Drawn-Out Negotiations Over Covid IP Will Blow Back on Biden

The Biden administration recently announced its support for a proposal before the World Trade Organization that would suspend the intellectual property protections on Covid-19 vaccines as guaranteed by the landmark TRIPS Agreement, a global trade pact that took effect in 1995.

The decision has sparked furious debate, with supporters arguing that the decision will speed the vaccine rollout in developing countries. The reality, however, is that even if enacted, the IP waiver will have zero short-term impact—but could inflict serious, long-term harm on global economic growth. The myopic nature of the Biden administration’s announcement cannot be overstated.

Even if WTO officials decide to waive IP protections at their June meeting, it’ll simply kickstart months of legal negotiations over precisely which drug formulas and technical know-how are undeserving of IP protections. And it’s unthinkable that the Biden administration, or Congress for that matter, would actually force American companies to hand over their most cutting-edge—and closely guarded—secrets.

As a result, the inevitable foot-dragging will cause enormous resentment in developing countries. And that’s the real threat of the waiver—precisely because it won’t accomplish either of its short-term goals of improving vaccine access and facilitating tech transfers from rich countries to developing ones. It’ll strengthen calls for more extreme, anti-IP measures down the road.

Experts overwhelmingly agree that waiving IP protections alone won’t increase vaccine production. That’s because making a shot is far more complicated than just following a recipe, and two of the most effective vaccines are based on cutting-edge discoveries using messenger RNA.

As Moderna Chief Executive Stephane Bancel said on a recent earnings call, “This is a new technology. You cannot go hire people who know how to make the mRNA. Those people don’t exist. And then even if all those things were available, whoever wants to do mRNA vaccines will have to, you know, buy the machine, invent the manufacturing process, invent creation processes and ethical processes, and then they will have to go run a clinical trial, get the data, get the product approved and scale manufacturing. This doesn’t happen in six or 12 or 18 months.”

Anthony Fauci, the president’s chief medical adviser, has echoed that sentiment and emphasized the need for immediate solutions. “Going back and forth, consuming time and lawyers in a legal argument about waivers—that is not the endgame,” he said. “People are dying around the world and we have to get vaccines into their arms in the fastest and most efficient way possible.

Those claiming the waiver poses an immediate, rather than long-term, threat to IP rights also misunderstand what the waiver will—and won’t—do.

The waiver petition itself is more akin to a statement of principle than an actual legal document. In fact, it’s only a few pages long.

As the Office of the United States Trade Representative has said, “Text-based negotiations at the WTO will take time given the consensus-based nature of the institution and the complexity of the issues involved.” The WTO director-general predicts negotiations will last until early December.

That’s a lot of wasted time and effort. The U.S. Trade Representative would be far better off spending the next six months breaking down real trade barriers and helping export our surplus vaccine doses and vaccine ingredients to countries in need.

When this waiver inevitably fails to boost production, supporters won’t meekly back off. No, they will step up their haranguing of the United States for having failed to deliver on its supposed promise. There will be lots of yelling and recrimination, and what the Biden administration surely intended as a relatively toothless show of solidarity will instead end up being seen as just another rich country head fake.

That’s a problem for all of us who deeply care about the state of global IP policy, because the damage will be worse and longer-lasting than a diplomatic donnybrook. The United States worked for many years to ratify TRIPS, and since then has been pushing back on the populist anti-IP agenda and trying to convince the rest of the world that robust IP regimes can deliver economic development over the long run. Now much of that work will be undone in the process of this chaotic, and ultimately fruitless, waiver discussion.

Decades of expensive and risky research projects have paved the way for today’s breakthroughs

When COVID-19 came ashore, glaring gaps in the government’s pandemic preparedness became painfully obvious. Everything from inadequate stockpiles of personal protective equipment to confusing and uncoordinated guidance regarding closures hampered our early response.

But while the government floundered, America’s research scientists sprang into action. Moderna actually invented its vaccine mere weeks after the virus was genetically sequenced in January — though of course, it took months of clinical trials to prove the vaccine was safe and 94% effective.

Now, tens of millions of Americans have been vaccinated, and the end of the pandemic is in sight. The credit belongs to strong intellectual property protections, as they enabled scientists to move quickly and raise ample funding for vaccine research.

As a post-pandemic world nears — and we begin to prepare for future pandemics — bolstering America’s IP infrastructure will help equip us for whatever challenges lie ahead.

Decades of expensive and risky research projects have paved the way for today’s breakthroughs. Over the last 10 years alone, drug companies invested more than $1.5 trillion on global pharmaceutical research. And some of that went toward developing the technologies underpinning the leading COVID-19 vaccines.

Notably, that includes mRNA technology. mRNA directs our bodies to produce proteins. And for nearly three decades, researchers have posited that they could use synthetic mRNA to guide the production of proteins that help treat specific diseases.

When COVID-19 started spreading, pharmaceutical company researchers were actively working on mRNA vaccines for the flu, rabies, and Zika. The pandemic necessitated a shift in priorities — and within weeks, Moderna, a small biotech in Massachusetts, and BioNTech, a small biotech in Germany that had partnered with Pfizer a few years prior, began working on mRNA vaccines that essentially instruct cells to create a harmless version of the “spike” protein found on the surface of the coronavirus.

This, in turn, triggers an immune response, which produces antibodies and teaches our body how to fight off future infection. The FDA granted emergency use authorization to the mRNA vaccines from BioNTech/Pfizer and Moderna in December.

The fight against deadly diseases won’t end with COVID-19, of course.

Fortunately for us, America remains at the forefront of the global biopharmaceutical landscape. America is home to less than 5% of the world’s population but roughly half of all international pharmaceutical R&D spending.

That’s largely because of strong IP protections. These protections, including patents, give innovators a fair opportunity to recoup their investment costs before generics firms can manufacture copycat medicines. It takes years to develop a new medicine, conduct clinical studies, and navigate regulatory review. And it costs $2.6 billion, on average, to bring a new drug to market.

Patent protections make it possible for companies to chase state-of-the-art ideas. Ultimately, if a drug maker wants to stay in business, it’s imperative they manufacture innovative products that provide considerable benefit to patients. Those are the types of products that end up changing the world for the better — just like mRNA vaccines are doing right now.

Yet, inexplicably, some have proposed weakening — or outright dismantling — these critical protections. On the home front, these attacks have come from Sen. Bernie Sanders, I-Vt., and Rep. Jan Schakowsky, D-Ill.

It’s not an accident that the overwhelming majority of drugs are developed in countries with strong IP rights. Quite simply, there would be no COVID-19 vaccines without them. America’s pharmaceutical companies delivered the greatest breakthroughs in modern history precisely because our ecosystem incentivizes firms to pursue cutting-edge research.

When the next pandemic arrives, we will have no hope of defeating it if we weaken the one industry that’s best prepared to develop innovative treatments.

By Stefan Dittmer, Partner, Dentons, Germany, and James Pooley, Professional Law Corporation, USA, Members of the ICC Commission on Intellectual Property, International Chamber of Commerce (ICC)

Most kinds of intellectual property (IP), such as patentscopyrightstrademarks and designs, are rights granted by a government. But there is another right that depends only on the choice of an individual business: secrecy. The law protects someone who shares information in confidence with another, but does not require that it be registered with any agency. If there is a dispute, the legal system will sort it out.

Trade secrets have been part of commercial transactions for centuries, as a common and practical way for a business to maintain a competitive advantage. While other forms of IP are carefully limited to creative works that meet a very specific set of requirements, protection for secrets applies broadly to any information that is secret, that has some commercial value, and that the owner has taken some steps to maintain in confidence.

It is this breadth and flexibility of secrecy that make it so attractive, in particular to smaller organizations that may not have the budget to build a portfolio of registered IP rights. Every restaurant can have its secret recipes. Every beauty salon has its customer list and knows the individual preferences of its patrons. Every furniture maker has “tricks” to increase the efficiency or quality of the finished goods. More recently, secrecy has been identified as a means to protect unstructured data, for example, machine data produced in large quantities and used to fuel automation, or algorithms, another key component of the digital industry.

Trade Secrets: the other IP right, featured in an earlier edition of the WIPO Magazine, offers an introduction to trade secrets.

Historical background

The laws of most countries, following the standards laid down in the Agreement on Trade Related Aspects of Intellectual Property Rights (the TRIPS Agreement) protect obligations of confidentiality in business transactions.  The reality of continuing relationships means that the vast majority of those obligations are respected by the participants.

In the United States, trade secret laws had traditionally been a matter left to the individual states. A Uniform Trade Secrets Act was proposed to the states in 1979 and since then has been widely adopted, but with varying provisions that made enforcement on a national scale fairly complicated. In 1996, the federal government enacted the Economic Espionage Act, but it was limited to criminal remedies. Twenty years later, the US Congress passed the Defend Trade Secrets Act of 2016 (DTSA), which for the first time, gave trade secret holders the option to file civil claims in federal court, offering a number of procedural advantages over state courts.

Trade secrets have been part of commercial transactions for centuries, as a common and practical way for a business to maintain a competitive advantage.

In effect, the DTSA has harmonized the rules that apply to trade secret disputes, and the number of cases brought in federal court has surged. As is true in other areas of commercial litigation in the United States, a claim can be made based on circumstances that “plausibly” infer that the defendant has misappropriated a trade secret. After that, a broad array of “discovery” methods, including extensive document production and pre-trial taking of sworn testimony from witnesses, is used by both sides to uncover the relevant facts. Although this easy availability of discovery allows trade secret holders to more effectively enforce their rights, it makes litigation in the United States generally more expensive than in any other country. Coupled with the sometimes-uncertain outcomes and generous damage awards due to the availability of civil lay juries, this environment can be intimidating for companies from other jurisdictions that are used to the more modest cost and predictability of the civil law framework that does not allow for discovery or juries.

Almost at the same time as the DTSA was adopted in the United States, the Directive on the Protection of Undisclosed Know-How and Business Information (Trade Secrets) against their Unlawful Acquisition, Use and Disclosure (Directive (EU) 2016/943 of 8 June 2016, or “EUTSD” for the purposes of this article) entered into force.

Before that, the national laws of EU member states, similar to the laws of any major economy, protected trade secrets one way or another. However, the fragmentation of the legal landscape across the EU was identified increasingly as an obstacle to cross-border technology transfer and R&D or, more generally, innovation.

Pressure from industry and business associations, but also growing political support for the idea of harmonization, not the least the “Europe 2020 Flagship Initiative Innovation Union,” paved the way for adopting the EUTSD. It has been implemented by EU member states. Although full harmonization was not intended or achieved, companies doing business in the EU can expect to find national legal regimes in the member states that are reasonably identical or similar across the entire EU.

Inevitably, the process of introducing the EUTSD reignited the discussion as to whether secrecy is an IP right, after all. It is, in many aspects, an academic issue because even those who question the quality of secrecy treat it in many respects like an IP right. Contrary to the prevailing legal doctrine in the United States, the EU decided against qualifying secrecy as an IP right. As a consequence, Directive 2004/48/EC on the enforcement of intellectual property rights, better known as the Enforcement Directive, does not apply. While individual EU member states, notably Italy and Slovakia, decided otherwise, the practical relevance of this inconsistent approach is limited in that the EUTSD stipulates an enforcement regime quite similar to that of the Enforcement Directive.

This seemingly coordinated effort on both sides of the Atlantic to improve trade secret enforcement was the subject of a study by the International Chamber of Commerce published in 2019.

Recent reform and upgrading of trade secret laws has not been limited to the EU and the United States. In 2018 and again in 2019, China made significant amendments to its Anti-Unfair Competition Law to expand the definition of a protectable trade secret and to increase penalties for theft, including the availability of punitive damages. China further refined its law to address the trade secret owner’s challenge of developing sufficient evidence by declaring a “preliminary” showing of misappropriation sufficient to trigger a requirement that the defendant prove independent development of the information.

Trade secrets and SMEs

What does all of this legislative activity directed at strengthening trade secret laws mean for SMEs? There are two general consequences. First, the subject of protecting competitive advantage by secrecy has received more attention than ever before, with the result that more resources are available to assist SMEs in managing this often-overlooked aspect of intellectual property. Second, businesses of all types and in all countries are challenged to take advantage of this easy-to-use approach, not only to protect their own data, but to avoid unwanted exposure to the trade secrets of others.

Protecting an SME’s competitive advantage by using secrecy requires awareness of what information needs to be protected to retain that advantage, and of the measures available to reduce the risks to its secrecy. Legislation poses virtually no limit to the kind of information that can be claimed as a trade secret; it can be any kind of information, as long as “it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question” (the TRIPS Agreement, Article 39), and derives from its secrecy some actual or potential commercial value. Of course, the information must be distinct from individual skill, which is outside the scope of legal protection.

Protecting an SME’s competitive advantage by using secrecy requires awareness of what information needs to be protected to retain that advantage, and of the measures available to reduce the risks to its secrecy.

The more challenging aspect is to identify and apply security measures that are “reasonable,” since every control brings with it a certain cost, either in money or efficiency or both (consider, for example, the annoyance of dealing with two-factor authentication, in which you have to wait for a unique code to be sent to your phone). What is reasonable under the circumstances will be decided ultimately by a court taking into account a company’s risk environment, the value of the information, the threat of loss and the cost of measures to mitigate the risks.

To identify its most important trade secrets, the business should consider the value of the information, measured by the investment made to develop it, the potential advantage it provides over the competition, the potential damage from loss of control, its exposure to any form of reverse engineering (which is, in principle, allowed in most jurisdictions), and/or the likelihood that a competitor might independently discover or develop it.

Once information has been identified as a valuable trade secret, the company needs to carry out realistic risk assessments to determine appropriate security controls. Introducing different classes of information with corresponding security measures can be useful to structure the process of managing trade secrets. Other parts of this process may include labeling the information in accordance with its classification, restricting access to those with a need to know, applying other physical and electronic safeguards and using properly drafted confidentiality (or non-disclosure) arrangements in situations where information must be revealed to a supplier or other business partner.

In the EU, the adoption of Regulation (EU) 2016/679 (General Data Protection Regulation) helped to raise companies’ awareness for data security. Technical and organizational measures, mandatory under the General Data Protection Regulation (GDPR), Article 32, to protect the secrecy and integrity of personal data, can also be “reasonable steps under the circumstances” to preserve the confidentiality of trade secrets.

SMEs, for the very reason that they often rely on secrecy rather than registered rights to protect their IP, are particularly prone to the threat of becoming targets of industrial espionage. For them, it is essential to not only apply high levels of cyber security, but to update and upgrade them regularly to remain on top of technical developments. After all, what is “reasonable under the circumstances” is subject to change due to technical progress and the relative value and threat variables, which may change over time.

While cyber-crime is on the minds of many businesses, the most prevalent threat to the preservation of secrecy are individuals who, while employed by the company (or by a trusted supplier), legitimately hold or have access to the information, but leave the company and carry the information to their new employer. In addition to contractual confidentiality obligations that should be standard in any employment agreement, IT surveillance within the limits of employment and data privacy legislation, frequent training on applicable duties, and a diligent exit process, including exit interviews, can help mitigate the risk. So can an established and well-communicated practice of strict enforcement in cases of security breaches. And not to forget that third party information illegally brought into the company by new hires also poses a threat to the company’s position, making it important that recruiting and on-boarding processes are reviewed.

Thanks to recent improvements in trade secret laws around the world, SMEs have more options and opportunities to increase enterprise value and prevent loss of data assets by using the IP right that is entirely in their control: trade secrets.

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The Journal spoke with Jim, who shared his thoughts on the importance of trade secret protection in the global economy and how the Defend Trade Secrets Act (DTSA) has affected this practice area in the two years since it was signed into law. The following is an excerpt from the discussion.

Thank you for joining us, Jim. Can you give us a little background about where you grew up and whether there were any signs in your childhood that indicated an interest in intellectual property law?

I grew up in Wilmington, Delaware, where I think everyone in the community was affected to some degree by DuPont and the chemical industry. But I wasn’t very interested in science myself. I've frequently told people that my high school teachers would be very amused to find out what I've been doing as an adult.

I loved college geology because it got me outdoors, but the chemistry of it was a challenge. So, there wasn't anything about my upbringing that anticipated what I ended up doing. I was just very lucky to have landed in Palo Alto, CA, in the early 1970s after law school.

What would your classmates most remember about you from high school?

Well, they probably would remember me mostly as a Boy Scout. That was my main activity.

They would also remember me because my buddies and I created a feature-length movie our senior year. We went out and rented a camera and bought some 16-millimeter film and did a kind of James Bond spoof built around the school. It was a ton of fun.

Since then, you have developed world-renowned expertise in trade secret law. How did you decide to specialize in this area of law?

I certainly didn't plan that. I arrived in Palo Alto in the summer of 1972, having received a summer-job offer from an 11 lawyer firm, which is now Wilson Sonsini.

As Silicon Valley was developing, people were often leaving one company and moving to another, and very frequently, there were lawsuits against the people who left to do these startups. There weren’t so many lawyers around Palo Alto at that time, so I ended up working on these trade secret lawsuits simply because I was there, and I was a trial lawyer working with companies where these issues came up a lot.

After I had been doing this about seven years, I noticed that there was a common theme to every one of these cases, which was that someone had done something really dumb. And so it occurred to me that if people understood the basic rules of the road in leaving one company to go to another, and respecting the integrity of the trade secrets that they'd left behind, these lawsuits just wouldn't happen anymore.

Working with a publisher that I met on one of my cases, I decided to write a book on trade secrets, which was published in 1982, and six weeks later, a very big trade secret case broke, IBM-Hitachi, a criminal case where Japanese executives were being taken in handcuffs to the federal courthouse in San Jose. When the media needed someone to comment on what was going on, my book happened to be on their desk. So, it was another case of being in the right place at the right time. I started providing a lot of public commentary on trade secrets, and between that and the experience that I had developed, I just fell in love with this practice area. I eventually started teaching it, and then wrote a treatise.

It's now been a little over two years since the federal DTSA was signed into law. You recently testified before the House Judiciary Committee in D.C. as to whether the DTSA was working as intended. In your view, what were the problems that the DTSA was designed to solve?

The main issue was the patchwork nature of the laws and procedures that faced anyone who needed to enforce their trade secret rights. There was an array of state laws which varied to some extent and were administered at state- or county-level courts, making it a real challenge for companies that had actors in multiple states or internationally to address their concerns.

Many years ago, trade secret cases tended to be local, in part because information traveled only on paper, but once we moved into the computer age, and particularly the networked era, that old system of dealing at a state or local level with trade secret disputes wasn't working very well.

And so, the main reason for bringing federal civil law into the picture was to provide trade secret owners an opportunity to use the federal system, with its nationwide service and its common rules.
Now, when the act was first being considered, most of the focus was on a specific provision of the act that addressed ex parte seizures. That was something useful for a narrow set of circumstances, where you had some specific secrets that were about to be taken from the jurisdiction or destroyed unless you got very fast relief.

Do you believe the DTSA has accomplished its goals?

Yes, it has, or I should say it's well on its way to doing that. One of the expected advantages of having this federal system installed as an overlay – not as a substitute – in state-law adjudication of trade secrets was to achieve some level of harmonization. If you get harmonized rules and approaches, then enforcement of rights becomes more predictable and easier. We are starting to see federal courts look to the decisions of state courts that use the Uniform Trade Secrets Act, and state courts are now referring to federal court decisions. And federal judges in different districts throughout the country are referring to each other's decisions.

Plus, I think it's fair to say that those who thought that it might overwhelm the federal system are happy to see that there hasn't been an avalanche of cases. There's been a noticeable, but modest, increase in the workload of the federal courts over trade secret cases.

Do you foresee the need for any further tweaks or changes to make the DTSA even more effective?

There is one unsettled area that I think could benefit from greater attention, either legislatively or perhaps through the courts, and that has to do with the extra-territorial application of the DTSA. It's not entirely clear to what extent the DTSA applies to trade secret misappropriation that happens outside the U.S.

Section 1837 of the Economic Espionage Act, into which the DTSA was inserted, states the intent of Congress to apply the law extra-territorially as long as at least one act in furtherance of the offense happened in the U.S., or the offender is a U.S. citizen or permanent resident. And as you can tell from my emphasis on the words "offender" and "offense," that section is a little bit awkward to apply in a civil cause of action. In Sections 4 and 5 of the DTSA that were not codified, but were part of the bill, Congress found that any misappropriation of U.S.-based trade secrets occurring overseas must necessarily have an impact in this country, on our economy, lost jobs, etc.

If you take that expression by itself, that may be enough under existing Supreme Court jurisprudence to indicate that the law should be applied extra-territorially in a general way, but we don't know yet. We really don't have a definitive ruling from the courts, but we know that from the way trade secrets have to be distributed around the world as part of modern commerce, misappropriations happen overseas. And so, it will be very important over time to get clarity on the extent to which the DTSA can provide a robust tool for owners of secrets that happen to have been misappropriated outside of the U.S.

In your congressional testimony, you cited a National Science Foundation Census Bureau survey in which companies rated the importance of different types of IP laws in protecting their competitive advantages. According to the survey results, trade secrets were rated number one, rated at more than twice the level of patents. Did those results surprise you?

They did not surprise me. The first reason is that they were consistent with a similar survey that had been done in 2000 that indicated secrecy was at the forefront of measures taken by companies to protect competitive advantage. And it also was consistent with my own observations in working with companies regarding their intellectual-property and commercialization strategies. In many industries, like pharma and biotech, patents form an existential part of doing business, but for many other industries, they are simply one of a series of tools that are available.

And even in pharma and biotech, the secrecy of research and development is enormously important. It's important in order to preserve competitive advantage. It's important in order to be able to ever get a patent because you have to treat it as a trade secret to begin with.

As important as patents are, there is only a narrow band of information that qualifies as a patentable invention that's novel and not obvious, whereas trade secret law applies to protect any kind of information that's helpful to a business. And so the coverage is massively greater in terms of applying to information assets of modern business.

Over the past 40 years, we've shifted from a tangible asset-based economy to an intangible asset-based economy. In other words, data have become the primary asset of business these days, and data are protected mainly by secrecy. So no, the results of that survey did not surprise me, and I see it only going in a similar direction in terms of the impact of secrecy as a management tool going forward.

In light of IP-rights challenges, patentability restrictions such as Alice, and stricter damage standards in patent matters, it seems that the value of obtaining patents has taken a hit. Should companies re-evaluate the importance of trade secrets in their IP-protection strategies?

Yes. In industries where patentability issues have been hit pretty hard, looking at secrecy as an alternative way to protect information assets is extremely important.

In speaking to friends who are running intellectual property programs inside major companies, many of them have overseen a shift in the way that the company deals with their patent program. Everyone in the past had a patent committee that looked at disclosures and decided what to patent. Generally speaking, when something was determined not to justify patenting, it more or less fell to the cutting-room floor. These days, the approach is how you're going to protect these innovations if not through the patent system. How are we going to make sure that somebody in the organization is assigned to that task so that these assets get properly managed.

What are some of the decision points for a company to consider in determining whether to protect IP with patents, as opposed to trade secrets, understanding that once a trade secret is disclosed, the trade secret is gone? In addition, for some ideas and technologies, if you are going to sell it in the marketplace, that would be a big concern for using trade secrets if a competitor could take a look at it, reverse-engineer it, then figure it out on their own.

If you are putting out a product or service that reveals to the world the secrets of its composition, then you've lost it. You might have some first-mover advantage, but that's basically it.
And so, in situations where the innovation can be seen immediately or is relatively easy to reverse-engineer, you are much better off trying to find a way to use the patent system because you can get that extra period of protection.

On the other hand, we have the situation where innovations that are commercialized in secret, like process technology, are typically better protected by secrecy than by patenting because if you patent it, then you teach the world what it's all about.

In the 1940s, DuPont developed a revolutionary method for processing titanium dioxide and decided to maintain it as a trade secret rather than seek a patent. And that was, in part, because if someone else was using the process, particularly in a foreign country, there would be no way that they could find out. And so the best way to protect it was to keep it a secret, and they successfully did that for decades and decades, way longer than they would have had any patent protection. And they were able to spin off the business for a couple of billion dollars a few years ago. So, in the cases where you have technology that cannot be easily reverse-engineered, that's a very important reason to use secrecy instead of a patent.

Of course, there are some innovations that have such a short shelf life that patenting would almost be a waste of time. By the time you get the patent, it's no longer an advantage. So, one of the things that companies look at is: How long do we expect to be able to exploit this?

No matter how broadly trade secrets are used and applied, patents offer a unique kind of strength because patents allow you to exclude anyone else in the country from practicing the innovation, whereas with trade secrets, you take the risk that someone else is going to come up with the same thing and may even publish it. And so, you may lose the benefit at any time. So, patents are stronger, and particularly if you're preparing to license some of your technology or want to be able to do that, it's a good thing still to wrap it in a patent because it's generally easier to value.

For companies that decide to pursue trade secret-protection strategies for certain assets, are there any particular trapdoors or cautions that they should avoid to make their trade secret-protection strategies more effective?

The most important idea, and the most significant driver of success, is paying attention to the management of these assets. Many companies tend to think about them as kind of soaked into the woodwork, and they don't pay enough attention to the importance of active engagement.

These assets are volatile; they are vulnerable to loss. Studies have shown that 80 percent to 90 percent of information loss happens through employees or contractors who are trusted with access to these very important assets.

The biggest trapdoor for businesses is failing to focus on information security risk management. So much can be done in this area just by ensuring that you have the right policies and procedures in place, you're doing the right training, you have the right people involved running the program, you’re reviewing it for effectiveness over time, and so on. It doesn't take a whole lot of effort, and in any event the effort aligns with most companies' existing risk management and compliance programs.

At Stout, our team is involved in determining damages in disputes involving many different types of intellectual property. It appears to us that remedies for trade secret damages are still pretty wide open compared with damage remedies for other types of IP. Do you foresee that the DTSA might impose some stricter discipline in the determination of trade secret damages?

That's a very good question, and I think it's quite possible that we will see more frameworks and restrictions on trade secret damages simply because we have federal courts handling these cases under federal law. I would not be surprised if over time, we see some very illuminating commentary in the issued opinions of federal courts on what are the boundaries and touchpoints for calculating damages in trade secret cases.

Having said that, it's really important to remember the basic difference between patent damages and trade secret damages. Patent damages are based on the analysis of rights created under a federal statutory framework, and so, the issue has attracted a great deal of attention and analysis over the years, all grounded in the statute.

Trade secret damages ultimately and historically are grounded in the common law of tort, and tort law is designed mainly to provide full compensation to the victims of a wrong. Remember: Patents are a no-fault system. Trade- secret misappropriation is about fault, and so, that fundamental aspect of the law of secrecy informs how courts generally look at damages. So, you will see judges being very flexible in favor of the plaintiff because that's fundamentally how the law is supposed to work.

The DTSA provisions on damages are a direct reflection of the rules under common law, which provide the greatest recovery possible under several different theories: plaintiff’s loss, defendant’s gain, or a “royalty” measure. The plaintiff has a choice and can use one or two or three of them as long as they aren’t duplicative, and that means that, generally speaking, you can get what looks like very big verdicts that aren't constrained by some finer points of law, as you do with patents.

What should companies understand about the distinctions and differences between internal trade secret theft, such as theft by departing employees, and external trade secret theft, such as competitive espionage or hacking?

In general terms, the external, hacking-related espionage theft is more limited and harder to control than the internal issues. There's only so much you can do about hacking. It's important to address issues around information systems, your network, and to ensure that you've done as much as you can afford to do to install systems that allow rapid detection and response when you have a problem. But as we all know, there's a technological arms race where cyber hackers are concerned, and there's a limit to how much you can assure yourself that you are fully protected.

In contrast, we have frequent losses from internal operations through those whom we trust on a day-to-day basis that have access to our information. The most obvious example is the regular employee who is allowed access to the company's systems through a smartphone or a tablet or personal computer. And they take this everywhere they go, often using it to engage in robust sharing of everything that's happening in their life because they've been trained by social media to understand that sharing is good.

This is the same population that we have to deal with when they come in the next morning with those smartphones that they now use to access the company's networks as well as external ones. So, figuring out how to address the behavior of the workforce that has access to the secrets and training them to understand what the company considers to be confidential and their role in protecting it is, in my experience, far more effective in terms of mitigating the risk of loss than another program directed at cyber security.

Good advice. You are currently participating in a Sedona Conference Working Group on trade secrets, whose mission is to develop a set of guidelines to help federal and state judges do a better job in handling trade secret cases, and help companies do a better job in managing their intellectual assets. Can you give us a progress report on the activities of this working group?

The progress is very good, but we are still in the early stages. We are focusing on two topics to begin with. The first one relates to the issue of trade secret identification. The second one is about the employee life cycle. In other words, addressing the protection of secrets throughout the time that an employee comes, is recruited into the company, is trained, is supervised, and ultimately exits the company, and how companies should be looking at managing those issues.

At the end of a multiyear process, we expect to have a number of consensus-view statements on best practices for litigation and for managing information security within the company.

From 2009 to 2014, you served as deputy director general of the World Intellectual Property Organization. What were your impressions of the relative importance of intellectual property protection in the U.S. compared with other countries?

IP protection has always been very important to us as an economy, playing a critical role as a supporter and an accelerant for innovation in most industries. Over the years, the U.S. has been a leader in the international effort to promote the use of strong intellectual-property laws as a way to achieve economic development.

History teaches that countries that have thoughtful, robust intellectual property systems are much more likely to nurture domestic-innovation economies. And so, if they want to go in that direction, they need to embrace IP. You see it happening right now in China, where 15-20 years ago, there was a lot of concern that the Chinese economy was basically copying and not innovating. Now China has some leading world-class companies in many industries. And they have built a very strong patent system to support its domestic economy. This happened decades ago in Japan. It then happened in Korea.

In your recent congressional testimony, you sounded an alarm regarding 28 U.S.C. Section 1782, in which you suggested there is a danger in allowing foreign litigants to have access to testimony and other evidence from U.S. courts for use in foreign proceedings. You called this practice a one-way street for the acquisition and export of U.S. information. Please explain your concerns and what you think Congress should do to allay those concerns?

At a general level, I called this a one-way street because we offer this opportunity for foreign litigants to come here without insisting that they provide the same kind of access to evidence in their own countries. I think that the original assumption behind the statute was that if other countries saw how transparent and open we were about access to evidence, that they would institute similar procedures in their own countries, and we would achieve some level of reciprocity.

That has not happened, though, and there is no reciprocity built into this statute. The experiment has failed in terms of encouraging other countries to provide similar mechanisms so that U.S.-based organizations can get access to information in those jurisdictions. There is not a level playing field.

My more specific concern had to do with the maintenance of secrecy and confidentiality of information that's being handled in foreign jurisdictions. The assumption in most countries is that information that comes into a court is going to be publicly available.

This is certainly true throughout much of Europe, and it's one reason why the Europeans have drafted and promulgated the EU Trade Secrets Directive, one part of which requires that member states enact laws that will provide protections for confidential information that is produced in litigation.

And so we have this fundamental insecurity that exists in many other countries for information that's being handled by courts and, of course, by government agencies. Because 1782 applies very broadly to any court tribunal, and that includes, we now know, agencies of foreign governments, the information that's being sent over through Section 1782 necessarily is put at some level of risk.

What I suggested to Congress is that it require the federal judges who hear these petitions to engage in some analysis of the risk to the information and to require that protections be instituted in foreign jurisdictions for its use. This would be done as a condition of making the information available – get assurances that it will be protected when it gets to the foreign country. Some judges do that now on an ad hoc basis, but there's nothing in the statute that requires it.

Looking into your crystal ball, which industries or markets do you foresee as being most likely to face future IP challenges, and what do you see those challenges as being?

Any company that has to deal globally with secure information faces very high levels of risk in most other countries in the world. One of the reasons trade secret protection works well in the U.S. is that we have fairly easy access to proof. If you suspect that some secret has been stolen, you can start litigation and then get the information you need to prove what happened. In most of the rest of the world, you can't do that.

And so I hope over time that as a result of various actors, governments, and industry speaking about these issues and engaging in dialogue, we can find a way for companies, when they suspect they have a problem, to find and get access to the information wherever it is. This can happen in different ways.

I'm not suggesting that other countries adopt the U.S. system of litigation discovery, which has, in many ways, overburdened us, but there are ways, even in civil-law systems, to set up frameworks and protocols for the victim of a misappropriation to be able to get access to data, either through some form of seizure process or lowering the standard of proof that is required to initiate an action, and requiring the defendant to come forward and prove that it developed the information independently.

If we want to fully support companies that drive the global economy, we have to find ways to more realistically enforce trade secret rights.

Any last words of caution for our readers?

We just saw the Waymo v. Uber (“Waymo”) case, which is a reminder of the importance of managing risk around these very important assets. When Uber hired this fellow, [Anthony] Levandowski, away from Waymo, it took on a level of risk that it should have appreciated was almost existential for the company.

And yet, what it did about it actually exposed the company to more risk. Now, I'm not trying to make the point that Uber screwed up, but it's a reminder of the things that can go wrong in a rapidly evolving technological landscape, which is something that applies to an awful lot of companies these days.

When you hire away smart, experienced talent from a competitor, you face the risk that your valuable data assets may be tainted in some way, which could be a potentially massive problem. It is imperative to have careful management of these issues because they just don't come up in the same way that patent and copyright and trademark issues do – kind of clean and predictable. They tend to sneak up on you when you're not watching, or perhaps distracted by the excitement of an acquisition. Once you’ve been infected with someone else’s confidential data, extracting it can be complicated and expensive.

The Defend Trade Secrets Act came into effect a year ago, for the first time giving trade secret holders the option of filing misappropriation claims in US federal courts. Its launch has been smooth, calming initial fears about potential abuse of its ex parte seizure provisions. The traditional state law system for enforcement remains intact, and is the preferred forum for localised disputes. But for cases involving actors at the national or international level the new platform provides clear advantages, and over 300 complaints have been filed. The DTSA's whistleblower protections may have been weakened by a court decision that refused to dismiss an action against a reporting employee. But in general there have been few surprises, with federal courts interpreting and applying the new law consistently. Major issues remain for clarification, chiefly the extent to which the DTSA will apply to acts of misappropriation occurring outside the US

Published in the George Mason Law Review, Volume 23, Number 4, Pages 1045-1078

Civil claims for trade secret misappropriation have always been grounded on state law, with only limited access to federal courts. That would change with the Defend Trade Secrets Act (S.1890) now pending in Congress as an amendment to the Economic Espionage Act. The proposed law enjoys broad industry and bipartisan political support, and was favorably reported out of the Senate Judiciary Committee on January 28. Most of the focus to this point has been on the need for a federal option when misappropriation occurs across state or national borders. But at the recent hearing a new amendment was proposed and accepted that would have an impact well beyond the original legislation. Suggested by Senators Patrick Leahy and Chuck Grassley, this part of the law would provide immunity under federal and state law to whistleblowers who confidentially report suspected illegal activity to the authorities.

The idea for this proposal originated with a draft article, Tailoring a Public Policy Exception to Trade Secret Protection, recently posted by Professor Peter Menell of the UC Berkeley School of Law. Professor Menell was confronting what should be a rather obvious issue: how do we support and encourage the private disclosure to government of needed information about possible wrongdoing, while recognizing the legitimate secrecy interests of business owners? It turns out that current law does not provide a clear answer, and this has negative consequences for whistleblowers and law enforcement.

Although an exception of sorts exists for personal disclosure of trade secrets in the public interest, it is expressed in vague terms that require a balancing of interests in the context of case-specific facts. For example, the Restatement (Third) of Unfair Competition § 40, comment c, states that “a privilege to disclose another’s trade secret depends upon the circumstances of the particular case, including the nature of the information, the purpose of the disclosure, and the means by which the actor acquired the information.” You might imagine that an employee, discovering evidence of corporate wrongdoing, should be comfortably protected by this principle when taking that evidence in confidence to the government. But you would be wrong.

In cases where the whistleblower has reported illegal activity through a qui tam action under the False Claims Act, 31 USC § 3729, some companies have reacted by asserting claims against the former employee for having misappropriated the very secrets that made the action possible. Claims have even been filed against the whistleblower’s attorneys for their part in their client’s alleged violation of a standard nondisclosure agreement. Arguments against applying a public interest exception include that the former employee took too much information, or should have reported their concerns in some other way. In any event, the limited case law and ambiguous formulation of the exception expose potential whistleblowers not only to the expense of litigation but also to its inherent personal stress.

And the risk of litigation is only one of many negative consequences that can result from reporting internal evidence of wrongdoing. As Professor Menell explains, studies show that whistleblowers frequently suffer job loss or demotion, personal shunning or blacklisting. This affects their finances, their families and their health. As one researcher put it, “the surprising part is not that most employees do not talk; it is that some talk at all.”

When employees know of illegal activity but are too scared to come forward, the public suffers. The insider typically is in a unique position to provide the evidence, which then remains walled up within the organization. On the other hand, businesses have a compelling need, particularly in the modern information economy, to protect their legitimate trade secrets from exposure, and sometimes whistleblowers are wrong, driven by self-interest. But at the moment there is no reliable way to balance and protect all these interests by ensuring that the relevant information can get to the officials who can consider it in confidence and make a decision on whether to proceed.

The Leahy-Grassley amendment appears to do this well, adopting what Professor Menell calls a “sealed disclosure/trusted intermediary” approach. Specifically, the amendment would rephrase 18 USC § 1833(2) (defining exceptions to the EEA) to provide that a person may not be held criminally or civilly liable for disclosure of a trade secret, if the disclosure is made (a) in confidence to a government official or to an attorney and (b) for the sole purpose of “reporting or investigating a suspected violation of law.” Immunity would also apply for disclosures made in a complaint or other filing, but only if done under seal. Nondisclosure agreements presented to employees or contractors must contain a notice of the immunity, at least by reference to the company’s relevant policy document. (Failure to provide the notice will forfeit the right to recover attorneys fees or enhanced damages against the employee under the DTSA.)

Significantly – and this point was emphasized by Senator Dianne Feinstein at the January 28 hearing – the amendment would not protect any otherwise wrongful behavior of the employee, such as hacking a computer system in violation of the Computer Fraud and Abuse Act.

If the amendment survives and becomes law, it is not likely to create substantial new burdens or risks for employers. Statutory notice provisions have been required in employee NDAs for decades, as a result of state laws protecting the rights of individual inventors. Recent action by federal agencies like the NLRB and SEC have signaled that employee contracts must expressly confirm the individual’s right to share and report certain kinds of information. And although there is always some incremental risk when secret data is provided to the government, experience has shown it to be manageable.

The benefit to the public of this new approach could be profound. Government plays a central role in the modern economy, and can only enforce rules affecting safety, public health and financial integrity when it has access to information about what might be going wrong. Whistleblowers are usually the best source of this information, but they will almost never come forward if they face the risk of being sued for violating obligations of confidentiality. The DTSA whistleblower amendment provides a sensible answer: a safe harbor for disclosures in confidence to the government.

The Defend Trade Secrets Act (S.1890) would for the first time allow trade secret plaintiffs to file their cases directly in federal court. The proposed law was favorably reported out of the Senate Judiciary Committee on Jan. 28, but with an important amendment protecting the right of employees to change jobs. Specifically, the bill requires that there be evidence of threatened misappropriation to justify an injunction putting limits on what an ex-employee can do. Although some might see this as reinforcing some states’ (particularly California’s) rejection of the “inevitable disclosure doctrine,” its practical effect instead should be to reframe the discussion away from that abstract doctrine and toward the kind of evidence necessary to prove a threat.

Forty-seven states have adopted the Uniform Trade Secrets Act. The injunction provisions of the UTSA permit a court to enjoin “actual or threatened misappropriation” of a trade secret. In 1995, the Seventh Circuit decided Pepsico v. Redmond,[1] approving a temporary injunction against a senior marketing executive, who had lied about his future plans, from starting work in the same position for a direct competitor. The court explained that the UTSA allowed an injunction when the “defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.” This abstract phrase, detached from the facts of the case, came to be known as the “inevitable disclosure doctrine.” And because it was assumed to mean that employees could be enjoined merely because of how much they knew, it was widely condemned within California and other jurisdictions where policy and law strongly favor of mobility of labor.

“Inevitable disclosure” as an alternative to proving “threatened misappropriation” was rejected with strident language in Whyte v. Schlage Lock.[2] But in Central Valley General Hospital v. Smith,[3] another California court considered the question that Whyte had left unanswered: what evidence would be necessary to infer a “threat” under the UTSA. It concluded that while merely knowing the secret information was not enough, courts could intervene, for example, if the defendant had previously misappropriated trade secrets, or intended to misappropriate, or had refused to return confidential materials. In other words, bad behavior could provide the necessary inference of a threat.

In other states, where courts were presented with facts similar to Pepsico — that is, where the defendant had behaved in a way that made it unlikely he could be trusted — injunctions were sometimes issued, and judges called what they were doing an application of “inevitable disclosure.” See, e.g., Barilla America Inc. v. Wright.[4] As a result, commentators gradually settled into using the phrase without closely inquiring how it was being applied, and dividing jurisdictions according to whether they embraced or rejected “inevitable disclosure,” without questioning its meaning. California and a few other states were said to have rejected the doctrine, while many others had accepted it. But even in the states where it was accepted, judges almost always applied it only in cases where there was some evidence of bad behavior. See, e.g., Bimbo Bakeries USA Inc. v. Botticella.[5]

In other words, a false conflict had been created, and the evil that the Whyte court had railed against was mostly a phantom menace. But because the received wisdom was that inevitable disclosure could restrain someone from taking a new job without any evidence to support the inference of a threat, opponents concluded that employee mobility was protected only in California or in other states that had rejected the “doctrine.” And so when the DTSA was proposed last year, using precisely the same injunction language as the UTSA, they expressed concern that it might allow federal judges sitting in those jurisdictions to ignore state court rulings and apply the inevitable disclosure doctrine to enjoin an employee from taking a new job only because they knew too much. This was true even though the DTSA was expressly non-preemptive and had added language prohibiting an injunction that would “prevent a person from accepting an offer of employment under conditions that avoid actual or threatened misappropriation.”

After the Judiciary Committee held its hearing on the DTSA in early December, we continued to hear concern that this language would not be sufficient to protect employees from “inevitable disclosure” injunctions. Stanford Professor Mark Lemley and I then suggested a different approach, one that would direct federal judges to determine the existence of a threat based on the employee’s behavior rather than on what he or she knew. In the recently approved “substitute” bill, new language proposed by Sen. Dianne Feinstein, D-Calif., prohibits any injunction against “entering into an employment relationship” and requires that “conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows.”

Other amendments to the DTSA have also improved it, including bringing the limitations and enhanced damages provisions into line with the UTSA, tightening up the already strict requirements for an ex parte seizure order, and creating a new and important exception to protect whistleblowers who need to disclose confidential information in order to report a crime to the authorities. But in terms of widespread impact on the greatest number of trade secret cases, the Feinstein amendment stands out, because it would establish a national standard reflecting the value of employee mobility. Rather than arguing about abstractions or labels, and without affecting any state law or policy on noncompete agreements, courts will apply the statutory language that allows injunctions against threatened misappropriation, focusing on the quality of evidence needed to prove a threat.

In the process, we may have banished the ghost of inevitable disclosure.

[1] 54 F.3d 1262 (7th Cir. 1995). [2]101 Cal. App. 4th (2002). [3]162 Cal. App. 4th 501 (2008). [4]2002 U.S. Dist. LEXIS 12773, *25-26 (S.D. Iowa 2001). [5]613 F.3d 102, 118 (3d Cir. 2010).

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