Guest Post: The Case Against Federalizing Trade Secrecy

Guest post by Christopher B. Seaman, Assistant Professor of Law at Washington and Lee University School of Law. 

As Dennis recently discussed, the idea of creating a private cause of action for trade secret misappropriation under federal law appears to be gaining traction. Bipartisan legislation has been introduced in both the House and the Senate, and congressional action on these bills may occur as early as this fall. A number of influential actors in the intellectual property world, including the AIPLA, former USPTO Director David Kappos, and a coalition of large manufacturing and technology firms, have publicly supported federalizing trade secrecy. And several legal academics have advocated adoption of a federal trade secrets act.[1]

In a forthcoming article in the Virginia Law Review, I contend there are several important reasons why trade secrecy should remain primarily the province of state law. First, despite claims by proponents, the adoption of a federal civil cause of action would not create greater uniformity for trade secret protection. Currently, there is widespread agreement regarding the basic principles of trade secrecy under state law.   For instance, to establish the existence of a trade secret, both the UTSA (adopted by 47 states) and the Restatement of Torts (largely followed by the remaining jurisdictions) require the trade secret holder to prove that the allege secret has value because it is not generally known or used, and that the holder of the trade secret took sufficient efforts to keep the information secret from others. Similarly, the UTSA and Restatement largely agree on what conduct qualifies as “improper means” of acquiring a trade secret, and both recognize that reverse engineering and independent invention cannot create liability for misappropriation. While there are some variations between states regarding the particular details of trade secret protection, these differences are relatively minor, as the Federal Circuit has recognized.[2]

In fact, adopting federal legislation likely would result in less uniformity by creating two parallel regimes—federal and state—with overlapping authority over trade secret claims. As noted in the recent letter signed by 31 law professors, none of the current bills pending Congress would preempt state law, thus permitting a federal cause of action to exist in parallel with existing state remedies. Notably, there are important differences between the Economic Espionage Act (“EEA”), which would be amended to create a private cause of action, and current state law, such as the EEA’s mens rea (intent) requirements and its lack of express protection for reverse engineering. Moreover because trade secret claims frequently turn on the resolution of related state law issues—such as the scope and enforceability of nondisclosure agreements, or the fiduciary duties of an employee to a current or former employer—courts would either have to borrow from existing state law or create a new body of federal law in these areas to supplement the statutory text.

Second, proponents claim that federal legislation is needed to secure access to a federal forum, which they argue is imperative to adequately protect vital trade secret information. However, a substantial number of trade secret claims are already litigated in federal courts under diversity and/or supplemental jurisdiction, with the number of reported trade secret decisions increasing at least fourfold since the late 1980s.[3] In particular, acts of misappropriation by foreign actors and entities—which feature prominently in proponents’ arguments for federalization—generally would fall within the scope of district courts’ so-called alienage jurisdiction.[4] Others claim that additional federal remedies, like the ex parte seizure provisions in the House and Senate bills, are necessary to prevent irreparable harm after a trade secret has been stolen. However, they fail to explain why existing procedures, such as temporary restraining orders,[5] preliminary injunctions,[6] and civil seizures pursuant to state law under Federal Rule of Civil Procedure 64, are inadequate to protect trade secret holders.

Third, and perhaps most significantly, the proposed federalization of trade secrecy may negatively impact innovation by undermining a key objective of patent law: the disclosure of patentable inventions. Innovators who develop a potentially patentable invention often face the dilemma of whether to incur the cost, delay, and uncertainty of seeking patent protection, or instead maintaining the invention as a trade secret. Stronger trade secret protection via federalization will likely cause more inventors to opt out of the patent system in favor of trade secrecy. This, in turn, will reduce the amount of public disclosure regarding patentable inventions that can be used by others to improve upon the invention and to practice it after the patent’s expiration. In contrast to patenting, trade secret protection is “theoretically unlimited in duration, lasting so long as the information remains a trade secret.”[7]

As an alternative to federalization, my article instead proposes a modest expansion of federal courts’ jurisdiction over state law trade secret claims that could be achieved by tweaking some existing jurisdictional rules. For instance, Congress could adopt a so-called “minimal diversity” standard in trade secret cases that would make a federal forum available whenever at least one party is a citizen of another state from the other parties. Congress also could adopt a “national contacts” standard that would allow a U.S. company to rely on a foreign misappropriator’s contacts with the United States a whole, rather than just the forum state, to establish personal jurisdiction over foreign defendants. This proposal would offer the benefits of a federal forum for more trade secret claims, while at the same time avoiding the potential drawbacks of creating a new federal private cause of action for trade secret misappropriation.

[1] David L. Almeling, Four Reasons to Enact a Federal Trade Secrets Act, 19 Fordham Intell. Prop. Media & Ent. L.J. 769, 770 (2009); Marina Lao, Federalizing Trade Secrets Law in an Information Economy, 59 Ohio St. L.J. 1633, 1653 (1998); Christopher Rebel J. Pace, The Case for a Federal Trade Secrets Act, 8 Harv. J.L. & Tech. 427, 433-34 (1995).

[2] See TianRui Grp. Co. v. U.S. Int’l Trade Comm’n, 661 F.3d 1322, 1327-28 (Fed. Cir. 2011) (noting that “trade secret law varies little from state to state”).

[3] David S. Almeling et al., A Statistical Analysis of Trade Secret Litigation in Federal Court, 45 Gonzaga L. Rev. 291, 293, 302 tbl.1 (2010).

[4] See 28 U.S.C. § 1332(a)(2) (granting the district courts original jurisdiction over civil actions between “citizen of a State and citizens or subjects of a foreign state”).

[5] See, e.g., V’Guara Inc. v. Dec, 925 F. Supp. 2d 1120 (D. Nev. 2013) (granting a TRO to prevent trade secret misappropriation).

[6] See, e.g., Core Labs v. Spectrum Tracer Servs., 532 Fed. Appx. 904 (Fed. Cir. 2013) (granting preliminary injunctive relief for a trade secret misappropriation claim).

[7] Nova Chems., Inc. v. Sekisui Plastics Co., 579 F.3d 319, 327 (3d Cir. 2009).

22 thoughts on “Guest Post: The Case Against Federalizing Trade Secrecy

  1. Big picture: kill patents pump trade secret law. The lock down is coming.

    Employees and innovators beware.

    Reply
    1. Oh the chill that an employee will feel when not only can they be sued for leaving their company and working in an area their former company does like, but also possible prison terms.

      Reply
    2. Employees at technology companies need to be taught that they are hired and work at the company until the company no longer needs them. And, then they should go take up a new profession.

      Reply
  2. I have run across very few inventions which can be maintained as trade secrets once they are commercialized.

    Reply
  3. I wonder how many of the proponents of Federal trade secret laws are out there in other forums arguing in other contexts that the Federal government is “power hungry” and “completely out of control.”

    Are there some extreme examples of differences in trade secret law between the states that are currently being abused? Do some states have radically different ideas about what constitutes a trade secret and what the punishment is such that the differences are affecting commerce or affecting individuals in some harmful/unjust manner?

    Otherwise I’m not seeing the need for a new Federal cause of action.

    And if certain states have trade secret laws that are too onerous (e.g., providing too much protection for corporations and other business “entities” at the expense of the fundamental rights of individual human beings) then it seems we have readily available methods for dealing with those laws.

    Reply
  4. One question I’d be interested in how many companies are moving to trade secrets. As patents become weaker and weaker I’d expect companies to move to trade secrets.

    Good luck employees. Good luck innovating when everything is a secret.

    Reply
    1. Good luck innovating when everything is a secret

      “Good luck innovating when the planet is a lifeless orb devoid of minerals.”

      “Good luck innovating when the Zardonians from Alpha VIII have total control of everybody’s brain.”

      “Good luck innovating while you are busy 24 hours a day building monuments for your Chinese master.”

      All equally realistic and all equally compelling!

      Reply
    2. NWPA,

      I wonder how one can commercialize an invention, aside from a process perhaps, and keep it from being reverse engineered for something approaching 20 years. Does anyone have examples? I seem to be missing something.

      Reply
      1. One thing Troubled don’t think of what it is like now, but what it will develop to. Now, almost everything is open due to patents.

        Reply
  5. Inevitable Use and Disclosure

    That is all you have to know. It is IBM’s pet theory, and they use it when an employee jumps ship having knowledge of confidential and trade secret information and goes to work for a competitor. They argue that unless the employee is put on ice for a time, that he will inevitably use and disclose trade secret information in his brain.

    There is tension between IBM’s pet theory and the statutory law of California that says contracts that restrain the right of employee to pursue his profession are void. Typically one cannot put a California employee on ice under this theory. Thus IBM and others are trying to do an end run around California statutory law.

    They are very clever.

    Someone needs to alert the Atty. Gen. of California to intervene in the discussions on behalf of the citizens of California.

    Reply
    1. Ned,

      As I understand it, the current versions of the Federal TS laws do not – or will not – preempt the state laws, so your California specific law should remain intact, right?

      Reply
      1. Anon, but you seem to misunderstand. California will not tolerate restraints on an employee moving from one company to another under the theory that he will “inevitably” use and disclose his prior employer’s trade secrets. I am very suspicious that the prime reason that IBM and others may want to move to federalize trade secret law is to make inevitable use and disclosure the law of the land such that even if California would not find a violation, the big company could still win its case under federal law and get an injunction that would violate California public policy.

        We now have such conflicts between federal law and state policy in the area of marijuana where the state would allow that which the federal law would prohibit.

        I think there is no question here that the big boys are trying to do an end around California law in any other state law that protects employees.

        Reply
        1. Ned,

          What I am seeking to understand is how an avowed non-preemptive federal law appears to you to preempt California state law.

          Can you explain that?

          Reply
    2. Ned — you really have it in for IBM. You’ve made numerous negative comments about them the last couple of years.

      They piss in your coffee one day?

      Reply
      1. Oh no, I am not the only one here that has posted negatively about IBM. What you think we have in common?

        Reply
  6. Patents and copyrights have an express Consitutional basis for Federal law and jurisdiction. Federal trademark rights are based on the Commerce Clause. What will be the basis for federal jurisdiction over trade secrecy disputes, especially disputes between an employer and a former employee in the same state [no diversity] over alleged trade secrets re something that is not even yet a product, much less a product in interstate commerce?

    Reply
    1. Interesting question as to the constitutional tie-in paul (I think I asked a very similar question previously).

      I would go with the commerce clause, as “federalizing” pretty much anything related to commerce is quite easily done (think grain for personal consumption).

      I have a more basic question for the author and his three prong logic:

      1) Federal Cause of Action makes things worse (added layer, no preemption)
      2) mostly forum flip a coin – meh, not super persuasive (and as I noted in the previous comments, any fed action should aim to preempt the field)
      3) Federal Cause of Action works too well (for patent effect) – yet this is contradicted by 1). Plus – the AIA has already acted to strengthen TS with the submarine PUR.

      Can the author help clarify his logic?

      Reply

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