08.26.14

Publication,

Recent Congressional Bills Beg the Question: Is It Finally Time for Federal Trade Secret Protection?

PRACTICE GROUPS

Trade secrets can form a company’s lifeblood, the entirety of a business’s competitive advantage. Most businesses, however, would be surprised to know that the federal government does not comprehensively protect this important property. But this may be changing soon. In the months before Congress went on summer recess, two bills were introduced with bipartisan support (yes, you read that correctly) that could fill this important void, and further protect innovation.

As it stands, two different federal laws provide only limited trade secret protection. First, the Economic Espionage Act criminalizes the theft of trade secrets. In recent years, this law has twice been amended to broaden its protections and increase its penalties. Second, the Computer Fraud and Abuse Act governs computer “hacking” by providing for both criminal and civil actions against anyone who intentionally accesses a computer and obtains information (trade secrets and beyond) without authorization. While this law provides important protections against “hackers,” it does very little to protect businesses from employees who take valuable trade secrets to a competitor.

State laws currently provide the only comprehensive civil protections against the misappropriation of trade secrets. 48 states have adopted some version of the Uniform Trade Secrets Act (UTSA), which provides businesses the important civil remedy for misappropriation of trade secrets. (Only Massachusetts and New York have not adopted some version of the UTSA.) However, there are significant issues with this disparate protection because some important variations exist across states, making it difficult and expensive for businesses to ensure they are protected in all fifty states. For example, some states recognize the inevitable-disclosure doctrine, while others do not, or have yet to rule on the issue.

Two recent congressional bills attempt to solve this problem by providing the civil remedy for misappropriation of trade secrets that federal law currently lacks. At the end of April, Senators Chris Coon and Orin Hatch introduced the Defend Trade Secrets Act of 2014 (DTSA). Months later, at the end of July, Representative George Holding—along with a bipartisan group of 15 other congressmen and women—introduced the Trade Secrets Protection Act of 2014 (TSPA), which substantively mirrors the DTSA. In many ways, both bills track the UTSA.

The DTSA and the TSPA, however, go further than the UTSA in some important respects. For example, they provide a mechanism for a company to seize and preserve evidence related to the misappropriation without notifying the defendant. Both bills explicitly reference the Lanham Act’s similar procedures for trademark infringement. Under the UTSA, companies must utilize standard procedures for obtaining temporary restraining orders, which do not allow for this seizure of evidence—such as the computers and hard drives containing the trade secrets—without notifying the defendant. When a company’s most sensitive trade secrets are on the line, preserving evidence before notifying the defendant (potentially allowing the defendant to conceal the misappropriation) could be the critical difference between success and failure. The DTSA and the TSPA also provide a five-year statute of limitations compared to just three years under the UTSA (or even two years in some states). That is, a company would have two more years to bring a misappropriation claim under either the DTSA or the TSPA compared with the UTSA. The bills also authorize an award of up to three times a company’s actual damages, whereas the UTSA caps similar damages at twice actual damages.

Arguably, the most important potential impact of these bills is the creation of a federal cause of action that would provide businesses a guaranteed avenue to federal court—regardless of the parties involved. As a consequence of not having a federal cause of action, many misappropriation claims currently end up in state court. (Only parties that can establish diversity jurisdiction in UTSA cases can sue in federal court.) For a variety of reasons, such as the belief that discovery is better controlled, the decisions are more predictable, and efficient case management is more of a priority, many companies understandably are more comfortable suing in federal court. When a company’s most secret information is in the hands of a competitor, companies almost uniformly want to rely on federal courts, including federal appellate courts. A federal cause of action also means that over time, a body of federal case law will develop that will provide more uniformity (and thus, more predictability) than currently exists under the various state regimes.

Of course, the DTSA and the TSPA are both still in committee, and neither bill represents Congress’s first attempt at creating a federal regime to protect trade secrets. In fact, many of the congressional members supporting these bills have pushed similar legislation before (such as Senator Coons’s 2012 Protecting American Trade Secrets and Innovation Act). But this time may be different. The DTSA and the TSPA are modest in scope, mainly mirroring the UTSA with only limited (albeit important) differences. Moreover, both bills enjoy bipartisan support, and both efforts have been praised and endorsed by a variety of powerful companies and lobbying groups, such as Microsoft, Boeing, General Electric, and the National Association of Manufacturers. The recently increased media focus on data security issues can only help.

Only time will tell whether these bills will finally create the federal trade secret protection businesses crave.

Please do not hesitate to contact James Wendell if you have any questions about this article. (PDF)