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Congress May Be About to Shake Up Trade Secret Law: Is That a Good Thing?

28 April 2016

From The Wall Street Journal:

Federal civil law governing intellectual property has long been a three-legged stool: copyrights, patents and trademarks. Unless it’s tabled, legislation advancing in Congress would add a fourth one: trade secrets.

Trade secrets are like patents, but without the strict criteria for novelty and usefulness and without an expiration date. They’re basically confidential, valuable information that gives a company a competitive edge. Famous examples are the precise formula for Coca-Cola and the algorithms that Google uses to sort and filter the Internet.

But a main difference between trade secrets and other areas of IP is how legal fights over them are decided. Trade secret disputes between companies, unlike the three other legs, are brought in state courts.

. . . .

The bill has been described as the “most significant expansion of federal law in intellectual property since the Lanham Act in 1946.”

The DTSA would allow companies to sue for trade-secret theft and pursue damages in federal courts. “The DTSA would require evidence of actual or threatened misappropriation before a court may issue an injunction to prevent it,”

. . . .

Here’s Covington & Burling LLP attorney Richard A. Hertling, testifying before Congress on behalf of another business advocacy coalition in 2014:

Civil trade secret laws originated at the state level, in an era when trade secret theft was largely a local matter. State trade secret laws work well when, for instance, an employee of a local business steals a customer list and takes it to the business down the street. For companies that operate across state and national borders and have their trade secrets threatened by competitors around the globe, the array of state laws is inefficient and inadequate…

The DTSA has a lot of political support but also some critics. Some IP experts say that there’s already a lot of uniformity in state law. The addition of a whole new law, one that would be combined but not replace state law, would stretch adjudication costs and time by giving plaintiffs another forum to take their complaints.

Link to the rest at The Wall Street Journal (Link may expire)

This legislation passed the House of Representatives almost unanimously yesterday and the President is expected to sign it.

Here’s the definition of a trade secret from the new legislation:

The DTSA broadly defines the term “trade secret” to mean “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the another person who can obtain economic value from the disclosure or use of the information.”  Although this definition is broad and certainly includes abstract ideas and laws of nature, it might not encompass information that is only stored in the human mind.

Link to more detail at Patently-O

Got that? Information “stored” in your mind might or might not be owned by someone else.

Tech companies have been using trade secrets for some time to discourage competing companies from hiring valuable employees.

While a business may be exposed to liability for misappropriation by the actions of its overzealous employees, the risk arises more frequently in the hiring process.  New employees with knowledge of a former employer’s trade secrets, for example, may expose the new employer to liability by using or disclosing secrets in the course of their employment.  It is not necessary that the new employee actually use or disclose a former employer’s trade secrets to expose a subsequent employer to liability.  An employer can be enjoined from hiring a new employee where it is “inevitable” that the employee will use or disclose a former employer’s trade secrets in the course of subsequent employment.

Link to more detail at Fairfield & Woods

While PG has perused the occasional confidentiality clause in publishing contracts, he has never seen explicit obligations placed on an author to keep trade secrets of a publisher safe.

Unfortunately, PG predicts this new legislation will catch the attention of counsel for publishers. More verbiage will be added to the contracts publishers want authors to sign. Perhaps by claiming royalty statements or emails from editors contain trade secrets, some publishers will seek another hammer to keep their authors barefoot and pregnant.

It is in the nature of major new laws that several years are required for trial and appellate courts to apply the broad legislative language to the particular facts of individual cases. Court opinions under state law protecting trade secrets may provide some guidance, but in the face of brand new statutory language, it will be easier to argue that definitions and principles developed under state law won’t apply.

This period of some uncertainty about what is and is not protected and/or permitted will give the holders of trade secrets (who usually have more resources than individuals who are employees or contractors) an additional hammer to wave in the direction of those individuals. Inevitably, more than a few companies will overreach. Trade secrets litigation is already expensive and will become more so in the near future.

And, yes, trade secrets laws do limit the First Amendment rights of individuals to freedom of expression, but this exception is well-established under cases arising from state trade secret laws.

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7 Comments to “Congress May Be About to Shake Up Trade Secret Law: Is That a Good Thing?”

  1. The addition of a whole new law, one that would be combined but not replace state law, would stretch adjudication costs and time by giving plaintiffs another forum to take their complaints.

    To me, this is the root of MANY problems we have with our legal and legislative system. Legislators, much like college professors, must “publish or perish” as the old saying goes. They want to author their own laws to pad their legislative resume, but no one wants to go in and remove outdated or ridiculous laws, or simply edit and revise things that are already in existence. Thus, creating a bloated and impossibly complex legal maze.

    As an example: there’s a law in Rhode Island that states you cannot sell toothpaste and a toothbrush to the same customer on a Sunday! Was that ever a thing?

    • About the toothpaste thing- I cannot think of any reason why that would even be a law.

      I guess moronic leaders aren’t a modern phenomenon.

  2. Trade secrets are a counterpart to patents: patents grant a temporary monopoly on ideas in return for publicly documenting them. Trade secret laws protect ideas, which may or not be patentable, as long as the originator protects them reasonably on their own.

    The intent of the trade secrets laws is to minimize/counter economic espionage of which there is a whole *lot* both within nations and between them. Some cases are clear (and infamous) like the French government bugging Boeing employees traveling on AirFrance in the 60’s and 70’s to secure details of the eventually cancelled SST program while the russians were bugging the french which is why the Tupolev and the Concorde all looked just like the SST.

    More recently and less lear, Bezos jump-started Amazon by hiring a boatload of Wal-mart logistics staff, prompting a lawsuit.

    There’s a fine line between personal experience and corporate secrets, surrounded by a broad gray area. Enough to keep armies of lawyers occupied for a couple centuries.

  3. If Congress is involved, probably NOT.

  4. some publishers will seek another hammer to keep their authors barefoot and pregnant.

    Please please tell me that’s a mixed metaphor…

  5. …some publishers will seek another hammer to keep their authors barefoot and pregnant.

    As the terms included in big pub contracts grow ever worse for the writer, it really seems that big pub wants to take everything while giving the writer nothing. Nicely phrased, PG.

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