Defend Trade Secret Act Moving Forward

by Dennis Crouch

I am always amazed how gridlock is pushed aside to implement intellectual property laws.  In a unanimous vote yesterday, the Senate passed the Defend Trade Secret Act (DTSA, S. 1890) that would create a federal cause of action for trade secret misappropriation and provides for damages and injunctive relief (including a seizure order to prevent dissemination).  Neither Senators Ted Cruz nor Bernie Sanders voted.  The identical bill H.R. 3326 is pending in the House of Representatives and includes 127 co-sponsors (mostly Republican).  President Obama has announced his support as well.

From Senator Hatch:

Trade secrets–such as customer lists, formulas, algorithms, software codes, unique designs, industrial techniques, and manufacturing processes–are an essential form of intellectual property. Other forms of intellectual property, such as patents, copyrights, and trademarks, are covered by Federal civil law. Trade secrets, by contrast, are the only form of U.S. intellectual property where the owner does not have access to a Federal civil remedy for misuse or misappropriation. As a result, billions of dollars each year are lost to trade secret theft, which stifles innovation by deterring companies from investing in research and development. Currently, the only Federal vehicle for trade secret protection is the 1996 Economic Espionage Act, which makes trade secret theft by foreign nationals a criminal offense. But this remedy criminalizes only a small subset of trade secret theft and relies on the thinly stretched resources of the Department of Justice to investigate and prosecute such offenses. . . . State laws today are perhaps even more variable in their treatment of trade secrets than they were at the time the Uniform Trade Secrets Act was proposed in 1979. This next mixed bag of differing legal regimes forces victims of trade secret theft to wade through a quagmire of procedural hurdles in order to recover their losses. . . . Put simply, State law is designed for intrastate litigation and offers limited practical recourse to victims of interstate trade secret theft–the contrast between intrastate and interstate. Maintaining the status quo is woefully insufficient to safeguard against misappropriation. U.S. companies must be able to protect their trade secrets in Federal court.

Most trade secret cases involve former employees who take knowledge with them as they move to a new venture.  The bill apparently includes minor safeguards for whistle-blowing employees and bar a court from preventing a person from moving to a new job. However, as far as I know, no employee groups have supported the Bill.

More info: 

Misappropriation is defined as “(A) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (B) disclosure or use of a trade secret of another without express or implied consent by a person who–(i) used improper means to acquire knowledge of the trade secret; (ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was–(I) derived from or through a person who had used improper means to acquire the trade secret; (II) acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or (III) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or (iii) before a material change of the position of the person, knew or had reason to know that–(I) the trade secret was a trade secret; and (II) knowledge of the trade secret had been acquired by accident or mistake.”

Improper means “(A) includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means; and (B) does not include reverse engineering, independent derivation, or any other lawful means of acquisition.”

 

 

Effective Date: The amendments shall apply with respect to any misappropriation of a trade secret for which any act occurs on or after the date of the enactment of this Act.

Not Intellectual Property: The new trade secrecy law “shall not be construed to be a law pertaining to intellectual property for purposes of any other Act of Congress.”  Thus, for example, the bankruptcy IP exception 365(n) would not apply to licenses of trade secret information.

About Dennis Crouch

Law Professor at the University of Missouri School of Law. Co-director of the Center for Intellectual Property and Entrepreneurship.

27 thoughts on “Defend Trade Secret Act Moving Forward

  1. The definition of “misappropriation” is too broad. Mere acquisition is not enough, there must be use too. As is, the definition could include lawyers.
    “Misappropriation is defined as ‘(A) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (B)…'”
    So, for example, let’s say company X finds out that one of their employees may have brought trade secrets with them from a former employer, and company X wants to be responsible and contacts their lawyer, sending them copies of the files and asks for guidance and whether they could fix the problem by destroying the data and putting the employee in a different department. So now, both company X and the lawyer have “acquired” the trade secrets and are guilty of misappropriation even if they don’t use the secrets for their gain and try to do the right thing. That can’t be right. Did I read it wrong?

  2. I suppose as many states have trade secrets laws it is more rational to have a federal law. OTOH, many of it’s proponents tried to say that other countries have laws protecting trade secrets, but AFAIK it’s only one country, and that’s Switzerland. It might have been more of a harmonising move if the federal law had weakened trade secret law in the US. We are the only ones marching in step, right?

  3. I would like to see a great employment lawyer tell us how this could be used to lock-down Google employees. The way to think about this is that will expand the ability of the company to protect inventions. Patents were great for employee mobility (and the CA trade secret law is credited with allowing mobility and helping to create the greatest software/hardware industry in the world including Intel.) Patents mean that what you did is public and owned by the company so you can just move on.
    This bill could have a great affect on patents than the AIA. Companies could start to keep things secret and behind firewalls. That is what they started doing in the 1980’s before patents. So, the real question is will this affect employee mobility? It cannot help. A typical tech employee (I was one) takes years to get really good at a specific tech. You learn languages, systems, and problem areas that you are an expert in. If the company figures out how to exclude you from using part or all of your skills through trade secret law, then the cost of moving to another company may be years of re-learning.
    To sum up: I don’t think this has been thought through. I don’t think that real scenarios have been worked through of how a company like Google could lock-down their employees and start to keep all their work secret.

    1. And I was a real software engineers that worked at one of the most advanced best start-ups and I had to sign an employment contract that made it hard to impossible for the 24 year old me to switch jobs without taking a big hit in my skill set.

      1. I will also point out that about 5 years ago when I became aware of the massive lobbying of Google I predicted a bill like this was going to introduced. CA is famous for not allowing companies to lock-up employees with IP. That has consistently been named as one of the reasons that CA is the great innovative state. That is not me but almost every real economist that has studied this. I am sure Google has economist now that say this doesn’t matter or lawyers like Lemley that will concoct some half-baked nonsense about trade secrets to justify locking down employees. That is reality. Mobility of the employee is paramount to innovation. And again–do the mental exercise of thinking about the difference between trade secret protection and patent protection. Trade secret projection is often more nebulous and can extend to whole areas of technology whereas patent protection is more fixed and localized.

        Anyway, it should be clear to any intellectual honest person that this is not a good idea without far more research into the affects it will have on the technology industry.

        1. The “funniest” thing is watching the “logic” of lemmings at such places as Ars Technica, Slash-Dot, or Tech-Dirt bemoan patents with the usual Kool-aid while they march up that (corporate-owned) cliff.

          As if they are all Cypher and want to be plugged back into the Matrix…

    2. To sum up: I don’t think this has been thought through.

      On the contrary, I think that this has been thoroughly thought through – just by those aiming for a different result than those that would have a strong and vibrant patent and innovation system.

      Why on earth would you want to compete in an area of disruptive innovation when as an established corporation, you can control the money flow?

  4. Would this Act superseded state trade secret law or is it merely a secondary venue to bring an action? Thanks

        1. PatentBob,

          A previous version expressly did NOT supersede – and was yet another layer to the patchwork of State laws.

    1. No preemption:

      The statute will continue to include the following provision:

      “This chapter shall not be construed to preempt or displace any other remedies, whether civil or criminal, provided by United States Federal, State, commonwealth, possession, or territory law for the misappropriation of a trade secret, or to affect the otherwise lawful disclosure of information by any Government employee under section 552 of title 5 (commonly known as the Freedom of Information Act).”

      1. If you are the defendant (like a Google employee), then this is worse. It means Google can pick and chose between the state and federal laws to sue you.

      2. In case “remedies .. for misappropriation of a trade secret” does not include CA et al statutory protection for employees in employment contracts, note that Federal courts should be applying state contract law under Erie v. Tompkins, et al. However, Fed. Cir. decisions have not been consistent in that respect.

        1. Yes, but I think that the protection for employees will only extend to the CA causes of action not the federal causes of action.

          I will bet that the Google attorneys are going to have a field day with their employees with this. They will probably get on a loud speaker and say, “All of you are now our b$tches.”

  5. I’m equally amazed, and even read somewhere that the Senate passage vote was unanimous [with those two leading gadflys absent]. Is that amazing amount of agreement correct? Was it on only a voice vote on the consent calendar?

    P.S. This makes me wonder if the pending legislation for restoring patent suit venue to what it used to be before a Fed. Cir. decision rendered the patent suit venue statute moot [aka save us from all being dragging into E.D. TX] might also have a chance in this otherwise do-nothing Congress? Even the pharma and biotech industries ought to be able to support that narrow a patent reform bill?

    1. Shocked and appalled are more appropriate reactions to those that care about innovation in the USA. Let’s hope that the E.D. TX stays strong to counter the justices that have litter regard for our Constitution. (And let’s hope that little that Paul Morgan wants comes true so that we can continue to have the strongest innovation engine the world–though with the AIA it is beginning to sputter.)

  6. Innovation NOT shared is innovation…

    …that will be protected MORE than innovation shared.

    “Go figure”

  7. What is the status of shrink wrap licenses which prohibit reverse engineering (RE)?

    Could a shrink wrap agreement give rise to a duty to maintain the secrecy of the trade secret or alternatively would breach of a term prohibiting RE be seen as unlawful? Is there difficulty with the language “or any other lawful means of acquisition” if RE is performed in a context which raises issues of unlawful conduct?

    How safe would reverse engineering be if a shrink wrap license for example claimed trade secrets in the item and that opening meant acceptance of the duty not to reverse engineer and an undertaking not to reverse engineer?

    1. Good question, especially since the last I heard there were at least two states that prohibited shrink wrap licenses?
      Note also the recent Fed. Cir. decision supporting post-sale restrictions, but which many folks think is heading for the Sup. Ct.. Also, there is the issue of sale versus alleged license.
      Then there is the practical question of how does one maintain trade secret protection for any product that is reverse engineerable and widely distributed? Even if you could possibly ID, and sue, the TS “leaker” itself, once the information becomes public it cannot be enforced in TS suits against all other members of the public.

  8. Dennis,

    Your article states “The identical bill H.R. 3326 is pending in the House of Representatives.” This is not quite correct. H.R. 3326 is identical to S.B. 1890 **as it was originally introduced.** However, in the Senate Judiciary Committee, Senator Grassley amended the original language to make some crucial changes. Those changes include (1) language that protects employee mobility, and (2) making the statute of limitations three years instead of five years, so the DTSA conforms to state law (the UTSA has a three year statute). The whistle blowing protection was also added in committee.

    It’s very important that if the House passes this bill, it do so **with** Senator Grassley’s excellent amendments, and **not** as originally introduced in either chamber.

Comments are closed.