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Mark L. Krotoski is a partner in the Litigation, Privacy and Cybersecurity and Antitrust practice groups of Morgan, Lewis & Bockius LLP, resident in the Washington office. He previously served as the national coordinator of the Computer Hacking and Intellectual Property Program in the Criminal Division of the Department of Justice and as an instructor on economic espionage and trade secret cases and other law enforcement issues at the DOJ National Advocacy Center.
Trade secrets, as a unique form of intellectual property, can create tremendous value for their owners, employees, an industry and the economy. The development of one trade secret can help launch numerous products or a new industry. Consider as examples the many products created by the Coca Cola formula or Google algorithm trade secrets.
The consequences of trade secret theft can be devastating. Many years of research and development and the cost of investment may be exploited by competitors or others. The cost of trade secret theft has been estimated to be “from one to three percent of the Gross Domestic Product ('GDP') of the United States and other advanced industrial economies.”1
Under current law, trade secret thieves can benefit from a “catch me if you can” environment. The remedy for trade secret theft is essentially left to local state laws. Presently, 47 states have enacted some form of the Uniform Trade Secret Act (UTSA).2 Yet in today's global economy, within hours or a few days of the initial theft, the trade secret can be transferred or transported to other states or other countries and may never be recovered. Once the secret is disclosed, the competitive value of the trade secret dissipates.
Under state law, efforts to obtain remedies for the stolen trade secrets taken to other jurisdictions can be cumbersome and ineffective. The mere act of obtaining a deposition of a witness in another state can require multiple court orders and unacceptable delays.3 In contrast, federal jurisdiction offers nationwide subpoena service power.4
Presently, federal law only provides for the prosecution of criminal trade secret theft under the Economic Espionage Act (EEA) of 1996.5 While the Department of Justice has successfully prosecuted significant trade secret theft cases, many trade secret thefts do not rise to the level of federal criminal prosecution.
Given the national priority to promote and protect trade secrets, the time has come for enactment of a federal civil private right of action. The national importance in addressing the problem of trade secret theft in our information-based economy warrants a federal remedy. After reviewing pending legislation, this article highlights several reasons why a federal civil trade secret law should be enacted.
On July 29, Rep. George Holding (R-N.C.) introduced the Trade Secrets Protection Act of 2014 (H.R. 5233) with bipartisan co-sponsors.7 On Sept. 17, the legislation, as amended, was reported out of the House Judiciary Committee.8
In its current version, the House legislation would make four primary changes to current law. First, it would establish a new private civil action in federal court. The legislation allows a trade secret owner to “bring a civil action under this subsection if the person is aggrieved by a misappropriation of a trade secret that is related to a product or service used in, or intended for use in, interstate or foreign commerce.” Second, the measure provides for an ex parte civil seizure order for the “seizure of property necessary to preserve evidence in a” federal trade secret civil action “or to prevent the propagation or dissemination of the trade secret that is the subject of the action.” Third, the legislation provides for a five-year statute of limitations, which is longer than many states provide. Fourth, as amended by voice vote, the measure would require a report concerning the scope of trade secret theft outside the U.S.
Earlier in the year, on April 29, Sen. Christopher Coons (D-Del.) introduced the Defend Trade Secrets Act of 2014 (S. 2267) with Sen. Orrin Hatch (R-Utah).9 The Senate bill also creates a private right of action for trade secret misappropriation but does so differently. Under the Senate measure, a federal civil action may be brought for (a) a violation of the federal criminal trade secret provision (Section 1832); (b) a violation of the foreign economic espionage provision (Section 1831); or (c) based on “a misappropriation of a trade secret that is related to a product or service used in, or intended for use in, interstate or foreign commerce.” Like the House bill, the Senate measure also provides for an ex parte civil seizure order and would establish a five-year statute of limitations.
While there are some differences between the House and Senate trade secret protection bills, together they demonstrate a concurrence on some key areas for reform.
While there are some differences between the House and Senate bills, together they demonstrate a concurrence on some key areas for reform.
As summarized below, a federal civil remedy would provide stronger protection of trade secrets and reinforce intellectual property rights.
A federal trade secret law will help promote and protect national economic innovation and the development of trade secrets as a unique form of intellectual property. Our national interest in protecting trade secrets was recently summarized in Federal Bureau of Investigation testimony before the Senate:
Our foreign adversaries and competitors are determined to acquire, steal, or transfer a broad range of trade secrets in which the United States maintains a definitive innovation advantage. This technological lead gives our nation a competitive advantage in today's globalized, knowledge-based economy. Protecting this competitive advantage is vital to our economic security and our national security.10
Trade secret law will encourage invention in areas where patent law does not reach, and will prompt the independent innovator to proceed with the discovery and exploitation of his invention. Competition is fostered and the public is not deprived of the use of valuable, if not quite patentable, invention.11
The legislation's objective to promote and protect our national competitive advantage in innovation complements and reinforces the original goals of the EEA, which established a federal criminal trade secret statute. As the EEA House report noted, “threats to the nation's economic interest are threats to the nation's vital security interests.”12 In signing the EEA into law, former President Bill Clinton described the need to protect trade secrets, which “are an integral part of virtually every sector of our economy and are essential to maintaining the health and competitiveness of critical industries operating in the United States.”13 Arguably, these objectives are even more important today. Our national economy relies on information and technology in ways that could never have been foreseen as recently as two decades ago.
A federal private cause of action will put trade secrets on par with the three other forms of intellectual property that already have federal civil remedies: copyrights, trademarks and patents.
One trade secret can represent the culmination of many years of research and development and a substantial investment of funds. If the entrepreneurial risks in time, effort and money can readily be stolen without an effective remedy, innovation is necessarily chilled. At some point, the risks for innovation may not be worth the unrealized reward.
In sum, a new federal civil cause of action will continue to reward risk takers for their efforts and punish wrongdoers who steal or misappropriate trade secrets. It will provide a new level of deterrence and accountability for wrongdoers.
A federal private cause of action will put trade secrets on par with the three other forms of intellectual property that already have federal civil remedies: copyrights,14 trademarks15 and patents.16 To effectively protect all forms of intellectual property, Congress should fill this gap.17
Each type of intellectual property advances distinct interests. Trade secret law protects information that provides a commercial advantage to its owner. Copyright law protects original creative works of authorship and extends to: computer software; literary, musical, dramatic, choreographic and architectural works; motion pictures and sound recordings; and pictorial, graphic and sculptural works.18 Trademark law applies to “any word, name, symbol, or device, or any combination thereof” that identifies and distinguishes the source of goods.19 Patent law covers inventions that are publicly filed and provides a “right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States.”20
The different forms of intellectual property can be interrelated. Trade secrets often serve as a precursor to patents. After the information is developed in confidence, the trade secret owner may seek the benefits from patent law by publicly filing the invention. One trade secret may lead to other forms of intellectual property protection for related products.
Under current law, an individual who infringes a copyright, trademark or patent can be held to account in federal court. In contrast, trade secret misappropriation is dependent essentially on state law.
Once a trade secret theft occurs, among the highest priorities for trade secret owners is the recovery of their trade secrets. Regrettably, recovery is not often obtained. Time is of the essence as the greatest chance to recover the trade secrets is close in time to the misappropriation.
The House and Senate bills include a new civil ex parte seizure provision to permit the “seizure of property necessary to preserve evidence in a civil case” and prevent “dissemination of the trade secret.” This provision will enhance the likelihood that trade secrets may be recovered. Similar seizure orders are provided for counterfeit trademark goods and copyrighted works.21
Appropriately, a number of safeguards are included. The seizure order may only issue for the person who “misappropriated the trade secret by improper means, or conspired” with one who did, and “is in possession of the trade secret.”22 A federal judge could not sign the order unless the applicant makes a specific showing and posts security to protect against wrongful seizure. A hearing involving all parties would be held within seven days. No state law has a comparable provision to freeze the situation, preserve evidence and seize trade secrets for the court to decide an appropriate resolution.
Several features of the EEA are stronger than current state law in protecting trade secrets. Because the legislation uses these provisions, a federal private right of action will therefore provide stronger protections for trade secrets than under the UTSA.
The protection of trade secrets in the litigation process is vital to preserve the confidentiality of trade secrets. The UTSA allows the court to issue a protective order.23 However, the UTSA does not address the situation in which a trial court orders the disclosure of trade secret information. Regrettably, this is an occasional risk in the litigation process. In contrast, the EEA contains a stronger mechanism to safeguard trade secrets during litigation.
Specifically, EEA Section 1835 allows for an interlocutory appeal for review of an adverse disclosure ruling.24 Without clear interlocutory appellate review, based on recent U.S. Supreme Court precedent, an adverse ruling may not be appealable until after the conclusion of the entire case.25 The legislation addresses this deficiency by using the stronger EEA protective order provision in civil cases.
The federal protective order provision has worked well to safeguard a wide variety of trade secrets. In the 18 years under the EEA, only twice has an interlocutory appeal been sought under Section 1835. On both occasions, the government prevailed in safeguarding the trade secrets.26
The shadow of potential and immediate appellate review makes a difference. The federal judiciary can focus on the central issue of properly safeguarding trade secret information during litigation. Civil trade secrets deserve the same protection.
The longer statute of limitations period allows trade secret owners a more realistic amount of time to seek relief.
Most trade secret misappropriation cases are highly reactive.28 Typically, a company learns about the trade secret theft after the misappropriation. Even upon learning about the misappropriation, the extent of the misappropriation may be unknown for some time. For example, many more trade secrets may have been misappropriated than were initially realized. Additionally, the company may not be able to determine how the trade secrets were stolen. The longer statute of limitations period recognizes these realities and allows trade secret owners a more realistic amount of time to seek relief.
The global economic reality is that many trade secrets are stolen and taken abroad. The EEA includes a specific extraterritorial provision to make clear that it applies to misappropriation conduct outside the country.29 The legislation extends this provision to civil cases.
The federal civil remedy would benefit from the more descriptive and broader definition of trade secret information under the EEA. While the definition of trade secret under the EEA is based on the UTSA, the EEA definition is broader than the UTSA in two respects. First it is more descriptive in terms of what is covered. Second, the federal definition expressly applies to intangible information.
Under the UTSA, a “trade secret” is defined as “information, including a formula, pattern, compilation, program, device, method, technique, or process.”31 In contrast, the broader federal definition applies expressly to:
all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.32
One of the objectives of the EEA was “to ensure that the theft of intangible information is prohibited in the same way that the theft of physical items is punished.”34 Congress made this clear by expressly including intangible information in the definition of a trade secret. The language used is important as courts look first to the plain meaning of the language of the statute in determining legislative intent.35
The legislation would not preempt state trade secret remedies. While some have criticized this approach, there are benefits from having a national and local remedy to protect trade secrets.
In our federal system it is common to have state and federal remedies. Each jurisdiction may vindicate its interests. The complementary approach also promotes deterrence as trade secret thieves will risk being held to account in either a federal or state court. Companies can best decide whether a local or national remedy is best under the circumstances.
It is not uncommon for federal and state law to overlap and support one another. As an example, the Uniform Securities Act (USA) is used as a model for state securities law to cover “fraudulent activity … at a level that eludes the applicability of federal law and, even when federal law applies, eludes the capacity of federal enforcement. Without state regulation accompanied by civil and criminal enforcement of the law in state courts, there would be no hope of redress for many victimized investors.”36 As another example, a federal statute prohibiting age discrimination37 is supplemented by many state age discrimination statutes.
Similarly, while most crimes are local, there is a benefit to allow prosecution of fraud at the local and federal levels. As another example, many states have enacted laws prohibiting computer intrusions or unauthorized access to computers,38 which supplements the Computer Fraud and Abuse Act which has both civil and criminal remedies.39
The time has arrived for a federal civil private right of action for trade secrets. A new federal law will reinforce innovation, protect trade secrets, advance our national economic and security interests and maintain our national competitive advantage with trade secrets. As already noted, the legislation establishes greater protection for trade secrets than is provided under state law.
The national protection of trade secrets is a bipartisan issue which deserves strong support. Trade secret owners should have the option of obtaining relief for trade secret theft in federal court. The national problem of safeguarding and encouraging trade secrets justifies this federal remedy.
1 Center for Responsible Enterprise And Trade (CREATe.org) and PricewaterhouseCoopers LLP, Economic Impact of Trade Secret Theft: A Framework for Companies to Safeguard Trade Secrets and Mitigate Potential Threats 3 (Feb. 2014), https://create.org/wp-content/uploads/2014/07/CREATe.org-PwC-Trade-Secret-Theft-FINAL-Feb-2014_01.pdf.
2 For the UTSA, seehttp://www.uniformlaws.org/shared/docs/trade%20secrets/utsa_final_85.pdf. For UTSA jurisdictions, seehttp://bit.ly/1qXXA0d.
3 To address this problem, several states have adopted the Uniform Interstate Depositions and Discovery Act. However, many states have not, including Texas, Florida and Illinois. See Legislative Fact Sheet--Interstate Depositions and Discovery Act (listing states), http://www.uniformlaws.org/Act.aspx?title=Interstate%20Depositions%20and%20Discovery%20Act.
4 Fed. R. Civ. P. 45(b)(2) (“A subpoena may be served at any place within the United States.”).
5 18 U.S.C. §§1831-1839.
6 SeeEconomic Espionage and Trade Secret Theft: Are Our Laws Adequate for Today's Threats?, Hearing Before the Senate Judiciary Subcommittee on Crime and Terrorism, 113th Cong. 2d Sess. (May 13, 2014), http://www.judiciary.senate.gov/meetings/economic-espionage-and-trade-secret-theft-are-our-laws-adequate-for-todays-threats; Trade Secrets: Promoting and Protecting American Innovation, Competitiveness and Market Access in Foreign Markets, Hearing Before the House Judiciary Subcommittee on Courts, Intellectual Property and Internet, 113th Cong. 2d Sess. (June 24, 2014), http://judiciary.house.gov/index.cfm/hearings?ContentRecord_id=01570313-F0D4-4B54-9013-CB5A768A0E78.
7 See H.R. 5233, 113th Cong., 2d Sess. (July 29, 2014), http://www.gpo.gov/fdsys/pkg/BILLS-113hr5233ih/pdf/BILLS-113hr5233ih.pdf . Presently, there are 21 co-sponsors.
8 See Committee Markup Transcript of: H.R. 5233, the “Trade Secrets Protection Act of 2014” (Sept. 17, 2014), http://judiciary.house.gov/_cache/files/4d029f1e-fbf3-40e1-acdd-e555b464c984/09.17.14-markup-transcript.pdf; see also Press Release, Judiciary Committee Approves Trade Secrets Legislation (Sept. 17, 2014), http://judiciary.house.gov/index.cfm/press-releases?ContentRecord_id=316CB38D-2FE7-462A-8FCC-71205AEE2152 .
9 See S. 2267, 113th Cong., 2d Sess. (Apr. 29, 2014), http://www.gpo.gov/fdsys/pkg/BILLS-113s2267is/pdf/BILLS-113s2267is.pdf; see also Press Release, Sens. Coons, Hatch Introduce Bill to Combat Theft of Trade Secrets and Protect Jobs (Apr. 29, 2014), http://www.coons.senate.gov/newsroom/releases/release/senators-coons-hatch-introduce-bill-to-combat-theft-of-trade-secrets-and-protect-jobs.
10 Statement of Randall Coleman, FBI Assistant Director, Counterintelligence Division, Senate Judiciary Subcommittee on Crime and Terrorism, Economic Espionage and Trade Secret Theft: Are Our Laws Adequate for Today's Threats?, 2 (May 13, 2014).
11 Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 485 (1974) (footnote omitted) (holding that patent law does not preempt trade secret law and recognizing the distinctions between these separate forms of intellectual property).
12 See, e.g., H.R. Rep. No. 104-788, 104th Cong., 2d Sess. 4 (1996) (noting “the development of proprietary economic information is an integral part of America's economic well-being”).
13 Statement on Signing the Economic Espionage Act of 1996 (Oct. 11, 1996), http://www.gpo.gov/fdsys/pkg/WCPD-1996-10-14/pdf/WCPD-1996-10-14-Pg2040-2.pdf.
14 See 17 U.S.C. §§501 et seq.
15 See Lanham Act, 15 U.S.C. §§1051-1127.
16 See U.S. Patent Act, 35 U.S.C. §§1 et seq.
17 Federal criminal statutes already apply to copyright and trademark infringement and trade secret misappropriation. Criminal copyright cases are authorized under 17 U.S.C. §506(a) and 18 U.S.C. §2319; criminal trademark cases are provided for under 18 U.S.C. § 2320. Trade secret misappropriation is subject to criminal penalties under the Economic Espionage Act, 18 U.S.C. §§1831-1839.
18 See 17 U.S.C. §102(a) (subject matter of copyright).
19 See 15 U.S.C. §1127 (defining “trademark”).
20 35 U.S.C. §154(a) (contents and term of patent).
21 See 15 U.S.C. §1116(d) (trademarks); 17 U.S.C. §503(a)(3) (incorporating certain subsections of 15 U.S.C. §1116(d)).
22 For the committee amendment, seehttp://judiciary.house.gov/_cache/files/60510e95-3f53-418b-b91a-9846b7e2cd46/amdt-1-holding-passed-vv.pdf.
23 UTSA, Section 5 provides that “a court shall preserve the secrecy of an alleged trade secret by reasonable means, which may include granting protective orders in connection with discovery proceedings, holding in-camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.”
24 18 U.S.C. §1835 provides: “In any prosecution or other proceeding under this chapter, the court shall enter such orders and take such other action as may be necessary and appropriate to preserve the confidentiality of trade secrets, consistent with the requirements of the Federal Rules of Criminal and Civil Procedure, the Federal Rules of Evidence, and all other applicable laws. An interlocutory appeal by the United States shall lie from a decision or order of a district court authorizing or directing the disclosure of any trade secret.”
25 See generally Mohawk Industries, Inc. v. Carpenter, 558 U.S. 100 (2009) (holding interlocutory appellate review of an adverse attorney-client privilege ruling was not available and reinforcing the role of one appeal following a final judgment in the case).
26 See United States v. Hsu, 155 F.3d 189, 203-04 (3d Cir. 1998) (reversing disclosure order as the attempt and conspiracy offenses did not require actual proof of the trade secret); see alsoUnited States v. Fei Ye, 436 F.3d 1117, 1121 (9th Cir. 2006) (although the circuit lacked jurisdiction over the interlocutory appeal since “the district court's order does not direct or authorize the 'disclosure’ of trade secrets as required by the plain language of §1835,” issuing a writ of mandamus to rescind the district court ruling mandating pretrial depositions concerning the trade secrets).
27 See UTSA, §6.
28 See, e.g., M. Krotoski, Common Issues and Challenges in Prosecuting Trade Secret and Economic Espionage Act Cases, 57 U.S. Att'ys' Bull. 1, 13-14 (Nov. 2009) (highlighting case examples showing the reactive nature of many trade secret cases), http://www.justice.gov/usao/eousa/foia_reading_room/usab5705.pdf.
29 18 U.S.C. §1837 (applicability to conduct outside the U.S.); see also H.R. Rep. No. 104-788, at 14 (“To rebut the general presumption against the extraterritoriality of U.S. criminal laws, this subsection makes it clear that the Act is meant to apply to the specified conduct occurring beyond U.S. borders.”).
30 See generally Kiobel v. Royal Dutch Petroleum Co., 133 S. Ct. 1659, 1664-65 (2013) (applying presumption to the Alien Tort Statute); Morrison v. Nat'l Australia Bank Ltd., 130 S. Ct. 2869, 2878 (2010) (noting “[w]hen a statute gives no clear indication of an extraterritorial application, it has none”).
31 UTSA, §1(4).
32 18 U.S.C. §1839(3).
33 H.R. Rep. No. 104-788, at 12 (“These general categories of information are included in the definition of trade secret for illustrative purposes and should not be read to limit the definition of trade secret. It is the Committee's intent that this definition be read broadly.”).
34 H.R. Rep. No. 104-788, at 11; see also id. at 4 (“In the last few decades, intangible assets have become more and more important to the prosperity of companies. … As the nation moves into the high-technology, information age, the value of these intangible assets will only continue to grow.”).
35 See generally Ratzlaf v. United States, 510 U.S. 135, 147-48 (1994) (“we do not resort to legislative history to cloud a statutory text that is clear”).
36 Introducer's Statement of Intent LB 1114, 98th Leg., 2nd Sess. (Neb. 2004), http://nebraskalegislature.gov/FloorDocs/98/PDF/SI/LB1114.pdf.
37 Age Discrimination in Employment Act (ADEA), 29 U.S.C. §§621-634.
38 See State Computer Crime Statutes, National Conference of State Legislatures (listing state statutes), http://www.ncsl.org/research/telecommunications-and-information-technology/computer-hacking-and-unauthorized-access-laws.aspx.
39 18 U.S.C. §§1030 et seq.; see also id. § 1030(g) (providing for a limited civil right of action).
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