Just Queryin'

Last week, the Supreme Court decided Snyder v. United States. Contrary to some editorial headlines, it did not "legalize bribery." It said that while bribing state and local officials is illegal under 18 U.S.C. § 666, giving them gratuities--gifts that are not part of any quid-pro-quo arrangement--are not covered by that statute. But some critics raised the point that Justice Thomas, who has been criticized for accepting gifts from rich people with interests in some of the cases before him, was part of the majority on the case.

Which got me thinking.

Paying gratuities to federal officials is covered by 18 U.S.C. § 201(c), which makes it illegal for a "public official" to "receive" or "accept" "anything of value . . . for or because of any official act performed . . . by such official."

So Justice Thomas accepted luxury vacations and other gifts from billionaires. I'm not aware of any evidence that the gifts were actually provided "because of" his votes or opinions in any specific cases, or that he was aware of any such motivation. But if they were and he was, query whether his actions would implicate § 201(c). Or whether, for a judge, the "official act" has to be a specific vote or opinion, rather than a pattern of them, which the payer wants to reward.

Also, Canon 3(b)(2)(C) of the Supreme Court's Code of Conduct provides that a justice should disqualify himself from a case when his "impartiality might reasonably be questioned," as when he has "an interest that could be affected substantially by the outcome of the proceeding." Would it be reasonable to question whether the above conduct falls close enough to § 201(c) that Justice Thomas has an interest in the outcome of any case under that statute, or other laws relating to unlawful gratuities, such as 18 U.S.C. § 666?

Our Telepathic Future?

Much of my career has involved proving or disproving whether someone knew, believed, or intended something. Nearly all crimes require a certain mens rea, or "guilty mind." The same is true for civil claims, like RICO, that are based on allegations of crime. So too for many other civil cases, from whistleblower retaliation (requiring retaliatory intent), to certain kinds of defamation (requiring "actual malice"), to patents (requiring "willful" infringement for enhanced damages). Fraud cases, both civil and criminal, almost always turn on intent.

So when the Supreme Court blesses a new way to show a jury what someone was thinking, I pay attention. In the case of Thursday's decision in Diaz v. United States, I read every word of every separate opinion. And for my world of competitive psychoanalysis, it qualifies as a doozy.

What the Court Said

In Diaz, the titular defendant was stopped entering the U.S. from Mexico with 54 pounds of methamphetamine hidden in her car's door panels and the trunk. Her defense was that her boyfriend had asked her to drive the car, and she didn't know the dope was there. As part of its case, the government called an expert witness on Mexican cartels, who testified that "in most circumstances" involving such car-based smuggling, "the driver knows they are hired . . . to take the drugs from Point A to Point B." The woman was convicted and sentenced to seven years in prison.

Federal Rule of Evidence 704(b) states that "[i]n a criminal case, an expert witness must not state an opinion about whether the defendant did or did not have a mental state or condition that constitutes an element of the crime charged or of a defense." The idea is that it is up to the jury to decide what the defendant's state of mind was, and a witness should not be able to serve up a pre-packaged conclusion with the imprimatur of a court-approved expert. Diaz argued that this meant the government's expert should not have been allowed to give the above testimony, as it essentially equaled an opinion about whether she knew the drugs were in the car.

The Supreme Court, or at least most of it, disagreed with her. The majority took a narrow view of Rule 704(b), and said that it only barred an expert from explicitly opining on what the specific defendant knew, or on what all defendants in those circumstances would know. As long as the expert only testified that most people in the defendant's situation had the required knowledge, there was no problem. The jury could still decide whether the defendant was in the supposed minority of persons who were ignorant and innocent.

The dissent, penned by Justice Gorsuch, was incredulous. How, he wondered, could the government be allowed to circumvent the rule and introduce testimony that people in the defendant's situation would have guilty knowledge, simply by inserting the word "most"? Of course, he said, the opinion was "about" whether the defendant had the required state of mind (and thus violated the plain language of 704(b)); otherwise, why would it be relevant?

But in her concurrence, Justice Jackson--a former public defender--was almost gleeful. As she pointed out, what goes around, comes around: defendants, just as easily as the government, could introduce experts to opine that most people in the defendant's situation did not have the required knowledge, or intent, or willfulness. While Justice Gorsuch worried that the government now had a "powerful new tool" to prove mens rea, Justice Jackson recognized that the same tool could be equally powerful in creating reasonable doubt.

Back to the Good(?) Old Days

As the justices on both sides recalled, Rule 704(b) had been enacted after the trial of John Hinckley, Jr., who was charged with shooting President Reagan in 1981. At trial, multiple psychiatrists testified for the prosecution and the defense about whether Hinckley's mental disorders made it impossible for him appreciate the wrongfulness of his conduct. The jury found him not guilty by reason of insanity. In the ensuing public outcry, Rule 704(b) was introduced to prevent such battles of the experts in the future.

From personal experience, I can attest that prosecutors are not keen to let cases turn on expert battles. Not only does it take much of the probative power away from the prosecutors and law enforcement agents, but the complex and technical nature of the testimony often leads to jury confusion, which is an invitation to reasonable doubt.

But if Justices Jackson and Gorsuch are right, we may be looking at a return to the Hinckley days, with competing experts allowed to explain what "most" people in certain scenarios think. Insider trading case? An experienced stock trader or finance professor could say that most traders in the defendant's position would not intend to use the material nonpublic information they held for improper trading, but rather would trade based on legitimate factors. Health care fraud? A doctor could say that "most" of their peers would think that a certain billing arrangement was permissible. And so on.

For the expert witness industry, good times may be on the way.

Unless

Or maybe not so fast? Rule 704(b) is only one obstacle to expert testimony. Another important one is Rule 702, which allows only qualified experts to opine, and only if their specialized knowledge will help the jury; the testimony is based on sufficient facts or data; and the testimony derives from reliable principles and methods, and their reliable application in the case.

My first reaction to reading the facts of Diaz was: how did this testimony make it past Rule 702? How could the government's expert, a law enforcement officer but presumably never a drug mule or cartel member, have any basis to say what such people typically "know"? There was no indication that the expert had conducted any broad-based survey of drug smugglers, nor that he would have any idea how to do so. As Justice Gorsuch put it, the basis of the testimony appeared to be the agent's "convenient ability to read minds," even though "perhaps no 'science' is more junky than mental telepathy." 

He went on, perhaps reading my own mind:

"I struggle to see how a witness claiming to offer an opinion about another person’s (or class of persons’) thoughts at a particular moment in the past can meet any of those standards.  No one, at least outside the fortuneteller’s den, can yet claim the power to conjure reliably another’s past thoughts.  . . . [In] assessing whether a defendant's story about her state of mind is credible . . . [j]urors are more than up to performing that task, and they hardly need the help of some clairvoyant."

I once prosecuted a tax fraud case in which the defendant planned to call an expert to testify about cognitive bias--the idea that people tend to believe what they want to believe; in that case, that a particular tax refund theory was legitimate. I opposed, citing Rule 702, and may or may not have cited such legal luminaries as Paul Simon,* Francis Bacon, Upton Sinclair, and Voltaire to underscore that the jury did not need help with this particular scientific concept. The witness was excluded.

As it turns out, in Diaz, the defendant did not object under Rule 702, at least not in her motions in limine. (Yes, I looked them up.) Not a criticism of defense counsel--there were objections under other rules, and perhaps there were good reasons to skip 702. In any case, it did not come up at any stage of the trial or appellate processes.

My Own Crystal Ball

I suspect that Rule 702, and the related Daubert doctrine, will play a role in keeping out some amount of expert opinion on mental state, at least when it comes to testimony as facile as that at issue in Diaz. (Seriously: how can a law enforcement agent have a reliable scientific method for determining what most suspects know?)

Then again, the six-justice Diaz majority seemed entirely untroubled by the notion of widespread expert testimony regarding knowledge and other mental states. It did not mention Rule 702 even once. Justice Jackson, meanwhile, all but sent engraved invitations to defense counsel to make use of the practice. Perhaps 702 will not hold the line after all.

If not, the impact goes well beyond the criminal world. Rule 704(b) explicitly applies only to criminal cases; there is no such restriction in civil cases. And some may find it hard to see how expert testimony on mental states can be a fine basis for sending someone to prison, but unacceptably unreliable in business litigation and other disputes where life and liberty are not at stake. Hinckley-esque expert battles could perhaps find their way into a wide range of civil disputes as well.

Upshot: Kids, if you're having second thoughts about law school, you may want to stick with that psychology major a bit longer. There could be a few openings on the way.

* "… a man hears what he wants to hear, and disregards the rest."

When Don Corleone met Poindexter

I like it when worlds collide. Many of my cases have involved the intersection of two very different kinds of practice. For instance: the Racketeer Influenced and Corrupt Organizations (RICO) statute and intellectual property law. RICO was designed to combat the mafia, and is often the province of gangsters and feds. IP is for people who studied more in high school and maybe spent less time in jail (or dating). I was a prosecutor, but also a nerd. (Inside tip: that's true of many prosecutors.) And I've handled more than a few matters involving both RICO and IP, often patent lawsuits that have gone off the rails somehow.

So for my first post, I'm taking up one of the increasingly common ways in which those two areas fit together: RICO claims based on alleged theft of trade secrets. Congress authorized such claims in the 2016 Defend Trade Secrets Act (DTSA), but to date there have been relatively few of these cases. I think that's going to change, and IP lawyers should be ready.

What is RICO?

The RICO statute (18 U.S.C. §§ 1961-1968) was enacted in 1970 to address an increase in organized crime, in particular the growth of the Sicilian Mafia. It allowed federal prosecutors to define an "enterprise" made up of various individuals or companies who committed certain types of crimes over a period of time, and to prosecute the members of that enterprise, with sentences ranging up to 20 years per violation, along with seizure and forfeiture of related assets.

Congress also created a private right of action in RICO, allowing victims of RICO enterprises to sue the members of those enterprises civilly for harm to "business or property." Initially, this was meant to empower victims of organized crime to help the government fight it. But over time, it has been used more often in business disputes involving allegations of fraud. Because a successful RICO plaintiff is entitled to treble damages and recovery of attorney fees, courts have referred to it as "the litigation equivalent of a thermonuclear device."

How does RICO apply to trade secrets?

Not every crime can make for a RICO case. The statute lists only certain types of federal and state crimes as forms of "racketeering activity" that can make up a RICO criminal charge or civil claim. Among them are many one would ordinarily associate with the mafia: murder, kidnapping, arson, robbery, bribery, extortion, etc. But the list also includes federal mail and wire fraud, which are by far the most commonly invoked in civil RICO cases, as business plaintiffs seek to enhance the impact of fraud allegations.

Theft of trade secrets or "economic espionage" can also be a federal crime, defined at 18 U.S.C. §§ 1831 and 1832. And in the DTSA, Congress added those offenses to the list of RICO racketeering activity, also known as "predicate offenses." Thus, if a company is the victim of trade secret theft, and can satisfy the other elements of RICO, it can file a civil lawsuit for treble damages.

Why haven't we seen more of these cases?

Companies have filed a lot of trade secrets lawsuits under the DTSA itself; some very quick research turned up well over 2,000 federal court decisions involving the statute. But RICO claims based on trade secret theft? Not so much. I found only about 100 or so federal decisions that mention both the DTSA and RICO. And only two of them were from federal appellate courts. This remains largely the road less traveled.

With the promise of treble damages, attorney fees, and the opportunity to associate one's opponent with organized crime, why haven't trade secrets plaintiffs made more of these claims?

One reason may be that it is not easy to put together a viable RICO case. The plaintiff has to plausibly allege and prove that (1) the defendants were part of an "enterprise" consisting of multiple persons and companies working together for a common purpose; (2) the enterprise's members engaged in a "pattern" of racketeering activity, involving multiple illegal actions taken continuously over an extended period (generally over a year) or posing an ongoing threat; (3) the defendants knew of the illegal conduct and acted with criminal intent; and (4) the racketeering caused "concrete financial loss" to the plaintiff's business or property.

Judges are often hostile to RICO cases that appear to be merely trumped-up business disputes. The First Circuit, which came up with the "thermonuclear" metaphor, has said that courts should "strive to flush out frivolous RICO allegations at an early stage of the litigation." Many courts do so at the pleading stage, on motions to dismiss.

How have trade secret plaintiffs tried to overcome these barriers?

In practice, it should not be too hard for a company that can adequately allege trade secret theft to plead many elements of a RICO claim. If a valuable trade secret was stolen, that likely creates enough of a loss to provide standing. A decent drafter could describe the departing employee(s), and perhaps their new employer, as forming an "enterprise." Criminal DTSA violations are by definition acts of racketeering.

Where things get harder, and where many trade-secret-based RICO cases have failed, is the "pattern" requirement. The plaintiff has to describe multiple, related acts of illegal racketeering that continued over an extended period or are ongoing. Some trade secret plaintiffs have tried to do this by alleging that after the defendants wrongly obtained the trade secrets, each time they used them--e.g., each sale of a product using the stolen technology--counts as a new DTSA violation that extends the unlawful pattern.

But courts have tended to reject this theory. One reason is that only a criminal violation of the DTSA counts as a form of "racketeering." And while the criminal provisions cover many actions (e.g., knowingly "stealing" stolen trade secrets), they do not expressly cover "using" stolen trade secrets. So repeated "use" of stolen trade secrets is not enough. Just last month, a Northern District of California judge in Sylabs v. Rose applied this rationale in dismissing RICO claims based on the DTSA.

It shouldn't be too hard for a plaintiff to get around this problem. While the criminal DTSA provisions do not cover "using" stolen trade secrets, they do cover "copying," "downloading," "uploading," "communicating," or "possessing" such information, among other things. It's hard to imagine how a company could use trade secrets stolen from a competitor without repeatedly taking one of those actions. Even attempting or conspiring to do one of those things can violate the criminal provisions. A trade secrets plaintiff might avoid the Sylabs issue simply by choosing the right statutory verb.

But even then, the plaintiff would have to describe a "continuous" pattern of such actions. This could involve "closed-ended" continuity, such as a series of thefts, copying, transferring, and other covered actions with the trade secrets extending over a period of roughly one year or more. Or it could involve "open-ended" continuity, with an indication that the illegal conduct is likely to continue into the future. Many trade secrets cases are brought while the alleged conduct (including knowing possession of stolen trade secrets) is still underway; this could arguably be enough to establish "open-ended" continuity.

Another challenge is that some courts require that a RICO claim involve more than one unlawful scheme and victim. For example, in MedImpact Healthcare Systems, Inc. v. IQVIA, Inc., the defendants were accused of stealing trade secrets from their joint venture partner through a series of actions. A judge in the Southern District of California granted summary judgment for the defendant, as there was only one combined scheme affecting one corporate family of injured companies. This could be a tough barrier, as trade secrets disputes don't often feature multiple separate plaintiffs targeted separately.

Aside from the pattern requirement, RICO plaintiffs also have to allege that the defendant acted with a certain mental state, dictated by the underlying type of racketeering conduct. The criminal DTSA provisions require that the defendant (1) intend to convert the trade secret to the benefit of someone other than its owner; (2) intend or know that the conversion will harm the owner; and (3) know that the trade secret was stolen or taken without the owner's permission. Under the Supreme Court's Twombly and Iqbal decisions, a plaintiff must allege facts sufficient to make it "plausible" that the defendant had such knowledge or intent. Merely pointing out that the trade secret was stolen and ended up in another company's hands may not be enough.

More fundamentally, some judges seem to take the basic view that whatever its language, the DTSA was not meant to transform garden-variety trade secrets lawsuits into RICO cases threatening treble damages. In Hardwire v. Ebaugh, a Maryland federal judge rejected a plaintiff's case theory that, he said, would "turn a single trade secret misappropriate claim into a RICO offense every time a defendant violated the DTSA and then did not immediately stop their allegedly unlawful use of the trade secrets."

Absent particularly egregious or fraudulent conduct, a trade-secrets-based RICO claim is unlikely to fare well in those courtrooms.

Why will we see more of these cases going forward?

Of the 100 or so DTSA/RICO decisions I found, over half were issued in the past 3 years, which indicates that the frequency of these cases is picking up. There are a few possible reasons.

First, it has become harder to protect IP using patents. The 2011 America Invents Act  created a new way to challenge patents' validity, while several Supreme Court decisions made it harder to obtain certain types of patents, to file patent cases in certain favorable jurisdictions, or to obtain large jury verdicts for patent infringement. Companies and their counsel may start to see trade secrets law as a better tool than patent law for protecting IP.

Second, juries in some recent trade secrets trials have awarded eye-popping verdicts; in 2022, for example, a Virginia jury awarded $2 billion to the plaintiff in Appian Corp. v. Pegasystems, Inc. This amplifies the first factor above. Meanwhile, lawyers, litigation funders, and enterprising plaintiffs see possible contingency fee windfalls.

Third, and more recently, the crackdown on employee non-compete agreements has led companies to look for other ways to protect themselves from departing staff taking their secret sauce to competitors. On April 23, 2024, the FTC issued a new rule largely banning employee non-compete agreements. The rule, set to take effect in September, was immediately challenged by the U.S. Chamber of Commerce and others. Whether or not it survives, the fate of non-competes generally looks dubious, as both political parties move towards more economically populist policies and states from New York to Oklahoma follow in the footsteps of California, which long ago did away with non-competes in most circumstances.

Finally, as is the premise of IP law itself, success breeds imitation. Eventually, unless the courts construe the relevant statutory provisions narrowly (and even then), at least some trade secrets-based RICO cases may lead to large-scale judgments or settlements. When that happens, expect lawyers from both the IP and RICO worlds to pile on.

***

We are different breeds--us, the supposedly grizzled white-collar ruffians with our thick cigars and black fedoras, and they, the proverbial IP eggheads with bad haircuts and Popular Mechanics subscriptions. Or maybe we are not so different after all. Either way, I have a feeling we'll be seeing more of each other.