What You Need to Know About Trade Secret Law Now

by Robins Kaplan LLP
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   Recent legal developments have made it more difficult to obtain and enforce some patents including, in particular, medical diagnostics and software-implemented technologies. Because of these patent law changes, a wide spectrum of intellectual property owners have begun to look to trade secret law as a way to protect IP assets.

   Now, thanks to the current proposals before Congress, IP holders may have even greater cause to choose trade secret protection as both pending bills provide for a federal private right of action for trade secret misappropriation.  Understanding the history of trade secret legislation and the current proposals before the U.S. House and Senate can help IP holders decide when trade secret law protection makes the most sense.

The birth of Federal trade secret legislation

   In 1974, the Supreme Court confirmed that state trade secret laws may protect inventive subject matter without running afoul of the federal patent system.[1] Following that decision, the states then continued their long-standing tradition of developing independent bodies of law and procedure to address the economic consequences of trade secret misappropriation.

   Congress passed the Uniform Trade Secrets Act (UTSA) in 1979 in an effort to harmonize those varying state trade secret laws. The UTSA sought to give companies that operate in several states a more reliable, nationwide system of trade secret protection. Almost all states have since adopted the UTSA, either in part or as a whole. But continuing state court activity has led to variations among states as to the standards for trade secret protection and available remedies for acts of trade secret misappropriation.

Trade secret law commonalties across states

   Even with individual state legislation differences, common features do exist within most of the states’ application of the law. These include:

  • Definition: Most states define a trade secret as information that derives some independent economic value. In general, the IP owner must keep the information away from others who could obtain economic value from its disclosure or use.
  • Scope: In contrast to patents, almost any information relevant to a business’ economic success can qualify as a trade secret.
  • Confidentiality requirement: The owner of the information must affirmatively take efforts to maintain the secrecy of the information.
  • Criminalizing misappropriation: Generally, trade secret misappropriation occurs with acquisition or disclosure of the trade secret through improper means—theft, bribery, misrepresentation, or inducement of another to breach a duty to preserve secrecy.[2]

These common features play a large role in creating the base for the new bills now in Congress.

The expansion of trade secret rights under Federal Law

   In 1996, Congress passed the Economic Espionage Act (“EEA”), responding to an increasing danger of industrial espionage, especially from foreign entities. The EEA criminalized acts of trade secret misappropriation by foreign actors or governments, and also criminalized domestic acts of trade secret misappropriation where the trade secret relates to interstate commerce. A conviction for acts of misappropriation under the EEA can lead to a substantial prison term and a heavy fine.

   Severe penalties and limited government resources have contributed to a relatively small number of criminal cases brought under the EEA. But several high profile convictions have increased overall awareness of the consequences of trade secret misappropriation. A criminal action under the EEA does not preempt a state law-based civil action. As a result, trade secret holders have recovered large damage awards and in some cases obtained injunctive relief in a companion civil action, often aided by a prior criminal conviction for trade secret misappropriation.

   Two bipartisan bills currently pending in Congress propose to amend the EEA. Each seeks to create a federal private right of action for trade secret owners to obtain redress for misappropriation. As with the UTSA, the federal cause of action the bills propose would broadly define trade secrets and acts of misappropriation with the aim of normalizing the law across the country.

   Senators Coons (D-DE) and Hatch (R-UT) introduced the first proposal, the Defend Trade Secrets Act of 2014 (DTSA), on April 28, 2014. The DTSA permits a trade secret owner to bring a federal civil action in response to acts of misappropriation or foreign economic espionage. It also provides for the following remedies:

  • Damages
  • Injunctive relief
  • Fee-shifting (if a party brings a claim in bad faith)
  • Up to three times enhanced damages (if the trade secret “is willfully and maliciously misappropriated”)

The DTSA also provides for an important tool: An ex parte order for preservation of evidence or seizure upon the verified complaint or affidavit of a trade secret owner.

   The second proposal, the Trade Secret Protection Act of 2014 (TSPA), found its way into the House on July 29, 2014. Representative Holding (R-NC) introduced the bill with 15 representatives from both parties listed as co-sponsors. The TSPA has the same overall provisions as the DTSA. It also preserves the right of the Attorney General to seek an injunction through a civil proceeding. Perhaps more importantly, the TSPA contains additional restrictions on the civil seizure. Specifically:

  • A court cannot issue the seizure order unless a temporary restraining order would be inadequate
  • A court must find evidence similar to that required to support a preliminary injunction (immediate and irreparable harm, balance of the harms favors seizure, likelihood of success in proving that a misappropriation occurred)
  • The applicant for seizure must not have publicized the seizure request

   Both parties in Congress appear eager to grant federal court jurisdiction to hear tortious acts of trade secret misappropriation. It is rare that expanding judicial enforcement of rights to trade secrets would garner such bipartisan support. That rarity illustrates the considerable national interests at stake in protecting economically valuable intellectual property assets of domestic enterprises.

Conclusion

   Federal trade secret law is facing potential expansion in the form of two proposals pending before the House and Senate. These proposals speak to creating a civil right of action for trade secret misappropriation. If passed, the legislation could offer broader stability and predictability of the economic benefits of trade secret-related commercial activity. Intellectual property owners should take the time to discuss with counsel how the proposed changes affect offensive and defensive strategies for existing and potential trade secret IP.

[1] Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974)

[2] Trade secret misappropriation is distinct from other contractual duties of confidentiality, such as between licensor and licensee, or employer and employee, claims that have shaped the remedies and defenses available to the involved parties.

 

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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