Trade Secret Protection is the new Black? Maybe

Intellectual property owners may benefit from an anticipated change to federal trade secret law

For some technology areas like medical diagnostics and software-implemented technologies, recent legal developments have made patent rights more difficult to obtain and enforce. When patents fall short, intellectual property owners have the option of relying on trade secret law to protect technology assets that confer a definable economic advantage over competitors.

In the past few months, both houses of Congress have proposed changes to federal trade secret laws. Those proposals outline a new civil litigation enforcement channel that could increase the value of intellectual property held as trade secrets. It’s probably too soon for rights holders to begin celebrating. But given the breadth of the proposals in light of the current law, the future may hold expanded relief for misappropriation that creates a strong incentive for actors to preserve trade secrets, broadly promoting stability and predictability of commercial activity.

40 years ago, the Supreme Court confirmed in Kewanee Oil Co. v. Bicron Corp. that state trade secret laws may protect inventive subject matter without running afoul of the exclusive federal patent system. Guided by their respective common laws and the Restatement of Torts, states developed different bodies of law and procedure governing liability and remedies for trade secret misappropriation.

Proposed as a framework for harmonizing trade secret laws among states, the Uniform Trade Secrets Act (UTSA) sought to give U.S. companies operating in several states a more reliable, nationwide system of trade secret protection. Even though the UTSA has now been adopted at least in part by almost all states, trade secret laws nevertheless continued to develop separately in each state, providing variable degrees of protection.

Despite differences in states’ application of the law, there are common features. Consistent with the UTSA, most states define a trade secret as information that derives some independent economic value because the information is not known by others who can obtain economic value from its disclosure or use. The owner of the information must affirmatively take efforts to maintain the secrecy of the information. In contrast to patents, almost any information relevant to a business’ economic success can qualify as a trade secret.

Generally, trade secret misappropriation under state law 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. 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 involved parties.

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Responding to an increasing danger of industrial espionage, primarily from abroad, Congress passed the Economic Espionage Act (EEA) in 1996. The EEA criminalized acts of trade secret misappropriation by foreign actors or governments, as well as domestically, provided that the trade secret contributed to interstate commerce activity. The Justice Department has the option of seeking a conviction for acts of misappropriation that can lead to a substantial prison term and a heavy fine. Perhaps not surprisingly, severe penalties and limited resources have contributed to a relatively small number of criminal cases brought under the EEA.

After several attempts in recent years, two bills recently introduced with bipartisan support propose amending the EEA to grant a private right of action for trade secret owners to seek redress for misappropriation. As with the UTSA, federal civil actions propose to apply broad definitions for trade secrets and those improper means creating acts of misappropriation.

Senators Coons (D-DE) and Hatch (R-UT) introduced the Defend Trade Secrets Act of 2014 (DTSA) on April 28, 2014. The DTSA permits an owner of a trade secret to bring a civil action in response to acts of trade secret misappropriation or foreign economic espionage. The DTSA provides for damages, injunctive relief, fee-shifting if a claim is brought in bad faith, and up to three times enhanced damages are available if the trade secret “is willfully and maliciously misappropriated.” An important tool provided for in the proposed legislation is an ex parte order for preservation of evidence or seizure upon the verified complaint or affidavit of a trade secret owner.

15 representatives from both parties co-sponsored the Trade Secret Protection Act of 2014 (TSPA), first introduced in the House by Representative Holding (R-NC) on July 29, 2014. In general, the TSPA has the same overall provisions as the DTSA, but TSPA preserves the right of the attorney general to seek an injunction through a civil proceeding. But the TSPA contains more restrictions on the civil seizure. An order seizing property cannot issue 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), and in addition, the applicant for seizure must not have publicized the seizure request.

By and large, both parties in both houses of Congress appear eager to pass legislation that would grant the federal courts jurisdiction to hear tortious acts of trade secret misappropriation. That expanding judicial enforcement of rights to trade secrets would garner such bipartisan support — a rare event in the 113th Congress — illustrates the considerable national interests at stake in protecting economically valuable intellectual property assets of domestic enterprises.

Only time will tell what effects a civil right of action for trade secret misappropriation might have on intellectual property rights management. But given the political winds afoot in Washington, companies would be wise to seek legal counsel about offensive and defensive strategies regarding trade secret protection, and potential changes that may impact current views.

Contributing Author

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Matthew McFarlane

Matthew McFarlane is a trial attorney at Robins, Kaplan, Miller & Ciresi L.L.P. who represents clients in a variety of intellectual property matters....

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