Bill would shift trade secrets landscape

Recognizing that "[t]rade secrets are an increasingly important form of intellectual property that have become more vulnerable to theft," on Sept. 17, the House Judiciary Committee approved the Trade Secrets Protection Act, H.R. 5233. The bill would create a federal civil remedy for trade secrets misappropriation and, according to House Judiciary Committee Chairman Bob Goodlatte, R-Va., take "a positive step toward improving our trade secrets laws" by building on recent legislation, namely the Economic Espionage Act (EEA).

The EEA criminalizes the theft of trade secrets and conspiracies or attempts to steal trade secrets, but it does not currently provide a private civil action for injured parties. If it becomes law, the bill would amend the EEA to permit companies and individuals to assert statutory claims in federal court to protect their trade secrets.

General Background

Trade secrets are generally defined as commercially valuable information that is not generally known or readily ascertainable to the public, but which is subject to reasonable measures to maintain confidentiality. Trade secrets may include scientific formulas or algorithms, strategic plans and business information, and manufacturing techniques or processes.

The current variation in state laws and procedures creates a complex environment for trade secret owners. Each of the 50 states has its own trade secrets law, although 48 states have adopted some version of the Uniform Trade Secrets Act (UTSA). The UTSA aimed to harmonize standards regarding the misappropriation of trade secrets, but because of the state-by-state differences in trade secrets laws (and the judicial interpretations of the same), and concerns about forum-shopping and choice-of-law issues, legislators and commentators have recommended that Congress provide a federal private right of action for trade secret theft.

The Current Scope of the EEA

Currently, the EEA provides for criminal prosecution and penalties for trade secret theft. For instance, Section 1831 of the EEA criminalizes the knowing theft, duplication or receipt of trade secrets for the benefit of a foreign government or instrumentality. Given the Obama administration's focus on "stamping out" intellectual property theft, Section 1831 was amended in January 2013, when the president signed into law the Foreign and Economic Espionage Penalty Enhancement Act. With respect to individuals, the Enhancement Act increased fines from $500,000 to $5 million. Individuals also may be imprisoned for up to 15 years, or may be subject to a fine and/or imprisonment. Organizational defendants, on the other hand, may be fined up to $10 million or three times the value of the stolen trade secret to the organization (including research and development and other avoided costs).

Generally, Section 1832 of the EEA criminalizes the knowing misappropriation of trade secrets, as well as attempts and conspiracies to misappropriate trade secrets. The scope of Section 1832 was amended pursuant to the Theft of Trade Secrets Clarification Act, which was signed into law by the president in December 2012. In response to the 2nd U.S. Circuit Court of Appeals' decision in United States v. Aleynikov, 676 F.3d 71 (2012), the Clarification Act expanded the scope of Section 1832 to include products or processes that may be used, or intended for use, in interstate or foreign commerce (e.g., source code, trading algorithms, etc.). Violations of Section 1832 may result in fines and/or imprisonment of up to 10 years for individuals, and fines of up to $5 million, restitution and/or forfeiture of ill-gotten gains for organizations.

These developments demonstrate the commitment of policymakers and law enforcement personnel to strengthening penalties, enhancing deterrence and protecting key intellectual property assets. Legislators have urged that the recent legislation is vital to protecting U.S. jobs and technologies, while promoting investments and innovation. However, many believe that federal criminal law alone is insufficient. They argue, for example, that trade secrets laws may vary from state-to-state and that federal civil law is likely to be better suited to facilitate discovery across state and national boundaries and to serve defendants or witnesses.

The Trade Secrets Protection Act

Because trade secrets protection is currently accomplished through a patchwork system of federal criminal laws and state civil statutes, the House and Senate have considered bills that would create a federal civil cause of action for the misappropriation of trade secrets, including for products or services that are used in, or intended for use in, interstate or foreign commerce. The bill just approved in September - introduced by Rep. George Holding , R-N.C. - has received bipartisan support. In proposing the bill, Ranking Member John Conyers, D-Mich., commented that "[t]rade secrets are fundamental to the success of any business" and that the bill would "create a civil cause of action and allow companies to enforce their rights in federal court[.]" Like other forms of intellectual property, such as patents, trademarks and copyrights, the bill would establish subject matter jurisdiction in federal courts for the theft of trade secrets. It also may aid in the development of a national standard for trade secrets cases.

The bill adopts the key protections of the UTSA, such as, for example, rendering unlawful the acquisition, disclosure or use of trade secrets and it defines potential remedies to include injunctive relief, damages and attorney fees. The bill also permits litigants to seek reasonable royalties and exemplary damages of up to three times the economic damages. The bill further extends the relevant statute of limitations to five years (as is the case for most federal offenses).

Moreover, the bill creates ex parte seizure rights, meaning litigants may seek an order seizing property necessary to preserve evidence or to prevent the dissemination of trade secrets that are the subject of the action. This may be the greatest departure from the current framework because no similar provision exists under the UTSA. In fact, the provision allows the owner of the trade secret to make an early appearance in court - outside of the presence of the defendant - to seek a seizure order. Commentators have suggested that the bill may be vague with respect to the nature of the items that may be seized; it simply provides for "the seizure of property necessary to preserve evidence ... or to prevent the propagation or dissemination of the trade secret that is the subject of the action." Under the bill, to obtain a seizure order, a party must provide adequate security for damages in the event the seizure is determined to be wrongful.

Given its bipartisan support, the House Judiciary Committee approved the bill by voice vote. A companion piece of legislation was introduced in the Senate by Sens. Chris Coons, D-Del., and Orrin Hatch, R-Utah. The Defend Trade Secrets Act, S. 2267, is materially similar to the House version. Coons and Hatch have touted their proposed bill as critical to protecting American intellectual property. It has been endorsed by the National Association of Manufacturers, the U.S. Chamber of Commerce, and several companies. The Senate Judiciary Committee held a hearing on the bill in May, but it has not yet been put to a vote.

Potential Ramifications

The protection of trade secrets continues to be a high priority for law and policymakers, law enforcement personnel, and the administration. The House has taken a critical step by approving the Trade Secrets Protection Act. It has been suggested that, if the bill becomes law, it would (i) build on the EEA by creating a uniform standard for trade secret misappropriation cases, and (ii) ensure consistency among the various types of intellectual property, like copyrights, patents and trademarks, each of which is covered by federal law.

And though the Senate continues to debate companion legislation, this process could take some time and there is a possibility that the House and Senate may work together to reconcile the proposed legislation before a final version of the bill is sent to the president. Although not intended to preempt existing state law provisions under the UTSA, if the bill is signed into law, it will substantially change the trade secrets landscape by providing a federal civil right of action for trade secrets owners.