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Trade secrets are now on a fast track toward a federal identity that would put them on par in the legal world with patents, trademarks and copyrights.
In what could become a major step toward deterring cyber-crime, the U.S. Senate unanimously passed a bill April 4 to empower corporate espionage victims to seek damages for computer-enabled intellectual property theft.
The Defend Trade Secrets Act (SB 1890) is a bill that would create a federal civil cause of action for trade-secret theft. As of today, trade-secret lawsuits may only be litigated in 47 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands; there is no federal jurisdiction.
The Obama Administration issued a statement indicating its support for the bill, which now awaits approval by the House of Representatives.
Could Go Far in Deterring Cyber-Crime
The IT business, not to mention anybody who has ever written a piece of code or set a price margin, should be all for this bill. It potentially is a big step toward deterring cyber-crime, because it empowers corporate espionage victims to seek damages for computer-enabled intellectual property theft on a national and international basis. By enabling corporate victims to recover losses from cyber-enabled IP theft, the bill encourages victims to pursue perpetrators.
In an op-ed article in Politico, bill sponsors Senators Orrin Hatch (R-Utah) and Chris Coons (D-Delaware) wrote: “Maintaining the status quo is woefully insufficient to safeguard against misappropriation in today’s fast-paced innovation economy.
“Trade secrets are the lifeblood of the American economy. Virtually all companies depend on trade secrets to protect their most valuable information and processes. The medical device industry, for example, dedicates enormous resources to the research and development of life-saving products; much of that investment is shielded as trade secrets. Businesses that provide IT infrastructure and data storage—the backbone of the innovation economy—get their competitive edge from proprietary designs and software principally defended by trade secret law.
“In today’s knowledge- and service-based economy, trade secrets are indispensable to protecting confidential, intangible assets. According to some estimates, trade secrets are worth $5 trillion to the U.S. economy, on par with patents. The loss from their misappropriation is substantial—between $160 billion and $480 billion annually.”
Like with patents, trademarks and copyrights, trade secret owners may seek redress for intellectual property theft based on a federal statutes in federal court should the bill become law. Additionally, the bill provides for the availability of orders that will allow trade secret owners to have law enforcement seize stolen trade secrets without notice to the misappropriator upon a sufficient showing to the federal court.
How This Impacts the IT Industry
Reclaiming stolen software and other amorphous IT trade secrets might be a bit more challenging for law enforcement personnel to accomplish, however. How trade-secret owners describe and safeguard their intellectual property—because trade secrets are simply another form of IP—plays importantly into the entire scenario.
What exactly is a trade secret, and what sets it apart as a legal entity from copyrights, trademarks and patents?
According to the World Intellectual Property Association, a trade secret is defined as this: “Any confidential business information which provides an enterprise a competitive edge may be considered a trade secret. Trade secrets encompass manufacturing or industrial secrets and commercial secrets. The unauthorized use of such information by persons other than the holder is regarded as an unfair practice and a violation of the trade secret. Depending on the legal system, the protection of trade secrets forms part of the general concept of protection against unfair competition or is based on specific provisions or case law on the protection of confidential information.
“The subject matter of trade secrets is usually defined in broad terms and includes sales methods, distribution methods, consumer profiles, advertising strategies, lists of suppliers and clients, and manufacturing processes.”
Defining ‘Trade Secret’
The latter statement means that to be legally defined as a “trade secret,” the trade secret needs to be a known fact held within reasonable secrecy guidelines as a way to help a company do its business. The trade secret does not necessarily have to be in written form; read on.
HG.org, a legal services resource site, says: “Trade secret laws protect any formula, pattern, device, or compilation of information that provides a business advantage over competitors who do not use or know of it. A strategy to increase worker productivity, for example, is a trade secret. Trade secrets do not receive patent protection, because they are not inventive. Trade secret laws are included in intellectual property laws because, like other intellectual property laws, they prevent the unauthorized use of certain intangible subject matter.”
Trade secrets can be formulas, business ideas or strategies, customer lists, pricing and margins—any type of information, so long as it contains independent economic value and hasn’t been published. Typically, they are tangible, such as a document or digital file, but there is no requirement that they be in writing. It can be as amorphous as a verbal description of how something is done.
Attorney Robert Milligan of Seyfarth Shaw in Century City, Calif., is co-chair of the firm’s Trade Secrets, Computer Fraud & Non-Competes practice group and has been following the bill since it was introduced in July 2015.
“This (bill) is very significant in the sense that it puts trade secrets on a similar plane with the other intellectual property assets that a company may hold, and it also may be easier for companies who maintain trade secrets to litigate claims, because now they’re not going to be required to go to state court,” Milligan told eWEEK. “They can navigate in federal court, where discovery may be easier than having to get witnesses and documents from other states, as opposed to using the federal subpoena power.”
How a Federal Trade Secrets Law Would Impact Silicon Valley
Supporters of SB 1890 Comprise All Business Sectors
If you look at the list of supporters for the bill, it runs the gamut of business in the United States: IT, retail, manufacturing, research, financial services, health care and so on. “Trade secrets are what separate competitors in the market, whether that’s pricing, margins, or some sort of secret that the public doesn’t know about in the operation of their business,” Millligan said.
In the technology sector, some companies are moving away from patent protection because of the limitations of the 20-year monopoly, Milligan said.
“In patents, the IP owner only has the monopoly for 20 years, whereas with a trade secret, it’s forever, so long as the information is secure,” Milligan said. “You can also license trade secrets as well, subject to non-disclosure agreements. This is welcome among technology companies, if you look at the people who’ve come out in support of it: Intel, Boeing, Adobe, IBM, the Information Technology Council, and so on.”
Levels of Software Can Be Considered Trade Secrets
In the software world, Milligan said, certain levels of software can be protected as trade secrets.
“One of the main requirements of a trade secret are the ‘reasonable secrecy’ measures,” Milligan said. “That’s built in to the definition, whether it’s state law or federal law. What that means is that companies have to do a good job of documenting how they protect that information: Do they designate it as ‘confidential,’ do they describe it in their non-disclosure agreement to their employees and their third-party contractors—whoever can have access to the confidential information.”
Milligan said that companies should be proactive in inventorying the trade secrets, and making sure they are adequately protecting that information through NDAs and password-protected files that are designated as confidential.
The idea for the legislation is also to help U.S. companies against the threat of foreign actors, Milligan said.
“Foreign actors have moles internally in the United States that are trying to acquire trade secrets, and then leave and then have it (the product) mass-produced abroad. It’s trying to address that threat as well—particularly with regard to the EX-Parte Seizure Order,” Milligan said.
Why EX-Parte Seizure Order is Important
The EX-Parte Seizure Order is part of the Trade Secrets bill that allows a trade secret owner to obtain an order from a judge for U.S. marshals to seize back the trade secret from the alleged bad actor without prior warning. This is to protect the trade secret owner from having the alleged bad actor skip the country or destroy the evidence before it is recaptured.
“For instance, a technology company with a foreign national or someone who’s working for the company takes the technology, and you get wind of it that they’ve left the country. The Seizure Order provides you with the ability to get the federal government involved and marshals to seize the misappropriated goods. That’s something that we don’t have right now under the state regime,” Milligan said.
“You can get an order from the state requiring them to return the property, but in order to get law enforcement involved to seize the goods is something that doesn’t currently exist.”
In summary, Milligan said: “The creation of a federal civil cause of action for trade secret misappropriation is a game changer, and will allow businesses to protect their valuable proprietary information on a nationwide basis in our federal courts. It will allow for more effective remedies to protect trade secrets and more efficient discovery than state court actions. Trade secrets will now join patents, trademarks, and copyrights as valuable intellectual property assets protected by our federal laws.”