Guest Post: Defend Trade Secrets Act — A Primer, an Endorsement, and a Criticism

Guest Post by David S. Almeling, a partner in the San Francisco office of O’Melveny & Myers LLP. Almeling specializes in patent and trade secret litigation.

It’s been an exciting month for trade secret law. Senators Christopher Coons (D-Delaware) and Orrin Hatch (R-Utah) introduced the Defend Trade Secrets Act, a bill that would, for the first time, provide a federal right of civil action for trade secret theft. And the Judiciary Committee held a hearing during which speakers expressed support for the DTSA, including Eli Lilly’s VP and General Patent Counsel, Douglas Norman, who stated that the DTSA “will establish the gold standard for national trade secret laws globally.”

The DTSA is a game changer. If enacted, it would constitute the most dramatic rethinking of trade secret law since 1979, when the National Conference of Commissioners on Uniform State Laws approved a model statute called the Uniform Trade Secrets Act. Since then, 48 states have adopted the UTSA in some form, replacing their common-law regimes with statutory ones.

The DTSA isn’t perfect — I’ll explain why in a moment — but it’s the best bill of its kind introduced to date, and it should be enacted.

A Primer

The DTSA authorizes a trade secret owner to bring a civil cause of action in federal court for either (1) a violation of the Economic Espionage Act, which criminalized certain types of trade secret misappropriation, or (2) a “misappropriation of a trade secret that is related to a product or service used in, or intended for use in, interstate or foreign commerce.” The DTSA’s definition of misappropriation tracks closely the UTSA’s definition.

The DTSA would also:

Grant courts the power to issue ex parte orders “for the preservation of evidence” and “for the seizure of any property used…to commit” the alleged misappropriation. This is similar to the relief available under the Lanham Act for counterfeit goods.

Allow courts to award injunctions; damages for actual loss or unjust enrichment; a reasonable royalty “in lieu of damages”; exemplary damages up to treble the amount of compensatory damages, as opposed to the UTSA, which permits courts to award only double damages; and attorneys’ fees.

Establish a five-year statute of limitations, two years longer than the UTSA’s provision.

Decline to preempt any other law.

An Endorsement

The DTSA is not the first bill in recent years to propose a federal cause of action for trade secret theft.

Other recent efforts include: Senator Coons’s prior bills in 2011 and 2012; the proposal by Rep. Zoe Lofgren, the Silicon Valley–based Democrat, to enact PRATSA (Private Right of Action Against Theft of Trade Secrets Act of 2013); and the 2013 introduction of FAIR (Future of American Innovation and Research Act) by Republican Senator Jeff Flake of Arizona. These attempts all failed, never making it out of committee.

The reasons they fell short varied; I won’t rehash them here. But the DTSA is the most comprehensive bill to date, as it addresses a broad swath of trade secret theft and encompasses a robust range of remedies.

The DTSA is better than the current system — one in which each state has its own autonomous civil trade secret law. Today, 48 states have enacted some form of the UTSA, with New Jersey (in 2012) and Texas (in 2013) being the latest adherents. New York and Massachusetts are the only remaining holdouts.

Despite the UTSA’s widespread adoption, the “U” — Uniform — hasn’t lived up to its name. State legislatures often modify the UTSA. And even if every state enacted the same UTSA, there would still be a patchwork because state courts often issue different interpretations of the same UTSA provision.

Trade secret owners, employees, and others in the knowledge economy incur the costs of this state-by-state approach. Facing different laws in different states, they are left to deal with the resulting complications that come with attempts to comply with each state’s laws. And once a dispute arises, these differences also impose costs on courts and litigants, who wage needless battles over forum shopping and choice of law. A federal statute would eliminate these differences and achieve other benefits, such as easing nationwide service of process and discovery.

This isn’t the first time I’ve endorsed some form of a federal trade secret statute. I did so in a 30-page law review article in 2009 and in a five-page Law 360 article in 2013.

I’m not alone in my support of a federal trade secret statute generally and the DTSA specifically. Senator Coons’s April 29, 2014 press release notes that the DTSA has the backing of the National Association of Manufacturers, the U.S. Chamber of Commerce, and dozens of companies, including 3M, GE, Microsoft, and P&G. The AIPLA’s Trade Secret Law Committee recently voted to endorse the DTSA (disclaimer: I was one of the voting members). And other organizations, including the ABA’s IP Section and the Commission on the Theft of American Intellectual Property, announced support for some form of a federal trade secrets act in 2013.

A Criticism

Where the DTSA stumbles is in its promise not to “preempt any other provision of law.” This causes two problems.

First, the need for the DTSA stems in part from state-by-state variations in trade secret laws and the transactional and substantive problems that such variations impose. The DTSA leaves those variations in place. Worse, the DTSA adds another law to the already cluttered landscape of 48 UTSA states (with their variations), two non-UTSA states, the federal Economic Espionage Act, and a federal common trade secret law.

Second, the DTSA opens a backdoor to common-law and other causes of action that are precluded in most states. The UTSA “displaces tort, restitutionary, and other laws…providing civil remedies for misappropriation of a trade secret.” The DTSA doesn’t displace anything.

Under the DTSA, trade secret plaintiffs would have the option of pursuing their claim in state or federal court and, if they choose federal court, the additional option of asserting duplicative causes of actions that aren’t available in state courts.

Why I Still Endorse the DTSA

Trade secrets are the only major type of intellectual property (i.e., copyrights, patents, trademarks, and trade secrets) not governed primarily by a federal statute. Copyrights and patents got theirs in the 1700s. Trademark got its in the 1800s. Now that we’re firmly in the information age, it’s time for trade secrets to join their peers.

True, the DTSA is only a partial step toward uniformity, as it leaves the current state-law regime in place and doesn’t preempt overlapping causes of action. But in the absence of a complete transition from a state-based trade secret regime to a federal one, the DTSA is an important step in the right direction.

This post by David S. Almeling does not purport to represent the views of O’Melveny or its clients.

50 thoughts on “Guest Post: Defend Trade Secrets Act — A Primer, an Endorsement, and a Criticism

  1. “btw, how exactly do you think that the state province of trade secrets (you know, the historical place) is affected by the constitution?”

    I’m not aware of how the “state province of trade secrets” is “affected” by the US constitution. Other than perhaps them being left to themselves and having their inherent power to govern themselves left alone. But you can feel free to tell me how you think that it is otherwise “affected”.

    1. 6,

      You broached the subject, refuse to answer and then ask me to answer the topic you broached?

      Classic (and not in a good way for you).

  2. From my quick review of the bill, the most annoying part of it is that it is based off the criminal trade secret laws — any victim of a criminal violation can bring a civil action. Then there is a catchall for any “misappropriation of a trade secret that is related to a product or service used in, or intended for use in, interstate or foreign commerce.” While a later definition section defines “misappropriation,” it fails to define “trade secret.”

    Seems to me you ought to start from scratch and create a comprehensive civil bill, similar to the Lanham Act, which I think has worked pretty well.

    (And, BTW, like the Lanham Act, I see no need to preempt state law. What happens 99% of the time in trademark cases is that state law claims are brought as an afterthought. There are hundreds of opinions where a court analyzes trademark claims under the Lanham Act, and then there is a throwaway sentence or two stating that the state law and common law trademark claims follow the same law and yield the same result. That is what is going to end up happening if this bill passes.)

  3. Interesting work Mr. Almeling.

    Your one criticism of “Where the DTSA stumbles is in its promise not to ‘preempt any other provision of law.’ ” would be enough for me to NOT support this version of DTSA, as that reason alone indicates that the benefits attempted to be reached (as reflected in your more voluminous writings) would NOT be reached, and that we would be adding only yet another layer of complexity and cost further burdening those that you write as would be the beneficiary of a truly Federal system. Further, all of the arguments that sound in Federalism are not reached by a non-truly Federal plan. The reasoning falls apart.

    If we come this far, we should do it right.

  4. Where have we heard this “national uniformity” and “forum shopping” argument before?

    Unless we bring the whole kit under the Federal Circuit, there still will be forum shopping etc.

    But, when we created the Federal Circuit, what we created was a defiant court, defiant of other circuits on basic law, and of the Supreme Court on patent law, and whose members were routinely feted by patent lobbying organizations.

    Why do we listen seriously to these apostles of national uniformity, whose hidden agenda tends toward concentration of power that are more easily suborned? How many time shall we be fooled by the same argument and by the same organization, the AIPLA.

    1. blah blah blah – blame those that attempt to hold the Royal Nine to the constitutionally appointed writers of law – blah blah blah

      1. anon, way back when, IBM, AT&T, GE and 3M all had the view that the SC and the regional circuits were the problem. They set about to “fix” things — and fix things they did. They all backed the Federal Circuit, and the Federal Circuit was created.

        Back when I first got out of law school, I was involved in an antitrust suit against AT&T. AT&T, it appears, had backed regulation of the telecom industry because they could control the regulations. AT&T then used their power over regulation to suppress competition. That is why, despite regulation, the government eventually, in the ’70s, IIRC, had to sue them to break AT&T up. The case of AT&T should be studied in law schools to see what crony capitalism is all about.

        Don’t be naïve, anon. When the AIPLA is proposing something, you should smell a rat.

        1. When the AIPLA is proposing something, you should smell a rat.

          Interesting then , this quote from the guest post author’s work:

          To assess the merits of an FTSA, one must balance the reasons for enactment with those against it. Indeed, arguments against an FTSA prevailed when proposals for some form of federal trade secret law were presented to the American Bar Association’s Section of Intellectual Property in 1992 and the American Intellectual Property Law Association (“AIPLA”) in 2007.

          Don’t be naïve – indeed.

    2. “Why do we listen seriously to these apostles of national uniformity, whose hidden agenda tends toward concentration of power that are more easily suborned? How many time shall we be fooled by the same argument and by the same organization, the AIPLA.”

      I don’t believe you’ve ever uttered more sage words Ned. Congrats.

      1. 6,

        I suggest that you read Almeling’s more extensive work (link in the main article) and pay attention to the Federalism argument.

        Ned’s cry here about consolidation of power (as they sound in an anti-Federalist position) misses for reasons given in the larger piece.

        1. I think he’s “crying” less about the mere “consolidation” and more about the inevitable capturing of that power for the interests of certain groups.

          1. You quite miss the fact that this is very much a mere State-Federal item and that ALL Federal items (including you and yours at the Patent Office) have an equal chance of ‘capture.’

    3. Ned,

      In light of our past dialogues on the proper role of the Court in relation to Congress, I thought you might enjoy the article by Amanda Frost, Academic highlight:

      Congressional overrides of Supreme Court decisions,

      SCOTUSblog (May. 30, 2014, 2:56 PM), link to scotusblog.com

      1. Thanks anon.

        “Judicial narrowing of federal regulation, except in tax and intellectual property cases, where regulation-friendly interpretations are often overridden;”

        I also see congress reacting against patent friendly interpretations by passing such legislation as CBM. Both the Supreme Court and congress are united against the Federal Circuit.

        1. Classic over-reading on your part Ned – you way overstep the intent of the authors, whose studies simply did not include CAFC actions.

          A rather careless and easy to see mistake at that. This reflects poorly on you and highlights your continued bias against the CAFC and continued bias for the Royal Nine.

        2. in pieces then since the moderation filter eats the post….

          While the Eskridge study is not for the faint of heart (and the dense 225 pages of the updating study should be read carefully), the prime takeaway from that study makes the exact opposite point that those such as Ned Heller and 6 advocate here:

        3. But one of the most important conclusions of this Article is that overrides usually are not a zero-sum game in which rent-seeking groups expend their political capital for favorable but generally inefficient treatment by Congress. Instead, the majority of overrides update the U.S. Code to meet changed circumstances, to address largely uncontroversial changes in the public consensus, and to correct problems in the administration of the rule articulated by the Court. These overrides usually garner broad bipartisan support. And they achieve these results through a political process that better reflects the values of republican democracy than change driven by the other branches ever could. A sustained loss of these overrides would be an unfortunate result for the rule of law in this country.

        4. But one of the most important conclusions of this Article is that overrides usually are not a zero-sum game in which rentseek1ng groups expend their political capital for favorable but [usually] inefficient treatment by Congress.

        5. Instead, the majority of overrides update the U.S. Code to meet changed circumstances, to address largely uncontroversial changes in the public consensus, and to correct problems in the administration of the rule articulated by the Court. These overrides usually garner broad bipartisan support. And they achieve these results through a political process that better reflects the values of republican democracy than change driven by the other branches ever could. A sustained loss of these overrides would be an unfortunate result for the rule of law in this country.

        6. Congressional power should stay in Congress and not be taken either by an activist Court, nor by an usurping Executive branch (through machinations of a shadow ruled, non-vetted Agency).

          The real life problem that should be the focus of academia is how to rescue a flailing and inattentive Congress to not only keep the wolves of the other branches of government at bay (for example, by emphasizing when the separation of powers doctrine is being encroached), but also to focus on how to empower patent law and make it stronger so that innovation is amply rewarded for the true benefits of Quid Pro Quo.

  5. I think one thing trade secret companies would love, more than anything, is to keep the trade secret after the secret is disclosed… put the genie back in the bottle, lets say. I see that the courts would have the power to give an injunction. But what would be the reach? Obviously the violator of the espionage act, but is that whom it would be limited to? What if a third party copies it? Would the injunction carry to the employees is they move to another company?

    I don’t see how the injunction would go further than the company committing the espionage- which means that the cat will eventually get out of the bag. Fair to say, then, that the injunction is merely punitive?

    1. J: I think one thing trade secret companies would love, more than anything, is to keep the trade secret after the secret is disclosed… put the genie back in the bottle, lets say. I see that the courts would have the power to give an injunction. But what would be the reach?

      The reach is that you can’t communicate or use information that everybody already knows about if you want to be free of harassment by the “job creators”. It’s the same underlying “policy consideration” that drives the patenting of methods of providing [insert ineligible information here] to somebody else “with a computer.”

      Also, in the future we’ll all have Federal rights to get our old memories back (or the value thereof) after they’ve been tainted with some terrible ad that was shoved in our face.

      It was amusing to read on Wikipedia that Coke has had “success” with keeping its formula a “trade secret”. My question: which formula? The old American formula, the old Mexican formula, the old European formula, or the formula that results in a taste identical to a new can of Coke that other companies have duplicated and (in some cases) sell more cheaply?

      I don’t see how the injunction would go further than the company committing the espionage- which means that the cat will eventually get out of the bag. Fair to say, then, that the injunction is merely punitive?

      Yes. But perhaps not punitive enough. Three strikes = tongue removal might do the trick. Is that cruel or unusual? This is a country where the government kills people with cheap untested drugs because we can’t find other countries to make the tested drugs cheaply enough.

      1. My statement merely suggests what a company, in an ideal world, would like to happen. I don’t think it is a stretch to say that a trade secret user would love to suppress the stolen secret. I don’t think that it has ever actually happened.

        So my question- and it is not a rhetorical question, I really don’t know- is what would this “new” power of the court to grant injunctions mean? Is it an attempt to suppress the trade secret from being used, and if so, would it really be effective?

        1. J,

          Generally speaking, the notions of “an ideal world” are a bit beyond the discourse here.

          After all, in the ideal world, we would all get down on our knees with Jane.

          “I would think that if you understood what Communism was, you would hope, you would pray on your knees, that we would someday become communists.”

          Spoken at a gathering of students at Michigan State University, November 22, 1969.

          Be it as it may – and human nature being what it is – the injunction power would not reach that which you would think possible in that “ideal world.”

  6. “The need to protect American business from trade secret theft has never been greater. As the attorney general recently warned, “A hacker in China can acquire source code from a software company in Virginia without leaving his or her desk.” It is time to fill the gap in recent legislative efforts and enact a federal civil cause of action for trade secret theft.”

    – David S. Almeling, O’Melveny & Myers LLP

    COMMENT: EXACTLY NOTHING IN THE BILL INTRODUCED WOULD STOP THIS PURPORTED “SOFTWARE SHANGHAI” HYPERBOLE. HOWEVER, IT CERTAINLY WOULD PUT THE FEAR OF GOD INTO EVERY HONEST AND DECENT ENGINEER IN THE U.S.A. ANYTHING THAT MIKE ROGERS SUPPORTS IS PROBABLY DERELICT.

    1. Maybe you could just tell us why what we have is insufficient.

      The two biggies are that the current system is not uniform from one state to another and that the current system doesn’t provide access to the federal courts unless there is diversity jurisdiction.

          1. Non-responsive question.

            Again, the two questions reinforce each other and do so regardless of practicing or not practicing in state court.

            LOL – Leopold, is that you?

            1. I’m not getting drawn into one of your p!ssing contests, anon. If you don’t accept that uniformity of law across state lines and access to federal courts are different issues, then we’ll just have to leave it at that.

            2. You misfire again DanH – no one is questioning the difference between state and federal court.

              No One.

              However, you are quite missing the point of the comment and you still are double dipping.

              (this is no contest – I remain dry and you remain west, smelly and stained)

      1. Thanks for the response Dan.

        I don’t see either of those as particularly pressing, and as anon noted, the second sort of seems like double dipping. As to the third one you noted below, that there is something wrong or hard or whatever with taking care of this at the state court, that just seems like a need to improve the state court. Maybe you, and other people, totally do think these are pressing concerns based on your experience. If you ever want this thing passed then you might want to look into sharing what’s going on that is so pressing. At present, your article gives the impression that we should just do it “because”.

        As the David notes above, this is just giving the feds more power of the everyday worker.

        Besides all that I don’t see where constitutional grant of power for this comes from, off hand.

        In either event, yeah, can’t support this and I hope congress doesn’t either.

        If a pressing need arises that would actually be addressed by the legislation then maybe, maybe we should consider this sort of massive increase in federal regulating.

        1. …that just seems like a need to improve the state court.

          I don’t disagree, but that’s not likely to happen any time soon. I think it’s safe to say that most businesses that operate in multiple states would greatly prefer to litigate in federal court, as it is viewed as more predictable, with less susceptibility to “home cooking.”

          Besides all that I don’t see where constitutional grant of power for this comes from, off hand.

          That would be the commerce clause. The proposed statute is limited to situations that deal with interstate or foreign commerce.

          …this is just giving the feds more power of the everyday worker.

          LOL. Perhaps. But I don’t think most trade secret cases of any significance involve the “everyday worker.”

          If a pressing need arises that would actually be addressed by the legislation then maybe, maybe we should consider this sort of massive increase in federal regulating.

          I don’t know how pressing it is, actually – I’m certainly not going to lose any sleep over it. But, I don’t think this amounts to a “massive increase in federal regulating.” More or less the same activities would be illegal as before; this bill mostly provides for additional causes of action.

          That said, Mr. Almeling doesn’t say very much about the seizure provisions. That kind of thing always concerns me – I think those probably warrant a close look, to be sure the potential for abuse is minimized.

          1. I don’t think most trade secret cases of any significance involve the “everyday worker.”

            From the perspective of the person being hauled into Federal court, every case is pretty “significant.”

            It does seem excessive to me to make a per se Federal case out of trade secret misappropriation.

            1. The (sheepskin) cover over the wolf of enforcing a patent right being the second worst thing ever because (gasp) you follow the actual given path for enforcing that right…

              Y.
              A.
              W.
              N.

          2. “That would be the commerce clause. The proposed statute is limited to situations that deal with interstate or foreign commerce.”

            I figured you might say that. And in such a case, I’m not even hardly sure how such a statute would be helpful unless it is overreaching beyond what the commerce clause really allows for. The commerce clause is dealing with commerce, buying and selling. Not with trade secrits. But meh, since when would congress let a little thing like the constitution stop them?

            But yeah, imo you need a pressing reason.

            Especially when you’re proposing trying to end “home cooking” ;)

            1. And in such a case, I’m not even hardly sure how such a statute would be helpful unless it is overreaching beyond what the commerce clause really allows for

              WOW.

              Translation: “Meh, my belief system will not be influenced by actual law

            2. The commerce clause is dealing with commerce, buying and selling. Not with trade secrits.

              ???

              trade noun \ˈtrād\ : the activity or process of buying, selling, or exchanging goods or services

            3. “trade noun \ˈtrād\ : the activity or process of buying, selling, or exchanging goods or services”

              For whatever reason my previous post is locked in moderation forever. So let’s try again.

              You’re pulling the first definition of “trade” when the second definition is the one that is generally being used in “trade secrits”. Generally the trade secrit has nothing to do with the “the activity or process of buying, selling, or exchanging goods or services”. Rather it has to do with “a skilled job, typically one requiring manual skills and special training”.

              You can’t rely on a clause related solely to the activity or process of buying, selling, or exchanging goods or services to enact laws that affect a skilled job, typically one requring manual skills and special training, or the secrits obtained in doing such a job.

              Well, I guess you could, because since when does the constitution stop the congress?

            4. For whatever reason my previous post is locked in moderation forever. So let’s try again.

              You’re pulling the first definition of “trade” when the second definition is the one that is generally being used in “trade secrits”. Generally the trade secrit has nothing to do with the “the activity or process of buying, selling, or exchanging goods or services”. Rather it has to do with “a skilled job, typically one requiring manual skills and special training”.

              You can’t rely on a clause related solely to the activity or process of buying, selling, or exchanging goods or services to enact laws that affect a skilled job, typically one requring manual skills and special training, or the secrits obtained in doing such a job.

              Well, I guess you could, because since when does the constitution stop the congress?

            5. …and each one shows a blatant misunderstanding and a lack of care about what trade secrets really mean.

              btw, how exactly do you think that the state province of trade secrets (you know, the historical place) is affected by the constitution?

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