iStock_000015201637LargeIn its broadest strokes, American law recognizes four types of intellectual property—patents, trademarks, copyrights and trade secrets. Patents and trademarks have been enshrined in US federal law since the 1780s, through the Constitution, and trademarks have been protected at national level since the 1870s through legislation. But until quite recently, trade secret protection has been left to the law of individual states. This may surprise many since the US companies dependence on trade secrets exceeds dependence on patents, trademarks, and copyrights by a two to one margin, at least as measured by their IP portfolio values in a 2014 study. The US federal government, however, has stepped more directly into the trade secret picture in 2015 on the legislative, enforcement and policy front.

Federal Legislators Consider National Civil Remedies In Trade Secret Cases

On the legislative front, federal law with civil enforcement remedies seems more likely in 2015 than it ever has before. The Judiciary Committee of the United States House of Representatives in mid-December reported favorably on HR 5233, a proposal to create a federal civil cause of action concerning trade secrets. The Senate has its own version of the bill. While Congress did not vote on it before year end, the House bill has bi-partisan support, including 23 co-sponsors split between Democrats (9) and Republicans (14).

The House Report provides the rationale for federal legislation at this time:

The trade secrets of American companies are increasingly at risk for misappropriation by thieves looking for a quick payday or to replicate the market-leading innovations developed by trade secret owners. Using ever-more sophisticated means of attack, these thieves aim to steal the know-how that has made American industry the envy of the world. The Commission on the Theft of American Intellectual Property found that the illegal theft of intellectual property is undermining the means and incentive for entrepreneurs to innovate, slowing the development of new inventions and industries that could raise the prosperity and quality of life for everyone.

Recognizing that up until now trade secret owners had only criminal remedies under federal law and civil remedies under state law, the Judiciary Committee concluded that more was needed:

While 48 states have adopted variations of the UTSA, the state laws vary in a number of ways and contain built-in limitations that make them not wholly effective in a national and global economy. First, they require companies to tailor costly compliance plans to meet each individual state’s law. Second, trade secret theft today is often not confined to a single state. The theft increasingly involves the movement of secrets across state lines, making it difficult for state courts to efficiently order discovery and service of process. Finally, trade secret cases often require swift action by courts across state lines to preserve evidence and keep a trade secret thief from boarding a plane and taking the secret beyond the reach of American law. In a globalized and national economy, Federal courts are better situated to address these concerns.

America’s strength has always been found in the innovation and ingenuity of its people–its inventors, creators, engineers, designers, developers, and doers. American businesses that compete globally will lose their competitive edge if they cannot quickly pursue and stop thieves looking to shortcut the innovative products, designs, and processes that have fueled our economy. This bill will equip companies with the additional tools they need to protect their proprietary information, to preserve and increase jobs and promote growth in the United States, and to continue to lead the world in creating new and innovative products, technologies, and services.

Expect some continued attention to these issues, and possible passage before mid-term elections.

For trade secret owners, at least as of now, passage of the House version of the bill would be an added tool. That is a purposely loaded statement because, despite references in the report to federal courts being better equipped to handle such claims, the proposed legislation requires neither pre-emption of state claims nor exclusive federal court jurisdiction. Hence, employers and trade secret owners will still be able to proceed in state court or append state law claims to claims brought in federal court under such new federal question jurisdiction. This can be an important added weapon since some states, such as New Jersey, recognize an employer’s right to enjoin disclosure of confidential business information that does not itself meet the definition of a trade secret. Seee.g.LaMorte Burns & Co. v. Walters, 167 N.J. 285 (2001) (“Importantly, however, information need not rise to the level of a trade secret to be protected… Other jurisdictions also have held that information not technically meeting the strict requirements of trade secrets may be protected as ‘confidential information’ and may serve as the basis for a tort action”). While this could mean that passage of the proposed bill alone would not promote uniformity implied by the Committee, it may move things in that direction as a practical matter, though the legislation is not without critics.

Importantly, the Act also contains mechanisms for relief not found in the Uniform Trade Secrets Act or its various state-by-state progeny. The House bill provides for ex parte seizure when “necessary to preserve evidence” or to “prevent dissemination of the trade secret.” While neither the bill nor the Committee report expressly says so, this ex parte seizure order mechanism seems to lessen the burden, somewhat, on those seeking injunctive relief because it creates an entitlement when available remedies under Rule 65(b) “would be inadequate” to preserve evidence or to prevent dissemination of the trade secret. Of course, there is a bit of a problem for trade secret owners (and their counsel) lucky enough to obtain such orders because the proposed act also states that “The court shall take appropriate action to protect the person against whom an order under this paragraph is directed from publicity, by or at the behest of the person obtaining the order, about such order and any seizure under such order.” Read literally, that seems to say that a movant can obtain the order but not make the third parties or the public aware that movant has done so. Because the value of such relief is often the deterrent effect that such an order can have in depressing the market, or market value, for the pilfered secrets, further tweaking (either textually or through interpretation and pragmatic application) will probably be necessary for that aspect of the Act to reach its intended potential.

Further, the proposed legislation is broader than the Uniform Trade Secrets Act adopted in 48 out of the 50 states in terms of temporal and geographic reach. First, the proposed federal legislation has a five-year statute of limitation as opposed to UTSA’s recommended three year limitations period. More importantly, the federal legislation has provisions for reporting theft of trade secrets abroad, and would seemingly apply its civil remedies outside the United States just as the criminal provisions of the Economic Espionage Act are applicable extraterritorially. See H.R. Rep. No. 113-657; See also 18 U.S.C. §1837 (applicability to conduct outside the U.S.); see also H.R. Rep. No. 104-788, at 14 (“To rebut the general presumption against the extraterritoriality of U.S. criminal laws, this subsection makes it clear that the Act is meant to apply to the specified conduct occurring beyond U.S. borders.”)

So, it appears that we are one step closer to a federal civil remedy for protecting trade secrets. Even if it passes, however, employers and other trade secret owners will have to figure how, and if, to incorporate this added weapon into their arsenal. While it may complement state law claims in some circumstances, it may complicate them in others, and it remains necessary to have counsel who is prepared to sort out such options to put forward the best, most effective arguments promptly in the right court at the right time to stop the trade secret from escaping. In the end, added weapons are nice, but only when placed at the disposal of those who can pick the right ones for the job and get it done.

Federal Trade Secret Enforcement Already On Uptick Through Criminal Law

U.S. Attorneys in many jurisdictions are more willingly to use criminal law enforcement tools to step into the fray between companies and their former employees who have allegedly misappropriated trade secret information. In a recent case out of the Northern District of Illinois, two former employees of Citadel LLC, a Chicago based premier hedge fund in the high frequency trading space, pled guilty and received three-year sentences for their participation in a scheme to steal source code from Citadel and a prior employer in order to create their own trading strategy for their personal future use. Similarly, a New Jersey federal court recently sentenced an engineer to 18 months in prison for stealing trade secrets from two global medical technology companies based in northern New Jersey. This continues a trend begun in earnest in 2013 after the Department of Justice issued the Administration’s Strategy On Mitigating The Theft Of U.S. Trade Secrets. Since that time, federal criminal enforcement efforts in trade secret matters have been on the upswing in many industries and jurisdictions.

Employers too appear more inclined to report such conduct to governmental enforcement agencies than in the past. While there is always a balance of judgment employers must make when involving Federal or State law enforcement authorities in their employment-related matters, there certainly appears to be an emerging trend for such authorities to actively investigate and thoroughly prosecute cases against employees who steal trade secrets. Whether this will grow or abate if federal civil remedies come into play is still to be seen.

Federal Policy Arms Also Looking At Trade Secrets

In perhaps one of the best indications that the Washington establishment and governmental infrastructure recognizes this drift toward increased federal activity in the realm of trade secrets, the United States Patent and Trademark Office (USPTO) hosted a symposium on trade secrets in January 2015 (which remains available by webcast at that link), even though that federal office deals with trademarks and patents rather than trade secrets. According to the opening remarks of Michelle Lee, Deputy Director of the USPTO, the agency decided to host the event because “trade secrets are an important form of intellectual property.” And illustrating that the USPTO’s event was part of a coordinated federal focus on trade secret issues, the USPTO further described the reasons for the conference by quoting the DOJ’s strategy memo noted above:

The protection of U.S. trade secrets from misappropriation is an Administration priority.  As noted in the Administration Strategy on Mitigating the Theft of U.S. Trade Secrets (February 2013), “trade secret theft threatens American businesses, undermines national security, and places the security of the U.S. economy in jeopardy.”  In pursuit of the goals of the Administration Strategy through information sharing and discussion, the United States Patent and Trademark Office held a public symposium on issues relevant to the protection of trade secrets.  Topics discussed included legislative proposals regarding trade secret protection, losses due to trade secret theft and challenges to protecting trade secrets, the intersection of patent and trade secret protection, issues in civil litigation, trade secret protection in foreign jurisdictions, and proposed responses to the threat of trade secret theft in the U.S.

It will be interesting, and potentially beneficial, to track these evolving developments, as US companies engage in overseas business and foreign business bring their trade secrets to the US.