One Step Closer To Making A Federal Case Out Of It

In the year-end holiday rush, employers and other trade secret owners may not have noticed that the Judiciary Committee of the United States House of Representatives in mid-December reported favorably on HR 5233, a proposal to create a federal civil cause of action concerning trade secrets. (Click here for copy of Committee Report and here for text of bill). The Senate has its own version. (Click here). While Congress did not vote on it before year end, the bill is said to have bi-partisan support in the House and there are intimations of White House approval.

The House Report provides the rationale for federal legislation at this time:

The trade secrets of American companies are increasingly at risk for misappropriation by thieves looking for a quick payday or to replicate the market-leading innovations developed by trade secret owners. Using ever-more sophisticated means of attack, these thieves aim to steal the know-how that has made American industry the envy of the world. The Commission on the Theft of American Intellectual Property found that the illegal theft of intellectual property is undermining the means and incentive for entrepreneurs to innovate, slowing the development of new inventions and industries that could raise the prosperity and quality of life for everyone.

Recognizing that up until now trade secret owners had only criminal remedies under federal law and civil remedies under state law, the Judiciary Committee concluded that more was needed:

While 48 states have adopted variations of the UTSA, the state laws vary in a number of ways and contain built-in limitations that make them not wholly effective in a national and global economy. First, they require companies to tailor costly compliance plans to meet each individual state's law. Second, trade secret theft today is often not confined to a single state. The theft increasingly involves the movement of secrets across state lines, making it difficult for state courts to efficiently order discovery and service of process. Finally, trade secret cases often require swift action by courts across state lines to preserve evidence and keep a trade secret thief from boarding a plane and taking the secret beyond the reach of American law. In a globalized and national economy, Federal courts are better situated to address these concerns.

America's strength has always been found in the innovation and ingenuity of its people--its inventors, creators, engineers, designers, developers, and doers. American businesses that compete globally will lose their competitive edge if they cannot quickly pursue and stop thieves looking to shortcut the innovative products, designs, and processes that have fueled our economy. This bill will equip companies with the additional tools they need to protect their proprietary information, to preserve and increase jobs and promote growth in the United States, and to continue to lead the world in creating new and innovative products, technologies, and services.

Expect some continued attention to these issues, and possible passage, early in the just convened Congress, perhaps shortly after the State of Union address if there is any search for legislation with support on both sides of the aisle.

For trade secret owners, at least as of now, passage of the House version of the bill would be an added tool. That is a purposely loaded statement because, despite references in the report to federal courts being better equipped to handle such claims, the proposed legislation requires neither pre-emption of state claims nor exclusive federal court jurisdiction. Hence, employers and trade secret owners will still be able to proceed in state court or append state law claims to claims brought in federal court under such new federal question jurisdiction. This can be an important added weapon since some states, such as New Jersey, recognize an employer’s right to enjoin disclosure of confidential business information that does not itself meet the definition of a trade secret. See, e.g., LaMorte Burns & Co. v. Walters, 167 N.J. 285 (2001) (“Importantly, however, information need not rise to the level of a trade secret to be protected… Other jurisdictions also have held that information not technically meeting the strict requirements of trade secrets may be protected as ‘confidential information’ and may serve as the basis for a tort action”). While this could mean that passage of the proposed bill alone would not promote uniformity implied by the Committee, it may move things in that direction as a practical matter.

Importantly, the Act also contains mechanisms for relief not found in the Uniform Trade Secrets Act or its various state-by-state progeny. The House bill provides for ex parte seizure when “necessary to preserve evidence” or to “prevent dissemination of the trade secret.” While neither the bill nor the Committee report expressly says so, this ex parte seizure order mechanism seems to lessen the burden, somewhat, on those seeking injunctive relief because it creates an entitlement when available remedies under Rule 65(b) “would be inadequate” to preserve evidence or to prevent dissemination of the trade secret. Of course, there is a bit of a problem for trade secret owners (and their counsel) lucky enough to obtain such orders because the proposed act also states that “The court shall take appropriate action to protect the person against whom an order under this paragraph is directed from publicity, by or at the behest of the person obtaining the order, about such order and any seizure under such order.” Read literally, that seems to say that a movant can obtain the order but not make the third parties or the public aware that movant has done so. Because the value of such relief is often the deterrent effect that such an order can have in depressing the market, or market value, for the pilfered secrets, further tweaking (either textually or through interpretation and pragmatic application) will probably be necessary for that aspect of the Act to reach its intended potential.

So, it appears that we are one step closer to a federal civil remedy for protecting trade secrets. Even if it passes, however, employers and other trade secret owners will have to figure how, and if, to incorporate this added weapon into their arsenal. While it may complement state law claims in some circumstances, it may complicate them in others, and it remains necessary to have counsel who is prepared to sort out such options to put forward the best, most effective arguments promptly in the right court at the right time to stop the trade secret from escaping. In the end, added weapons are nice, but only when placed at the disposal of those who can pick the right ones for the job and get it done.