Wednesday, April 30, 2014

Seaman: The case against federalizing trade secrecy

In his new article, The Case Against Federalizing Trade Secrecy, forthcoming in the Virginia Law ReviewChris Seaman does what the title suggests: he makes the case against federalizing trade secrecy protections and challenges the wisdom of current proposals in this direction. I'll quickly summarize the article and then make a few points. In general, I found the article highly educational and think Seaman makes a compelling case that federalization would be an unnecessary legal innovation.

Seaman starts with a quick history of trade secret laws, drawing on prior work by scholars like Catherine Fisk. According to Seaman's account, in the pre-Industrial era, trade secret laws were unnecessary as masters passed the knowledge required to practice a trade to apprentices, who were contractually required to keep the master's know-how secret. But, writes Seaman, "[m]ass industrialization underminded this contract-based protection for proprietary information" as concentration of production in large factories diminished the one-to-one master-apprentice model and technological developments produced more secrets for employees to observe. "Thus, a new source of protection was needed."

In response to these developments, Seaman explains, English common law and later U.S. state courts applying the common law began to "recognize a property-like interest in trade secret information and granted injunctive relief to prevent its unauthorized disclosure and use." Disparate common law rules were eventually codified into uniform ones, beginning with the American Law Institute's (ALI)  non-statutory Restatement (First) of Torts (1939), Sections 757-758, and culminating with the Uniform Trade Secrets Act (USTA) in 1979, which has been implemented through the laws of 47 states and generally prohibits the "misappropriation" of a "trade secret" that has economic value and has been the subject of "reasonable" efforts to maintain its secrecy. Seaman also describes existing federal laws that can potentially be used to protect trade secrets, such as the National Stolen Property Act (NSPA) and even the Criminal Fraud and Abuse Act (CFAA), which prohibits conduct such as intentionally accessing a protected computer without authorization.

In the heart of the paper, Seaman introduces three new proposals for a federal cause of action: (1) the Promoting American Trade Secrets and Innovation Act of 2012 (PATSIA), (2) the Private Right of Action Against Theft of Trade Secrets Act of 2013 (PRATSA), and (3) the Future of American Innovation and Research (FAIR) Act of 2013.  (Update: a new bill was also introduced on April 29, 2014.)

According to Seaman, the federal proposals would make two main changes to the existing state-level system. The first is the jurisdictional advantage of being able to sue in federal court. But Seaman argues this may be overblown since diversity cases brought by US citizens against foreigners can already be heard in federal court.

The second change is more significant: broader extraterritorial jurisdiction. Indeed, the proposed laws' main motivation seems to be fear of foreigners stealing U.S. secrets. As Seaman observes, PATSIA applies only if the complaint contains a sworn representation that the case implicates a "substantial need for nationwide service of process" or involves "misappropriation of secrets from the United States to another country." And FAIR applies only if the trade secret holder shows the defendant "committed, threatened, or conspired to commit misappropriation while outside of the United States" or on behalf of someone outside the U.S. As Orly Lobel has reported, the U.S. is currently pushing for stronger trade secret protections and anti-economic espionage legislation and enforcement around the world in various trade agreements.

Seaman goes on to argue that these new laws are both unnecessary and a bad idea. The first reason he gives is that federalization would limit states' ability to experiment in policy design, but without sufficient justification. All three proposals resemble the USTA, albeit with the exceptions noted above. And forty-seven states and the District of Columbia have already enacted the USTA. In addition, free trade agreements such as NAFTA ensure that states adopt at least minimum standards of protection. The second reason he gives is that a federal cause of action for trade secret misappropriation will "undermine patent law's objective of promoting the disclosure and widespread dissemination of information regarding new inventions."

While I agree with Seaman that federalization doesn't seem imminently necessary, his second point rests on two claims that I am not sure he proves: first, that a federal civil cause of action for trade secret misappropriation will strengthen trade secret laws, and, second, that stronger trade secret protection will ultimately decrease disclosure of information and harm innovation. As to the claim that federalizing will necessarily increase trade secret protection, Seaman doesn't mention that states, which already compete for mobile businesses using subsidies and tax credits, have their own incentives to ratchet up trade secret protections in order to attract and keep high tech businesses. When I mentioned this point to him, Seaman conceded that, in the absence of a federal standard, some states might have incentives to strengthen trade secret protections, but he suggests that states are not likely to uniformly do so. For instance, he points out that some USTA states adopt the inevitable disclosure doctrine, which allows employers to enjoin an employee from working at a job that would inevitably result in disclosure of trade secrets, while others do not. Nonetheless, although Seaman might be right that federalization will make trade secret protection stronger across the board than it currently is, we can't say for certain ex ante whether it will.

Seaman's second claim is even more ripe for debate: that a federal trade secret law will "undermine patent law's objective of promoting disclosure and widespread dissemination of information regarding new inventions because it will cause more inventors to opt out of the patent system." As Seaman notes, this conflicts with Mark Lemley's argument, as well as the Supreme Court's conclusion in Kewanee, that strong trade secret laws can actually promote patent law's goal of "disclosure" of valuable information that would otherwise be kept secret by permitting firms to encourage free exchange of information using only "reasonable" efforts to maintain secrecy. Seaman's response to this logic is that even if some trade secrecy protection is necessary to stop firms from fully locking up information through physical restrictions and contracts, too much trade secret protection can also reduce disclosure. "If the alternative of robust trade secrecy rights causes a substantial number of inventors to rely on trade secret law instead of patenting," he writes, "then the aggregate amount of information available to the public will decrease." However, especially when we take into account that increased trade secret protection will not reduce disclosure of information that is already non-patentable (e.g. client lists, customer data), it could just as easily be the case that stronger trade secret laws, whether at the state or the federal level, would lead to more "disclosure" of information of all kinds among employees and among firms, especially if patent protection simultaneously gets weaker.

Caveats aside, Seaman's article makes an important point that the argument in favor of trade secret laws as "disclosure-promoting" has limits, and that these limits may be challenged if federalization goes forward and leads to less patenting in favor of secrecy.

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