Promise of federal protection brings new hope for critical US IP law

The United States lacks a strongframework for protecting trade secretsat the federal level. However, proposedlegislation could be about to shake thingsup and provide new protection in this area

US companies have various legal tools available to protect their intellectual property, including patents, copyrights, trademarks and trade secrets. However, despite accounting for an average of two-thirds of US companies’ information value, trade secrets have only limited recognition under federal statutes. The resulting inability of companies to protect their trade secrets has become a real competitive weakness for the US economy, with victims of trade secret misappropriation forced to seek redress through a patchwork of ill-suited protections. However, a new bill called the Defend Trade Secrets Act, introduced this April, may finally provide strong federal protection for companies whose trade secrets are purloined illegally.

To appreciate why existing trade secret protections are insufficient, one must understand the current nature and scope of trade secret misappropriation. US company trade secrets are commonly misappropriated by or for companies from countries lacking strong domestic IP protection. The foreign companies then use these trade secrets to compete unfairly with US companies. The problem is systemic: according to recent industry surveys, nearly 60% of respondents have been victims of attempted or actual trade secret theft. Estimates place the annual cost of trade secret misappropriation to US companies at between $160 billion and $480 billion. This may be the largest mass misappropriation in the history of human activity.

The first federal effort to address trade secret misappropriation was the Economic Espionage Act of 1996, which made it a federal crime. However, because the act is limited to criminalising misappropriation (as opposed to creating civil causes of action), US companies must rely on the government to enforce their rights. In 2013 the Department of Justice (DOJ) brought just 25 cases of trade secret theft – understandable, given its limited resources. Affected companies are the stakeholders and thus in the best position to enforce their rights – they have the necessary resources and an immediate and tangible economic interest. US industry has moved in this direction under the current legal regime. One avenue is US state causes of action, where available. However, these actions are woefully inadequate because misappropriation occurs across state and national boundaries. This makes issues such as discovery, witness production and absconding defendants nearly impossible to manage.

Another available avenue is Section 337 of the Tariff Act, which allows actions for the misappropriation of trade secrets before the International Trade Commission (ITC). However, Section 337 is limited because in order to establish a cause of action, victims must prove the import into the United States of goods containing the misappropriated trade secret. Evidence of this can be difficult to obtain, such as with trade secrets embodied in services or trade secret processes lacking distinguishable features in the goods created with the trade secrets. Furthermore, import into the United States is only one of many ways that foreign trade secret thieves compete against US victims. US companies operate in a global economy and limiting relief to situations where goods embodying a stolen trade secret are imported into the United States leaves the thieves’ competitive advantage in every other country unaltered.

Even state attorneys general have begun to take action. Given the systemic nature of misappropriation and the broad effect on states’ economies, several have filed or threatened to file suits under their state unfair competition laws. Unsurprisingly, these actions suffer from the same problems:

  • They are state actions tied to intra-state activity;
  • They are brought by state prosecutors with limited resources; and
  • Key stakeholders (ie, the affected companies) have only limited opportunities to participate.

However, there is new hope. On April 29 Senators Chris Coons (Delaware) and Orrin Hatch (Utah) introduced the Defend Trade Secrets Act. This would amend the Economic Espionage Act to include a federal civil cause of action for the theft and misappropriation of trade secrets. It would harmonise US law by creating a single federal standard for misappropriation and enable discovery, witness production and flight-risk defendants to be handled effectively through well-established federal processes. In addition, it would provide the same nationwide remedies for trade secret misappropriation as are already available for patent, copyright and trademark infringement. This would help US companies to combat trade secret misappropriation without the inefficiencies and jurisdictional problems plaguing the existing system.

Importantly, the Defend Trade Secrets Act would send a strong and clear statement that the US government stands behind US businesses, in a world where foreign interests are systematically attacking US innovators on an unprecedented scale. A private federal cause of action can be utilised on a larger scale than DOJ criminal actions, which are limited by strained government resources. In addition, a private federal cause of action carries considerable advantages in scope, scale and flexibility, as compared to ITC and state attorney general actions.

It is time for the United States to put in place a federal trade secret system providing the same protections as the federal government offers to other forms of intellectual property. The current disorganised patchwork invites theft, undervalues trade secrets, removes incentives for investment in US-based R&D and puts US jobs at risk. The Defend Trade Secrets Act would provide much-needed relief to US innovators that have suffered for too long. Senators Coons and Hatch should be applauded for their effort to extend the United States’ gold-standard IP protection to trade secrets.

David Kappos is a partner at Cravath, Swaine & Moore, New York, and the former director of the US Patent and Trademark Office

Unlock unlimited access to all IAM content