Federal Trade Secret Legislation Gathers Momentum, But Questions Remain

by Brooks Kushman P.C.

In many ways, trade secret protection has been the “odd man out” among intellectual property rights. While patents, trademarks, and copyrights are dominated by federal statutes, trade secret rights arise under state law. In addition, while patents, trademarks, and copyrights are subject to federal review and registration, trade secrets lack central administrative regulation. Although the state-law nature of trade secrets has functioned adequately for many years, Congress is considering legislation that would create a new federal civil action for trade secret misappropriation, including broad remedies currently unavailable under state law.

Trade secret law protects a broad range of proprietary information, including processes, formulae, product development plans, and customer information. In order to qualify for protection, the trade secret generally must be in use, must confer an economic advantage to the user, must not be generally known in the industry, and must be the subject of reasonable safeguards to preserve its confidentiality. If those requirements are met, the owner may file suit when a trade secret is acquired, used, or disclosed by improper means, such as by illegal conduct or through the breach of a contractual or other legal duty. Remedies include injunctive relief to prevent actual or threatened misappropriation and damages. Historically, trade secret law developed from common law principles of agency, trusts, and torts and varied widely from state to state. Beginning in the 1980’s, however, states began adopting the Uniform Trade Secrets Act (“UTSA”) promulgated by the Uniform Law Commission. Today, the UTSA has been adopted in 47 states. Massachusetts, New York and North Carolina are the only states that have not adopted the uniform act, although a bill to adopt it has been introduced at the Massachusetts State House.

For several years, Congress has been concerned that the current state law system of trade secret rights is inadequate. Critics have pointed out that in many industries, trade secrets are at least as important as patents and copyrights, although the prevalence of trade secrets is less apparent due to their secret nature. In addition, as companies compete in interstate and global trade, state-law systems seemed ill-suited to protect valuable secrets. Finally, Congress has expressed concern about the threat posed by international espionage, including state-sponsored hacking campaigns targeting sensitive industrial information.

The principal federal statute directed to trade secret protection is the Economic Espionage Act of 1996. 18 U.S.C. §§ 1831–1839. The EEA created criminal penalties for trade secret misappropriation, including by a defendant acting as an agent for a foreign power, but did not include a private civil action for damages. Prosecutions under the EEA have been hampered in many cases by concerns that the prosecution process would result in the public disclosure – and thus destruction – of the trade secrets in question. Congress amended the EAA in 2012 to make it clear that the Act applied to trade secrets that were used in, or intended to be used in, products or services in interstate commerce, and to increase the range of available criminal penalties.

Two bills creating a federal cause of action for trade secret misappropriation have been introduced in the current Congress and are receiving broad support, although neither was passed by the full House or Senate. The House bill, H.R. 5233, known as the “Trade Secrets Protection Act of 2014,” was introduced by Representative George Holding (R North Carolina) and cosponsored by several representatives. This bill would:

  • Create a private civil action for misappropriation of trade secrets;
  • Create a civil seizure remedy, authorizing a court to enter an ex parte order seizing property necessary to preserve evidence or to prevent the “propagation or distribution” of a misappropriated trade secret. The order would be effective against a person or entity that misappropriated the secret, or was part of a conspiracy to misappropriate the secret.
  • Create other expanded remedies, including allowing a court to order affirmative steps to protect a trade secret subject to misappropriation and to award both compensatory and punitive damages.

The proposed legislation would preserve state trade secret law. The House Judiciary Committee reported H.R. 5233 to the full House on September 17, 2014. A Senate version of the bill, S 2267, known as the “Defend Trade Secrets Act of 2014” was introduced by Senator Christopher A. Coons, (D Delaware) and closely resembles the House bill. S. 267 has been referred to the Senate Judiciary Committee for consideration.

The bills have the support of a number of industry groups concerned about trade secret protection and efforts to combat industrial espionage. On the other hand, some have questioned the usefulness of a federal cause of action, when the current system of state laws seems to be working. Although uneven development and application of trade secret law was an issue prior to the UTSA, 47 states now have adopted the uniform statute with relatively minor variations in a few states. In addition, federal courts are available to adjudicate claims under the UTSA between parties in different states by exercising diversity jurisdiction. Some have argued that adoption of a federal cause of action would erode state activity in the trade secrets area, resulting in a loss of a useful mechanism for experimentation and development of trade secrets law. Furthermore, since a large percentage of trade secret misappropriation cases involve claims against current or former employees, some concern exists that a federal cause of action would lead to further federal court involvement in employment disputes, which traditionally have been resolved by state courts using state law principles.

In addition, some concerns have been expressed about the ex parte seizure provisions in the House and Senate bills, since they could lead to the interruption of business activities involving innocent third parties or the public.

Following the November election, or in the next term, Congress is likely to advance legislation to expand federal enforcement of trade secret rights. The outcome of that activity may create important substantive and strategic issues for companies that protect their valuable proprietary information as trade secrets.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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