The Movement Toward a Federal Trade Secret Protection Law

With the recent attention by the U.S. Congress and the U.S. Supreme Court to patent issues, the value of the IP protected as a trade secret may not be receiving the attention it deserves.  Various studies have suggested that the value of IP protected as a “trade secret” (such as the recipe for Coke) greatly exceeds the value of IP protected by patents.  Importantly, the protection afforded a trade secret lasts forever (or at least as long as the trade secret remains confidential); whereas the length of protection for a utility patent is generally 20 years from the earliest effective filing date for patent applications filed on or after June 8, 1995.

While patents are governed by a single federal statutory framework at 35 U.S.C. § 101, et seq., including exclusive jurisdiction in the federal district courts for infringement disputes and most other matters related to patents, with all appeals directed only to the U.S. Court of Appeals for the Federal Circuit, a trade secret in the United States is subject to 50 different state laws.  A suit to enforce a trade secret may be brought in state court, and alternatively, possibly in federal court as well, if there are other bases for federal jurisdiction such as diversity of citizenship with respect to the parties, or the existence of pendant jurisdiction if claims pursuant to federal statutes such as those involving patents, trademarks or copyrights are also at issue.

To partially address potential inconsistent outcomes in trade secret cases between so many competing jurisdictions concerning what is now a national and international market for IP, most states have adopted, as a matter of state law, the Uniform Trade Secrets Act (“UTSA”).  Since Texas adopted the UTSA in 2013, reportedly 47 states have now adopted this single framework.  The UTSA defines a trade secret as:

[I]nformation, including a formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers that (A) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (B) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

TEX. CIV. PRAC. & REM. CODE § 134A.002(6).  While the UTSA generally supersedes prior Texas common law regarding trade secrets for cases accruing after September 1, 2013 (see          § 134A.007), and brings the definition of a trade secret into conformity with that of most other states, the UTSA does not create a private right of action for misappropriation of trade secrets under federal law nor provide for automatic subject matter jurisdiction in the federal courts.

The Economic Espionage Act of 1996 (18 U.S.C § 1831) and the Computer Fraud and Abuse Act (18 U.S.C.  §1030) in 1986 were initial responses by the U.S. Congress to concerns of the business community regarding thefts of trade secrets and other business information in the global marketplace.  While these acts create criminal penalties, the Economic Espionage Act does not create a private right of action, and the private right of action created by the Computer Fraud and Abuse Act is limited to five narrowly defined circumstances that are not applicable to trade secrets in general.  See 18 U.S.C §1836 and 18 U.S.C §1030(g).

H.R. 5233 is titled the “Trade Secrets Protection Act of 2014” (“TSPA”) and was referred to the House Committee on the Judiciary on July 29, 2014.  The TSPA would amend the Economic Espionage Act to create a private right of action with original jurisdiction in the federal courts for misappropriation of trade secrets related to interstate commerce.  (Id. at §2(b)(1)).  By its terms, the TSPA would not preempt the existing state law framework under the UTSA.  Remedies would include a court ordering on ex parte application measures necessary to preserve the trade secret by preventing further dissemination.  A court would further be empowered to issue an injunction to: prevent actual or threatened misappropriation of the trade secret; (2) require affirmative protection of the trade secret; and (3) in “exceptional circumstances that render an injunction inequitable” require a reasonable royalty for use of the trade secret for the duration of the trade secret.

Damages measured by actual loss and any additional damages for unjust enrichment are also authorized.  In lieu of such damages, a reasonable royalty is also authorized.  The TSPA further provides for the imposition of treble damages where the trade secret is found to be “willfully and maliciously misappropriated.”  In the event the trade secret is “willfully and maliciously misappropriated,” the court has discretion to award attorney fees to the prevailing party, as well as if a claim of the misappropriation is made in bad faith, or a motion to terminate an injunction is made or opposed in bad faith.

The TSPA would include a 5-year statute of limitations running from the date of the misappropriation.  There would also be a discovery rule based on when the misappropriation in “the exercise of reasonable diligence should have been discovered.”  If the trade secret were learned through reverse engineering or independently developed, then no liability would attach.

The prospects for passage of H.R. 5233 are uncertain at this time given the approaching mid-term elections.  However, the bill is an important recognition of the value protected by trade secrets, and the additional protection of U.S. economic interests that could be provided by a uniform federal private right of action to address misappropriation of trade secrets subject to jurisdiction of United States courts.

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