Friday, April 03, 2009

BC Law Review Symposium, panel 2

Panel 2: Corporate Reputation, Corporate Secrecy & The First Amendment

Elizabeth Rowe, University of Florida Levin College of Law

Trade secret lawsuits against web site operator for distributing decryption code; against individual to bar publication of sensitive photos and other materials; against a TV network to keep it from broadcasting film of a factory interior; against former employees. Assume there’s a threat to free speech from trade secret litigation. What should be done?

One question: is trade secret property? Courts are more solicitous of property rights as counterbalances against free speech claims. What is the justification for using someone else’s property? If an embezzler takes money, there’s no problem proceeding against him. Property explains the reaction of defending against the intruder. Another way to think of it: commercial privacy. But no one has ever explored what that means—how like individual privacy would commercial privacy be? A right to control access—greater protection against surveillance by competitors than the Fourth Amendment gives against surveillance by the government.

The First Amendment is generally outweighed in standard trade secret cases because the First Amendment protects public information, and a trade secret is not public. If there’s a breach of a duty of confidence, the courts will find no free speech issue. Where there’s no contractual or quasi-contractual relationship, the First Amendment weighs more heavily. Analogy to anticompetitive lawsuits defended on grounds of right to petition the government, where courts have asked (1) is the claim objectively basis, so that no reasonable litigant could believe it valid, and (2) is there a subjective motivation to interfere with a competitor’s business relationships. Courts have asked similar questions when looking at whether assertion of a trade secret claim is tortious.

Trade secret has built-in precautions, procedural and substantive. If applied vigorously, they are speech-protective. A lot of what troubles us about these cases is not unique to trade secret—broader civil procedure issues about the ability of a powerful party to assert claims against a weaker party. Defamation, etc. have the same problems. Big issue: trade secret isn’t defined/established until litigation—there’s no registration system or examination. Proving that the business took reasonable steps to keep the secret secret is usually the hardest step for the plaintiff; unfortunately, most court opinions don’t discuss the threshold question of what counts as a trade secret. That’s improper. The UTSA makes a fee award available to a prevailing defendant in cases in which the plaintiff should have known it didn’t have a trade secret.

Practical limits on lawsuits: threatening lawsuit can encourage further disclosure, as when a disgruntled employee posts a trade secret on the internet. Once it’s out there, the secrecy is lost.

Example of trade secret litigation gone bad: Scientology litigation to protect its religious secrets. Years, dozens of appeals, bad litigation tactics, multiple judges; ended up with a big fees award to defendants. Scientology had a philosophy of using litigation to harass and discourage critics, rather than to win. Was there proper application of the procedural and substative rules? Yes, just way too late, but in the end the courts got it right; the church only got one preliminary injunction (some other TROs, later dissolved once the court clued in). Scientology created controversy and called attention to its secrets; attempt to preserve secrecy failed.

Moderator, Lee Tien, EFF: EFF sees cases at a very different stage, before they actually happen. And usually the cases then don’t happen because EFF tells people it can’t find them counsel, so the people take the challenged stuff down. How much can we derive then from lawsuits, when on the ground the cost to the corporation is a couple of C&Ds and they usually work? Significant chilling effect, which might not be so bad for many things, but expansive secretization can be a problem when Apple sends out 10,000 copies of its OS and then claims it’s still a trade secret. Or people who get devices as a gift and want to reverse engineer them—they aren’t bound by contract, but are still vulnerable.

Rebecca Tushnet, Georgetown Law

Who gets criticize corporations, and under what terms? There are three distinct groups who might want to engage in speech about about commercial entities or to constrain those commercial entities from making particular claims of their own. Competitors may sue each other for false advertising under the Lanham Act and coordinate state unfair competition law; consumers may sue businesses using state consumer protection laws and common-law claims; and government regulators may impose requirements on what businesses must and may not say.

I will evaluate a facially persuasive but ultimately misguided claim about corporate speech: that because consumers regularly get to say nasty things about corporations under the lax standards governing defamation of public figures, corporations must be free to make factual claims subject only to defamation-type restrictions on intentionally false statements—essentially, common-law fraud.

Courts have occasionally evaluated whether the Federal Trade Commission’s findings are consistent with the First Amendment, but have put few limits on the FTC. Likewise, the only courts to consider whether the First Amendment ought to impose restrictions on Lanham Act false advertising claims have rejected free speech claims. Nike v. Kasky, a putative consumer class action, was the first real attempt to apply First Amendment restraints to private consumer protection law. It was not a success, but it came nearer than the others, in part because of a fairness argument unavailable in the other two contexts.

Beginning in 1996, Nike was targeted by protesters claiming that it (actually, its subcontractors) underpaid and abused workers in developing countries. Nike launched a public relations counteroffensive. Marc Kasky believed that Nike was not telling the truth in those claims, so he sued, as California law then allowed him to do. A divided California Supreme Court held that Nike’s statements about its labor practices in press releases, letters to universities which had contracts with Nike, paid “advertorials,” and letters to the editor were commercial speech. The Supreme Court granted cert, but ultimately dismissed certiorari as improvidently granted because of underlying procedural difficulties.

Kasky could have been a New York Times v. Sullivan for consumer class actions. Several aspects of Kasky combined to make the plaintiff’s claim troubling. Nike had faced a well-organized campaign determined to make its labor practices matters of public controversy, and had been seeking to defend itself when it spoke out. California law, like the federal Lanham Act and most state consumer protection laws, lacks any scienter requirement; perfectly good-faith errors, if false, can lead to liability. In addition, California’s standing requirement for consumer suits was minimal at best.

What happened? I want to focus here on one particular, rhetorically powerful argument for Nike and why it was not and should not have been sufficient.

From Nike’s perspective, one significant problem with calling Nike’s speech commercial was its effect on the balance between Nike and its critics. When antiglobalization forces condemn Nike for its labor practices, their speech – concededly noncommercial – is subject only to general libel laws. One side gets to fight freestyle while the other is limited to Marquis of Queensberry rules.

Some responses cast the matter as one of David confronting Goliath. Nike’s side often cast the issue as one of organized interest groups, distinct from consumers, attacking businesses: politically correct Goliath versus business Goliath (or even small business David).

The fundamental difficulty with the fisticuffs metaphor: Advertising law allows many different actors to challenge an ad. The Lanham Act requires both sides to refrain from foul blows, so there’s no unfairness at all between competitors. The FTC, state attorneys general, and similar government actors are referees: cousins to that familiar government agent, the nightwatchman. If First Amendment doctrine requires application of a defamation standard to false advertising claims in the name of equality, it will disrupt other coherent regulatory schemes that are already equal – the referee will go home.

The answer might be to require only consumers to show fault. But that rule would be even more bizarre. The core justification for state regulation and competitor lawsuits is to protect consumers from harm. If consumers themselves can only stop deliberate or negligent falsehood, what justification do others – who have interests that will never quite align with consumers’ – have for suppressing nonnegligent speech?

There is also a second symmetry that is key to Nike’s argument from fairness: nice things versus nasty things. The argument is that, if consumers can attack Nike, Nike must be allowed to defend itself with non-defamatory speech using the same standards. This symmetry is vitally important to the other two regulatory schemes because the usual false advertising scenario involves someone challenging nice things that the advertiser says about itself.

Nike’s attempt to speak positively about itself subject only to New York Times v. Sullivan constraints was therefore a dagger aimed at the heart of false advertising law generally. Conclusion: when gov’t acts as a regulator, as with the FTC, or allows consumers to act as regulators, by using the courts, then the symmetry argument should not apply.

Where might symmetry play a useful role in imposing First Amendment constraints on regulations of commercial speech? Where they actually disadvantage competitors systematically, perhaps. Trademark owners get to take advantage of every non-false sales pitch possible, including appeals to our emotions, the seductive likability of the familiar [Bradford on emotion and dilution], etc. But dilution protection means that critics/competitors cannot appeal to our negative emotions, cannot use disgust or other emotions to get us to abandon a brand. [Deere v. MTD; Katya Assaf’s The Dilution of Culture and the Law of Trademarks, 49 IDEA 1 (2008)] To the extent that dilution actually does force competitors to fight on different terms, it might be subject to the viewpoint discrimination/Marquis of Queensberry objection.

Dilution may be a generational thing. In 1980, dilution was not considered a strong argument; it wasn’t until later, and a general trend towards propertization—we didn’t use “IP” as a term then—that dilution strengthened. His initial reaction to Kasky: this is a case about whether the speech was in fact commercial. It was embedded in a dialogue about globalization. The ACLU was on Nike’s side. But there is a blurring of the line between participating in public debate and proposing a commercial transaction.

Papandreau: For Rowe: protecting public speech isn’t the proper definition of the First Amendment’s scope. There seems to be a real chilling effect of the lawsuits, especially when combined with Jane Doe claims—because it’s so easy to allege a trade secret violation, maybe easier than alleging defamation.

Rowe: True, this is the fundamental problem of trade secret law (not just in its First Amendment intersection). In practice, there can be a long time between a TRO and a preliminary injunction—depends on the defendant whether this is something that it/he can afford. But it’s not a unique problem: the power of civil litigation generally can chill.

Zimmerman: Isn’t it a problem that there’s very little scrutiny of the nature of the trade secret, not just the methods used to protect it ? The Food Lion v. ABC case might have been brought as a trade secret—about the operation of the back room of the grocery. Yet trade secret folks seem to agree that the nature of the trade secret doesn’t seem to matter much. Also, how the defendant got the trade secret matters a lot—if a third party thinks the trade secret has public interest, then that’s a big First Amendment deal and yet the UTSA seems to contemplate a legitimate action against the third party.

Tien: The standard saying that the defendant need only have “reason to know” of the trade secret status factors into that.

Rowe: On the one hand, trade secret law doesn’t make value judgments—marketing info, secret recipes, maybe even illegal/immoral shortcuts (Bernie Madoff’s business model?). But courts in practice do make value judgments. Courts distinguish between technical and business info; courts are more likely to find technical info (possible patent subject matter) to be a trade secret than business (marketing) info.

Zimmerman: But what about drug info, scientific info reported to FDA that the FDA calls trade secret?

Rowe: There are exceptions for disclosing info in the public interest. California’s Bunner case is problematic in many ways, including that it involved reverse engineering. It shouldn’t have gone as far as it did.

Tien: The EFF makes all these arguments! But in N.D. Cal. we have a lot of pro-business judges inclined to protect trade secret first and ask questions after. Given the expense of discovery, the deck is stacked.

Kwall: Privacy v. property—say more.

Rowe: Everybody seems to think that property is the stronger claim. The privacy claim just adds extra, compared to perhaps other rights.

Joe Liu: Say more about equivalence—is it just an aesthetic preference? Being mistaken about statements about yourself is less persuasive. Is Nike hamstrung by application of strict liability, as was the concern in Sullivan?

Lidsky: Protection of speech shouldn’t depend on ID of speaker, right? Separately, Fred Schauer talks about boundaries between areas of law—securities regulation has proved relatively impervious to First Amendment constraints.

Me: I don’t think that first proposition is descriptively or normatively true, at least as applied to non-human entities. Schauer doesn’t have a theory of how the boundary shifts; Nike was an attempt to move the boundary and make it hard to argue with a straight face that the Lanham Act was exempt from scrutiny.

Yen: Unpredictability of damages was a big concern in Sullivan—is that as big a problem when injunction is the only remedy?

Me: Absolutely, the SCt later decided to calibrate speech-protective effects by allowing some lawsuits even when Sullivan’s standards weren’t met, but cabining damages so that only actual damages were available in the absence of actual malice. You can do some rough calibration that way, but in the end a C&D letter may have an irreducible chilling effect, at least depending on the size of the target.

Zimmerman: Rethinking commercial speech—this conversation is ignoring the audience. The audience wants to hear what Nike and Kasky have to say. She’s willing to cabin off commercial advertising, though not to cabin off the SEC and the FTC. But the public benefits from robust debate—it’s going to buy the sneakers.

Me: Sure, and Nike didn’t stop advertising or even talking about its labor policies after Kasky. Unless you get rid of the Lanham Act and the FTC, kicking Kasky out of the running still leaves Nike subject to a plain falsity/misleadingness standard in its ads.

Zimmerman: But Nike should have been free to defend itself—it didn’t start the conversation.

Me: It started the conversation about the shoes—it doesn’t get to control the metrics people use to evaluate the shoes. Every instance of speech participates in an ongoing conversation about what we should value.

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