January 2016

Unlike other forms of intellectual property, including copyrights, trademarks and patents, there is no federal common law or statute providing for a private remedy for misappropriation of trade secrets. Instead, aggrieved parties are forced to rely on state causes of action (even if brought in federal court under diversity jurisdiction) which vary from state to state. 

As large companies become more and more dependent on trade secrets, such as software code, manufacturing procedures, and product designs, and as these secrets become easier to misappropriate through cyber-espionage, Congress has attempted to step in to create a federal cause of action for misappropriation. To that end, the House and Senate each presented separate, though similar, trade secret bills in 2014. After they both failed to pass, Congress has regrouped and, on July 29, 2015, presented the Defend Trade Secrets Act of 2015 to both the House and the Senate. The proposed bill, the House and Senate versions of which are identical, has received bipartisan support and is supported by many large industries. However, many critics argue that a federal cause of action is unnecessary and will just add to the confusion or, worse, result in abusive practices by unethical or misguided companies who may seek to leverage the harsh remedies offered by the act to extort payouts from smaller competitors.

Stated Goals and Noteworthy Provisions

The Defend Trade Secrets Act of 2015 (“DTSA”) seeks to create a private cause of action under the Economic Espionage Act of 1996, which provides for criminal penalties. In a press release discussing the DTSA, its proponents noted that “[i]n today’s electronic age, trade secrets can be stolen with a few keystrokes, and increasingly, they are stolen at the direction of a foreign government or for the benefit of a foreign competitor.” The press release states that while the Economic Espionage Act of 1996 made theft of trade secrets a crime, the DOJ lacks the resources necessary to prosecute many cases. Similarly, while state law provides for a cause of action for misappropriation of trade secrets, the press release claims that state laws are not effective at stopping interstate theft. To that end, the DTSA has three goals:

  1. harmonize US trade secret law by creating a uniform standard for trade secret misappropriation;
  2. provide for injunctions and damages to preserve evidence, prevent disclosure and account for economic harm, all without preventing employee mobility; and 
  3. provide remedies consistent with other forms of intellectual property, which are all covered by federal civil law.

The DTSA seeks to achieve these goals through several provisions that would unify trade secret law in the United States. Some of the most noteworthy provisions include:

  1. the creation of a private civil cause of action in Federal Court under the Economic Espionage Act of 1996;
  2. the adoption of definitions for “trade secret” and “misappropriation” that were proposed in the Uniform Trade Secret Act (which many individual states have already adopted);
  3. remedies, including actual loss, unjust enrichment and/or a reasonably royalty, as well as treble damages for willful and malicious conduct;
  4. a generous five- (5) year statute of limitations from the date of discovery; and
  5. ex parte seizure of any property “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.”

Purported Benefits

As discussed above, proponents of the DTSA argue that it would have many benefits for industry. First, it would provide for a uniform cause of action in all states, which would therefore allow an employer to create uniform employee notices and policies to protect its trade secrets in all 50 states. Second, it would allow for national process. For instance, in a situation where an employee steels trade secrets from his employer and then flees to an international airport in a second state, the DTSA would allow service or process in the second state. In contrast, state long-arm statutes might not allow for service of process on such a fleeing employee, which could result in him leaving the country with the misappropriated trade secrets before jurisdiction, and therefore an immediate remedy like a temporary restraining order, could be sorted out by the state court. Third, it would allow for uniform discovery and easier cross-state discovery by relying on the well established Federal Rules of Civil Procedure, which provide for effective nationwide discovery. 

Purported Harms

While the DTSA describes the problems that it is meant to solve, many critics argue that an effective solution to these problems already exists. Most notably, such critics argue that the Uniform Trade Secrets Act (“UTSA”) already provides for effective, uniform protection against misappropriation of trade secrets. 

The Uniform Trade Secrets Act, which was published by the Uniform Law Commission in 1979, and amended in 1985, is a uniform act that was meant to harmonize the state common and statutory law relating to misappropriation of trade secrets that had developed throughout the years. The UTSA was actually quite similar to the DTSA in many regards. For instance, they both 1) provide for private rights of action for misappropriation of trade secrets; 2) adopt the same definition for “trade secret” and “misappropriation”; 3) provide remedies including enhanced damages (the UTSA allows doubled damages whereas the DTSA allows trebled damages); and 4) they both provide a clear statute of limitations (3 years in the UTSA; 5 years in the DTSA); and they both allow ex parte temporary restraining orders (the DTSA also allows ex parte seizure of property, which is presumed to differ in scope from a temporary restraining order). 

More interestingly, while the proponents of the DTSA argue that state law all varies widely, 47 states have adopted the UTSA, with several minor differences. For instance, the full definition of “trade secret” varies in some states. However, this variance is not as problematic as it would first seem; the discrepancies are largely a result of the inclusion of additional non-limiting examples of what is included in the already broadly defined term “trade secret.” For instance, some states expressly include “software” in the definition while others do not. However, this word difference notwithstanding, the broad definition used in all states would include software provided that the other requirements for characterization as a “trade secret” were met (e.g. it must derive independent economic value by not being readily ascertainable and it must be subject to efforts that are reasonable to maintain its secrecy).

Moreover, to the extent that there are variances in trade-secret law between the states, opponents of the DTSA note that these variances are largely the result of differences between other areas of state law (which are not addressed by the DTSA), such as employment law, duties of confidentiality and unfair competition law. One instance, wherein differences between states exist is in the adoption of the inevitable disclosure doctrine. However, the DTSA does not appear to take a clear stance on inevitable disclosure; it implies that it applies, but also suggests that it does not, with language stating that one of the core goals of the proposed act is to promote employee mobility.

Instead of creating uniformity, opponents of the DTSA further argue that the DTSA will create more uncertainty because it does not preempt other causes of action arising under the same nucleus of common facts (whereas the UTSA does), and allows for different provisions than state courts, such as a longer statute of limitations, which will promote forum shopping. Moreover, as the DTSA is based on the Commerce Clause, it will not implicate classic examples of trade secrets, such as customer lists (which are not “related to a product or service . . . used in . . . commerce”).

Many of the other purported benefits of the DTSA can also be addressed by existing law. For instance, while the DTSA allows for national process that could be used to stop a fleeing employee at an international airport before leaving with the misappropriated trade secrets for a foreign company, the DOJ already gives customs and border protection the ability to do this. Rather than going to court under the DTSA for an ex parte seizure order, a concerned employee can call in a tip to the DOJ describing the employee and trade secrets at issue, in which case the customs agents can search the employee and confiscate his property as needed. This is not simply a hypothetical; it has happened on several occasions. Additionally, the UTSA already allows for ex parte temporary restraining orders which can be used to seize assets and also permits employers to contract with their employees (the perpetrators of most misappropriation of trade secrets) so that the employer will have the right to search (remotely or otherwise) their employee’s equipment for trade secrets. Finally, state courts already provide a means of obtaining discovery from occupants of other states, which are commonly used in commercial disputes. 

Conclusion

Given the bipartisan support, and the attention that cyber-espionage has received in the media, it seems inevitable that Congress will ultimately pass an act creating a private federal cause of action for misappropriation of trade secrets. Only time will tell if it creates unity or, as its critics fear, forum shopping and abuse by large corporations against their former employees and smaller rivals.