertising cases, there’s been a regrettable trend to require overly specific evidence of materiality, starting with the Fifth Circuit’s Pizza Hut v. Papa John’s case, in which the court held that the false claim “Better Ingredients” wasn’t actionable because there was no survey evidence of materiality, mangling the rule that surveys or other response evidence is required when a claim is only implicitly, not explicitly, false. Because of this heightened attention to materiality, we see things like the Pom Wonderful court carefully going through the evidence that consumers actually cared that a product called “100% Pomegranate Juice” had 100% pomegranate juice.

Materiality remains, though, a matter of consumer preference. The public is entitled to get what it chooses, even if it is choosing by caprice, fashion or ignorance: FTC v. Colgate-Palmolive, 380 U.S. 374 (1965). The Supreme Court explicitly linked TM and false advertising, holding that infringement and false advertising are barred even if the product’s actual quality is high and consumers would be satisfied with it. The seller may reason that when the “annoying or irrational habit” (preferring a particular brand, preferring verification of a product claim) is broken consumers will be happy. But a misrepresentation cannot be used to “break the habit.” I focus on this language because it presumes materiality—an immaterial claim would not break a reasonable consumer’s habit because it wouldn’t change her behavior.

Now, though, we’ve abandoned materiality in TM; confusion is king, with no consideration of whether it matters. And it’s worse than it seems: abandoning materiality has feedback effects on infringement liability, because our multifactor test tells us that consumers are more readily confused when they aren’t paying much attention, and consumers don’t pay much attention to things they don’t care about, so confusion over an immaterial matter is automatically more likely, simply because courts have detached confusion from its moorings.

A couple of traces of materiality remain in TM at the margins, for example in discussions surrounding expressive works.

We should return to this conception of TM infringement, in which materiality is an integral part. We have a semi-natural experiment of what that would look like in the fallout from Dastar. Pre-Dastar, people sometimes brought false attribution claims as false advertising claims; they basically always lost. Bringing them as §43(a)(1)(A) claims proved much more successful, until Dastar, which explicitly said that §43(a)(1)(B) claims remained. But it turns out to be very hard to replead false attribution to be false advertising, and materiality is one reason.

How could materiality help TM? Certain people have devoted a lot of energy to finding a TM use requirement in the structure and history of TM law. But Mark McKenna responds that the question of whether a defendant is using a term “as a mark” can be collapsed into whether consumers are confused about source or sponsorship. Materiality allows us to cut at least some of the loops of that Gordian knot. And it has a substantial history and current presence in the Lanham Act.

Possible counterargument: materiality shouldn’t be required because false perceptions of connection can damage the value of the plaintiff’s brand. Mark McKenna is rebutting this empirically. Moreover, materiality can help us force TM owners to explain this story concretely rather than allowing it to stay as cliched doctrine. If we unpack the assumptions here, it becomes clear just how badly this brand-value rationale fits the modern sponsorship/permission cases. Even if people believe that Google needs GEICO’s permission to run ads in response to a search for GEICO, and even if those people become disillusioned with Google as a search engine, it is bizarre to suggest that they’d conclude there was something wrong with GEICO. It’s bizarre, frankly, to suggest that they’d even remember half-consciously thinking that GEICO gave permission to Google.

Presumptions can help us manage materiality in TM, like the health/safety presumptions in false advertising more generally. Thus, core “source” use can be presumed material, and we can identify source the same way we identify core general advertising claims: what’s the focus of the ad? What’s the biggest word on the product? Is there a special font drawing your attention to it? Etc.

Materiality won’t solve all our problems, nor should it. But it can answer some vexing questions and contribute to restoring some sense to the TM side of the Lanham Act.