Thoughts On Senate Passing Trade-Secrets Bill

Dr. Shubha Ghosh is the new Crandall Melvin Professor of Law at Syracuse University College of Law and director of Technology Commercialization Law Program.

Through a nearly unanimous vote, the Senate passed the Defend Trade Secrets Act of 2016 on April 4.  This Act creates a civil cause of action in federal court for misappropriation of trade secret.  Twenty years ago, Congress made trade secret misappropriation a federal crime.  With the Senate vote, Congress has moved closer to federalizing what has been a matter of state law since at least 1790.  This movement is a positive one as trade secrets are an important body of law for promoting innovation and commercialization of technology.  But there are several potential pitfalls that Congress and the courts need to approach with caution in the law’s implementation.

First, the law authorizes seizures of goods that may contain misappropriated trade secrets. Although courts can order such seizures under extraordinary circumstances and only against parties who are deemed to have misappropriated trade secrets, there is always the danger of overreach. In the areas copyright, trademark, and patent, intellectual property owners have been zealous in enforcing their rights against even innocent users of copyrighted music, trademark parodists, and innocent businesses that acquire products that allegedly infringe patents. Similar enforcement efforts may occur under any new federal legislation.  The seizure provisions must be applied sparingly and with a heavy burden on the trade secret owner to ensure that seized products in fact embody misappropriated trade secrets.

Second, trade secret law has always recognized reverse engineering, a method of learning the trade secret through experimentation and study of a product.  If I buy a can of Coca-Cola and through my knowledge of chemistry uncover the secret formula, I have not broken any laws. In fact, trade secret law encourages such independent discovery as research is part of the innovation process. Although existing state law acknowledges reverse engineering, it is not clear how courts will interpret reverse engineering under any new federal legislation.  Courts should not narrow established understandings of reverse engineering and the support of independent discovery.

Finally, there is the problem of inevitable disclosure. In certain situations, an employee can be barred from taking a position at a competing company because of the possibility of trade secrets being misappropriated. Twenty years ago, an Illinois court kept a Pepsi executive from taking a position at Quaker Oats for fear that he might leak trade secrets.  According to the court, even if actual trade secret misappropriation had not occurred, disclosure of Pepsi’s secrets was inevitable under the circumstances.  This wide reaching application of state trade secret law has been rejected by many state courts, but a few influential jurisdictions still enforce the rule of inevitable disclosure. The rule has been criticized because employment mobility is beneficial to the economy and should be prevented only if there is clear evidence of misappropriation of trade secrets or infringement of other intellectual property. With a new federal law, courts may take the opportunity to make inevitable disclosure the law of the land, as opposed to the law in a handful of states.  This path should be avoided to maintain the proper balance between employee movement to new jobs and the protection of proprietary information.