Innovators Can Sleep at Night if Their Trade Secrets Are Well Protected

Trade secrets are considered the oldest form of intellectual property in the world, and in the 21st century trade secret assets may become the largest, most lucrative driver for the United States in a world that largely tolerates theft of innovation. The motto “Don’t Innovate, Imitate” need not be an issue, though, when trade secret assets are well-protected.

Depending upon the type of trade secrets case, plaintiffs’ outcome may be more favorable when they elect to file in State courts, because of the “Uniform Trade Secrets Act” UTSA and its flexibility.

The UTSA has been a great success, with 99 percent of US states implementing its provisions. However, the Uniform Act does not encompass remedies for criminal prosecution. This has led to some jurisdictions adopting their own criminal law in respect to trade secrets.

By example, the adoption of criminal sanctions by California of the Penal Code § 499c, covers criminal prosecution for misappropriation of trade secrets.

Protection for misappropriation of trade secrets differs substantially between the California penal code and the recent “Defense of Trade Secrets Act” (DTSA) – Defend Trade Secrets Act. For example, Cal. Penal Code § 499c does not provide for the protection of trade secrets in the course of prosecution. Whether in practice California courts will protect the confidentiality of a trade secret, is dependent upon pursuit of protective relief from the Court.

In contrast, the DTSA requires the court to “take such . . . action as may be necessary and appropriate to preserve the confidentiality of trade secrets,” and creates a right of interlocutory appeal from any decision or order authorizing or directing the disclosure of a trade secret for the United States Government when prosecuting theft of trade secrets. Further, section 1835 of the DTSA as amended, additionally prevents courts from directing the disclosure of any information the owner asserts to be a trade secret without first allowing the owner to submit under seal a description of their interest in keeping the information confidential, and explicitly dictates that “the provision of information relating to a trade secret to the United States or the court in connection with a prosecution under that chapter shall not constitute a waiver of trade secret protection.”

In California, offenders convicted of theft of trade secrets under section § 499c of the penal code are guilty of theft, which (assuming the value of the secret(s) stolen is above $950). It can be a felony punishable by imprisonment up to three years (pursuant to the sentencing guidelines codified in Cal. Penal code § 1170h) and required restitution (Cal. Penal code 487). Further, § 499c codifies specific penalties, including imprisonment not exceeding one year (pursuant to the sentencing guidelines codified in Cal. Penal code § 1170h), or fines up to $5,000, or both, for those who induce another to misappropriate a trade secret.

The DTSA provides for significantly steeper penalties: imprisonment up to ten years, or fines up to $250,000 (18 U.S.C. § 3571), or both, or for organizations that engage in theft of trade secrets, fines (recently increased by the DTSA) up to the greater of $5,000,000 or three times the value of the trade secret to the organization (includingthe avoided cost of research and development).

DTSA further provides explicit immunity from criminal liability for whistle blowers, while Cal. Penal Code 499c has no such provision. The language of the elements of trade secret theft in § 499c is drafted in such a way as to appear to leave open to criminal prosecution of someone who acts with the intent to appropriate a trade secret even if they do so exclusively for the use of a law organization or other appropriate enforcement entity in the event of a “whistle blower” scenario. The Federal statute is explicitly applicable to foreign acts.

And, the DTSA dictates that §§ 1831-39 apply to conduct occurring outside the United States if the offender meets the following criteria: is a U.S. citizen or permanent resident alien, or a corporation organized in the U.S., or if an act in furtherance of the offence was committed in the U.S. Cal. Penal Code § 499c is subject to the limitations of the extraterritoriality of California criminal law generally.

Key Differences Between the Federal Criminal Statute and the California Statute Relating to Theft of Trade Secrets

Accordingly, the key differences between the federal criminal statute and the California statute dealing with criminal conduct is that the federal statute provides a procedure which is efficient and, at the same time, protects the confidentiality of the trade secret. Further, the procedure against criminal conduct is stricter with DTSA.

Under the DTSA federal courts operates under a single, national standard for trade secret misappropriation and a transparent set of procedural rules, offering predictability and ease of use. Second, federal courts provide nationwide service of process and a unified approach to discovery, enabling quick action by trade secret owners even when confronted with actors in multiple jurisdictions. Third, as a result of their extensive experience with complex cross-border litigation involving intellectual property, federal courts would be able to resolve jurisdictional issues quickly and applications for injunctions or seizures fairly. Fourth, their generally more predictable discovery procedures will serve the legitimate needs of trade secret plaintiffs, who typically must develop most of the facts to prove their case through defendants and third parties.

Finally, while the DTSA is not preemptive and would allow litigants a choice to sue in state or federal court, the opponents fail to explain why having that choice should be deemed undesirable “forum-shopping,” any more so than in other areas, such as trademark and securities law, where concurrent state and federal jurisdiction has long existed.

If you’re looking for protection outside criminal acts, then the UTSA offers, essentially, reliably case law that can be highly beneficial to companies that operate across state lines and that have relied upon established commercial trade secrets standards. Thus, the trade secret protections that have been enacted for many years under the uniform trade secrets act provide reliable safeguards for the majority of trade secret disputes.

However, if is a plaintiff is seeking criminal sanctions, it may be prudent to proceed under the DTSA.

Glossary:

Uniform Trade Secrets Act (UTSA)

Defend Trade Secrets Act (DTSA, 18 usca)

Cal Penal Code section § 499c