Academic journal article Santa Clara High Technology Law Journal

Secondary Liability for Trade Secret Misappropriation: A Comment

Academic journal article Santa Clara High Technology Law Journal

Secondary Liability for Trade Secret Misappropriation: A Comment

Article excerpt

I. INTRODUCTION

Professor Rustad's article focuses on a problem that has received serious attention in recent years: the involvement of foreign countries in misappropriating trade secrets from American firms. (1) In 1996, Congress adopted the Economic Espionage Act ("EEA") to help address this problem. Professor Rustad reviews the Act's enforcement record and finds it wanting; relatively few cases have been brought and many of these cases have resulted in only mild sanctions. (2) He identifies several reasons for this poor record, most of which are traceable in one way or another to the statute's exclusive reliance on public enforcement. (3) He recommends two reforms: (1) add a private cause of action to the EEA, and (2) extend civil liability to third party software manufacturers and vendors whose negligently designed software enables trade secret misappropriation.

This Comment focuses critically on these reforms, and especially on the second proposal. Part II briefly examines the basic premise underlying Professor Rustad's arguments, that foreign theft is a sufficiently serious problem today to warrant bolstering legal protection for trade secrets. I am skeptical of this proposition and Part II explains why. Part III focuses on the specifics of Professor Rustad's secondary liability proposal. Here too my message is one of restraint. Even if stronger legal protection is a good idea, it is not at all clear that imposing liability on software manufacturers and vendors for negligent enablement is a desirable way to do it given the potentially high social costs and the likely superiority of a contract alternative.

I should state a caveat at the outset. This Comment is not intended to be a complete and rigorous analysis of the many complicated issues involved. Its goal is to raise questions and express doubts that can be the basis of further research and analysis.

II. THE TRADE SECRET THEFT PROBLEM--HOW SERIOUS IS IT?

Professor Rustad makes a number of strong claims about the magnitude and seriousness of the foreign trade secret theft problem, referring at one point to an "astonishing rise in economic espionage and its colossal cost to business" and at another to "overwhelming evidence of widespread state sponsored economic espionage." (4) It is not at all clear, however, that there is enough reliable empirical evidence to support these claims, or that Professor Rustad has a sufficiently articulated normative framework for assessing the seriousness of the problem. Analytical and empirical rigor is particularly important when, as here, conclusions about the severity of the problem are used to support decisions about costly legal enforcement.

I do not question the fact that foreign governments are involved in appropriating trade secrets from American firms. (5) However, the fact that trade secrets are being taken, even with some frequency, is not by itself enough to justify stronger legal protection. Legal intervention through trade secret law can be very costly. We need to know how much trade secret theft is taking place before we can balance the benefits of stronger legal protection against the costs.

Professor Rustad does cite several studies which purport to quantify the magnitude of the problem, and there are also other existing studies. Most of these studies use survey methodology and ask firms to report the total number of trade secret loss incidents and the economic value of those losses. (6) While these surveys provide some useful information, they also suffer from serious methodological limitations that undermine their reliability as measures of trade secret misappropriation. The following account briefly describes some of these limitations. While the factors discussed here tend to push the survey results higher than the true loss level, other factors tend to push in the opposite direction. (7) All of these factors compound the uncertainty of the results. …

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