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.

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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.