US Senate urged to be the "gold standard" of trade secret protection with the DTSA

The AmeriKat in her post-lunch
slump on most days...but not today!

Just as her eyelids were getting a bit droopy following a late lunch of steamed fish and milk, the AmeriKat put her earphones on and tuned into the live hearing from the Senate Judiciary Committee on trade secrets and the proposed Defend Trade Secrets Act (see her post last night).

Senator Grassley (Republican -  Iowa), Chairman of the Committee, opened the session by emphasizing the value and importance of trade secrets to the American economy citing a US Chamber of Commerce report which stated that publicly traded US companies own an estimated £500 trillion in trade secrets.  Given their huge value, trade secrets are a prime target of theft.  With globalization and the emergence of the digital economy, the ease and frequency with which trade secret thieves utilize technology to obtain trade secrets has made it increasingly difficult for owners and law enforcement to take action. 

Randall Coleman, Assistant Director of the Counterintelligence Division of the FBI, testified before the Senate Judiciary Committee that “economic espionage and theft of trade secrets are increasingly linked to the insider threat and the growing trend of cyber-enable trade secret theft”.  Senator Grassley also cited the then-Attorney General Eric Holder's statement that:

"There are only two categories of companies affected by trade-secret theft: those that know they've been compromised and those that don't know yet.”

The impact of trade secret theft was calculated at over $300 billion - comparable to the current annual level of US exports to Asia - according to a report by the Commission on the Theft of American Intellectual Property. 

The purpose of the DTSA is to plug the gap in US trade secret law where there is currently no federal civil recourse available for trade secrets theft - there is only state law under the Uniform Trade Secrets Act and federal criminal law under the Economic Espionage Act.  The former, state law, restricts remedies and actions to state borders which is unrealistic in an environment where trade secrets are disseminated digitally across state lines and international borders. Further, because states have not implemented the UTSA completely consistently, it has lead to a patchwork of different and difficult procedural issues.  Criminal recourse, on the other hand, relies on the FBI and criminal prosecutor's already stretched resources and bandwidth.  Federal trade secrets legislation, in the form of the DTSA, therefore provides a means for sufferers of trade secrets theft to obtain quick cross-border relief. 

It's hearing time!  Get ready for some trade secret debate
in Washington D.C.

Senator Leahy (Democrat - Vermont) stated in his opening remarks that the proposed federal law would serve as a meaningful example internationally, but that he took care in ensuring that any seizure remedy is narrowly-tailored.  For example, by ensuring that actions to protect confidential information on a computer server do not unintentionally impact other content on the server that is unrelated to the theft.  Senator Leahy then opened the floor to three witnesses. 

Karen Cochran (Chief IP Counsel) for DuPont stated that the DTSA would provide an improved mechanism for protecting trade secrets which are of monumental importance to Dupont in that they protect technologies underlying Kevlar®.  She illustrated the problem of the current gap in US trade secrets law with reference to Kevlar®  - a high-strength fiber used in a range of applications, most famously body-armour.  To get to the quality of product they have today, DuPont invested over fifty (50) years of research and development to master this technology.  Much of this know-how is protected by trade secrets which, in 2006, they had discovered was subject to theft.  Although DuPont thought that it was just misconduct of one ex-employee, it transpired that it was a large-scale and sophisticated theft which lead to a federal criminal investigation led and indictments of Kolon Industries, Inc. under the Economic Espionage Act. However, the civil litigation against Kolon was not completed until this year.

Cochrane stated that it was fortunate that DuPont had access to federal court, but even then they encountered difficulty in determining the depth and scope of the theft.  Of particular concern was when DuPont learned that Kolon had deleted or destroyed considerable volumes of relevant evidence. "After multiple motions to compel, hearings and investigation to piece together what remained, this evidence destruction severely hampered DuPont’s ability to prove its case", Cochrane stated.  Accordingly, as a result of DuPont's experience she stated that the US needs assured and direct access to federal court  - a court who is experienced with litigating complex technologies - and a trade secrets law that would reduce the risk for further trade secret dissemination or destruction.

Tom Beall (Vice President and Chief Intellectual Property Counsel) of Corning Incorporated echoed these sentiments and emphasized the cross-border nature of trade secret theft:

"Many of today’s innovative companies, both large and small, operate across state and international borders and have their trade secrets threatened by competitors around the world; they maintain company data digitally, trade around the globe, and may have employees in multiple states and countries. For these companies, the existing patchwork of state laws is inadequate for several reasons. First, trade secret theft often requires immediate action in order to preserve the value of the stolen property, particularly when a stolen trade secret is taken across state lines, or when the misappropriator seeks to leave the country. In many states, courts lack sufficient tools to act quickly to prevent dissemination of a stolen trade secret across state lines. Second, state courts lack procedures equivalent to federal court to seamlessly conduct cross-jurisdictional discovery. Because trade secret misappropriation often involves actors in multiple states, litigating in state court can be highly inefficient. Third, variation in state laws creates challenges for companies seeking an efficient, unified compliance plan, and results in the additional unnecessary cost of navigating different state laws."

Professor Sharon Sandeen
concerned about the scope
of the proposed DTSA

Professor Sharon Sandeen (Hamline University School of Law) stated that although she was against misappropriation of trade secrets, she expressed concerns about the scope of the DTSA and the impact on small business.  Professor Sandeen commented that:

"[a]lthough much of the commentary that surrounds the DTSA. concerns the problem of cyberespionage, the vast majority of trade secret claims in this country are not against alleged spies but involve former employees or other business associates.3

This is where the potential for abuse arises. Usually in these cases, the alleged misappropriation does not involve the wrongful acquisition of trade secrets, but rather an alleged breach of a duty of confidentiality.4 In other words, in most trade secret cases the defendant was voluntarily given access to the alleged trade secret by his or her own employer or business associate, sometimes under circumstances giving rise to a duty of confidentiality, sometimes not.

The companies that support the DTSA are very sophisticated, have ample legal resources, and have detailed policies and procedures in place to identify and protect their trade secrets. However, not all trade secret plaintiffs fall into that camp."

Professor Sandeen also cautioned that the important definitional exceptions and limits to trade secret protection which were not part of the DTSA, could also bring about the possibility for abuse. An additional point that was repeated by Professor Sandeen was the fact that with a new federal law, the federal courts would have to create new case law - which would lead to uncertainty and expense - especially if in conflict with state law.  ["That would be a reason never to pass any new legislation, surely", says Merpel.]   

Relying on state laws
for trade secrets is not enough
in the digital age

The final witness, James Pooley, stated that since he started his career as a lawyer in Silicon Valley in 1973 he has handled hundreds of trade secrets disputes on both sides of the fence.  He pointed out that most of his clients were smaller companies and individuals in the technology industry.  Advances in electronics has made data theft infinitely easier and faster.  Unlike threats of a generation ago, when a trade secrets are stolen they are done so instantly and quickly disseminated  to competitors located outside of state and national borders.  Trying to reach across state borders in such circumstances is not feasible with the current patchwork of state legislation and given the time-critical nature of trade secret theft.   Federal courts have the necessary resources and ability to act quickly across state borders.  Such a solution, as proposed by the DTSA, is required. 

On the matter of the ex parte seizure order in Section 2 of the DTSA, Pooley stated that the seizure order is narrow.  The application must clearly meet all the requirements set out in the provision and must minimize interruption to business.  These protections are greater than the other ex parte forms of release, namely the temporary restraining order.  Further, the law provides for consequences for careless applications, the penalties being severe.  He further dismissed the claim that there were issues of labor mobility as similar language from state law in the granting of injunctions had been adopted.  In sum, Pooley declared that the DTSA would improve efficiency of trade secret litigation.

The AmeriKat will be back later with the second report on today's hearings summarizing the key points from the Senators' questioning of the witnesses.