Anticipating a Federal Trade Secret Law

Unlike patents and copyrights, trade secrets have historically been protected primarily under state law rather than federal law. That long history may soon change, as bills to create a federal cause of action for trade secret misappropriation are advancing through both houses of the U.S. Congress. These bills would allow trade secret owners to bring a federal civil action for trade secret misappropriation as long as the trade secret “is related to a product or service used in, or intended for use in, interstate or foreign commerce.”[1] And, for the first time ever, the pending bills have the bipartisan support necessary for passage.

The federal trade secret bills would provide several powerful weapons currently missing from trade secret owners’ arsenals. First, they would create a truly uniform, nationwide law of trade secrets without the idiosyncrasies of the various states’ own trade secrets laws. Second, they would establish specific procedures for ex parte civil seizures, which are not found in the Uniform Trade Secrets Act (“UTSA”), which forms the basis for most states’ laws. Third, they would provide the benefits that generally arise out of litigation in federal courts, including broad discovery (both in terms of subject matter and geography) and the uniformity of the Federal Rules of Civil Procedure.

The Current Landscape of Trade Secret Law

Currently, trade secret law is governed primarily by state law. In 47 of the states and the District of Columbia, that law is a version of the UTSA.[2] The UTSA allows a trade secret owner to bring a cause of action for misappropriation, generally because another party has acquired those trade secrets by improper means or has threated their disclosure. Under the UTSA, a “trade secret” is defined as any information that derives potential or actual economic value from not being generally known to other persons who can benefit economically from its use, is not readily ascertainable by other persons who can benefit economically from its use through proper means, and is the subject of reasonable efforts to maintain its secrecy.[3] A trade secret is “misappropriated” when a person acquires a trade secret with the knowledge (or reason to know) that the trade secret was obtained by improper means; or discloses or uses a trade secret that was obtained by improper means, derived from a person who obtained it by improper means, or obtained under terms of confidentiality.[4] In addition, a person may misappropriate a trade secret by disclosing or using the trade secret after learning that the trade secret was revealed by accident or mistake.[5] In this context, “’improper means’ includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.”[6]

Under the UTSA, potential remedies include injunctive relief against actual or threated misappropriation, damages, and attorneys fees. The damages can include actual loss incurred by the trade secret owner and disgorgement of unjust enrichment by the misappropriating party or, alternatively, a reasonable royalty for the unauthorized disclosure or use of the trade secret. In the case of willful and malicious misappropriation, damages can be enhanced up to double the amount otherwise awarded. Attorneys’ fees can also be awarded for willful and malicious misappropriation, but are also available for a claim brought in bad faith or the bad faith bringing of or opposition to a motion to terminate an injunction. To obtain recovery under the UTSA, however, any claim must be brought within three years after the claim was, or could have been, discovered.

Notably, a claim under the UTSA can be brought only in state court, unless there is diversity of citizenship or a concurrent federal claim. Thus, service of process is limited, as is a party’s ability to obtain foreign or out-of-state evidence. In addition, the procedures of various state courts can limit the trade secret owner’s ability to pursue its claims, or may limit damages.

Currently, there is no federal law option for a private party seeking to protect its own trade secrets. That is, federal law, through the Economic Espionage Act (“EEA”), provides only for public enforcement of trade secret rights, and does so primarily through criminal punishment rather than civil enforcement. Unlike the UTSA, however, the EEA applies both throughout the U.S. and extraterritorially. In addition to criminalizing economic espionage (that is, improper actions for the benefit of foreign governments or their agents), the EEA establishes a federal criminal offense for misappropriating trade secrets “that [are] related to a product or service used in or intended for use in interstate or foreign commerce.”[7] The act of misappropriation must be done with the intent to convert the trade secret to the economic benefit of a person other than the owner and with the intent or knowledge that the offense would injure the owner of the trade secret.

The acts that constitute misappropriation under the EEA are somewhat different from those under the UTSA, reflecting the difference between the criminal and civil context of the two laws. Misappropriation under the EEA includes: (1) stealing; appropriating, taking, or carrying away without authorization; concealing; or obtaining by fraud, artifice, or deception; (2) unauthorized copying, duplicating, sketching, drawing, photographing, downloading, uploading, altering, destroying, photocopying, replicating, transmitting, delivering, sending, mailing, communicating, or conveying; (3) receiving, buying, or possessing the trade secret with knowledge that it had been stolen or obtained without authorization; (4) any attempted misappropriation; and (5) conspiracy to misappropriate.[8]

The EEA also includes a provision for civil enforcement, but only by the U.S. Attorney General and only to obtain injunctive relief.[9] It is this civil enforcement provision that the pending bills would expand to provide for private enforcement of trade secret rights.

Pending Federal Legislation

Although there are now several bills pending in both the House of Representatives and the Senate that would create a federal private right of action for trade secret misappropriation,[10] only two related bills, one in the House and one in the Senate, have attracted bipartisan support. The House bill, H.R. 5233, entitled the “Trade Secret Protection Act of 2014,” passed through the House Judiciary Committee on September 17, 2014, and currently sits on the House floor, awaiting Congress’s return after the November elections. The Senate Bill, S. 2267, entitled the “Defend Trade Secrets Act of 2014,” is currently before the Senate Judiciary Committee, which held hearings in May of this year.

Both bills are based in large part on the “Protecting American Trade Secrets and Innovation Act of 2012” (“PATSIA”), a Senate bill from the last Congress that never advanced out of committee. Indeed, Senator Coons, the primary sponsor of the current Senate bill, was one of the sponsors of that earlier draft. When the U.S. Intellectual Property Coordinator solicited comments on trade secret issues in 2013, PATSIA generally received support from entities such as the American Bar Association, the American Intellectual Property Association, the Intellectual Property Owners Association, and Ocean Tomo.[11]

Because both bills are based on PATSIA, they are fundamentally very similar. The bills both create a private cause of action for trade secret misappropriation based on the Commerce Clause of the U.S. Constitution. They also both create a process for obtaining an ex parte civil order for seizure of trade secret information. However, because they have a significant number of subtle differences (for example, the House bill adds a requirement that the executive branch report to Congress on thefts of trade secrets abroad), the House and Senate will have to act swiftly to reconcile the two bills in the short time remaining for the 113^th Congress.

In creating a private cause of action, the two bills use the same definition of a trade secret, the same definition of misappropriation, and the same definition of improper means. However, the bills define the terms slightly differently from the definitions in the UTSA.

First, the bills use the EEA’s definition of “trade secret.” Thus, trade secrets under the pending legislation are limited to secrets “related to a product or service used in or intended for use in interstate or foreign commerce.” This is because the bills are predicated on the U.S. Constitution’s Commerce Clause, which permits the federal government to regulate commerce between the States or with foreign countries, but does not allow regulation of strictly intrastate matters.

Second, the bills define “misappropriation” as any of several acts, including: (1) “acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means;” or (2) disclosure or use of a trade secret without consent by a person who (i) used improper means to acquire knowledge of the trade secret, (ii) at the time of disclosure or use, knew or had reason to know that the trade secret was derived from or through a person who had used improper means to acquire it or a person who had a duty to maintain the secrecy of the trade secret, or was acquired under circumstances giving rise to a duty to maintain the secrecy, or (iii), before a material change of position of the person, knew or had reason to know that the trade secret was a trade secret and that knowledge of the trade secret had been acquired by accident or mistake.

Third, “improper means” under the two bills “includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means,” but expressly excludes reverse engineering or independent derivation. Many states have recognized such exclusions in one form or another, but the UTSA does not spell them out explicitly, as do the pending bills.

Both bills also provide for the same remedies for trade secret misappropriation. They allow a court to grant an injunction to prevent actual or threatened misappropriation (including by requiring affirmative actions to be taken to protect the trade secret) or, if an injunction would be inequitable, condition use of the trade secret on the payment of a reasonable royalty. In terms of damages, the bills allow recovery of damages for actual loss and unjust enrichment (so long as there is no double recovery) or, instead, a reasonable royalty. If the misappropriation is willful and malicious, the bills (like the UTSA) allow for the recovery of enhanced damages, although (unlike the UTSA) the damages can be trebled, not just doubled. Attorney’s fees are available under the same terms they are available under the UTSA. Importantly, the statute of limitations under the bills is five years, not the three years under the UTSA.

The two bills take slightly different approaches to the standards for an ex parte civil seizure. They both require an affidavit or verified complaint in support, and reasonably particular pleading requirements regarding the trade secrets and the material to be seized if a court is to enter such an order for the preservation of evidence or prevention of propagation or dissemination of the trade secret. However, the Senate bill goes further in allowing seizure of property used to commit or facilitate commission of economic espionage. The standards required for the entry of a seizure order are addressed in different ways: in the House bill, they are expressly spelled out; in the Senate bill, they are imported from the Lanham Trademark Act (specifically, 15 U.S.C. § 1116(d)(2)-(11)).

One substantial difference between the bills was added to the House bill in Judiciary Committee proceedings. Specifically, the House bill now requires the Attorney General to submit a public report to Congress within one year of the bill’s enactment (and every two years thereafter) on overseas trade secret misappropriation, including by foreign governments, instrumentalities, and agents. It also requires the Attorney General to make recommendations for legislative and executive actions that could reduce trade secret misappropriation outside the U.S.

Another significant difference between the bills is how they harmonize with other provisions of the EEA. The House bill retains the Attorney General’s cause of action for civil enforcement of the EEA, the Senate bill gets rid of it. The Senate bill also allows a private party to assert a claim for economic espionage. Those differences are theoretically important because preservation of the public civil suit provision (found in the EEA at 18 USC § 1836(a)) would allow the federal government to pursue a claim when a private company is unable to do so, but the evidence is not so compelling as to justify a criminal conviction. The private right of action based on economic espionage could also be important, as it would allow private parties to proceed against foreign governments, potentially influencing foreign relations.

Conclusion

Although there is no guarantee that further action will be taken during this Congressional term, great progress toward the enactment of a federal cause of action for trade secret misappropriation has, and is, being made. Momentum is likely to continue to build, and a cause of action allowing for all of the benefits of federal court litigation is likely to result in the near future.

[1] H.R. 5233, § 2; S. 2267, § 2.

[2] The other three—Massachusetts, New York, and North Carolina—have not enacted the UTSA, although each does provide some form of trade-secret protection. We focus only on the UTSA here.

[3] UTSA § 1(4).

[4] Id. at § 1(2).

[5] Id.

[6] Id. at § 1(1).

[7] 18 U.S.C. § 1832(a).

[8] Id.

[9] 18 U.S.C. § 1836.

[10] For information on pending bills other than the two discussed in this article, please see: https://www.mbhb.com/events/xpqEventDetail.aspx?xpST=EventDetail&event=120.

[11] For a presentation providing additional detail on these comments, please see: https://www.mbhb.com/events/xpqEventDetail.aspx?xpST=EventDetail&event=83.

© 2014 McDonnell Boehnen Hulbert & Berghoff LLP

snippets is a trademark of McDonnell Boehnen Hulbert & Berghoff LLP. All rights reserved. The information contained in this newsletter reflects the understanding and opinions of the author(s) and is provided to you for informational purposes only. It is not intended to and does not represent legal advice. MBHB LLP does not intend to create an attorney–client relationship by providing this information to you. The information in this publication is not a substitute for obtaining legal advice from an attorney licensed in your particular state. snippets may be considered attorney advertising in some states.