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Time to Modernize and Strengthen Trade Secret Law, Corporate Counsel

December 01, 2015

The U.S. Senate Judiciary Committee has scheduled a hearing for Dec. 2 on a subject that is important to our national economy and security: protecting trade secrets. The hearing will highlight bipartisan legislation, the Defend Trade Secrets Act (DTSA), that, if enacted, will modernize and strengthen trade secret law and address a number of weaknesses under current law. The legislation has been introduced by Senators Orrin Hatch (R-UT) and Chris Coons (D-DE) and Representatives Doug Collins (R-GA) and Jerrold Nadler (D-NY).

The bipartisan support isn’t surprising, even in the current Congress. After all, who is against protecting trade secrets? Trade secrets provide tremendous benefits to the national and local economies. They support, jobs, innovation and new products and services. Trade secrets--which can take many forms such as source code, formulas, secret recipes and prototypes--have many owners, from small businesses, startups, medium and large companies and individuals and groups who have yet to form a company.

Because of their significant value, however, they are often targeted for theft and misappropriation by insiders, competitors and more recently perpetrators of cyber espionage. Thieves can reap the benefit of potentially millions of dollars in prior research and development invested in trade secrets. The cumulative cost has been estimated to be from one to three percent of the Gross Domestic Product of the United States and other advanced industrial economies.

Unfortunately, under current law, obtaining a meaningful remedy can be costly, cumbersome and ineffective. Today, civil trade secret remedies are based solely on state, but not federal law. State trade secret laws provide an important remedy for local trade secret theft, however, in today’s global economy, state laws are often ineffective in redressing theft of trade secrets that are removed to other jurisdictions. For example, obtaining a deposition of a witness in another state can require multiple court orders in different jurisdictions and lengthy delays.

In limited circumstances, federal courts may apply state trade secret law where jurisdiction is based on diversity of citizenship among the parties and the matter in controversy exceeds $75,000 (known as diversity jurisdiction). However, diversity jurisdiction is not available where the parties are from the same state, even if the trade secret was removed to another state or outside the country. Under this jurisdiction, the federal court is applying state and not federal trade secret law.

What may be most troubling is that policies to encourage and promote trade secrets are undermined by an inability to obtain meaningful remedies. The most important remedy, of course, is the ability to recover trade secrets after they are stolen. But these days trade secrets can readily be emailed or transferred to other jurisdictions within minutes or hours.    

DTSA advances a number of significant benefits.  DTSA would, for the first time, afford trade secret owners the option of a federal private right of action for trade secret theft. Claims for the infringement of other forms of intellectual property, including copyrights, trademarks, and patents, are heard in federal court. There is no reason why this same option should not be extended to trade secrets, which is one of four intellectual property rights.  Trade secret owners would have a choice of seeking relief in either federal or state court where the jurisdictional requirements are met. This gives them more choices on the best forum for the case.

Second, DTSA provides an effective, reasonable and balanced means to recover stolen trade secrets. In any trade secret case, one of the highest priorities is to recover the stolen trade secrets. Regrettably, they rarely are. Current law lacks an effective mechanism to help make that possible. The legislation would provide a federal court the authority to issue a short-term, ex parte civil order, under limited circumstances and upon a sufficient showing, to seize allegedly stolen trade secrets and prevent their transfer. The ex parte provision simply allows the federal court to preserve the status quo pending a full hearing within seven days with all parties. This part of the legislation also contains a number of safeguards. For example, it requires that the seized material be brought within the custody of the court, and enables the court to consider any claims of abuse in the ex parte seizure.

Third, DTSA includes provisions that recognize the realities of trade secret theft in the digital era. For example, the court can “secure the seized material from physical and electronic access during the seizure and while in the custody of the court.”  A party can request that any seized materials be encrypted.

Fourth, by amending an existing statute, the Economic Espionage Act (EEA) of 1996, which is a criminal statute, DTSA would create new civil remedies and draw upon practice and experience with a statute that has been used effectively for criminal cases. For example, the federal protective order provision has been used successfully to safeguard a wide variety of trade secrets and is stronger than state law. The definition of a trade secret is broader than the definition under the UTSA as it is more descriptive in its coverage and expressly applies to intangible information.

Fifth, the legislation would establish a five year statute of limitations, which is longer than the three year statute under the Uniform Trade Secrets Act (UTSA), which has been adopted by 47 states.  Trade secret theft cases can be challenging and difficult to investigate and prove.  Often the time to establish and understand the full scope of the misappropriation and the nature and circumstances may take a substantial amount of time.

Finally, the legislation strengthens the options for remedying trade secret theft by providing trade secret owners with a choice of federal or state law.  The legislation explicitly does not preempt state trade secret laws, which means that trade secret owners will continue to have a choice.

Some questions about the legislation have been raised.  In considering the answers to these questions, the benefits of the legislation are reinforced.

Could DTSA increase litigation and other costs for trade secret cases?  Actually, DTSA would reduce costs in a number of key respects. If the ex parte seizure order results in the recovery of stolen trade secrets, the cost savings will be tremendous. The inability to recover the stolen trade secrets in state court means the trade secrets may be used by others. The thief obtains a windfall by benefitting from the prior research and development invested in the trade secrets.

DTSA will promote litigation costs savings.  The costs of litigation will often turn on the facts of the case.  A local misappropriation may be well-suited for state court resolution.  However, the state court process is cumbersome and more costly when the trade secret has been taken to other jurisdictions. Under the legislation, the costs of litigation will be lower as a federal court can order discovery and depositions, and enforce a judgment more efficiently and effectively than state courts.

Will the new seizure order provision place small companies at a disadvantage?  Actually, small companies, start-ups and individual trade secret owners may benefit from the ability to use the new seizure provision. Often trade secrets are first developed in a small organization.  A small company may benefit from its ability to use the ex parte seizure provision to recover them through the federal court.         

Are the reforms too strong? Are they likely to promote wrongful claims?  In the event of any abuse of the seizure provision, the legislation contains a number of safeguards. In order to obtain a court-ordered seizure, the applicant must describe the trade secret with sufficient particularity in order to allow the court to evaluate the request. The provision contains restrictions about the publicity of the seizure, in order to protect those who might be unfairly targeted. And, among other protections, the legislation would also create a private right of action for a person who suffers damage by a wrongful or excess seizure. The court can also award “reasonable attorney’s fees to the prevailing party” for “claims of misappropriation made in bad faith.”

Will the federal legislation “de-harmonize” state trade secrets law?  Actually, the federal legislation strengthens and modernizes trade secret law to address the technological realities and other challenges of today.  The current federal criminal statute, the Economic Espionage Act of 1996, was originally based in large part on UTSA, which was last amended in 1985.   Many states have adopted variations to the UTSA model.  The problem is that UTSA is now outdated in many respects.  A more-than-30-years-old statute model statute has failed to keep up with the technological advances and other challenges confronting trade secret law today particularly in our global and national.  The new legislation builds upon the UTSA framework to modernize and strengthen trade secret law.

Is there any risk of “trade secret trolls”?  So-called “trade secret trolls” are a legal fiction and have never been seen over the past few decades under UTSA.  The claim is that the problem of “patent trolls” (in which a patent owner does not use the patent to develop products but brings patent infringement suits) may arise for trade secrets. Trade secrets differ from patents in key ways. Trade secret misappropriation requires access to the specific trade secret and misappropriation by improper means or unauthorized acquisition. There is no reason to believe that “trade secret trolls” could ever arise.           

In conclusion, the bipartisan DTSA, which is supported by many businesses, makes long overdue advances to strengthen and modernize trade secret law. DTSA would amend current law in a fair and measured way and by allowing for more meaningful remedies and enabling a court to address any abuses. Given the importance of trade secrets to national and economic security, innovation, jobs, and growth, Congress should enact this bipartisan legislation.

Reprinted with permission from the December 1, 2015 edition of Corporate Counsel© 2015 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 - reprints@alm.com.