Intellectual Property

Intellectual property (IP) theft is defined as theft of material that is copyrighted, the theft of trade secrets, and trademark violations. A copyright is the legal right of an author, publisher, composer, or another person who creates a work to exclusively print, publish, distribute, or perform the work in public. The United States leads the world in the creation and selling of IP products to buyers nationwide and internationally. Examples of copyrighted material commonly stolen online are computer software, recorded music, movies, and electronic games.

Theft of trade secrets means the theft of ideas, plans, methods, technologies, or any sensitive information from all types of industries including manufacturers, financial service institutions, and the computer industry. Trade secrets are plans for a higher speed computer, designs for a highly fuel-efficient car, a company’s manufacturing procedures, or the recipe for a popular salad dressing, cookie mix, or barbeque sauce. These secrets are owned by the company and give it a competitive edge. Theft of trade secrets damages the competitive edge and therefore the economic base of a business.

A trademark is a registered name or an identifying symbol of a product that can be used only by the product’s owner. A trademark violation involves counterfeiting or copying brand name products such as well-known types of shoes, clothing, and electronics equipment and selling them as the genuine or original product.

The owner of Napster at a 2001 news conference following a court ruling that the company must stop allowing users to share copyrighted music.

The two forms of IP most frequently involved in cybercrime are copyrighted material and trade secrets. Piracy is a term used to describe IP theft—piracy of software, piracy of music, etc. Theft of IP affects the entire U.S. economy. Billions of dollars are lost every year to IP pirates. For example, thieves sell pirated computer software for games or programs to millions of Internet users. The company that actually produced the real product loses these sales and royalties rightfully due to the original creator.

Historically, when there were no computers, IP crimes involved a lot of time and labor. Movie or music tapes had to be copied, physically produced, and transported for sale. An individual had to make the sale in person. To steal a trade secret, actual paper plans, files, or blueprints would have to be physically taken from a company’s building and likewise sold in person.

In the twenty-first century software, music, and trade secret pirates operate through the Internet. Anything that can be digitized—reduced to a series of zeroes and ones—can be transmitted rapidly from one computer to another. There is no reduction of quality in the second, third, or fourth generation copies. Pirated digital copies of copyrighted work transmitted over the Internet are known as “warez.” Warez groups are responsible for illegally copying and distributing hundreds of millions of dollars of copyrighted material.

Pirated trade secrets are sold to other companies or illegal groups. Trade secrets no longer have to be physically stolen from a company. Instead, corporate plans and secrets are downloaded by pirates onto a computer disc. The stolen information can be transmitted worldwide in minutes. Trade secret pirates find pathways into a company’s computer systems and download the items to be copied. Companies keep almost everything in their computer files. Pirated copies are sold over the Internet to customers who provide their credit card numbers then download the copy.

Intellectual property pirates use the computer to steal vast amounts of copyrighted material and cause severe damage to the victimized companies. IP pirates never have to make sales in person or travel, their costs are minimal, and profits are huge. Internet pirates target online shoppers who look for discounted, but legitimate, products. They do so by emails and Internet advertisements that seem to be the real thing. Not just individuals, but companies, educational institutions, and even government agencies have been tricked by IP pirates into buying stolen goods.

Arrest and prosecution of IP crimes is difficult for U.S. law enforcement agencies. U.S. laws combating this new type of crime were only beginning to be written by the early twenty-first century. Very little stops IP pirates, and organized crime groups have become involved as well. The profits they generate from IP crimes finances many other criminal activities such as drug trafficking, illegal gun sales, gambling, and prostitution.

Intellectual property pirates also come from many foreign countries such as China, South Korea, Vietnam (Southeast Asia), and Russia. International IP law is practically nonexistent. While offline IP violations can be investigated by traditional law enforcement tactics such as using undercover agents, cyber IP criminals operate only in cyberspace and can disappear in seconds.

Trade Secrets

Trade secrets are types of business information that confer value because of their secrecy, such as confidential formulae, manufacturing techniques, and customer lists. The theft of U.S. trade secrets is a growing problem, costing American businesses hundreds of billions of dollars per year. Electronic espionage by major foreign powers such as China is particularly serious.

Unlike holders of other forms of intellectual property, owners of trade secrets cannot invoke a federal civil legal remedy. A federal trade secrets law would help victims recover damages and make it easier to stop thieves before they flee the country. Such a law, designed not to displace optional state law remedies, would both protect the rights of the owners of trade secrets and strengthen the economy.

Strong protection for intellectual property (IP) is vitally important to the health of the United States economy. IP industries account for more than 40 percent of U.S. economic growth and employment, and they create strong incentives for investments in innovation that drive future
U.S. economic growth and innovation.

Currently, owners of three of the four major categories of IP rights—patents, trademarks, and copyrights—may invoke robust federal law remedies to compensate them for the theft of their valuable property. Owners of the fourth key category of IP rights—trade secrets—do not, however, enjoy such protection. Creation of a federal civil remedy for trade secret theft would remedy this shortcoming to the benefit of the U.S. economy and American holders of trade secrets. It might also help to spur stronger international protection of trade secrets.

What Is a Trade Secret?

A trade secret is business information that confers economic value on its owner by virtue of its secrecy. Common types of trade secrets include proprietary industrial and manufacturing techniques, business and sales methods, confidential formulae, and customer lists.

Trade secrets run the full gamut of business-sensitive information, from the formula for Coca-Cola and the KFC recipe for fried chicken to the Google proprietary search algorithm and the WD-40 formula (the cleaning spray used by 80 percent of Americans) just to name a few examples. Once trade secret information becomes public, it is essentially worthless because third parties—particularly competitors—can use it freely.

The Growing Problem of Trade Secret Theft

U.S. trade secret theft is a growing problem that stems not just from security breaches by firms’ employees and business partners, but also from expanding electronic espionage by rival firms and foreign governments. Trade secret misappropriation imposes huge costs on the American economy. In 2012, the National Security Agency estimated that U.S. businesses lose $334 billion per year due to trade secret thefts and cyber breaches. If anything, this figure understates the problem because it does not include the significant costs that businesses absorb to protect their secrets. Moreover, the burden of trade secret theft will likely rise as China and other nations increasingly target U.S. business assets, as underscored by the recent U.S. Justice Department indictment of Chinese officers.

The scale of business losses from individual thefts is huge. For example, Motorola spent over $400 million in developing iDEN military telecommunications technology, which was stolen on behalf of a company that developed products for the Chinese military. This is not just a big- business problem. The loss of trade secrets is particularly significant for small-sized and medium-sized enterprises, which rely more heavily on such secrets than they do on other forms of IP to protect their information assets.

Status of Legal Protection for American Trade Secret Owners

Unlike holders of the other three primary forms of IP—patents, trademarks, and copyrights— trade secret owners must depend on state law to protect their rights in the face of trade secret theft. State statutes based on the American Law Institute’s Uniform Trade Secrets Act (UTSA) have largely supplanted state common law protection of trade secrets. At present, 47 of the 50 states and the District of Columbia have adopted it. New York, North Carolina, and Massachusetts have not yet done so, but their laws are substantially similar to the UTSA.

The UTSA defines a trade secret as information (including a formula, pattern, compilation, program, method, technique, or process) that derives economic value from not being generally known or readily ascertainable using proper means by other persons and is the subject of efforts to maintain its secrecy that are reasonable under the circumstances.

Misappropriation of a trade secret under the UTSA occurs when the secret has been acquired through improper means, under an obligation not to disclose or use it, from someone who had an obligation not to disclose it, or by accident or mistake if the accidental acquirer later learned that the information was a trade secret before using or disclosing it. “Improper means” include theft, bribery, misrepresentation, breach, inducement of a breach of duty to maintain secrecy or espionage through electronic or other means. Reverse engineering and independent discovery of information embodied in a trade secret is not improper means.

Sanctions under the UTSA include preliminary and permanent injunctions for threatened and actual misappropriation; damages (including payments for unjust enrichment and up to double damages for willful and malicious misappropriation); and reasonable attorney’s fees (for bad faith or willful and malicious misappropriation).

Federal Criminal Penalties

The Economic Espionage Act of 1996, whose definitions track the UTSA, criminalizes misappropriation of trade secrets intended to benefit foreign governments or agents and for economic gain. Criminal fines include imprisonment, individual fines of up to $5 million, and fines directed at organizations of up to $10 million or three times the value of the misappropriated trade secret, whichever is larger.

Trade secrets illicitly acquired through computer hacking (computers accessed “without authorization”) are subject to criminal and civil penalty under the Computer Fraud and Abuse Act. Finally, various state laws impose criminal sanctions for certain types of trade secret thefts.

Lack of a Federal Civil Remedy

The lack of a federal civil remedy for victims of trade secret theft precludes owners of trade secrets from vindicating their rights under certain circumstances. Enjoining and sanctioning trade secret thieves who cross state lines is often difficult. Procedural differences and jurisdictional issues inherent in a multi-state system may complicate and render more costly efforts to achieve results in a non-local tribunal. Efforts to invoke federal diversity jurisdiction likewise are complicated by requirements of complete diversity of citizenship among the parties and choice-of-law questions. Despite the similarity among state civil laws, procedural and case law differences may arise.

Furthermore, although victims of trade secret theft can inform the Justice Department (and state attorneys general in some jurisdictions) of suspected criminal misappropriations, limited prosecutorial resources and conflicting demands on enforcers make obtaining federal (or state) action—which in any event does not directly compensate the victim—an uncertain proposition. For example, companies may find it particularly difficult to recoup losses from employees who steal a trade secret, immediately leave the state where the theft occurred, flee the United States, and subsequently turn the trade secret over to a competitor.

In such situations, time is of the essence, and the requirement to seek a private remedy under another state’s law can cause critical delays. Such delays may make the difference between stopping a rogue employee before he leaves the country and allowing him to get away.

The Benefits of Federal Trade Secret Legislation Without Offending Federalism

Unlike the current situation, a federal civil statutory remedy would make federal tribunals instantly available to aggrieved businesses that seek injunctions, which is particularly important when the time is of the essence due to flight risks. As soon as a federal judge issues an injunction, federal marshals could act quickly to stop a rogue employee or other thief from leaving the country. A uniform federal damages standard would also benefit firms by reducing uncertainties that may arise due to differences in state-specific case law and procedural norms.

Furthermore, by creating a powerful new means of obtaining recompense for harmed businesses, strong federal civil trade secret legislation would at least marginally reduce the expected rewards and incentives of misappropriation of trade secrets. This would tend to slow the growth of trade secret theft to the benefit of both IP holders and the broader American economy.

Relatedly, an appropriate federal statute would have a salutary “demonstration effect” on major foreign jurisdictions, such as the European Union (EU), which is considering EU-wide regulation to protect trade secrets. Federal legislation could strengthen the hand of U.S. negotiators in pushing for the U.S. approach to trade secrets in ongoing U.S.–EU trade and economic liberalization negotiations on the

Transatlantic Trade and Investment Partnership (T-TIP). The United States could also use a T- TIP accord to press other large jurisdictions with poor records on trade secret protection—such as China—to improve their systems. In short, good federal legislation could yield significant domestic and international benefits for American holders of trade secrets.

Moreover, a new federal law need not undermine federalism. As long as the federal standard does not preempt state law remedies, it would retain the potential benefits of the states continuing experiments to write optimal civil trade secret laws, and harmed companies could pursue state remedies if they so desired. The ability of federal and state IP laws to coexist is well illustrated by the case of trademarks, where the federal Lanham Act and state laws protecting trademarks have long coexisted successfully.

Additionally, in today’s information economy in which trade secrets may be electronically transmitted across state lines and international boundaries quickly and seamlessly and as trade secret theft imposes a major and growing burden on interstate commerce, extending federal civil law to combat the theft of trade secrets would be a quintessentially appropriate exercise of Congress’s authority to regulate interstate commerce.

The growing theft of U.S. trade secrets is significantly harming the U.S. economy and the property rights of American businesses. Appropriately crafted federal trade secret legislation that respects federalism principles could bolster the U.S. economy and protect important property rights both at home and abroad. Such legislation merits serious consideration.


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