A FEDERALIST ACCOUNT OF THE LAW OF TRADE SECRECY.

• Author: Salvucci, Martin J.
• Position: NOTE

In May 2016, President Barack Obama signed the Defend Trade Secrets Act of 2016 (DTSA) into law. (1) Prior to the passage of the DTSA, trade secrets--unlike patents, copyrights, and trademarks--were protected largely by a patchwork of state laws. (2) Observers have described the passage of the DTSA--which, for the first time, creates a private cause of action under federal law for the misappropriation of trade secrets--as the most significant development for intellectual property law since the passage of the Lanham Act, which effectively federalized the law of trademarks in 1946. (3)

Even by the standards of intellectual property, trade secrets are especially vulnerable to theft. They are easily accessible and generally portable--and often, they are carried away in the mind's eye. (4) Their misappropriation is estimated to cost American firms as much as three percent of Gross Domestic Product--a figure that easily exceeds $300 billion. (5) And former FBI Director Louis Freeh once testified that stolen intellectual property resulted in the loss of more than one million American jobs--a substantial percentage of which, presumably, were attributable to the misappropriation of trade secrets. (6)

The DTSA amends an already-existing federal criminal statute--the Economic Espionage Act of 1996 (EEA)--to incorporate a private cause of action for misappropriation. (7) At the same time, the DTSA also expressly provides that already-existing state laws will not be preempted. (8) This decision is significant for two reasons. As a practical matter, it permits owners to retain the protections of the patchwork of state laws that previously served as their sole line of defense. In functional terms, moreover, this dynamic likely creates a novel federal-state system of protection, as well as an untested arrangement that will implicate significant doctrinal questions that pertain to federalism.

This paper asks what the DTSA can tell us about federal and state relations, what we call "Our Federalism" and vice versa. It proceeds in four parts. The first traces the history and the evolution of the law of trade secrecy from its beginnings in the nineteenth century through the development and widespread adoption of the Uniform Trade Secrets Act (UTSA). It also explores the subsequent passage of the EEA, as well as the debates that preceded the enactment of the DTSA. The second part examines the DTSA's jurisdictional element, which ostensibly limits what claims may proceed under federal law. It determines the available evidence--including both principles of statutory construction and albeit limited case law--does not answer how narrowly or broadly the jurisdictional element should be construed.

The third part takes up two values of Our Federalism--uniformity and experimentation--to argue for a narrow reading of the DTSA's jurisdictional element. Although it acknowledges that the DTSA likely will create what amounts to a "floor" for trade-secret protections, the third part argues that the anti-preemption provision will undercut the uniformity in protection and enforcement sought by the statute's proponents. Moreover, the third part takes up the example of so-called "inevitable disclosure" to contend that additional space for innovation at the state level is warranted. The fourth part offers some brief observations on likely trends in the law of trade secrecy.

PART ONE: THE PATH OF THE LAW

Scholars treat the law of trade secrecy as the "youngest sibling" among intellectual property's four major disciplines. (9) Unlike protections for patents and copyrights--whose longstanding statutory predicates ensured prominent placement within the American Constitution (10)--the law of trade secrecy, much like the law of trademarks, emerged from a handful of common-law torts during the nineteenth century. (11) The emergence of trade secrets, in particular, followed the Industrial Revolution, which undermined well-established contractual norms.

1. Trade Secrecy at Common Law

   Prior to the Industrial Revolution, "[t]he proprietary knowledge needed to practice a trade or craft often was passed from a master to an apprentice. In turn, the apprentice was contractually required to keep secret the know-how learned from the master." (12) But this contractual "restriction lasted only for the duration of the apprenticeship; afterward, the apprentice could 'freely depart with whatever skill and knowledge [he] had acquired.'" (13) Mass industrialization rendered those contractual arrangements largely impracticable due to a newly-mobile workforce, on the one hand, and a host of now readily observable industrial technologies on the other. (14)

   The first reported protection for trade secrecy in the United States appears in 1837. In Vickery v. Welch, the Supreme Judicial Court of Massachusetts ordered specific performance of an agreement mandating the "exclusive" use of a secret method for cooking chocolate. (15) Subsequent decisions across jurisdictions continued to refine the scope of these protections: "The holder of a trade secret was required to take precautions to preserve its secrecy, but this secrecy did not have to be absolute. Information generally known to the public could not qualify as a trade secret. And an obligation not to disclose or use proprietary information was enforceable through an injunction." (16)

   By the 1930s, the law of trade secrecy had attracted sufficient attention as to merit inclusion in the American Law Institute's Restatement (First) of Torts (Restatement), which sought to bring a modicum of consistency and uniformity to the thicket of state tort-law regimes. (17) The Restatement defines a trade secret in relatively broad terms--as "any formula, pattern, device or compilation of information which is used in one's business, and which gives [its owner] an opportunity to obtain an advantage over competitors who do not know or use it." (18)

   The Restatement requires that "the subject matter of a trade secret must be secret." (19) Since practical considerations militate against a requirement for absolute secrecy, the Restatement offers relatively modest guidance as to where best to draw the line: "A substantial element of secrecy must exist, so that, except by the use of improper means, there would be difficulty in acquiring the [relevant] information." (20) Although it emerged in subsequent years as an important resource for academic inquiry, the Restatement largely failed in its attempt to bring consistency and uniformity to the law of trade secrecy at the state level. (21)

2. The Uniform Trade Secrets Act

   By the late 1960s, the Uniform Law Commission (ULC) sought to resurrect the project of uniformity--an effort that culminated with the development of the Uniform Trade Secrets Act (UTSA). By its own terms, this novel effort suffered from no shortage of ambition: "The contribution of the Uniform Act is substitution of unitary definitions of trade secret and trade secret misappropriation, and a single statute of limitations... The Uniform Act also codifies the results of the better reasoned cases concerning the remedies for trade secret misappropriation." (22)

   The UTSA follows the Restatement's example in enumerating the wide range of information that could plausibly be entitled to trade-secret protection, including "a formula, pattern, compilation, program, device, method, technique, or process." (23) To qualify, the information must meet two requirements. First, it must derive "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." (24) And second, it must be "the subject of efforts that are reasonable under the circumstances to maintain its secrecy." (25)

   Parties who learn of trade secrets with knowledge or reason to know that the information was acquired through "improper means" risk suit for misappropriation. The UTSA defines these "improper means" to include "theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means." (26) Notably, the UTSA also outlines a number of "proper means," which include discovery by independent invention, discovery by reverse engineering, discovery under a license from the owner of the trade secret, observation of the item in public use or on public display, or obtainment from published literature. (27)

   The primary remedy in cases of misappropriation is injunctive. According to the UTSA, "[a]n injunction shall be terminated when the trade secret has ceased to exist, but the injunction may be continued for an additional reasonable period of time in order to eliminate commercial advantage that otherwise would be derived from the misappropriation." (28) Subsequent amendments have provided for "payment of a reasonable royalty" in rare cases--typically those in which the grant of a prohibitive injunction would be unreasonable. (29)

   Likely on account of its stated ambition to achieve uniformity, the first iteration of the UTSA sought to displace "conflicting tort, restitutionary, and other law... pertaining to civil liability for misappropriation of a trade secret." (30) More recent amendments clarified the scope of the UTSA's intended preemptive effect by exempting both contractual and criminal remedies from displacement. (31) The model statute provides for a three-year statute of limitations for all claims of trade-secret misappropriation. (32)

   Within ten years of the UTSA's publication in 1979, more than 30 state legislatures had enacted the model statute in either its initial or amended form--albeit with some variation at the margins. (33) Although such rapid early success ensured that the pace of adoption would eventually slow, the reach and the appeal of the UTSA proved nothing less than remarkable. Once Texas--the nation's second-busiest docket for...