Two important economic factors of the late 20th century (and whose predominance promises to continue into the 21st) are the rapid rate of technological development and the rise of globalization. These two factors have had opposing effects on trade secrets. While the dominance of technological developments has made trade secrets more valuable, warranting greater protection, the rise of globalization has made them harder to protect.
Intellectual property-inventions and innovations in products and processes-has been the engine driving economic growth. Proprietary rights to inventions and innovations may be protected by patents, copyrights and trade secret laws. Since controlling the use of inventions, innovations and other business enriching information is essential to competitive success, trade secrets are becoming increasingly valuable.
At the same time, globalization of the economic system has increased worldwide demand for these inventions and innovations. Globalization, the decline in customer and employee loyalty, the availability of venture capital and improved information flow all makes trade secrets less secure.
In the United States, trade secrets have long been protected by the civil and criminal law of the various states in which the information could be found. Reflecting the enhanced importance of and the increased difficulty in protecting proprietary technology, the United States recently enacted the Economic Espionage Act of 1996 which made stealing trade secrets a federal criminal offense. The United States government also made sure the statute's reach stretches beyond the boundaries of the United States. A theft of trade secrets outside the United States may be criminally actionable, therefore, this legislation will affect how all trade secrets are protected. In certain states, theft of trade secrets may also be actionable under criminal fraud statutes. See e.g. Section 499(c) of the California Penal Code.
Trade Secret Law--The Legal Foundation
The law of trade secrets developed from the duty of good faith imposed generally in commercial dealings. A trade secret is commonly defined as:
- information,
- deriving actual or potential economic value by virtue of its not being readily ascertainable through proper means by the public, and
- which is the subject of reasonable efforts to maintain its secrecy.
This definition of a trade secret is found in the Uniform Trade Secret Act. Other definitions, including those found in cases and statutes in the various states, may differ.
The legal system protects the owner from someone who uses improper means to learn the trade secret, either directly or indirectly. Thus, anyone using improper means to learn the trade secret has breached a duty of good faith dealing with the trade secretowner.
The breach of that duty of good faith usually takes the form of:
- an abuse of a confidence,
- the use of improper means to ascertain the secret, or
- a breach of contract.
Anyone involved in the breach of that duty is liable for trade secret misappropriation.
This duty is owed generally and may be breached even by a person who has no direct contact with the owner of the trade secret or his agents. As long as that person knows or has reason to know that his or her knowledge of the trade secret was derived from someone who obtained the information by improper means or who disclosed it, either in breach of the duty of confidentiality or by mistake, he or she cannot lawfully use that trade secret.
Liability for trade secret theft will attach to a person who knew or should have known the information was acquired improperly. Conversely, one whose acquisition of a trade secret was not improper is free to use that information.
State Law and the Uniform Trade Secret Act
Originally trade secret misappropriation in the United States was treated through common law as an unfair method of competition or a breach of a contractual obligation. As the circumstances under which trade secrets were misappropriated became more common, complex and convoluted, the Uniform Trade Secret Act was drafted and in 1979 approved by the National Conference of Commissioners on Uniform State Laws. The Uniform Trade Secret Act provides the standardized trade secret definition above, as well as specifying the circumstances under which use of that secret by another is unlawful and the forms of relief that are available. The Uniform Trade Secret Act has been adopted in some form by 41 states and the District of Columbia.
It is important to recognize that trade secret law differs from patent law. While patent law prohibits any unauthorized use of that which is claimed, the law of trade secrets does not prohibit the use of the trade secrets, but rather, only prohibits the use of improper means for acquiring the trade secrets. There is no trade secret misappropriation if the accused company acquired the trade secrets by proper means, such as independent development, reverse engineering, or from public literature.
U.S. Diplomatic Efforts to Improve Trade Secret Protection Outside the United States
At the same time, the US government was realizing it could not solely rely upon domestic civil laws to protect its citizens' trade secrets, and began efforts to improve protection of intellectual property rights worldwide.
Its unilateral efforts took the form of bilateral trade and friendship treaties, and Section 301 and Special 301 investigations, with their concomitant threat of economic sanctions. Its multilateral effort culminated in the TRIPs (Trade Related Aspects of Intellectual Property Rights) chapter of the Uruguay Round Agreement of GATT. Section 301 of the Trade Act of 1974; 19 USC 2411; Special 301 of the Omnibus Trade and Competitiveness Act of 1988 (PL 100-418), 19 USC 2242; Marrakesh Agreement Establishing the World Trade Organization, Annex IC: Agreement on Trade-Related Aspects of Intellectual property Rights, April 15, 1994, reprinted in The Results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts 365-403 (GATT Secretarial ed., 1994).
In particular, TRIPs requires signatories to protect certain "undisclosed information." See Section 7: Protection of Undisclosed Information, Article 39. The definition of the protected "undisclosed information" conforms to the definition found in the Uniform Trade Secret Act: the information must be secret, have commercial value because it is secret and have been subject to reasonable steps by the person lawfully in control of the information to maintain its secrecy. Moreover, only the disclosure to, acquisition by, or use by others "in a manner contrary to honest commercial practices" is unlawful. Such unlawful practices include breach of contract, breach of confidence and inducement to breach, as well as the acquisition of undisclosed information by third parties who knew, or were grossly negligent in failing to know, that such practices were involved.
In Asia, laws governing contracts and unfair competition afford some protection to trade secrets. There was, however, no specific statute for protecting trade secrets until Japan acted in 1990. However, its statute remains untested because the Japanese constitution requiring all court proceedings to be public is interpreted to prohibit protective orders, and would disclose the trade secrets to be protected. Since the 1994 signing of the Uruguay Round agreement, other Asian countries have enacted statutes specifically protecting trade secrets. For example, Taiwan enacted its Trade Secrets Act effective on January 19, 1996; China's trade secret amendments to the Unfair Competition Law became effective December 1, 1995; and Korea's Trade Secret Amendment to the Unfair Competition Prevention Act became effective December 31, 1992.
The New Federal Law: The Economic Espionage Act of 1996
The value of trade secrets has continued to grow and the efforts to steal them have also grown more sophisticated and difficult to detect. In recognition of the need for a more effective deterrent, the Economic Espionage Act of 1996 (the Act) was recently enacted, with penalties including imprisonment for up to 15 years and fines of up to $10 million. 18 USC §§ 1831-39.
The Act's definition of a trade secret is modeled upon the Uniform Trade Secret Act and protects "all forms and types of financial, business, scientific, technical, economic or engineering information." The Act criminalizes the actions of whomever:
- steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains a trade secret;
- without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys a trade secret;
- receives, buys, or possesses a trade secret, knowing the same to have been stolen or appropriated, obtained, or converted without authorization;
- attempts to commit any offense described in any of paragraphs (1) through (3); or
- conspires with one or more other persons to commit any offense described in any of paragraphs (1) through (4), and one or more of such persons do any act to effect the object of the conspiracy ....
The Act creates two new offenses not found in the civil law: attempting to steal a trade secret and conspiring with others to steal a trade secret. In US criminal law, the attempt to commit an unlawful act is often a criminal offense. Conspiracy is also included as a separate offense. For example, evidence against one member of a conspiracy, including hearsay evidence against his interest, is admissible against all members of the conspiracy.
The statute also extends trade secret law to cover conduct occurring outside the United States. Activities outside the United States are usually not actionable unless they can be shown to have an actual or intended substantial effect on US interstate commerce. See Section 401 et seq., Restatement (Third) of the Foreign Relations Law of the United States (1987). But see Paolino v. Channel Home Centers, 668 F.2d 721 (3d Cir. 1981). However, under the new Act, if a citizen or resident alien of the United States misappropriates or converts a trade secret wholly outside the United States, a criminal action may still be brought, although no actions by either the rightful owner of the trade secret or the accused offender took place within the United States. Even if the accused offender were not a citizen or resident alien of the United States, but had only made incipient plans to steal the trade secret while in the United States, a criminal action could still be brought under the Act.
The statute not only specifically targets agents of foreign governments who steal trade secrets for the benefit of those governments, it also criminalizes the theft of trade secrets when there is no foreign government involvement. For economic espionage, as defined by the Act, one of the offenses mentioned above must be committed knowing it will benefit a foreign government, foreign instrumentality or foreign agent. Trade secret theft under the Act requires a different intent: an intent to convert a trade secret to the economic benefit of anyone other than its rightful owner, knowing the conversion of the trade secret will injure the rightful owner. If the stealing of the trade secret is for the benefit of a foreign government, the US prosecutor does not need to prove any other intent. If the theft was not for the benefit of a foreign government, the prosecutor must then prove that the trade secret misappropriator intended to injure the owner of the trade secret and confer an economic benefit on another, and that the person accused knew both were consequences of his or her actions.
When Will the Act Be Used?
The question then arises, in what types of situations will the Economic Espionage Act be utilized as opposed to (or even in conjunction with) a trade secret misappropriation civil lawsuit? There have been no cases yet prosecuted to completion under the Act, as it was just signed into law on October 11, 1996. At least one indictment has now been brought under the Act but has not been prosecuted to completion. This indictment, brought in Pittsburgh, does not allege foreign government involvement. However, the Act promises to serve as a powerful deterrent.
With theft of trade secrets now a federal crime, trade secret owners may request the assistance of the US government to investigate the theft. If the government obliges, its subpoena power to search without warning the alleged misappropriator's offices and seize records can produce incriminating evidence. Companies have to produce the incriminating evidence or risk being charged with obstruction of justice. Grand juries can also be used to investigate, in order to obtain evidence sufficient to bring a lawsuit and prove the theft of a trade secret and the defendant's culpability. And, because of the Speedy Trial Act, defendants will not be able to delay trials as they sometimes are able to do in civil actions. Moreover, just the threat of criminal indictment may induce potential defendants to settle privately and on favorable terms to the owner of an asserted trade secret.
However, when a trade secret owner refers a case to the US Attorney for prosecution, he loses some degree of control. The US Attorney then determines investigation and trial strategy and decides when and whether to proceed. As long as the US Attorney is considering criminal action, the trade secret owners' taking of discovery in any civil action will be inhibited because witnesses may invoke their 5th amendment right against self incrimination. In fact, once an action is begun under the Act, the trade secret owner may be prevented from reaching a favorable settlement offer with the misappropriator, because the US Attorney may be unwilling to terminate his investigation and request dismissal of any indictment.
A criminal trial will favor the plaintiff in any subsequent civil trial on the same trade secret theft. Since the burden of proof for conviction under the Act is much higher than the burden which must be proven to win a civil trade secret action, a conviction will generally mean there is sufficient proof for civil liability. Even if the criminal prosecution were unsuccessful, it could be useful in revealing the defendant's case strategy, strengths and weaknesses.
Finally, the institution of a criminal proceeding, with the authority of the US Government, can have a devastating effect on the alleged misappropriator, especially in terms of negative publicity which would certainly be generated by both the trade secret owner and the US Attorney. Ultimately, such deterrence may be the primary motivating factor for trade secret owners in referring misappropriation cases to the US Attorney for prosecution under the Act and may be far more valuable to a company, especially a large corporation, than compensation for the damages resulting from the misappropriation.
What Does the Act Mean for Businesses?
By providing severe criminal penalties for acts of trade secret misappropriation, the Act is a potent weapon in the hands of the trade secret owner. However, companies can suffer unintended negative consequences. Most businesses act ethically. But because of the breadth of offenses prohibited by the Act, every company bears risk of potential liability under the Act through such routine activities as hiring employees (even temporary contract workers), consulting with vendors and customers, engaging consultants, entering into business relationships with others and sending employees to trade conferences where they meet and confer with others in the industry. Each of these activities creates a potential for improperly receiving trade secrets of others. While the Act requires that committing the offenses be "knowingly", this knowledge predicate will be of little comfort to the company facing prosecution because it hired an employee who in prior employment acquired knowledge, some of which his former employer may consider to be its trade secrets.
Therefore, it is important for companies to protect themselves from such liability. First, every company should implement a written policy against the unauthorized use of information, regardless of its source. Second, the company needs to take measures to assure compliance with the policy, including, at least, the following actions:
- Advise in writing new employees and temporary workers that they may possess trade secrets of previous employers and that they are not to use or disclose such information in connection with their work for the company. Routinely remind all employees of their continuing obligation under the policy.
- Advise in writing all employees of the company policy prohibiting the unauthorized use of information received from vendors, customers and others. The company should be especially aware of such situations involving a foreign individual or entity (including your company or a corporate relative), as such situations may provide an increased incentive for a US Attorney to prosecute under the Act.
- Create procedures whereby any suspicion of unauthorized use of information that might possibly constitute another's trade secrets can be quickly investigated. Should the investigation disclose that an unauthorized use of information has occurred, immediately cease use of the information, isolate the information so that it is not further disseminated through the company, determine how the information was received and consult counsel. It is important to cooperate with the trade secret owner to remedy the situation.
- Require employees to document their development work for new products, processes, and customers. Since the company will be hiring persons who carry trade secrets from their prior employment, it may be called upon to prove that it developed products, processes and customer lists independent of those persons' knowledge of other employers' trade secrets.
The purpose of these procedures is two-fold. First, they will instill in all employees an appreciation for the intellectual property rights of others (as well as those of their own company) and minimize the potential of an unauthorized use of information. Second, should the company find itself being investigated under the Act, these policies and procedures will help to establish that no violation occurred or that an individual committed the offenses in violation of company policy, which may minimize potential liability for the company.
Can the Act Be of Use to Foreign Businesses?
One principal purpose of the Act is enhanced protection of US businesses against industrial espionage by foreign governments and their agents. However, by criminalizing a spectrum of activity that constitutes trade secret misappropriation and industrial espionage, the Act provides broad protection for all businesses. The Act does not protect only US businesses, but rather, prohibits certain conduct regardless of the locale of the business to which it is directed against. Therefore, the Act will protect not only GM, Kodak, or Intel, but also foreign companies (especially those with US corporate relatives) from acts of misappropriation occurring in the US or even from those occurring outside of the US, if the offender is a US citizen or corporation. Admittedly, a foreign corporation will find it more difficult than a US corporation to convince the US Attorney to bring a criminal action under the Act. However, depending on the circumstances of the case, the Act will serve to protect foreign companies against acts of trade secret misappropriation.