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Keeping secrets: a primer on trade secret laws

Andrew GonsalvesEspionage is popularly known as a clandestine practice whereby a country, organization or individual obtains secret information from another without permission. The practice of espionage has been the subject of many of our most memorable fictional novels, movies and television shows.

Further, real reports of espionage continue to play out in the news media today, such as the continuing saga of former National Security Agency contractor/CIA employee Edward Snowden, who is accused of leaking around 200,000 classified documents to the press relating to the NSA’s surveillance program.

Espionage is often viewed by the public as a necessary and even acceptable tactic between enemy or warring countries. In the corporate world, espionage between competing companies has become a major concern, particularly with the proliferation of high-tech information-gathering technology.

Therefore, large and small businesses alike should be vigilant in how they protect their confidential and proprietary information. This article provides a primer on the laws that cover corporate espionage, which is also referred to as industrial espionage or economic espionage. This primer also provides some practices that companies can follow to protect their confidential information.

A brief overview of trade secret laws in the United States

In the corporate setting, businesses often develop and accumulate information that is proprietary in nature and that gives them a competitive advantage in the marketplace. Naturally, to maintain its competitive edge, a business would want to keep this sort of information secret. The term “trade secrets” is commonly used to refer to such confidential information. However, it is important for businesses to understand that there are certain prerequisites needed for confidential information to qualify as a “trade secret” under the law.

Trade secrets are protected under both federal and state laws. Under federal law, corporate espionage and the theft of trade secrets are covered by the Economic Espionage Act of 1996 (codified as 18 U.S.C. §§ 1831-1839). State law is almost exclusively covered under the model Uniform Trade Secrets Act, which was first introduced by the Uniform Law Commission in 1979 and later amended in 1985.

To date, the UTSA has been adopted in some form by every state, except for New York, North Carolina and Massachusetts. New York protects trade secrets solely based on common law, while North Carolina and Massachusetts have enacted their own trade secret statutes. Importantly, even those states that have adopted a variant of the UTSA may have trade secret laws that vary from one another. Therefore, companies should be aware of the particular trade secret laws that pertain to their jurisdiction.

Federal law: The Economic Espionage Act of 1996

The Economic Espionage Act of 1996 was signed into law by President Clinton at a time when the theft of trade secrets was believed to be responsible for the loss of billions of dollars by U.S. companies.

Under the EEA, a “trade secret” is defined as “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” (18 U.S.C. § 1839(3)).

This is a fairly exhaustive definition in terms of scope. However, to fall under the definition, it must also be demonstrated that the owner of the information “has taken reasonable measures to keep such information secret” and that “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 public” (18 U.S.C. §§ 1839(3)(A) and (B)).

In its current form, the EEA covers two separate but somewhat related offenses: economic espionage (18 U.S.C. § 1831) and misappropriation of trade secrets (18 U.S.C. § 1832). The economic espionage prong is directed to theft of trade secrets to benefit foreign entities, while the misappropriation of trade secrets prong is directed to placing the stolen trade secret into interstate or foreign commerce.

Section 1831 makes it a crime to knowingly misappropriate or conspire to misappropriate trade secrets with the intent or knowledge that such misappropriation will benefit any foreign government, foreign instrumentality or foreign agent. The penalties for individuals who violate § 1831 are fines of up to $500,000 or imprisonment of up to 15 years or both, while the penalty for an organization is up to $10 million in fines.

Section 1832 makes it a crime to knowingly misappropriate or conspire to misappropriate trade secrets that are related to or included in a product that is produced for or placed in interstate or foreign commerce, with the knowledge or intent that the theft will injure the owner of the trade secret and with the intent to convert the trade secret to the economic benefit of anyone other than the owner. The penalties for individuals who violate § 1832 can include the fines as defined under the statute as well as imprisonment for up to 10 years or both, while the penalty for an organization is a fine of up to $5 million.

Both of these offenses must be brought against an alleged offender by the federal government. While there currently is no private cause of action provided under federal law, a bill to provide private citizens the right to maintain a civil action against a trade secret violator was introduced in Congress as the “Private Right of Action Against Theft of Trade Secrets Act of 2013” (H.R. 2466, 113th Congress, 1st Session, June 20, 2013).

Nevertheless, although the EEA provides for serious criminal penalties, since only the federal government can prosecute, the federal statute affords aggrieved businesses no real control over whether and how the EEA is used against an alleged trade secret violator. Therefore, unless and until the EEA is amended to provide for a private right of action, businesses will need to proceed under state law for proactive remedies against trade secret theft.

Uniform Trade Secrets Act: The model for most state statutes

As mentioned above, the Uniform Trade Secrets Act is a model statute that has been adopted by 47 states in some form or variation. Under the UTSA, a “trade secret” is defined as “information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) 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 (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

In brief, under the UTSA, a trade secret comprises four separate elements. First, the trade secret must consist of information, which is ordinarily technical or business-related information (e.g., customer lists, secret recipes, marketing plans, et cetera).

Second, the information must derive actual or potential economic value from the fact that it is confidential or secret. For example, the value of the information may come from the fact that only the owner knows about the information and, therefore, cannot be used by a competitor. This competitive advantage can manifest itself in the requirement that the competitor would need to expend time, money and other resources in order to independently acquire such information.

Third, the confidential or secret information cannot be generally known to the public or by others in the specific marketplace in which the owner of the trade secret operates.

Fourth, the information must in fact be treated as a secret and reasonable steps must be taken by the owner to maintain its secrecy. Under this requirement, it is important that the owner understand that the mere intention or desire to keep a particular piece of information secret is not sufficient. Instead, the owner (e.g., business) must show that it has implemented and consistently applied reasonable measures to keep the information confidential.

As noted previously, the UTSA adopted by each state can vary. The reasonable measures requirement is generally the portion of the UTSA that differs the most from one state to another. Therefore, it is important that each business know how the “reasonable measures” standard is defined in each jurisdiction in which it operates.

The remedies suggested under the UTSA include injunctive relief, damages and attorneys fees.

Practical considerations for businesses

To be protected under either federal or state trade secret laws, confidential information must meet the definition of a trade secret under the applicable law. For businesses, this means that they should be vigilant in identifying the sort of proprietary information that gives them an economic advantage in the marketplace, particularly by virtue of keeping that information confidential. Businesses should also develop procedures for maintaining their confidential information as secrets that qualify as “reasonable measures” in their state jurisdictions.

The Federal Bureau of Investigation (fbi.gov, go to the Counterintelligence/Economic Espionage page) has also provided some practical steps that businesses can take to preserve trade secret protection, including: (i) recognizing that there is an insider and an outsider threat to your company; (ii) identifying and valuating your trade secrets; (iii) implementing a proactive plan for safeguarding trade secrets; (iv) securing physical and electronic versions of your trade secrets; (v) confining intellectual knowledge on a “need-to-know” basis; and (vi) providing training to employees about your company’s intellectual property plan and security.

Information-based innovations continue to drive the global competitive landscape for businesses, both large and small. Trade secrets can play an important role in a business maintaining its competitive advantage in the marketplace. Therefore, businesses should evaluate whether they have economically beneficial confidential information that should be protected as trade secrets and, if so, implement and maintain the proper procedures to protect those trade secrets.

Andrew K. Gonsalves is a senior attorney at the intellectual property law firm of Heslin Rothenberg Farley & Mesiti P.C. in Albany, N.Y. He can be reached by email at akg@hrfmlaw.com, or by phone at (585) 288-4832.

About Andrew K. Gonsalves