§ 5.01 Introduction

• Jurisdiction: United States
• Publication year: 2020

§ 5.01 Introduction

Trade secrets have become an important component of the protection of intellectual property in the United States. Trade secret theft threatens American businesses, undermines national security, and places the security of the U.S. economy in jeopardy.¹

Trade secrets, under U.S. law, consist of three parts: (1) information that is nonpublic; (2) reasonable measures taken to protect the information; and (3) the information derives independent economic value from not being generally known. In other words, trade secrets are commercially valuable designs, processes and techniques, and other forms of information kept confidential by companies because, by virtue of their secrecy, they give companies an edge in the marketplace. Examples of trade secrets include confidential formulas, manufacturing techniques, and customer lists. Trade secret law offers protection from trade secret "misappropriation," which is the unauthorized acquisition, use, or disclosure of such secrets obtained by some improper means. However, discovery of a trade secret by fair, lawful methods, such as reverse engineering or independent development, is permitted.

Unlike patents, trade secrets can be protected for an unlimited period of time and require no formal notification process.² But also unlike patents, once trade secrets are disclosed it completely loses its value. Further, there is no protection if the trade secret is uncovered by others through reverse engineering or independent development.

The protection of trade secrets serves a variety of functions. By creating a limited property right in information, trade secret law acts as an incentive for investment in innovation. It "encourages the development and exploitation of those items of lesser or different invention than might be accorded protection under the patent laws, but which items still have an important part to play in the technological and scientific advancement of the Nation."³ Similar to patent and copyright law, trade secret law "prompt[s] the independent innovator to proceed with the discovery and exploitation of his invention."⁴ Further, without trade secret protection, "organized scientific and technological research could become fragmented, and society, as a whole, would suffer."⁵

Further, the word "property" as applied to trade secrets "is an unanalyzed expression of certain secondary consequences of the primary fact that the law makes some rudimentary requirements of good faith."⁶ By sanctioning the acquisition, use, and disclosure of a person's valuable, proprietary information by improper means, trade secret law minimizes "the inevitable cost to the basic decency of society when one . . . steals from another."⁷ Thus, trade secret law recognizes that " 'good faith and honest, fair dealing, is the very life and spirit of the commercial world.'"⁸ The theft trade secrets threaten these benefits.⁹

Before President Clinton signed into law the Economic Espionage Act (EEA)¹⁰ on October 11, 1996, a significant gap existed in the protection of trade secrets. Only a minority of states specifically criminalized the theft of trade secrets, under widely varying standards.¹¹ Moreover, state prosecutors often lacked the resources and expertise necessary to investigate and prosecute this sort of crime. Federal law did not provide an effective remedy either, since federal prosecutors were forced to rely on a number of federal statutes that were not intended to punish thefts of trade secrets.¹²

Other factors also contributed to the increased awareness that trade secrets were not being adequately protected and that American companies were becoming more and more vulnerable to the theft of their proprietary information by unscrupulous competitors. Information is the core asset of many companies. Yet the modern environment of global competition and instant communication forces most organizations to entrust these assets to a more mobile and less loyal workforce. Outsourcing, collaborative engineering, and the virtual corporation have substantially increased the risk of loss through both inadvertence and espionage. With the end of the Cold War, large numbers of former military spies have been released to a commercial world presumably ready to use their skills in other ways.¹³ Moreover, the FBI has reported that foreign governments actively target the intellectual property assets of U.S. corporations.¹⁴ According to a report released by President Obama:

"Emerging trends indicate that the pace of economic espionage and trade secret theft against U.S. corporations is accelerating. There appears to be multiple vectors of attack for persons and governments seeking to steal trade secrets. Foreign competitors of U.S. corporations, some with ties to foreign governments, have increased their efforts to steal trade secret information through the recruitment of current or former employees. Additionally, there are indications that U.S. companies, law firms, academia, and financial institutions are experiencing cyber intrusion activity against electronic repositories containing trade secret information. Trade secret theft threatens American businesses, undermines national security, and places the security of the U.S. economy in jeopardy. These acts also diminish U.S. export prospects around the globe and put American jobs at risk."¹⁵

Finally, the ability to steal confidential information became easier and easier because of computer technology and the Internet. An employee involved in the theft of trade secrets no longer had to physically copy documents containing the trade secrets because companies began to store nearly all their scientific and technical information on computers. Thus, instead of copying hundreds of pages of information, an employee could download the material onto a single computer disk, which can be easily concealed in a breast pocket of a coat or shirt. The information on the disk can then be sent or transmitted anywhere in the world without the employer's becoming suspicious. Similarly, if a thief is able to log onto a company's computer system illegally he could download the company's trade secrets and also transmit them anywhere in the world.¹⁶ The information may also be at risk from cyberattacks. Cases have involved a wide variety of trade secret thefts from the formula of Coca-Cola to sensitive military technology. The EEA was intended to address both the general need for a federal criminal deterrent against trade secret theft and to prevent the growth of industrial espionage sponsored by foreign states.¹⁷ It is noted, however, that the amount of industrial espionage by foreign states has not decreased since the passage of the EEA.¹⁸ Indeed, a report to Congress from the office of the National Counterintelligence Executive highlighted the risks posed to U.S. companies and the U.S. economy from economic espionage in cyberspace committed by foreign governments and agents.¹⁹ The report finds that foreign agents collect sensitive economic information from U.S. companies and that such collection represents a "significant and growing threats to the nation's prosperity and security."²⁰ The report specifically identifies China and Russia as being the most "active and persistent perpetrators of economic espionage" and details insider thefts of corporate trade secrets with a link to China.²¹

Further, according to the legislative history of the Defendant Trade Secrets Act:

"The threat is significant. Trade secrets are an integral party of a company's competitive advantage in today's economy, and with the increased digitalization of critical data and increased global trade, his information is highly susceptible to theft. The United States Department of Defense has found that every year 'an amount of intellectual property larger than that contained in the Library of Congress is stolen from networks maintained by U.S. businesses, universities and government departments and agencies. General Keith Alexander former head of the National Security Agency and U.S. Cyber Command estimated that U.S. companies lose $250 billion per year due to the theft of their intellectual property. More recently, the Center for Responsible Enterprise and Trade, long

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