Guest Post: First Patent Reform, Now Trade Secret Reform?

By David S. Almeling

Last month, President Obama signed into law the America Invents Act, enacting the most significant reform to patent law in a half-century. Last week, Senators Herb Kohl and Christopher Coons introduced an amendment to the Currency Exchange Rate Oversight Reform Act (the "amendment"), which would, for the first time, provide a federal right of civil action for trade secret owners. In a press release announcing the amendment, Senator Coons stated it "would allow for a single, uniform, nationwide cause of action instead of the patchwork of state laws now in place, and would elevate trade-secret intellectual property on the same level as copyright, trademark and patent violations."

Although it's a step in the right direction, the amendment falls short. This article summarizes the amendment and explains why it's not a complete solution to the problems it seeks to solve.

Our State-Based Trade Secret Regime

Unlike trademarks, copyrights, and patents, trade secrets are not governed primarily by federal statute. Each state retains its own autonomous trade secret law. The inevitable result is that trade secret law differs from state to state. For example:

  • Forty-six states have enacted some or all of the Uniform Trade Secrets Act ("UTSA"). Those states aren't a unified bunch, though, as state legislatures made modifications to the UTSA and state courts adopted various interpretations of even the same provisions. The four states that don't follow the UTSA — Massachusetts, New Jersey, New York, and Texas — rely instead on the 1939 Restatement of Torts and other sources.
  • Some states, such as Illinois, embrace the inevitable-disclosure doctrine, under which a court can enjoin an employee from working for a new company when that employee had access to her former employer's trade secrets and has responsibilities at the new employer that make it inevitable that she would disclose those trade secrets. Other states, such as California, reject the doctrine. Many states haven't decided one way or another.
  • Most states have a statute of limitations that lasts three years (e.g., California). Other states have statutes as short as two years (e.g., Texas) and as long as five (e.g., Illinois).

With these interstate discrepancies comes a host of problems. A case's outcome may depend on the state in which suit is brought; the result in Kansas City, Missouri, may be different from the result across the river in Kansas City, Kansas. Another problem is the additional burden on plaintiffs and defendants, who must research which jurisdiction's laws are most favorable to their case, and on courts, which must decide between the competing laws. Such differences also create uncertainty, and thus cost, about which court will decide the dispute and what law that court will apply. Such differences impose further costs on trade secret owners who operate in multiple states, as they must protect trade secrets in a way that complies with the laws of each state.

The Amendment

The amendment would amend the federal Economic Espionage Act ("EEA"), which criminalizes certain types of trade secret misappropriation, to include a right of civil action for anyone "aggrieved by a violation of section 1832(a)." Section 1832(a) is one of the two types of conduct prohibited under the EEA, and it applies to misappropriating trade secrets related to or included in a product that is produced for or placed in interstate commerce knowing or intending that the misappropriation will injure the trade secret owner.

This new right of action would be limited to trade secret owners who provide a "sworn representation . . . that the dispute involves either substantial need for nationwide service of process or misappropriation of trade secrets from the United States to another country."

The amendment provides various forms of relief, including injunctive relief, damages, exemplary damages, and reasonable royalties. Significantly, the amendment also authorizes a court to issue a seizure order for property "used or intended to be used . . . to commit or facilitate the commission of the violation alleged in the civil action."

The amendment would not preempt any other law: "Nothing in the amendments made by this section shall be construed to modify the rule of construction under section 1838 of title 18, United States Code, or to preempt any other provision of law."

The Amendment is Limited

Among the amendment's limitations:

  • It doesn't "preempt any other provision of law." Translation: the amendment doesn't replace the current state-based regime, but instead adds a new law to the mix.
  • It applies only to one of the two categories of misappropriation prohibited by the EEA, and that category does not include many forms of misappropriation.
  • It applies only to trade secrets that are "related to or included in a product" — a subset of all trade secrets, which broadly include any information that is secret, derives economic value from that secrecy, and is the subject of reasonable measures to maintain its secrecy.
  • It applies only if the case involves either the need for nationwide service of process or the misappropriation of trade secrets from the U.S. to another country. Only a small percentage of cases fall into those categories.
  • By amending the EEA, the amendment incorporates the EEA's substantive requirements, including intent, that are in addition to the usual elements necessary to establish a prima facie case of trade secret misappropriation.

I spoke with a member of Senator Kohl's staff, who said that one purpose of the amendment is to expand the current framework of the EEA by providing a limited federal right of civil action. That is a laudable first step, but the amendment won't fix the patchwork problem because the only way to eliminate differences among states is to preempt state laws.

So if the amendment won't work, what law will? One that provides a private right of action for all types of trade secret misappropriation and that preempts inconsistent state law. One, quite simply, that replaces the current state-based trade secret regime with a federal one.

David Almeling is a counsel with O'Melveny & Myers in the firm's San Francisco office. This article does not purport to represent the views of O'Melveny or its clients.

 

14 thoughts on “Guest Post: First Patent Reform, Now Trade Secret Reform?

  1. Nice article – a correction.
    The statement “Most states have a statute of limitations that lasts three years (e.g., California). Other states have statutes as short as two years (e.g., Texas)” is in error.
    Texas Civil Practices and Remedies Code Sec. 16.010 (“MISAPPROPRIATION OF TRADE SECRETS”) provides for a three (3) year limitations window: “(a) A person must bring suit for misappropriation of trade secrets not later than three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.”

  2. Am I reading more into this case that need be? It seems to suggest that in applying the terms of a federal statute where trade secrets come to the fore, then a new “federal common law” should pertain to foster national uniformity (not sure what that “common law” is given that the UTSA and the Restatement 3d of Unfair Competition are not identical in their definitions of a “trade secret”).

    Insofar as I am aware, the last time the Supreme Court addressed the issue, involving FIFRA, it came down on the side of state law (Ruckelshaus v. Monsanto, 467 U.S. 986 (1984)).

  3. See this weeks CAFC decision in TianRui v. ITC: “At the outset, we reject Amsted’s argument that Illinois trade secret law governs the section 337 inquiry in this case. The question of what law applies in a section 337 proceeding involving trade secrets is a matter of first impression for this court. We hold that a single federal standard, rather than the law of a particular state, should determine what constitutes a misappropriation of trade secrets sufficient to establish an “unfair method of compe-tition” under section 337.”

  4. “First Patent Reform, Now Trade Secret Reform?”

    Trade secret is covered by state law, right? God, let’s hope so! We’ve had all the federal “reform” we can stand!

    They should have called the bill the America STOPS Inventing Act or ASIA, because that’s where it is sending all our jobs.

    “This is not a patent reform bill” Senator Maria Cantwell (D-WA) complained, despite other democrats praising the overhaul. “This is a big corporation patent giveaway that tramples on the right of small inventors.”

    “patent reform”

    Senator Cantwell is right. Just because they call it “reform” doesn’t mean it is. The agents of banks, huge multinationals, and China are at it again trying to brain wash and bankrupt America.

    The patent bill is nothing less than another monumental federal giveaway for banks, huge multinationals, and China and an off shoring job killing nightmare for America. Even the leading patent expert in China has stated the bill will help them steal our inventions. Who are the supporters of this bill working for??

    Patent reform is a fraud on America. This bill will not do what they claim it will. What it will do is help large multinational corporations maintain their monopolies by robbing and killing their small entity and startup competitors (so it will do exactly what the large multinationals paid for) and with them the jobs they would have created. The bill will make it harder and more expensive for small firms to get and enforce their patents. Without patents we cant get funded. Yet small entities create the lion’s share of new jobs. According to recent studies by the Kauffman Foundation and economists at the U.S. Census Bureau, “startups aren’t everything when it comes to job growth. They’re the only thing.” This bill is a wholesale slaughter of US jobs. Those wishing to help fight this bill should contact us as below.

    Small entities and inventors have been given far too little voice on this bill when one considers that they rely far more heavily on the patent system than do large firms who can control their markets by their size alone. The smaller the firm, the more they rely on patents -especially startups and individual inventors. Congress tinkering with patent law while gagging inventors is like a surgeon operating before examining the patient.

    Please see link to truereform.piausa.org for a different/opposing view on patent reform.
    link to docs.piausa.org

  5. Reply to both IVP and Prof. Crouch:

    Thanks for your comments — I was starting to worry that I was all wet.

    My understanding of the Commerce Clause is along the lines of both of yours — generally broadly construed but that there are in fact some limits somewhere (perhaps the Health Care case will lend some new light on things).

    But as general principles go, I wonder whether simply the outer bounds of the Commerce Clause would be seen as sufficient support to uproot and pre-empt the duly-enacted laws of 50 states, especially if the federal trade secret law is broad enough to reach purely intra-state matters. I would hope not.

    P.S. The proposal in this article hit two nerves of mine: harmonization for harmonization’s sake, and over-reach of federal law.

  6. Rod–

    The so-called pre-emption doctrine is a funny thing, with concepts such as implied preemption, conflict, occupation of the field, etc..

    It’s been a decade since I dealt with the commerce clause (and dormant commerce clause), and then only in the context of interstate commerce in solid waste–but I remember that there is a lot of wiggle room. I understand what you’re saying, but the constitutional authority is broad IIRC. All that really remains is to determine the scope of the intended preemption, if any.

  7. Congress shall have the power to “promote” the progress of the useful Arts. It does not have the power, I would submit, to “retard” the progress of the useful Arts.

    Any law, at any level, that seriously undermines the policy expressed in the Patents Clause is bad policy. Viz., Kawanee Oil. link to supreme.justia.com The question really is what enhances disclosure of US R&D in patents. The Constitution, after all, applies only to the US and to US inventions.

    Enhancing trade secret protection for US R&D against foreign misappropriation is good for America, and arguably does not undermine the Patents clause’s purpose. Patent protection is national, but trade secret disclosure is world wide. But, give me a break. Trade secret protection against patents where the invention is made in the US is the wrong policy. This clearly retards the progress of the useful Arts and it favors the US trade secret user against a US inventor who discloses. Bad policy.

    Call me jingoistic, but I would limit prior user rights to foreign priority patents only, and maximize the penalties for foreign trade secret misappropriation.

  8. Rod, I think that your idea has logical merit. However, the courts have given the commerce clause such a broad scope of power that its hard to see this not fitting within that range. This is especially true with regard to the protection of information that can so easily and naturally cross state and national boundaries.

  9. I guess where I was going was the article’s call for pre-emption of all state laws in order to address the asserted problem of inconsistency among state trade secret law.

    If a federal statute is enacted in order to do away with all state trade secret law (darned messy states), presumably such a law would not include the stated limitations of the current proposal. However, then I question whether such a law has a constitutional basis under the commerce clause.

  10. Article I, Section 8, Clause 3:
    “The Congress shall have Power – To regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes;”

    Article I, Section 8, Clause 18:
    “The Congress shall have Power – To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer there of.”

Comments are closed.