Happy New Year! And, welcome to Part 2 of the history of trade secret law.
As you’ll recall, we ended Part 1 with a promise that we would stop using the threat of death (or actual death) as a tool for protecting trade secrets. I didn’t say, however, that we had suddenly become civilized…
Havoc and Iron Both Wrought by Ironworkers’ Secrets, While Newton Invents Calculus
Modern trade secret law is, in part, designed to ensure the maintenance of commercial ethics.
There’s a good reason for that.
In the 1660s (when Newton was inventing calculus), France (apparently feeling like it missed out on the Iron Age) decided to set up its own iron industry. It seems that, at that time, Sweden was the Silicon Valley of Europe for iron. So, why build your own, when you can just steal it from a neighbor?
As historian Carlo Cipolla explained in his book, Before the Industrial Revolution: European Society and Economy, 1000-1700, “On occasion, it was considered legitimate to resort to force, and craftsmen were literally kidnapped.” Id. at 123. The story, according to Professor Cipolla, is a follows:
[A] number of [iron]workers sailed from Nyköping believing that they were being taken to some other part of Sweden. Instead they were brought to Lübeck, from there to Hamburg, and finally to France, . . . to start an iron industry on the Swedish model.
Id.
Stolen Trade Secrets Come to the United States, Kicking Off the American Industrial Revolution
While today, as a developed economy, we abhor the theft of trade secrets, we were closer to France in 1789, as our country was developing.
That was the year that Samuel Slater — the Father of the American Industrial Revolution, or “Slater the Traitor,” as he’s known across the pond – stole British textile mill designs from his employer and smuggled them into the United States to kick off the American Industrial Revolution. In case there is any doubt, it was illegal in England to do that.
This is precisely the type of conduct we read about all the time today in reverse: employees stealing their U.S. employers’ trade secrets and taking them to developing countries.
Trade Secret Laws Develop as the U.S. Expands
While the U.S. expanded westward, trade secret law as we know it today made its first appearance to the east in England in 1817 in Newberry v. James, 35 Eng. Rep. 1011 (Ch. 1817). See Mark A. Lemley, The Surprising Virtues of Treating Trade Secrets as IP Rights, 61 Stan. L. Rev. 311, 315 n.6 (2008). But, the first case to involve injunctive relief was not until three years later in 1820 in Yovatt v. Winyard, 37 Eng. Rep. 425 (Ch. 1820).
In the United States, the first trade secret case was Vickery v. Welch, 36 Mass. (19 Pick.) 523 (1837) — 20 years after modern-ish trade secret law first appeared in England. See Lemley, at 315 & n.6. And, like in England, the first case involving injunctive relief came later. In the United States it took until 1868, in Peabody v. Norfolk, 98 Mass. 452 (1868). See Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 493 n.23 (1974).
New Trade Secret Law Standards Are Established, While New York Looks Into the Future of Everything Else
In 1939, the New York World’s Fair was getting underway, the American Law Institute published the Restatement (First) of Torts.
The Restatement of Torts distilled from the then-existing hodgepodge of state laws the principles that set the standards for trade secret laws for decades to come. Indeed, even in states that have long since adopted more modern statutes, many still look to principles from the Restatement (First) of Torts for guidance.
Trade Secret Law Is Not a Flop
The 1970s ushered in two major trade secret milestones, both of which long outlasted the other big developments of the 70’s: 5.25” floppy disks, disco, Sony Betamax, and the Sony Walkman. (Sorry Sony, but you’re making up for it with your industry-leading mirrorless cameras.)
Entering the 70’s, trade secret law held a precarious legal position. Patent law, which is grounded in the Constitution, covers a large swath of the same information covered by trade secret law. (Indeed, someone once observed that every patent starts off as a trade secret.) Accordingly, the question naturally arose whether patent law preempted trade secret law. Fortunately the Supreme Court resolved the issue quickly (and favorably for trade secrets), holding in Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974), that patent law does not preempt trade secret law.
That decision cleared the way for the states to freely develop their own trade secrets laws. And the Uniform Law Commission (the ULC) clearly got the message. Five years later (in 1979), the ULC issued the Uniform Trade Secrets Act (UTSA), which made two major improvements to the Restatement (First) of Torts: the expansion of the definition of trade secrets and the organization of the topic into a straightforward outline.
Trade Secret Protection Goes Digital
In 1985, the ULC made several refinements to the 1979 version of the UTSA, resulting in the final version of the UTSA that has been used for the past 37 years.
As of today, the UTSA has been adopted in every state but New York, though even that is not without controversy.
First, Alabama’s trade secrets statute is based on an amalgam of Alabama common law, the Restatement of Torts, and the UTSA, see IMED Corp. v. Sys. Eng’g Assocs. Corp., 602 So.2d 344, 348–49 (Ala. 1992), and bears little resemblance to the text of the UTSA. Despite that, the Uniform Law Commission lists Alabama as having adopted the UTSA.
Conversely, while North Carolina’s statute appears to be largely derivative of the UTSA, North Carolina claims not to have adopted the UTSA. See Is the North Carolina Trade Secrets Protection Act Itself a Secret and Is the Act Worth Protecting, 77 N.C. L. Rev. 2149, 2151 (1999). Apparently not believing the maxim that actions speak louder than words, the Uniform Law Commission accepted North Carolina’s assertion and omitted North Carolina from the list of states that have adopted the UTSA.
Even aside from the questions about whether Alabama or North Carolina in fact adopted the UTSA, the Uniform Trade Secrets Act was not actually adopted uniformly. Even states that have unquestionably adopted it very often vary its language, sometimes quite significantly.
In 1986, in response to the movie War Games (fun movie, worth watching if you haven’t seen it), Congress became very worried about computer hacking, and passed the Computer Fraud And Abuse Act (the CFAA). (I’m really not kidding about the movie leading to the CFAA, by the way.) Though technically not a trade secret statute (and horribly drafted), the CFAA protects access to and interference with information on “protected computers” (really almost any computer at this point), regardless of whether the information is a trade secret or not.
Though significantly narrowed by the Supreme Court in 2021 in Van Buren v. U.S., the CFAA was, until 2016, frequently used by trade secret owners to secure federal court jurisdiction for their trade secret cases. However, after the DTSA (discussed below) and the Van Buren decision, the CFAA no longer provides meaningful assistance to trade secret owners in the majority of cases.
Federal Trade Secret Law Was Upgraded for International Conflict, as was Deep Blue
In 1995, the American Law Institute decided that trade secret law no longer belonged in the Restatement of Torts, but instead belonged in the Restatement (Third) of Unfair Competition.
That was probably the right call. But, few seemed to care.
Although the new Restatement was designed to align with the UTSA, the UTSA was already gaining traction in many states, and the other states (as well as even many of the states that adopted the UTSA) were used to using the Restatement (First) of Torts and had no interest in another non-controlling, supposed summary of trade secret law.
The following year (in 1996), while IBM’s chess-playing computer, Deep Blue, lost a chess match against world champion Gary Kasparov, Congress passed the Economic Espionage Act, which President Clinton promptly signed into law. The Economic Espionage Act was not the first federal law to address international espionage, but it was the first federal law to specifically make the theft of trade secrets illegal.
Unlike the CFAA ten years earlier, the Economic Espionage Act did not provide a private right of action. Accordingly, while it became an important tool for the protection of trade secret owners, it was not a tool that trade secret owners could use on their own.
Spoiler alert: That all changed in 2016.
Second spoiler altert: Good news, in 1997, Deep Blue had a rematch with Mr. Kasparov and won that match.
Trade Secret Protection Gains National Focus, While England Focuses on Itself
In 2016, while Brexit was getting underway, trade secret owners finally received a reliable way to meaningfully protect their trade secrets in federal court. In what some have called the most significant development in trade secret law in nearly four decades, a nearly unanimous Congress passed, and President Obama signed, the Defend Trade Secrets Act of 2016 (DTSA), thereby creating a federal private right of action for trade secret misappropriation.
The DTSA was modeled on the nearly-universally-adopted UTSA, and does not displace state law. So, trade secret owners can bring a claim based on both.
And, while the law under the DTSA is still developing (and is oftentimes interpreted based on the forum state’s UTSA case law), the U.S. should, in time, have an overlay of uniform trade secret law across the country that is actually uniform.
For now, however, the DTSA at least provides the (significant) benefit of federal court jurisdiction and all that comes along with it. This is particularly important now, after the Supreme Court’s narrow interpretation of the CFAA last year in Van Buren v. U.S. (referenced above).
* * *
I hope you enjoyed the trip back through history. Looking forward to seeing what lies ahead. In that vein, I will reiterate my concern and recommendation.
My concern: Despite Congress’s near-unanimous recognition in 2016 of the importance of protecting trade secrets, the federal government is looking at taking away (or severely limiting) one of the key tools used to protect trade secrets (noncompete agreements). I am referring not to the efforts to ban the use of noncompetes for low-wage workers (there are more compelling considerations there); I am referring to efforts to ban the use of noncompetes even for people who pose a real threat to their former employer’s trade secrets (and, in some instances, customer relationships). Background details here and here.
The recommendation: I have previously outlined the steps to take steps now, but here is a quick summary:
- Know the facts — not the rhetoric — and speak up on the issue of noncompete regulation (whatever your perspective).
- For companies, you should update your policies and agreements to ensure they will survive coming restrictions (state, as well as federal), and consider whether it makes sense to use a “springing” noncompete, i.e., a noncompete as a remedy for a violation of a less-restrictive restrictive covenant.
- Also for companies, implement (or update) your trade secret protection program and train your employees how to protect trade secrets — from the moment they start working for the company (which includes training on how to prevent infiltration of a former employer’s trade secrets into your company), throughout their employment (especially in a remote work environment), to after they leave the company.
- For those of you coming at this from the employee perspective, the protection of trade secrets is critically important. Doing things the right way helps not just your employer, but you and your colleagues. For those of you planning to leave a job, here is a primer on how to do it right.