Over the last fifteen years the recognized importance of intellectual property to international commerce has skyrocketed. The focus has been on code and patents and the willingness of strategic and financial investors to invest in both — and to litigate once rights have been acquired.
In that context, a focus on trade secrets has seemed outdated. But from another point of view, overlooking trade secrets has simply been a market failure. Trade secrets are protectable as formal IP, and arguably more powerful, because a trade secret does not need to be registered, and it can represent a broad right.
The Obama Administration is taking a novel course. It is invoking the enforcement of trade secrets under U.S. and international law as a tool of statecraft to combat industrial espionage.
Private companies would be well served to pay attention to this development. The Obama Administration is signaling that it thinks this tool has been overlooked, and can play an important role in protecting U.S. commercial interests. We will have to see whether private companies agree. Below we lay out some of the background relevant to this development.
One additional comment: the focus on trade secrets has an embedded risk. It requires that companies enforce their trade secrets. Failure to take action to do so will mean that private companies may be handing their opponents a strong defense to a claim that IP rights have been violated.
Trade secrets are generally defined as information that is not generally known to the public; that confers some sort of economic benefit on its holder which derives specifically from its not being generally known; and that is the subject of reasonable efforts by its owner to maintain its secrecy.
Enforcement of trade secret rights between private parties is largely the province of state law. However, the Economic Espionage Act of 1996, 18 U.S.C. §§ 1831-29 (the EEA), criminalizes some forms of trade secret theft and also empowers the government to initiate civil enforcement proceedings. Section 1831 of the EEA makes it a felony to knowingly steal or misappropriate a trade secret to benefit any foreign government or agency thereof. Section 1832 makes it a crime to knowingly steal or misappropriate a trade secret to the economic benefit of anyone but its owner if the accused party intends to injure the owner.
Recent years have seen an alarming growth in state-sponsored industrial espionage and criminal theft of trade secrets. The criminal activities involve efforts to acquire trade secrets both through the recruitment of current and former employees, and through cyber intrusion against electronic repositories of trade secret information. This is illustrated by a summary of the related criminal proceedings that have occurred since January 2009 published by the Department of Justice, which identifies 20 significant cases including the following examples:
- In November 2012, a former General Motors engineer and her husband were convicted of stealing GM trade secrets relating to hybrid vehicle technology worth $40 million. The defendants copied more than 16,000 GM files, including trade secret documents, to an external computer hard drive, and then tried to pass the trade secrets to a Chinese automaker.
- In October 2012, South Korea-based Kolon Industries and several of its executives and employees were indicted for allegedly engaging in a multi-year campaign to steal trade secrets related to DuPont’s Kevlar® fiber and Teijin Limited’s Twaran® fiber. The indictment seeks forfeiture of at least $225 million in proceeds from the alleged theft of trade secrets from Kolon’s competitors, and charges Kolon with multiple related criminal counts. According to the indictment, Kolon allegedly sought to improve its product by targeting current and former employees at DuPont and Teijin and hiring them to serve as consultants, then asking them to reveal confidential and proprietary information.
- In September 2012, a former senior software engineer for Chicago-based CME Group pleaded guilty to theft of trade secrets for stealing source code and other proprietary information while at the same time pursuing plans to improve an electronic trading exchange in China and admitted to downloading more than 10,000 files containing CME computer source code that made up a substantial part of the operating systems for CME’s Globex electronic trading platform. The government maintained that the potential loss was between $50 million and $100 million.
- In April 2011, a former Ford employee was sentenced to 70 months in federal prison for theft of trade secrets and economic espionage. The employee resigned to work at a Chinese automotive company. He copied 4,000 Ford documents onto an external hard drive, which he took to China. Ford valued the loss of the trade secrets at $50 million.
In response to these threats, on February 20, 2013, the Obama Administration announced a new “Strategy on Mitigating the Theft of U.S. Trade Secrets,” which summarizes the problem as follows:
“Emerging trends indicate that the pace of economic espionage and trade secret theft against U.S. corporations is accelerating. . . . Additionally, there are indications that U.S. companies . . . are experiencing cyber intrusion activity against electronic repositories containing trade secret information. Trade secret theft threatens American businesses, undermines national security, and places the security of the U.S. economy in jeopardy.”
With the Strategy, the Administration proposed a multi-faceted approach to address the situation, consisting of the following principal elements:
1. Focus diplomatic efforts to protect trade secrets overseas. The Strategy seeks to respond to the international aspects of the problem through a coordinated effort by the Departments of Commerce, Defense, Justice, Homeland Security, State, Treasury and the U.S. Trade Representative. Significantly, the Strategy commits the Administration to continue to apply diplomatic pressure on foreign governments where there are regular incidents of trade secret theft. In addition, the Administration will utilize trade policy tools to increase enforcement against trade secret theft; seek international law enforcement cooperation; build international training capacity; and work with global organizations to strengthen international enforcement efforts.
2. Promote voluntary best practices by private industry to protect trade secrets. The Strategy calls on industries and trade associations – consistent with anti-trust laws – to develop best practices to protect trade secrets. These include developing policies relating to research and development compartmentalization, information and physical security and human resources practices. The U.S. Intellectual Property Enforcement Coordinator, in concert with other government agencies, will help to facilitate these activities.
3. Enhance domestic law enforcement operations. The Strategy directs the Department of Justice and FBI to continue to prioritize the enforcement of the EEA. The Office of the Director of National Intelligence will coordinate efforts within the intelligence community to inform the private sector how best to combat trade secret theft, and will share threat warning and awareness information with the private sector.
4. Improve domestic legislation. The Strategy indicates the Administration’s intent to continue to ensure that U.S. laws in this area are as effective as possible. To this end, the Administration directed federal agencies to review relevant existing federal intellectual property laws in March 2011. This led to recommendations that the maximum sentence for economic espionage be increased from 15 to 20 years, and that the U.S. Sentencing Commission also increase the guideline ranges for economic espionage.
5. Promote public awareness and stakeholder outreach. Acting through the Department of Commerce, the Patent and Trademark Office, the International Trade Administration and the FBI, the Administration will encourage all stakeholders to be aware of the potential adverse effects of trade secret misappropriation and to take appropriate actions to combat it.