United States: Killing The Golden Goose: The Dangers Of Strengthening Domestic Trade Secret Rights In Response To Cyber-Misappropriation

Last Updated: June 20 2014

Article by Zoe M. Argento*

ABSTRACT

Hackers all over the world exploit our reliance on computer systems to take American trade secrets. The response will likely be a dramatic strengthening of trade secret law. Congress has already passed statutes strengthening trade secret law, and more bills are pending. The alarmist rhetoric on cyber-risks to trade secrets, however, ignores the most dangerous risk. By over-reacting to the threat of cyber-misappropriation, we may suppress the innovation and competition that produce our trade secrets in the first place. This paper uses an array of studies on cyber-risks and trade secret litigation to show that bolstering trade secret rights will have little effect on cyber-misappropriation. The evidence indicates that trade secret holders cannot and will not pursue cyber-misappropriators in court for technological and business reasons, not for legal reasons. Worse, strengthening trade secret law will cause significant collateral damage. Trade secret holders will use stronger trade secret rights in other types of misappropriation cases to impede follow-on innovation, restrict worker mobility, dampen competition, and hamper public access to useful information. In short, the costs outweigh the benefits of bolstering trade secret law to combat cyber-misappropriation of trade secrets.

In one of Aesop's fables, a farmer had a goose that laid golden eggs. Hoping to discover the source of the gold, he killed the goose. The farmer found nothing, and that, of course, was the end of the golden eggs.

In 21st century America, a different form of golden eggs is under threat—immensely valuable trade secrets encompassing much of the innovation and business strategy that power our economy. Cyber-hackers all over the world have dedicated their efforts to breaching American companies, research institutions, and government agencies to take them. Many of these hackers are well-organized and well-financed. Some are even state-sponsored. In January 2013, for example, the security firm Mandiant reported that a unit of the Chinese army had breached 115 American companies, sometimes retaining clandestine access over the course of years.1 The problem of cyber-intrusion is pervasive and growing. For example, in one survey in 2011, companies reported an average of 1.4 successful attacks per week, a 44 percent increase from the previous year.2

Our worries over losing trade secrets to cyber-intruders, however, may lead us to kill our own golden goose—the vigorous competition and culture of innovation that produce our trade secrets.

One of our greatest strengths as a nation is our innovative and entrepreneurial culture. Our country produced the airplane, the assembly line, the laser, the personal computer, the internet . . . the list goes on and on.3 Innovation is a key driver of U.S. economic growth and national competitiveness.4

The success of American innovation stems from many factors— capital markets, an educated populace, infrastructure, funding for basic research, among others—but one important factor is our system of intellectual property law, particularly trade secret law.5

In essence, a trade secret is information that derives value from not being known to competitors. Trade secrets play a critical role in supporting innovation in the United States. For example, in one study, secrecy ranked first or second in importance for product innovations in "twenty-four of the thirty-three surveyed industries."6 Trade secret law particularly favors small companies, which tend to be engines of innovation, because the hurdles to obtaining trade secret protection are relatively low.7 In contrast to patent law, trade secrets require only reasonable efforts at secrecy from the trade secret holder to earn legal protection.8 Moreover, trade secret protection may potentially last forever.9

Trade secret law, however, like other areas of intellectual property law, must strike a careful balance. Too little protection results in inadequate incentives to develop useful information and wasteful expenditures on protection.10 Too much protection causes harm in a number of different ways. By granting too much of a monopoly on trade secret information, trade secret law prevents companies from competing to provide better products using that information.11 Over-protection also decreases worker mobility by preventing employees with knowledge of their employers' trade secrets from departing to work for competitors or to start their own companies.12 This restricts personal freedom and economic dynamism. Monopolies on trade secret information inhibit follow-on innovation, a problem because most innovation builds on innovation.13 Finally, overbroad trade secret law limits free speech and restricts the flow of information important to the public.14 For example, natural gas companies shield information about their potentially dangerous hydraulic fracturing practices from regulators and the public by arguing that they are trade secrets.15

The rhetoric among political leaders on trade secret cyber-misappropriation ignores this delicate balance of conflicting policy concerns. An otherwise obscure area of the law, trade secrets have been the subject of an unprecedented level of attention recently due to concerns about cyber-hacking. President Obama, high-ranking members of his administration, and members of Congress have all loudly voiced concern.16 Fueled in part by national security concerns about the cyber-hacking of military secrets, the rhetoric from these political leaders has tended to be alarmist, protectionist, and moralistic.

This one-sided concern with protecting trade secrets is leading to a dramatic strengthening of trade secret law. The Obama administration is now conducting a legislative review to determine if more legislation is needed to enhance enforcement against trade secret theft.17 And a number of parties are advocating strengthening civil trade secret law by federalizing it. Indeed, four bills have recently been proposed in Congress to federalize civil trade secret law by adding a private right of action to the Economic Espionage Act (EEA).18 This would significantly increase the rights of those wishing to protect information. Strengthening trade secret law, however, will likely do little to combat cyber-misappropriation. This paper uses an array of studies of cyber-risks and trade secret litigation to show that trade secret holders cannot and will not pursue cyber-misappropriators in court for technological and business reasons, not for legal reasons. Worse, strengthening trade secrets will cause significant collateral damage. Trade secret holders will use stronger trade secret rights in other types of misappropriation cases in ways that will impede follow-on innovation, restrict worker mobility, dampen competition, and hamper public access to useful information, including for purposes of free speech. In short, the political rhetoric ignores the fact that the costs outweigh the benefits of bolstering trade secret law to respond to cyber-misappropriation of trade secrets. The argument is set forth in the following three parts. Part I outlines trade secret doctrine and policy, explaining how trade secret doctrine balances conflicting policy concerns. Part II discusses the cybersecurity threat to American trade secrets and the political response. This part shows how the political rhetoric has linked protecting trade secrets to emotionally resonant issues, including national security and job loss, and is leading to the strengthening of trade secret law. Part III shows how expanding trade secret rights, particularly by adding the private party right of action under the EEA, would likely harm innovation as well as other policy interests.

To read this article in full, please click here.

Originally published by Yale Journal of Law & Technology.

Footnotes

* Associate Professor, Roger Williams University School of Law. The author would like to thank Sharon Sandeen and David Levine for their comments and Mackenzie Flynn and Ryan McCaffrey for their research assistance. Mistakes, if any, are the sole responsibility of the author.

1 MANDIANT, APT 1: EXPOSING ONE OF CHINA'S CYBER ESPIONAGE UNITS 21 (Jan. 2013), available at http://intelreport.mandiant.com/Mandiant_APT1_Report.pdf [hereinafter MANDIANT APT 1].

2 PONEMON INSTITUTE, SECOND ANNUAL COST OF CYBER CRIME STUDY: BENCHMARK STUDY OF U.S. COMPANIES 2 (Aug. 2011), available at http://www.hpenterprisesecurity.com/collateral/report/2011_Cost_of_Cyber_Crime_Study_August.pdf [hereinafter PONEMON STUDY].

3 JAMES WEI, GREAT INVENTIONS THAT CHANGED THE WORLD 218 (airplane), 278 (internet) (Wiley 2012); DAVID E. NYE, AMERICA'S ASSEMBLY LINE 36 (MIT Press 2013), available at http://mitpress.mit.edu/books/americas-assembly-line (assembly line); American Institute of Physics, Bright Ideas: The First Lasers, http://www.aip.org/history/exhibits/laser/sections/whoinvented.html (lasers).

4 CHARLES SCHULTZE, MEMOS TO THE PRESIDENT: A GUIDE THROUGH MACROECONOMICS FOR THE BUSY POLICYMAKER 299 (1991); ECONOMICS AND STATISTICS ADMINISTRATION AND THE UNITED STATES PATENT AND TRADEMARK OFFICE, INTELLECTUAL PROPERTY AND THE U.S. ECONOMY: INDUSTRIES IN FOCUS v (March 2012), available at http://www.uspto.gov/news/publications/IP_Report_March_2012.pdf.

5 U.S. DEP'T OF COMM., THE COMPETITIVENESS AND INNOVATIVE CAPACITY OF THE UNITED STATES 2-1 (Jan. 2012), available at http://www.commerce.gov/sites/default/files/documents/2012/january/competes_010511_0.pdf (finding that three factors that form the basis of a strong innovative environment are support for education, research, and infrastructure); THOMAS SOWELL, BASIC ECONOMICS: A COMMON SENSE GUIDE TO THE ECONOMY 301-02 (Basic Books 4th ed. 2011) (discussing the importance of capital markets to support entrepreneurial activity); CHARLES SCHULTZE, MEMOS TO THE PRESIDENT: A GUIDE THROUGH MACROECONOMICS FOR THE BUSY POLICYMAKER 304 (1991) (suggesting that more engineering degrees leads to greater development of useful ideas); Wesley M. Cohen et al., Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (Or Not), NAT'L BUREAU OF ECON. RESEARCH, WORKING PAPER NO. 7552 at 11 (2000), available at http://www.nber.org/papers/w7552.pdf ("secrecy and lead time are ranked comparably overall as the two most effective appropriability mechanisms for product innovations") [hereinafter Cohen].

6 Cohen, supra note 5, at 13.

7 See Cohen, supra note 5, at 7, 14-16; see also Richard C. Levin et al., Appropriating the Returns from Industrial Research and Development, 18 BROOKINGS PAPERS ON ECON. ACTIVITY 783 (1987); CHI RESEARCH, INC., SMALL BUS. ADMIN., SMALL SERIAL INNOVATORS: THE SMALL FIRM CONTRIBUTION TO TECHNICAL CHANGE 3 (2003), available at http://www.sba.gov/advo/research/rs225tot.pdf (small businesses develop thirteen times more patents per employee than large businesses).

8 See UNIF. TRADE SECRETS ACT § 1(4)(ii), 14 U.L.A. 433 (1985); Mark A. Lemley, The Surprising Virtues of Treating Trade Secrets as IP Rights, 61 STAN. L. REV. 311, 313 (2008) [hereinafter Surprising Virtues].

9 Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 494 (1974) (Marshall, J., concurring) (noting that trade secret law offers protection of unlimited duration).

10 See infra Part I.B.

11 See infra Part I.B.

12 See infra Part I.B.

13 See infra Part I.B.

14 See infra Part I.B.

15 Travis D. Van Ort, Hydraulic Fracturing Additives: A Solution to the Tension Between Trade Secret Protection and Demands for Public Disclosure, 4 KY. J. EQUINE, AGRIC. & NAT. RESOURCES L. 439, 440, 458 (2012); Mike Soraghan, In Fracking Debate, 'Disclosure' is in the Eye of the Beholder, N.Y. TIMES (June 21, 2010), http://www.nytimes.com/gwire/2010/06/21/21greenwire-in-fracking-debate-disclosure-is-in-the-eye-of-19087.html.

16 See, e.g., Pres. Barack Obama, Remarks by the President on Securing our Nation's Infrastructure (May 29, 2009), available at http://www.whitehouse.gov/the_press_office/Remarks-by-the-President-on-Securing-Our-Nations-Cyber-Infrastructure; Gen. Keith B. Alexander, Director, National Security Agency, Keynote Address at American Enterprise Institute on Cybersecurity and American Power (July 9, 2012), available at http://www.aei.org/events/2012/07/09/cybersecurityand- american-power/; 159 CONG. REC. S3165-66 (daily ed. May 7, 2013) (statement of Sen. Carl Levin); Cyber Espionage and the Theft of U.S. Intellectual Property and Technology Before the H. Subcomm. on Oversight and Investigations, 113th Cong. (July 9, 2013) (statement of Tim Murphy, H. Rep.), available at http://energycommerce.house.gov/sites/republicans.energycommerce.house.gov/files/Hearings/OI/20130709/HHRG-113-IF02-MState-M001151-20130709.pdf; Chinese Telecommunications Investigation Open Hearing Before the H. Permanent Select Comm. on Intelligence, 112th Cong. (2012) (Opening Statement of Dutch Ruppersberger, H. Rep., Md., 2nd Cong. Dist.), available at http://intelligence.house.gov/sites/intelligence.house.gov/files/documents/09122012DutchOpening.pdf.

17 OFFICE OF THE PRESIDENT OF THE UNITED STATES, ADMINISTRATION STRATEGY ON MITIGATING THE THEFT OF U.S. TRADE SECRETS 12 (Feb. 2013), available at http://www.whitehouse.gov/sites/default/files/omb/IPEC/admin_strategy_on_mitigating_the_theft_of_u.s._trade_secrets.pdf [hereinafter ADMINISTRATION STRATEGY].

18 Defend Trade Secrets Act of 2014, S. 2267, 113th Cong. (2014); Future of American Innovation and Research Act of 2013, S. 1770, 113th Cong. (2013); Private Right of Action Against Theft of Trade Secrets Act of 2013, H.R. 2466, 113th Cong. (2013); Protecting American Trade Secrets and Innovation Act of 2012, S. 3389, 112th Cong. (2012).

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