Feature

Protecting U.S. Trade Secret Assets in the 21st Century

R. Mark Halligan

©2013. Published in Landslide, Vol. 6, No. 1, September/October 2013, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

There are four types of intellectual property rights: patents, copyrights, trademarks, and trade secrets. Of these, only patents and trade secrets protect information. Patents protect information by dedicating the information to the public in return for a limited monopoly. Trade secrets protect information with independent competitive value derived from the secrecy of the information.

The birth of every patent starts out as a trade secret. At the time of conception, the idea or information can be protected only by keeping it secret. However, a subsequent decision needs to be made to determine whether to convert the trade secret asset into a patent asset. The traditional approach is based on the NUN factors: novelty, usefulness, and nonobviousness. If the trade secret asset meets the patentability requirements, then the decision tree often dictates that the owner seek a patent because it will provide greater protection.

The patent versus trade secret calculus has changed dramatically.1 Recent judicial decisions in patent law have weakened patent protection. In contrast, trade secrets have flourished with broad protection and expansive remedies for trade secret misappropriation under U.S. law.2 Moreover, the America Invents Act (AIA) now affords full prior user rights under 35 U.S.C. § 273. An accused patent infringer can now rely upon “prior user” trade secrets to defeat alleged patent infringement claims. It is the new “secret weapon” under the AIA.3

The tension, of course, lies in the public disclosure requirements of the worldwide patent system. Literally, within minutes of the publication of a U.S. patent application, such information can be—and is—captured by high-powered computers, keyworded, and provided to worldwide actors and industries that can immediately use such information for competitive advantage and for commercial gain, displacing the U.S. company that filed the patent application in the first place. On a more sinister front, the U.S. first-inventor-to-file system now affords foreign actors the opportunity to steal U.S. technology, file a U.S. patent application, and “own” the U.S. technology developed by the first true inventor.

The United States has the most advanced legal system for the protection of trade secret assets in the world. Trade secrets are defined broadly to include any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others.4 Combinations and compilations of known elements in the public domain are protectable as trade secrets.5 Novelty is not required.6 The actual or threatened misappropriation of trade secrets can be enjoined.7 The inevitable disclosure doctrine provides the legal foundation for injunctive relief based upon the inevitable use of trade secret assets by direct head-to-head competitors.8 Circumstantial evidence is sufficient to prove trade secret misappropriation.9 U.S. litigants have the right to broad discovery that encompasses electronic evidence discovery to ferret out trade secret misappropriation and to seek emergency and permanent injunctive relief. Damages include the trade secret owner’s losses and the misappropriator’s unjust enrichment, as well as increased damages for willful and malicious misappropriation.10

However, despite all these advantages, U.S. companies and the intellectual property bar continue to ignore the importance of trade secret assets. Trade secrets have always been viewed as a stepchild intellectual property right—something far less than patent protection. In reality, trade secrets are the oldest form of intellectual property in the world and, in the 21st century, trade secret assets will become the biggest economic driver for the United States in a world that promotes “copying” technology rather than “innovation.” The motto “Don’t Innovate . . . Just Imitate” does not apply to trade secret assets.

Once again, the United States is ahead of the rest of the world when it comes to the recognition of property rights in trade secret assets. Coca-Cola discovered the value of trade secret assets over 100 years ago and is thriving today. The United States Supreme Court has held that a trade secret asset is a property asset, and the extent of a property right in a trade secret “is defined by the extent to which the owner of a secret protects his interest from disclosure to others.”11 Despite such progress, there are two critical deficits in trade secrets law that require urgent attention. First, U.S. companies must develop information asset management/accounting systems for trade secret assets. Second, the United States must provide U.S. companies with a federal civil cause of action for trade secret misappropriation.

Most U.S. companies do not have internal trade secret asset management systems. We are still using accounting systems that were designed by monks to keep track of wine bottles. A U.S. company can account for every table, every chair, and every pencil, but it cannot account for intangible assets. Before the computer revolution, U.S. companies measured book value based on tangible and physical assets—e.g., land, buildings, machinery, and vehicles. Today, the book value of many new economy companies approaches zero. Companies lease equipment, maintain virtual offices, and use cloud computing resources. The book value may be zero, but the market capitalization can be in the billions of dollars. The failure to implement accounting systems to track intangible assets is causing serious distortions in our economy.

The difference between book value and market capitalization is the value of the company’s intangible assets—primarily trade secret assets. For example, Google emerged out of nowhere to dominate the search engine world technology based upon “trade secret” algorithms. Google’s success today depends upon protecting these trade secret assets described as Google’s “brand.” A single trade secret asset can be worth millions—even billions—of dollars. Yet there are no accounting systems in place for these assets. Unquestionably, wide fluctuations in a company’s market capitalization can occur literally overnight upon the loss of trade secret assets, and shareholders need to be advised of material changes in the valuation of trade secret assets.

Today, companies issue general warnings in SEC filings as follows:

The loss of trade secret protection could make it easier for third parties to compete with our products by copying functionality. In addition, any changes in, or unexpected interpretations of, the trade secret and other intellectual property laws in any country in which we operate may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

This generalized approach to trade secret assets is simply unacceptable. We cannot continue to operate U.S. businesses where the core trade secret assets of the company are not documented and accounted for.12

Moreover, the lack of internal trade secret asset management systems promotes and encourages the theft of trade secrets. You cannot protect something unless you know what “it” is that you are protecting. There are four stages in the trade secret asset management cycle: identification, classification, protection, and valuation. Intellectual property lawyers for decades have lectured on the need to “protect” trade secrets, but that is the third stage in the cycle. The initial challenge is the “identification” and “classification” of trade secret assets. Today, software tools are available to conduct trade secret audits, and the SFP (subject-format-product) protocol can be used to classify trade secret assets.13 It can be done, it must be done, and the shibboleth that “we are working on it” no longer suffices.14

Companies need to identify and classify information and understand the information flows and life cycles of trade secret assets. As data moves out of research and development to the commercialization stages, employees and third parties are exposed to the trade secret information. To safeguard company proprietary information, it is critical to understand that trade secret assets are either “at rest” or “in motion.” The goal should be to develop a “need to know” culture and to track how trade secret assets are accessed, and stored, together with mapping the trade secret information “flows” both inside and outside the company. This must be a data-centric process. What and where is the sensitive data? Who has access to the trade secret? What is the user doing with the trade secret, and where is the trade secret going?

There should be a trade secret control committee and a trade secret protection function in every company. In this vein, it should be noted that “negative know-how” is a critical U.S. trade secret asset. In other words, knowing “what doesn’t work” is often as valuable or even more valuable than knowing “what does work.”15 Establishing a trade secret control committee will facilitate capturing all the trade secrets of the company including “negative know-how” trade secrets.

On October 11, 1996, President Clinton signed into law the Economic Espionage Act of 1996 (EEA).16 The United States recognized—at the birth of the Internet revolution—that the protection of trade secret assets was in the economic and national security interest of the United States.17 Unfortunately, the EEA has not deterred trade secret theft and foreign economic espionage. The Computer Crime and Intellectual Property Section of the United States Department of Justice has done an excellent job, but the burden on the government is too great.18 Without a federal civil cause of action, U.S. companies cannot adequately protect U.S. trade secret assets in a worldwide economy that now crosses international boundaries.

The statistics are staggering. Last year, for example, the FBI sponsored a campaign in nine U.S. cities with billboards stating: “$13 Billion Lost—Protect America’s Trade Secrets.”19 National Security Agency Director General Keith Alexander calls cyber-espionage “the greatest transfer of wealth in history.”20 Symantec places the cost of intellectual property theft for the U.S. economy at $250 billion a year. McAfee estimates global remediation costs at $1 trillion per year. Not a day goes by without another report of foreign economic espionage, computer attacks, and trade secret theft.

Whatever advantages the United States has achieved in the development of the law of trade secrets will be lost if we do not deploy effective means to protect trade secret assets. U.S. companies are victims of international trade secret theft, and U.S. companies need access to the federal courts to protect trade secret assets. We have federal civil causes of action for patent infringement, copyright infringement, and trademark infringement. There is no justification for depriving U.S. companies of access to the federal courts to protect U.S. trade secret assets.

We have made substantial progress toward the enactment of a federal civil cause of action for trade secret misappropriation. This author recommended amendments to the EEA in 2008,21 and last year Senators Kohl, Coons, and Whitehouse endorsed these recommendations with the introduction of S. 3389 entitled “Protecting American Trade Secrets and Innovation Act of 2012” (PATSIA).22 PATSIA establishes a federal cause of action for trade secret misappropriation based upon a verified complaint that the trade secret dispute involves either a substantial need for nationwide service of process or evidence of misappropriation of trade secrets from the United States to another country. There are also provisions in PATSIA for the issuance of civil ex parte seizure orders for the preservation of evidence, including any computers used or intended to be used to commit or facilitate trade secret misappropriation.

PATSIA terminated in the Senate Judiciary Committee with the expiration of the 112th Congress, but PATSIA will be reintroduced shortly by Senator Coons in the 113th Congress. This legislation needs bipartisan support together with a strong endorsement from the intellectual property bar.

The protection of U.S. trade secret assets in the 21st century requires the recognition that the emergence of a worldwide, information-based society has dramatically changed the intellectual property landscape. In this global environment, the protection of U.S. trade secret assets is in the national security and economic interests of the United States, and trade secret assets cannot and should not be perceived as second-tier intellectual property. In this new economy, U.S. companies have a corporate and fiduciary responsibility to develop internal trade secret asset management systems and to take the necessary steps to protect these corporate trade secret assets. Finally, the United States and the intellectual property bar need to recognize that the protection of U.S. trade secret assets requires that the Economic Espionage Act be amended in the 113th Congress to establish a federal civil cause of action for trade secret misappropriation, together with the other legislative changes necessary to preserve and protect U.S. trade secret assets.

Endnotes

1. R. Mark Halligan, Trade Secrets v. Patents: The New Calculus, 2:6 Landslide 10–13 (July/Aug. 2010).

2. Id.

3. David A. Haas & R. Mark Halligan, Trade Secrets: Your Secret Weapon under Patent Reform (2012), www.srr.com/assets/pdf/trade-secrets.pdf.

4. Restatement (Third) of Unfair Competition § 39 (1995).

5. See, e.g., Harbor Software, Inc. v. Applied Sys., Inc., 887 F. Supp. 86, 90 (S.D.N.Y. 1995).

6. Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974).

7. FMC Corp. v. Taiwan Tainan Giant Indus. Co., 730 F.2d 61, 63 (2d Cir. 1984).

8. PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995).

9. Greenberg v. Croydon Plastics Co., 378 F. Supp. 806, 814 (E.D. Pa. 1974).

10. Unif. Trade Secrets Act, 14 U.L.A. 437 (1985).

11. Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1002 (1984).

12. R. Mark Halligan & Richard F. Weyand, Trade Secret Asset Management: An Executive’s Guide to Information Asset Management, Including Sarbanes-Oxley Accounting Requirements for Trade Secrets (2006).

13. Every trade secret asset occupies a three-dimensional space: subject, format, and product. Using the SFP categorization method allows a company to capture millions of bits of information in a trade secret classification system. See id. at ch. 11.

14. R. Mark Halligan & Richard F. Weyand, The Sorry State of Trade Secret Protection, Trade Secret Off., www.thetso.com/Info/sorry.html (last visited July 9, 2013).

15. Glaxo Inc. v. Novopharm Ltd., 931 F. Supp. 1280, 1299 (E.D.N.C. 1996).

16. 18 U.S.C. §§ 1831–39 (2006).

17. 142 Cong. Rec. S12,207 (daily ed. Oct. 2, 1996) (statement of Sen. Specter); 142 Cong. Rec. H10,461 (daily ed. Sept. 17, 1996) (statement of Rep. Hyde) (“In my opinion, our economic interests should be seen as an integral part of [the country’s] national security interests, because America’s standing in the world depends on its economic strength and productivity.”).

18. See Computer Crimes & Intellectual Property Section, U.S. Dep’t of Justice, www.justice.gov/criminal/cybercrime (last visited July 9, 2013).

19. See $13 Billion Lost Protecting America’s Trade Secrets, Fed. Bureau Investigation, www.fbi.gov/image1/13-billion-lost-protecting-americas-trade-secrets-www.fbi.gov/view (last visited July 9, 2013).

20. Emil Protalinski, NSA: Cybercrime Is “the Greatest Transfer of Wealth in History, ZDNet (July 10, 2012), www.zdnet.com/nsa-cybercrime-is-the-greatest-transfer-of-wealth-in-history-7000000598.

21. R. Mark Halligan, Protection of U.S. Trade Secret Assets: Critical Amendments to the Economic Espionage Act of 1996, 7 J. Marshall Rev. Intell. Prop. L. 656 (2008).

22. See www.govtrack.us/congress/bills/112/s3389 (last visited July 9, 2013).

R. Mark Halligan is a partner in the Chicago office of Nixon Peabody LLP. He focuses his practice on intellectual property litigation. Mr. Halligan has litigated numerous cases regarding the misappropriation, protection, and enforcement of trade secrets. He also teaches trade secrets law and advises clients on best practices relating to the identification, protection, and valuation of trade secret assets.