CRS report discusses role of trade secret law in innovation policy

Primarily a creature of state law, a trade secret refers to commercially valuable information the owner of which has taken reasonable efforts to keep secret. The misappriopriation of trade secrets is a tort and may result in compensatory and punitive damages. Common examples of trade secrets include, chemical formulae, manufacturing techniques, customer lists, marketing strategies, and sales techniques.

The value of trade secrets owned by publicly traded US companies has been estimated at five trillion dollars.

A Congressional Research Service (CRS) report from last year notes that the rise of computer technology has made it more difficult for owners to maintain the confidentiality of their proprietary information. Today, the United States is the main target of foreign economic and industrial espionage. In fact, the Office of the National Counterintelligence Executive, in a report titled Foreign Spies Stealing US Economic Secrets in Cyberspace, accuses China and Russia of engaging in online espionage against the United States for economic advantage.

Trade secrets and patents form alternative types of intellectual property. As the report points out, an inventor must decide whether to keep the invention as trade secret, obtain a patent, or disclose and allow it to enter the public domain. One factor influencing this decision is whether the technology can be copied easily in which case it cannot be kept secret, and hence not the proper subject of a trade secret. Other factors include the costs associated with obtaining and maintaining a patent, the time required to obtain a patent, and the limited duration of patent rights.

More generally, trade secret protection implicates competing policy considerations. The report explains,

The availability of legal protection for trade secrets potentially promotes innovation, encourages firms to invest in employee development, and confirms standards of commercial ethics and morality. On the other hand, trade secret protection involves the suppression of information, which may hinder competition and the proper functioning of the marketplace. An overly robust trade secret law also could restrain employee mobility and promote investment in costly, but socially inefficient security measures.

Congress has legislated on trade secrets to a limited extent only. A federal statute enacted in 1996, the Economic Espionage Act, makes it a crime to misappropriate a trade secret under certain circumstances.

On the question of the federalization of trade secret law, the report cites arguments in favor for and against. Arguing in favor, some commentators point out that some state trade secrets laws place the United States in violation of its obligations under the NAFTA and TRIPS agreements which call on their member states to provide certain levels of trade secret protection. Those against the enactment of a federal trade secret law contend that it raises federalism concerns and might create additional, unnecessary burdens and costs on the federal judiciary.