The Negligent Enablement of Trade Secret Misappropriation

By Rustad, Michael L. | Santa Clara High Technology Law Journal, March 2006 | Go to article overview

The Negligent Enablement of Trade Secret Misappropriation


Rustad, Michael L., Santa Clara High Technology Law Journal


INTRODUCTION

During the March 30, 2005 oral argument in the Grokster file swapping case, the attorney representing the entertainment industry urged the U.S. Supreme Court to brace up its test for contributory copyright infringement in order to restrain widespread peer-to-peer (P2P) copyright infringement. (1) The attorneys for the media moguls urged the Court to replace the Sony standard with a more rigorous secondary liability test that would make software providers legally responsible for enabling P2P copyright infringement. (2) During the Grokster oral argument, Justice Stephen Breyer expressed skepticism about the long-term effects of expanding secondary copyright liability beyond the contours of the Sony case. Justice Breyer speculated that the Xerox copying machine and the Apple iPod would never have been brought to the marketplace if the inventors were subject to secondary liability because their invention enabled copyright infringement. (3)

In the Ninth Circuit opinion, the appellate court applied the Sony standard to the Streamcast and Grokster software, holding that the providers of these peer-to-peer (P2P) products could not be secondarily liable for copyright infringement since the software was capable of significant lawful use. The court held that neither P2P software developer "could be held liable, since there was no showing that their software, being without any central server, afforded them knowledge of specific unlawful uses." (4) In its groundbreaking Grokster opinion, the U.S. Supreme Court reversed the Ninth Circuit, holding that the P2P providers could be secondarily liable for copyright infringement by importing the novel theory of intentional inducement from patent law.

The Grokster Court unanimously held that "one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement is liable for the resulting acts of infringement by third parties." (5) The Court decided the case on an "intentional inducement" theory, declining to rule on the continuing vitality of the Sony test for contributory infringement. (6) The signpost of Grokster is the greater willingness of the Court to approve imposing secondary liability on third parties that facilitate intellectual property crimes and infringement. The U.S. Supreme Court's decision in MGM v. Grokster also raises the possibility that in a future case courts may be more receptive to arguments based upon negligent enablement, (7) intentional inducement's "running mate," in order to impose secondary liability on software producers that pave the way for trade secret misappropriation. (8)

Over the past quarter century, "the American economy exploded with new technology and a proliferation of software and Internet companies." (9) Total revenue of the top 500 software companies for 2004 was an estimated $330.7 billion, a 14% increase from 2003. (10) Software is too often introduced into the marketplace with well-known software design defects that enable intruders to immediately gain privileged access to computer systems, enabling the theft of trade secrets or the leak of confidential business or personal data. (11) Substandard software costs businesses and consumers tens of billions of dollars because of defective design features or other vulnerabilities that enable cybercriminals. (12) This Article presents the case for expanding third-party liability for the misappropriation of trade secrets to safeguard American international competitiveness. Three points are made in this article. The first point is that the manifest function of The Economic Espionage Act (EEA) was to punish and deter state-sponsored espionage. (13) While Congress also intended to punish and deter the misappropriation of trade secrets by domestic defendants, the thrust of the federal statute was directed to espionage by foreign agents, instrumentalities, and governments. …

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