In this era when the exploits of Bradley Manning and Edward Snowden dominate the headlines and are celebrated by many, and when stories on theft of top secret or competitive information have become everyday occurrences, it is only natural to ask: Can anything remain secret? Is there anything to be done?
While some of the biggest stories of the last year have implicated national security (Manning and Snowden), no businessperson can afford to fool themselves by presuming that business is immune from the same threats. In fact, for every incident involving national security leaks with political motives, competition or greed motivate even more thefts of intellectual property from private enterprise.
There is no mistaking that intellectual property is often an enterprise’s most critical and most highly valued asset. And because that asset can be highly mobile, the threats are mounting. Disillusioned or disgruntled employees (perhaps in the mold of Manning or Snowden, but more likely eyeing an opportunity on their own or with a domestic competitor) are just a part of the gauntlet of threats for businesses. The Obama administration’s report on mitigating the theft of U.S. trade secrets released earlier this year presents a sobering catalog of trade-secret thefts from U.S. companies.
The problem has been with us for years and shows no signs of abating. A recent estimate of the economic loss suffered by the U.S. economy as a result of the theft of intellectual property by foreign actors places that figure near $300 billion on an annual basis, according to “The Report of the Commission on the Theft of American Intellectual Property.” And that figure has grown over the last decade as indicated by the U.S. Department of Justice’s “Progress Report of the Department of Justice’s Task Force on Intellectual Property.” Considered across our economy as a whole, the loss is staggering. To victimized individual enterprises, the impact can be devastating and the loss can be incalculable.
As dark as things appear, businesses cannot hesitate to use the strategies available to protect their critical information while at the same time pursue stronger protections. When employed in a thorough, consistent and coordinated way, available tools can make a significant difference — even in this climate and while seeking stronger protections.
Begin at the beginning. There is simply no substitute for a good start to any relationship. By recent accounts, it appears that in the Snowden case, background checks were faulty or incomplete. Making the most of available screening for employees, contractors and business partners can only improve the odds of keeping valuable information under wraps. Clear policies, strong security practices and tailored agreements establish ground rules and evidence both the value of information and efforts taken to secure it.
Commentators have observed for years that restrictive covenants are disfavored in the law, stifle competition and that courts have applied increasing scrutiny. As litigation over the theft of confidential information and trade secrets has multiplied, it should come as no surprise that agreements, and the business interests that underlie them, are tested. But a noncompete is hardly the only contract available. In addition to nondisclosure agreements, forfeiture-for-competition and garden leave clauses have their places as well and are often subject to less scrutiny.
Covenants are a beginning, not a dead end. Even in the absence of written agreements, the Uniform Trade Secrets Act (UTSA) affords another means to secure information enterprises strive to maintain as confidential and that is competitively valuable. With Texas’ adoption of the UTSA earlier this year and New Jersey’s adoption late last year, legislation in 48 states and the District of Columbia protect, among other things, investments in research and development, formulas, methods, techniques, compilations, listings and even “how not to” do things. Defining intangible business assets that qualify as trade secrets sets the stage for using the act’s potent litigation tools.
In 2010, the U.S. Court of Appeals for the Third Circuit gave the UTSA and the inevitable disclosure doctrine a shot in the arm when the court clarified that threatened disclosure need not amount to “inevitability” before an injunction will issue but instead a “substantial threat” of disclosure will support an injunction, in Bimbo Bakeries USA v. Botticella, 613 F.3d 102 (3d Cir. 2010). Many have since contended that only rare cases will fit the requirements laid out in Bimbo, but few would have publicly predicted that the making of a breakfast food like English muffins would be so profitable and the “nooks and crannies” recipe involved in the case would be so highly prized as to generate such significant litigation and change the law.
The UTSA is balanced in that it provides something for both sides in trade-secret fights. This was illustrated in May when a panel of the Pennsylvania Superior Court in Krafft v. Downey, 68 A.3d 329 (Pa. Super. 2013), reversed a trial court’s dismissal of a claim for attorney fees in a case where the plaintiff brought a misappropriation claim in what the Superior Court determined was bad faith.
New Federal Statutes and Increased Criminal Enforcement on the Horizon
As my colleague, Leigh Ann Buziak, reported in June, members of Congress are weighing a number of measures to create a federal civil claim for theft of trade secrets to complement the Economic Espionage Act (EEA), which codifies trade-secret theft as a federal crime. Late last year, Congress amended the EEA to close a loophole after the Second Circuit in United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012), overturned a criminal conviction for the theft of source code for a high frequency trading program based on a statutory definition.
In light of the increasing harm inflicted on American businesses, it appears likely that Congress will strengthen federal law and that prosecutors will continue to look at domestic and international bad actors — particularly if the Obama administration’s report is any indication. Theoretically, trade secrets can remain secret indefinitely and thereby hold their value for just as long. But the confidentiality that must be maintained if a trade secret is to keep its value makes them a particularly vulnerable form of intellectual property.
In the era of Manning, Snowden and intense international and domestic competition, business cannot await the arrival of new causes of action or improved government action; comprehensive approaches — technical, legal and legislative — are needed to protect trade secrets and confidential information.
Michael Broadhurst is a partner and business trial lawyer at Blank Rome. Broadhurst’s commercial litigation experience spans the full range of issues that arise for companies, including contract litigation, noncompetition enforcement, professional malpractice defense and trade-secret protection.