Federal issues in trade secret law ([dagger]).

• Author: Cohen, Jerry

1. INTRODUCTION

   The general picture of trade secret law is that it is governed by state law as summarized in Restatement of Torts (1) and Restatement of Unfair Competition (Third) (2) and codified in more or less uniform state enactments based on the Uniform Trade Secrets Act. (3) The American Bar Association's Section of Intellectual Property soundly rejected a proposal for a preemptive federal trade secrets statute at its 1992 meeting in San Francisco. (4) Yet, long prior to the 1992 meeting, and at an accelerating pace thereafter, there have been several areas of federal relevance established in the law and practice of trade secret protection. (5) One must also consider federal issues presented by the Fourth, Fifth, Eleventh and Fourteenth Amendments, federal court jurisdiction to enforce state trade secret law, federal tax law and bankruptcy laws. (6)

2. THE (FEDERAL EMPLOYEE) TRADE SECRETS ACT (TSA)

   Early on, Congress recognized a need to codify the protection that federal agencies had given to data collected from private parties on an ad hoc basis. Various trade secret codifications in such sections as 15 U.S.C. [section] 1776, 18 U.S.C. [section] 112, 19 U.S.C. [section] 1335 and in various portions of the Revised Statutes (RS) were, in June, 1948, consolidated into the Trade Secrets Act (TSA). (7) After several subsequent amendments, the act now appears at 18 U.S.C. [section][section] 1905, 1906, 1907 and 1909. TSA provides criminal penalties for a federal civil servant revealing trade secrets of private parties. (8) In turn, the civil servant can invoke the statute as a basis of privilege when asked to reveal the information in a judicial proceeding until the court overrules the privilege. (9)

   TSA provides a safe harbor exception to the ban on revealing trade secrets or the like. Parties may reveal such information to the extent " ... authorized by law. ..." (10) As to banking information, the safe harbor extends to instances of express permission in writing from the Comptroller of the Currency, Board of Governors of the Federal Reserve System, or certain other organizations under the Federal Reserve Act or the Federal Deposit Insurance Corp. (11) The term "trade secret" provides a built-in screening limitation and a common sense threshold of significance. The "authorized by law" exception includes federal agency regulations promulgated within the scope of rule-making authority granted to the agency by Congress. (12)

   TSA does not per se provide a private right of civil action to enjoin disclosure, though TSA in tandem with the Administrative Procedure Act (APA) works to that end in principle. (13) Much of TSA application has been subsumed in practice into trade secret and business privacy exemptions of the Freedom of Information Act (FOIA),14 procurement laws and regulations, and specific governing statutes and regulations for regulatory agencies described below. TSA, however, retains a vital modern role in holding federal employees and agencies responsible for treatment of information. (15)

3. GOVERNMENT PROCUREMENT CONTRACTING AND SUBCONTRACTING; INDUSTRIAL SECURITY MANUAL; SUBCONTRACTORS

   The Federal Acquisition Regulation (FAR), along with some supplementation by particular agencies, notably the Department of Defense (DOD) Supplement to FAR (DFAR), govern the U.S. government's procurement of goods and services. (16) FAR exemplifies a structure of government acquisition of technical data or computer software with "limited" or "unlimited" rights. (17) The term "limited rights" refers to use for defined government purposes but excludes use for competitive procurement. (18) Along with the negotiations between a contractor and the government regarding limited versus unlimited rights pertaining to data, comes the issue of how much data to give in the first instance. (19)

   Often, a redacted data delivery can satisfy government purposes. Modern standards of quality control and zero-defect goals, as well as growing capacity for data storage and management, militate increasingly against acceptability of redacted data deliveries. This does not mean that the good days for contractors are nearing an end. The contractor and government lawyers, however, must work harder for compatibility of disclosure needs versus secrecy needs. (20)

   1. Procurement Contracts and Proposals

      Generally, a request for proposals and the resultant contract spells out the ground rules for data and software acquisition with limited or unlimited rights to data, which is consistent with the general standard of development or not at private expense. (21) In some cases, however, development history is ambiguous. In those occasions, a contracting officer will decide the issue, subject to review by an agency board of appeals and, in turn, by federal courts. In the instances of an equity claim, that process may be bypassed under TSA and APA as mentioned above. In either case, the decision-maker will apply a highly deferential standard of review. (22) In other cases, the procurement overrides the usual standard and stipulates unlimited rights notwithstanding development at private expense. There, a company presumably has fair warning and can decline to submit a proposal or go ahead and propose with its price reflecting its valuation of the surrendered rights. (23)

      Occasionally, a potential contractor submits an unsolicited proposal and disputes develop over whether an implied contract to respect confidentiality of data disclosed in the proposal binds the government. (24) Proper marking of information can be critical to gaining protected status or holding on to it. (25) A typical legend reads:

      Limited Rights Legend

      Contract No.--

      Contractor:--

      Limited rights shall be effective until--, thereafter the limited rights will expire and the Government shall thereafter have unlimited rights to the data. The restrictions govern use of the data as set forth in the definitions "limited rights" in par. (a)(15) at 252.227-7013 of the contract listed above.

      In the 2002 case, Xerxe Group, Inc. v. United States, (26) the U.S. Court of Appeals for the Federal Circuit affirmed a decision of the U.S. Claims Court rejecting compensation or injunctive relief to a contractor who failed to mark its unsolicited proposal as required in applicable FAR practices. (27) The Plaintiff had marked the cover page of its proposal but failed to so mark each page containing the data. (28) The regulation marking for an unsolicited proposal reads:

      Use and Disclosure of Data [Title Page Legend] The proposal includes data that shall not be disclosed outside the Government and shall not be duplicated, used, or disclosed-in whole or in part-for any purpose other than to evaluate this proposal. (29) If the Government awards a contract to this offeror as a result of--or in connection with--the submission of these data, however, the Government shall have the right to duplicate, use, or disclose the data to the extent provided in the resulting contract. This restriction does not limit the Government's right to use information contained in these data if they obtain such from another source without restriction. The data subject to this restriction are contained in Sheets [insert numbers or other identification of sheets]. [(b) The offeror shall also mark each sheet of data it wishes to restrict with the following legend:] Use or disclosure of data contained on this sheet is subject to the restriction on the title page of this proposal. B. Bid Protests

      The government's policy is to enter the commercial marketplace and conform to legal and moral standards of that marketplace. Accordingly, it is a misuse of government funds to deal on any other basis. The Comptroller General (CG) branch of the General Accounting Office (GAO) has a well recognized jurisdiction, (30) considers bid protests and instructs procuring agencies to terminate invitations for bids, requests for proposals, and even contract work in progress based on misappropriation of a rival company's trade secrets. (31) Nevertheless, CG discretion sometimes inclines to favor price competition rather than intellectual property (IP).

      One must also compare the interaction among trade secrets, patents and copyrights. (32) The government can give authorization and consent to contractors and subcontractors to infringe a patent or copyright. (33) The IP owner can not seek an injunctive remedy, however, but rather may assert the right to make a compensation claim to the agency involved in the transaction. (34) If that right is unavailing, the IP owner may sue in the U.S. Claims Court for compensation. (35)

      The Tucker Act (36) resolves trade secret 'takings' for issues grounded in contract. (37) The Federal Tort Claims Act (38) resolves trade secret torts. (39) Lastly, in equitable situations outside the scope of the foregoing, an APA claim resolves the trade secret dispute when an allegation of TSA violation involves a government officer. (40)

   3. Industrial Security Manual, Military Secrets, State Secrets

      An essential element of a defense effort is secrecy--protection of information about strengths, weaknesses, state of readiness and deployment of our military resources and our knowledge of similar factors for present or potential adversaries. (41) The U.S. military trains its uniformed defense force personnel well in such considerations and disciplines them to create and implement systems for facilities and information security. The military also disciplines its personnel in disclosure issues on a need to know basis using encryption and other tools of protection. (42) The great dependence of the military on the private sector (and vice-versa, the famed "military-industrial complex") presents challenges of maintaining the discipline through layers of thousands of contracting and subcontracting companies, and millions of their employees, consultants, shareholders, creditors, bankers, insurers, spreading further to family members and...