Trade secrecy protection may be a little too secret. It’s the most underrated and underappreciated form of intellectual property – at least among the public, policymakers, and scholars.
That’s why recently proposed legislation to create a new private federal cause of action for trade secrets theft is a welcome development. Bills in the Senate (3), co-sponsored by Senators Coons and Hatch, and the House (4) are under serious consideration and stand a chance to pass this fall.
Businesses rarely publicize incidents of trade secret theft, but there is plenty of evidence that the threat (5) of trade secret theft is large (6) and growing (7). The plight of American Semiconductor Corp (AMSC) provides a rare public glimpse into the threat and consequences of trade secret theft.
AMSC, a tech company that creates software to control wind turbines, was a great American success story. A star in the growing green tech sector, it was heralded as a model by President Obama and employed hundreds.
AMSC’s losses were devastating. Within a year, it had lost over 80% of its market cap and laid off more than half of its workforce – over 500 employees. US prosecutors tally the harm to AMSC at $2 billion so far.
The case illustrates the growing challenge of trade secret theft. The wrongdoing may be hard to detect and investigate, and the economic consequences can be vast.
As important as trade secret protection is in preventing loss, it has an even more important effect in encouraging innovation. In a large, multi-country study (10) just released by the Organization for Economic Cooperation and Development, my co-author and I found that stronger trade secret protection was associated with greater investment in innovation.
A fair question, however, is whether the US needs a federal law to enjoy the benefits of trade secrets. The laws of all 50 states currently protect trade secrets, almost all of them pursuant to statutes based on the Uniform Trade Secret Act (11) (UTSA), which is adopted with minor, but numerous, variations.
By and large, there is little wrong with the substance of state trade secret laws. Essentially, the proposed federal law defines trade secret protection the same way as state laws have always done. This is, in fact, a benefit because federal courts could look to well-developed and smart precedent going back to early 19th century law.
The problem that the federal law would solve is, instead, procedural. Our patchwork of state jurisdictions and varying court procedures is no longer up to the job of protecting trade secrets in the 21st century.
One reason is that the effectiveness of trade secret protection depends in large part on whether courts can help trade secret owners plug leaks quickly. Under the best of circumstances, trade secrets are fragile – once they are in the hands of a competitor, they are drastically devalued. Once they become public, they are destroyed. Time is of the essence.
The problem trade secret owners increasingly face is that they have less time than ever to rescue trade secrets. Information is more mobile and travels faster than ever. A mere 20 years ago, a rogue employee or unscrupulous competitor may have had to smuggle and ship large amounts of documents. Just as people now carry the equivalent of entire libraries on their Kindles, a rogue employee can, with a few clicks, spirit away thousands of pages of proprietary blueprints, technical manuals, formulae, and other documents on a thumb drive or in a remote folder.
Stolen trade secrets now cross state lines at the speed of light.
Divided trade secret jurisdiction may consume time that a trade secret owner no longer has. While a trade secret owner can enforce court orders across state lines, it takes time – time to file the order in another state’s court, and time to deal with potential technical challenges.
Trade secret owners don’t have the luxury of time. A federal trade secret law would give the trade secret owner nationwide jurisdiction, with orders enforceable from one court to another.
Another challenge for a trade secret owner is getting the evidence to prove its case. By definition, a trade secret must be possible to conceal. A trade secret thief may find it all too easy to hide the theft and use of a trade secret. The owner may be left with little more than a suspicion and some circumstantial evidence at best. The best evidence of theft is thus often in the hands of the defendant. Put these facts together, and it can be particularly difficult for a trade secret owner to get evidence.
Moreover, time is once again of the essence, as a trade secret thief may be in a particularly good position (and have every motive) to hide or destroy proof of its wrongdoing. An emergency order to seize evidence to prevent destruction of evidence is an important remedy in such cases.
Again, divided jurisdiction and varying state procedures pose particular challenges for trade secret owners. They can obtain evidence across state lines, but it is complicated – consuming time and money. This is particularly true if the evidence is in the hands of a third party. Also, states vary in their willingness to issue emergency orders to seize evidence.
The proposed federal act would greatly alleviate these challenges by facilitating faster, more efficient evidence gathering across state lines. It also provides for emergency orders to seize evidence, while protecting the rights of defendants.
Trade secret owners also face the danger that litigation could make things worse. Going to court may put the secret at further risk of disclosure, to other competitors and the world, unless the court system offers sufficient safeguards. Where safeguards are insufficient, a trade secret owner may face the unattractive choice of letting a single competitor get away with trade secret infringement, or litigating and losing the trade secret entirely.
Fortunately, most courts are willing to close court proceedings and seal records, where warranted. But standards vary between the states, and it is easier in some states than others. Once again, the proposed federal act offers the benefit of uniformity and certainty on this key point.
Another benefit of the proposed law is that it does not offend the important principle of Federalism. First, it does not pre-empt state laws. Trade secret owners can still use state courts – as may be necessary in the increasingly rare trade secret case that is truly and completely local.
In addition, the current state of trade secret protection presents one of the most traditional and widely-accepted bases for federal lawmaking. The US Constitution was motivated in part by a desire to avoid a patchwork of jurisdiction and regulation of interstate commerce among the states. With trade secrets becoming increasingly important, there is a strong case for Congress to enact consistent national regulation.
The proposed federal trade secret legislation is a timely, sensible reform. As trade secrets become more important, both trade secret owners and the US economy deserve the certainty and effectiveness that a federal act will provide.