It’s Time for Congress to Start Protecting Trade Secrets

By James Pooley
December 20, 2015

capitol-335-bWhile trade secrets have become more important, advances in electronics like flash drives and smartphones have made data theft almost infinitely easier and faster. And unlike the threats of a generation ago, when trade secret theft typically benefited a local competitor, globalization of business means that today’s insiders often steal on behalf of companies located in other states or countries.

Still, despite the fact that the reliance on trade secret protection is increasing and the need for a federal civil remedy is becoming more apparent, trade secret protection does not always get the same attention as other forms of intellectual property. Congress considering the Defend Trade Secrets Act (DTSA) provides an important opportunity at a critical juncture.

Information assets have rapidly come to form the core of our country’s economy. As recently as the late 1970s, only twenty percent of public company value was represented by “intangibles.” Today the number is over eighty percent. So in a single generation we have seen a shift of historic proportions in the nature of industrial property.

And that new property that fuels our economy is mainly protected as trade secrets. In a recent survey by the National Science Foundation and the Census Bureau, companies classified as “R&D-intensive” – which collectively account for 75% of private R&D spending in the U.S. – were asked to rank the importance of various kinds of IP laws in protecting their competitive advantage. Trade secrets came out on top, rated at more than twice the level of patents.[1] This is particularly true for small businesses, which traditionally rely on simple secrecy much more than costly patents.

Trade secret theft hurts all kinds of companies, as well as our economy. When large companies lose secrets to a foreign competitor, the competitor can go straight to manufacturing without the costs and risks of honest R&D, allowing it to undercut the U.S. company, which loses profits and jobs. And things can be much worse for a small business that relies on a single line of products. When it loses the technology that gives it a competitive edge, it may have to shut down.

To maintain legal protection, companies have to take reasonable steps to keep their information secret. When I first started working in this area, information security was fairly simple: all a company had to do was guard the photocopier and watch who went in and out the front door of the building. Since then, advances in electronics like flash drives and smartphones have made data theft almost infinitely easier and faster. The new environment enables not just external hacking of corporate networks, but also misappropriation by trusted insiders like employees, consultants and suppliers. And unlike the threats of a generation ago, when trade secret theft typically benefited a local competitor, the globalization of business means that today’s insiders often steal on behalf of companies located in other states or countries.

So within the time since I began my professional career, our economy has transformed to near-complete reliance on information for competitive advantage, while at the same time we have invented technologies that make it easier to steal that information and move it quickly out of the country.

Traditional state remedies for trade secret misappropriation are too inefficient to fully meet this new challenge. The Uniform Trade Secrets Act has been widely adopted, but with many deviations. In addition, state procedural laws were not designed for efficiency in cross-border litigation. If a case in Illinois requires testimony of a witness in California, getting the required orders from each state can take weeks or months.

The Economic Espionage Act makes some trade secret theft a federal crime, but relying on the U.S. Attorney to file criminal actions would only deal with a tiny fraction of the cases.

So it should be apparent that neither state law nor the EEA offers a satisfactory solution to the time-critical nature of interstate and international misappropriation of a company’s know-how. Federal courts, however, can provide the necessary resource. They can apply a single, national standard for trade secret misappropriation and a transparent set of procedural rules, allowing nationwide service of process and enabling quick action by trade secret owners even when confronted with actors in multiple jurisdictions.

American businesses – small and large – operate across state and national borders, and they deserve a federal civil remedy when their know-how is stolen.

I strongly disagree with those who argue that we don’t need federal legislation because state laws are uniform enough; that the DTSA’s seizure provisions are too broad; or that the legislation would burden small companies with higher costs and interfere with the right of individuals to change jobs.

First, the state-by-state variations in the UTSA today are in some cases worse than had existed before it was proposed. These inconsistencies burden companies – including small ones – that have interstate or international business. Enacting the DTSA will provide a level of uniformity across the federal system that we had hoped for but didn’t get with the UTSA.

Second, the ex parte seizure language in the DTSA is narrow and carefully designed to avoid abuse. The application must clearly and specifically demonstrate all the required facts. Only property “necessary to prevent the propagation or dissemination of the trade secret” can be seized. The order has to minimize interruption to the defendant’s related business and avoid any disruption to unrelated business. These protections are greater than exist for the other ex parte form of relief – a TRO.

Getting any ex parte order under these restrictions will be extremely difficult. And the consequences of a careless petition can be severe, including damages for wrongful seizure that are not limited by the amount of the required bond.

Third, the DTSA will not increase the cost of trade secret litigation. We have had decades of experience with federal courts handling state-law trade secret cases under supplemental or diversity jurisdiction, and there is no evidence of any difference in costs.

Finally, the DTSA presents no danger to the mobility of labor. It uses precisely the same language as the UTSA in permitting injunctions against “threatened” misappropriation. And it adds language barring injunctions against taking a job “under conditions that avoid actual or threatened misappropriation.” This provides additional assurance and is consistent with the law in every state that has enacted the UTSA, including California.

We need the DTSA, to fill a gap in remedies available to U.S. businesses operating in an information-based, globalized economy. The DTSA has been carefully fashioned to deter and punish abuse. Using well-established definitions and norms, it provides businesses a choice to file a familiar claim in an effective forum. And it does this without creating any new risks for small companies or individuals.

In part two of this article I will discuss the basic underpinnings of trade secret law in the United States, why the UTSA has failed, why the DTSA is the proper vehicle for Congressional action and why the criticism of the DTSA is wholly misplaced.

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[1] Business Use of Intellectual Property Protection Documented in NSF Survey, NSF 12-307 (2012), available at http://www.nsf.gov/statistics/infbrief/nsf12307/.

The Author

James Pooley

James Pooley is a former Deputy Director of the World Intellectual Property Organization (WIPO). Having returned to Silicon Valley, Mr. Pooley established a private law practice where he specializes in high-level litigation counseling and strategy.

For more than 35 years, Jim has represented clients as lead trial counsel and strategic advisor in high-stakes patent and trade secret disputes. His broad litigation experience, combined with his service as an international diplomat and business executive, make him uniquely qualified to handle today’s global IP challenges. Jim testified before the Senate Judiciary Committee on the Defend Trade Secrets Act, and has worked with congressional staff on the legislation. His most recent book is Secrets: Managing Information Assets in the Age of Cyberespionage, available here.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 3 Comments comments.

  1. Paul Morinville December 20, 2015 12:02 pm

    How does the federal government have the power to protect trade secrets? Seems the 10th amendment says no.

    This legislation would protect large cloud and data center companies who wish to hide their inventions. The problem with this is the mousetrap. If a successful economy is driven by always producing a better mousetrap, trade secrets hide the mousetrap. That means nobody can build a better one becasue nobody knows what exists. It creates an innovation system where everyone is on their own and reinvention the same thing again and again. Then hiding it.

    It makes sense to me to protect data. It makes no sense to protect patentable subject matter. Trade secret protections should exclude those things that could be patented.

  2. Night Writer December 20, 2015 4:28 pm

    I agree with Paul. The reality is that the great push for trade secret protection is part of the dismantling of the patent system by the multi-national corporations. If the trade secret legislation is passed, we are going to start seeing draconian employment agreements, an inability of employees to change companies, and everything becoming a secret with no patents and the disclosure.

    That is just reality. I predicted many years ago that as soon as patents were weakened that the push would come for trade secrets and here it is.

  3. Greg Waite December 23, 2015 9:52 am

    Trade secrets have and always will be an important part of the value of invention families. I agree that if you provide an imbalance between patent and trade secret protection that it can be exploited and have undesirable results. The patent system has and still does provide an incredible reference of research and has a lot to do with the great advancements that have been made. We need to be very cautious about the invisible and non-leveraging aspects of trade secrets.

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