Will Trade Secrecy Finally Join Its IP Siblings, Patents, Trademarks and Copyright, in Federal Court?
On January 20 2015, President Obama in his State of the Union address called for congressional action on cybersecurity, invoking the need to protect our businesses’ privacy, trade secrets and the economy. Theft of intellectual property is estimated to cost U.S. firms billions of dollars annually. Much of this loss is attributable to the misappropriation of trade secrets by foreign actors and entities.
The President’s State of the Union address came just over a month after the Federal Bureau of Investigation accused North Korea of orchestrating a cyber attack against Sony. Sony’s losses from the cyberattack are estimated at $200 million. While many of Hawai‘i’s business owners do not face the same potential for such catastrophic economic loss, protecting your company’s trade secrets should be a central consideration in your company’s strategic planning.
What, exactly, is a trade secret? The Uniform Trade Secrets Act (“USTA”) defines a trade secret as: “information . . . that (i) derives independent economic value, actual or potential, from not being generally known to [or readily ascertainable by], other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of [reasonable] efforts . . .to maintain its secrecy.”
In other words, trade secrets are your business’ confidential information that gives you a competitive edge over others by virtue of the fact that the information is, and remains, confidential.
While trade secrets may not invoke the same headline-grabbing attention as patents, trademarks or copyrights, trade secrets are often a company’s most valuable asset. Trade secrets are implicated by almost every aspect of a company’s operations, including vendors and customers, and dealings with employees. While there are millions of issued patents and copyrights, the total number of protectable trade secrets is nearly infinite.
Technological development, including the digitization of business records, widespread use of portable electronic devices, and cloud computing have rendered many U.S. businesses, both large and small, more vulnerable to electronic means of trade secret theft. Just last October, McKeon Sheldon Mehling offered a free seminar (Barbarian’s at the Gate: Protecting Your Business From Outsiders and Insiders) to Maui’s business owners, emphasizing the importance of trade secret protection in light of technological advancement.
Given the importance of trade secrets to our economy, the regulatory approach to trade secrets can have major consequences.
Unlike patents, trademarks, and copyright, trade secrets are principally protected under state, and not federal, law. Forty-seven states and the District of Columbia have adopted the USTA, a model law that establishes guidelines for the regulation and protection of trade secrets.
Hawaii has adopted the UTSA in Hawaii Revised Statutes Chapter 482B, which allows a trade secret owner to bring an action for injunctive relief to enjoin actual or threatened misappropriation of trade secrets and damages for such misappropriation. Where the misappropriation is found to be willful and malicious, a court may even award up to twice the amount in damages.
However, the adoption of the UTSA by each state is not entirely uniform and, under the state-based regime, trade secret owners do not have a federal civil cause of action of the misappropriation of trade secrets.
That may soon change.
Last year, two bills were introduced, which sought to federalize the regulation of trade secrets: the Trade Secrets Protection Act of 2014 (TSPA) in the House (HR 5233) with 18 co-sponsors (11 Republican, 7 Democrats), and the Defend Trade Secrets Act of 2014 (DTSA) in the Senate (S2267), sponsored by Sens. Coons (D-DE) and Hatch (R-UT).
The bills would provide a federal cause of action for trade secret misappropriation. Both bills substantially follow the language of the UTSA. However, there are some textual differences, which may create confusion given the large body of interpretive precedents that have developed with the UTSA.
The most significant departure from the UTSA is the proposed new ex parte seizure provision. This new provision, which does not have an equivalent in the UTSA, would allow trade secret owners the ability to go to court, unopposed, and obtain a court order to seize property “necessary to preserve evidence . . . or to prevent the propagation or dissemination of the trade secret that is the subject of the action.”
Support for the bills has been varied. Because trade secrets are often a company’s most valuable asset, supporters argue that federal trade secret protection is necessary. Proponents argue that businesses should have the ability to sue in federal court, a forum in which judges have greater experience in handling complex intellectual property and commercial disputes than their state court counterparts. Being in federal court also allows for a broader jurisdictional reach over foreign defendants and more liberal discovery rules.
Advocates also argue that we need uniformity in the regulation of trade secrets that the UTSA does not provide. Application of the UTSA still depends on the jurisdiction, and therefore creates uncertainty for trade secret owners. These commentators argue that the lack of uniformity has a number of negative consequences, increased inefficiency and costs associated with investigating and complying with different states’ requirements, and ultimately less investment in innovation.
Opponents of the proposed legislation argue that concerns over the availability of a federal forum are misplaced. A trade secret owner may still receive the benefits of being in federal court under diversity jurisdiction. Supplemental jurisdiction also provides another avenue for state law trade secret claims to be heard in federal court. For example, a plaintiff could bring a trade secret claim in federal court via supplemental jurisdiction by coupling it with claims of patent infringement, copyright infringement, and violations of federal antitrust law.
Critics also argue that there is already a high degree of uniformity in state laws governing trade secrets giving the widespread adoption of the UTSA. The adoption of the UTSA by 47 states (and the D.C.) has helped to harmonize the substantive law governing trade secrecy. The UTSA therefore serves as a de facto national standard, and the majority of state and federal courts tend to apply statutory standards (the UTSA), than common law or criminal law. These critics also argue that, even if federal trade secret legislation were enacted it would not necessarily result in substantive uniformity. Currently, neither of the proposed bills would preempt state trade secret law, expressly or implicitly, and therefore a federal civil cause of action could coexist with state law. Federal legislation that does not preempt state law could, ultimately undermine harmonization by creating a federal regime that exists in parallel with state trade secret law
For a very comprehensive deconstruction of the arguments for and against federalization of trade secret laws, see Prof. Chris Seaman’s forthcoming article and a recent letter written by Profs. David Levine and Sharon Sandeen, and signed by over thirty other law and information technology professors.
Whatever your position is, if you are a business owner, whether in Hawai‘i, New York or Texas, trade secret protection should be a central consideration to your overall operations. Keep abreast of developments in trade secret law. Congress is likely to revisit the issue of federalization again this year. While the TSPA and DTSA expired this month, President Obama’s State of the Union remarks about the importance of cyber-security and trade secret protection are sure to keep this debate marching forward.