FALL 2010

Trade Secrets


Course No. 9200-704 (& 804)-801

ID No. 85737 & 85736

Time:  W 6:30 - 9:30 p.m.
Room:  W-215
Professor Jay Dratler, Jr.
Room Across from 231D (IP Alcove)
Home: 330-835-4537
Copyright © 2000, 2002, 2003, 2006, 2008, 2010   Jay Dratler, Jr.   For permission, see CMI.

Questions and Notes on Remington, International Comity, and Bankrupty Proceedings

1.  The Remington case makes a nice segue from international protection to bankruptcy, as it has feet planted firmly in both fields.  First let's look at the case's international aspects.

From the plaintiff's point of view, what is the main issue in this case?  Isn't it whether the Dutch bankruptcy trustee had the power to sell Remington's trade secrets to BSI free of the restrictions that Remington's agreement with its Dutch subsidiary put on their use?

What would/should be the answer to that question under U.S. law?  If A licenses B, A's subsidiary, to use A's trade secrets but requires B to keep those secrets confidential, can B sell them to a third party for use without restriction?  If not, should B's trustee in bankruptcy be able to do so if B becomes insolvent?

Suppose that the answer to the last two questions is "no."  Does that necessarily mean that the same result should apply in Holland?  Does United States law apply in a Dutch bankruptcy proceeding?   Does our trade-secret law?  If so, what state's law should apply?

2.  You needn't have had a course in international law to see the practical consquences of one country trying to "project" its law into another.  The consequences are apparent in this case.  The Dutch bankruptcy trustee thought he was doing his job appropriately in accordance with Dutch bankruptcy law and the substance of Dutch law relating to trade secrets.  Yet the district judge in New Jersey was so frustrated with the Dutch trustee's failure to perform in accordance with what that judge saw as applicable U.S. law that he ordered the Dutch trustee jailed for contempt.

Isn't that order futile?  Is a Dutch judge likely to extradite a Dutch bankruptcy trustee for incarceration in the United States for failing to obey U.S. law?  More important, can you see the next step?  Isn't the next step for a judge in Holland to order the New Jersey judge jailed for violating Dutch law?

If you think that the United States is the only nation capable of aggressive tactics in attempting to assert its own law abroad, consider the famous case of Laker Airways.  There an English court of appeal enjoined the low-cost, no-frills airline from maintaining an antitrust action against its rivals in the United States, and the UK Secretary of State issued a directive forbidding any English subject from complying with any U.S. antitrust order, prohibition or discovery request absent his prior permission.  Cooler heads in the English House of Lords and the American judiciary later prevailed, but the case reflected a classic confrontation between two differing systems of national law.  For a good summary, see Monroe Leigh, Uuited Kingdom: Conflict of laws—antisuit injunction— English court's injunction halting antitrust proceedings in U.S. court dissolved, 79 A.J.I.L. 141-143 (1985).

3.  Two doctrines have developed to avoid this sort of scenario, which might lead to serious international misunderstanding and, in extreme cases, perhaps even to war.  First, most countries do not try to give their own law extraterritorial application.  That is, they apply their own laws only within their own boundaries and try to recognize foreign law with respect to events ocurring on foreign soil.  Courts in the United States generally follow this principle in the field of intellectual property.  They give U.S. law little or no extraterritorial effect, except where foreign events have direct effects on United States soil.  See generally, 1 Jay Dratler, Jr., Intellectual Property Law: Commercial, Creative, and Industrial Property § 1.09[1] (Law Journal Press 1991 & Supps.).

The second doctrine that helps prevent unfortunate conflicts is the doctrine of comity discussed by the Remington court.  Simply put, comity is a prudential, discretionary doctrine by which courts try to avoid international conflict by giving effect, where possible and not inconsistent with domestic law, to foreign laws and adjudications.

As the Remington court notes, the doctrine of comity differs from the so-called "act of state" doctrine, although the two are based upon similar policies. The "act of state" doctrine is mandatory; it forbids any domestic court from questioning the act of a foreign sovereign.  See Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 401, 84 S.Ct. 923, 11 L.Ed.2d 804 (1964) ("The act of state doctrine in its traditional formulation precludes the courts of this country from inquiring into the validity of the public acts a recognized foreign sovereign power committed within its own territory").  In contrast , the doctrine of comity is discretionary and prudential; it recognizes that not every act of a foreign court is an act of state, but it nevertheless cautions domestic courts against creating unnecessary conflict.

4.  Before the Third Circuit even reaches the matter of comity, it defers to Dutch law in two ways.  First, it recognizes that the propriety of an alleged transfer of assets (the trade secrets) from Remington's Dutch subsidiary to a buyer in a Dutch bankruptcy proceeding is a matter of Dutch law.  Second, it analyzes the proceedings in the Dutch bankruptcy to determine whether that precise issue was actually resolved under Dutch law.  Only after deciding that the precise issue was not decided does the court proceed to decide it—under Dutch law, as described to it by expert testimony introduced for that purpose.  See Fed. R. Civ. P. 44.

5.  The court's analysis of trade-secret protection under Dutch law is a classic example of a civil-law system's approach to trade secrets.  Holland at that time had no specific law on trade secrets; it had only a general provision for damages in the Civil Code, namely, Netherlands Civil Code, Article 1401.  That statute provided generally that "[e]ach wrongful act, by which damage is done to another, imposes upon him by whose fault that damage was caused the obligation to reimburse the same."   In the absence of judicial authority, the Third Circuit relies upon scholarly authority to the effect that trade-secret misappropriation is a"wrongful act" wthin the meaning of this Dutch provision.

Was the Third Circuit right to interpret Dutch law in this fashion without binding Dutch authority?  Could it have done so if there had been authority in Holland to the contrary, i.e., a judicial decision from somewhere in Holland saying that Netherlands Civil Code Article 1401 provides no cause of action for trade-secret misappropriation, or no remedy under similar circumstances?  Would it matter whether the court rendering that decision was the highest national court in Holland or merely a lower court?  Would/should it matter that Holland's is a civil-law system in which judicial decisions are supposed to have no precedential effect?

6.  The Remington decision came down nearly a decade before the TRIPs Agreement went into effect.  Suppose the same case arose today, now that the TRIPs Agreement, and in particular Article 39, is in effect.  (The United States and Holland are both members of the WTO and therefore signatories to the TRIPs Agreement.)

Would Netherlands Civil Code Article 1401 satisfy Holland's international obligations under Article 39 of the TRIPs Agreement?  if the highest court in Holland had intepreted it as protecting trade secrets, just like the Third Circuit?  if there were no judicial decision in Holland on point?  if the only decision in Holland were to the contrary, by a court at the lowest level of the Dutch judiciary?

If Dutch law were still uncertain, what weight should a United States court give to the TRIPs Agreement in determining whether Dutch law protects trade secrets?  If, for example, there is no judicial precedent on point in Holland, should a United States court conclude that a Dutch court would construe Civil Code Article 1401 as protecting trade secrets because Holland has an international obligation under the TRIPs Agreement to protect them?  Does/should that depend upon whether Holland recognizes a doctrine of self-execution of treaties as does the United States?  upon whether, if Holland has such a doctrine, Holland recognizes the TRIPs Agreement as self-executing?

7.  Now let's look at the international aspects of the Dutch bankruptcy procceding.  In Holland, as in the United States and most other countries, bankruptcy proceedings have two primary purposes.  First, they aim to distribute the assets of the bankrupt among its creditors and claimants as fairly and equitably as possible.  Second, if the proceeding is designed to reorganize, rather than liquidate, the bankrupt, they aim to give the bankrupt concern a"fresh start," free of ongoing debt that might impair its ability to continue to function as a business.  The Third Circuit describes this "fresh start" as "rehabilitation" of the bankrupt.

To reach the first goal—equitable distribution of assets among creditors and claimants—bankruptcy laws generally treat creditors and claimants similarly. They may recognize different classes of claimants, depending upon the characteristics of their claims, but all claimants within a particular class share equally in the distribution of the debtor's assets.  That is the universal rule for bankruptcy and indeed the Dutch rule of paritas creditorum (Latin: "partity of creditors) that the Third Circuit mentions.  Unsecured creditors—those without a security interest or other preferred status in the bankruptcy proceeding—generally are last in line and receive the least benefit from the distribution.  Often unsecured creditors in a liquidation receive only pennies on the dollar for their claims.

8.  From a bankruptcy perspective, the chief issue in the case is whether Remington's trade-secret claim can be put in a separate class from the bankrupt's ordinary debts and therefore whether Remington had a better chance than an ordinary creditor to receive a substantial portion of its claims.

Under American law, Remington can put its claim in a separate class through an equitable doctrine known as a "constructive trust."  A "constructive trust" is a fictional trust that considers the property it covers (the trade secrets, he documents containing them, or the inventory of typewriters and parts) to be the the property of Remington, at least in equity, rather than the property of the bankrupt estate.  See Begier v. IRS, 496 U.S. 53, 59, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990) ("Because the debtor does not own an equitable interest in property he holds in trust for another, that interest is not 'property of the estate.'  Nor is such an equitable interest 'property of the debtor' for purposes of [11 U.S.C.] § 547(b)"), followed in Poss v. Morris (In re Morris), 260 F.3d 654, 670, (6th Cir.Ohio 2001).  What this means, in essence, is that Remington might get an order for the trustee to return the specific property subject to the constructive trust, rather than having the trustee sell that property to the highest bidder and allow Remington to participate in its fractional share of the proceeds along with all the other creditors.

Was the Third Circuit right in concluding that the district court's "return the documents" order did not violate any principle of comity, i.e., that it was not inconsistent with the Dutch bankruptcy proceedings?  What facts in the case suggest that the Third Circuit was right in this regard?  Do any facts suggest the contrary?

9.  Remington also hoped to receive priority with respect to its claims against certain physical property, namely, the inventory of typewriters and parts built using Remington's trade secrets.  With respect to these assets—at least those outside the United States—the Third Circuit appeared reluctant to impose the same sort of constructive trust, for fear that doing so would conflict with the bankruptcy trustee's duty under Dutch law to distribute physical assets or their proceeds fairly and equally to all the creditors.  Did comity require the Third Circuit to limit the constructive trust to physical assets in the United States?  If the Third Circuit had not done so, would there have been a high likelihood of an international dispute?  Why or why not?

10.  In the end, Third Circuit provided a partial solution to the judicial dilemma along the lines of reciprocity.  Remington, it said, must reduce its trade-secret claim to a damages judgment in the New Jersey court and then take that judgment across the Atlantic to Holland.  If the Dutch trustee then recognizes the New Jersey judgment to the same extent as the judgment of a Dutch court, the New Jersey court should consider the Dutch trustee's interests in equal distribution and rehabilitating the debtor in deciding how to divide the bankrupt's physical assests in the United States. (Remington apparently tried to take this first step, but it followed the wrong procedure; it presented its claim to the Dutch bankruptcy trustee, rather than to a Dutch court, so another relatively fruitless appeal to the Third Circuit was necessary.  See Kilbarr Corp. v. Business Systems, Inc., 990 F.2d 83 (3d Cir. 1993).).

11.  If Remington had presented its claim based on the New Jersey judgement properly to a Dutch court, how would/should the Dutch court treat that claim?  Suppose the Dutch court recognized the claim but treated the judgment owing to Remington as just another unsecured claim in the bankruptcy proceeding, to be handled together will all the others.  Would that produce the same benefit to Remington and its current shareholders as a constructive trust under United States law?

The Third Circuit notes, however, that there was a chance for Remington's claim to be considered an "administrative" claim, which enjoys certain priority in bankruptcy proceedings.  If Remington can show that its claim is an administrative claim under Dutch bankruptcy law, then it will receive a pro-rata share of all the administrative claims, which get paid before the general claims of unsecured creditors.  Would that result produce the same benefit for Remington as a contstructive trust?  Would it be better for Remington than having its claim considered a general unsecured claim?

What legal strandard does the Third Circuit suggest that Dutch law applies in determining whether Remington's claim is eligible for an administrative priority?  Would Remington be likely to be able to satisfy that standard?

12.  Remington's litigation stategy appears to have beeen to concentrate on the proceedings in the United States and to pay less attention to the Dutch proceedings.  Was that a wise strategy?  Based upon what the Third Circuit's opinion reveals about Dutch Bankruptcy law, can you propose an international litigation strategy that might have had a better chance of success—or at least a chance of incurring less delay in payment?  Might Remington have been better off if it had hired Dutch legal counsel as soon as BSI had gone into insolvency proceeedings in Holland, rather than trying to enforce U.S. law there?

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