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Open Questions Add Uncertainty to Scope and Impact of New Trade Secret Law

February 16, 2023

Key Takeaways

  • The new law has the potential to have a great impact on how domestic companies protect their IP, and how foreign companies assess theft of trade secrets.
  • Many crucial issues, however, are left open. The scope and impact of the law will depend heavily on how the executive branch decides to address these issues, if at all.

On January 5, 2023, President Biden signed into law the Protecting American Intellectual Property Act, a new bill aimed at imposing sanctions on foreign individuals and entities involved in the theft of trade secrets belonging to a U.S. individual or entity. The law provides a new mechanism for the U.S., and potentially U.S. companies, to combat theft of trade secrets committed by foreign entities or individuals.

Specifically, the Act requires the President to identify and sanction any foreign person (i.e., individual or entity) that the President determines:

i. Has knowingly engaged in or benefitted from significant theft of trade secrets after the enactment of the act, and the theft contributes to or is likely to result in “a significant threat to the national security, foreign policy, or economic health or financial stability of the United States”;

ii. Has provided significant support for, or goods in services in support of, such theft;

iii. Is an entity owned, controlled, or acting on behalf of anyone under (i) or (ii); or

iv. Is a CEO or board member of anyone under (i) or (ii).

Notably, the Act only allows for sanctions against foreign persons. But the range of potential foreign persons that can be impacted is extensive. Sanctions are not limited to just those who stole significant trade secrets, but under the provisions may extend to others, such as executives and board members of the foreign person that stole trade secrets, regardless of whether they had knowledge of the theft. Also, unlike the Defend Trade Secrets Act, codified at 18 U.S.C. § 1836, the Act does not appear to be limited to acts of trade secret theft that occur in the United States, as long as the trade secret is owned by a U.S. person.

In addition, the penalties in this act are severe. When a foreign entity is added to the list, the President must impose 5 sanctions from a long list, which includes anything from blocking “all transactions in all property” in the U.S., to limiting loans from U.S. financial institutions, to excluding corporate officers from the U.S. However, the act specifically carves out any authority to impose sanctions on the importation of goods. This may be to keep from treading on the authority of the International Trade Commission under Section 337, which can direct Customs to stop importation of goods that are developed as a result of trade secret misappropriation.

Given the broad reach of the Act and the potential for crippling sanctions, it is important for both domestic and foreign corporations to be aware of implications of this law – for U.S. companies to protect their IP, and for foreign companies to protect themselves from liability. However, there are a number of substantial open questions that will need to be addressed in order to provide the public a better idea of how impactful this law will be.

Acts that Qualify as “Significant Theft” of Trade Secrets

The Act directs the President to sanction foreign individuals and entities that are involved in any significant theft of trade secrets. The Act, however, does not define what trade secret theft constitutes as “significant.”

The Act uses the term “theft” rather than “misappropriation.” Therefore, the drafters may have intended to adopt the criminal standard for theft of trade secrets under 18 U.S.C. § 1882, rather than the “misappropriation” standard from the Defend Trade Secrets Act. The criminal standard also has a similar knowledge requirement – both this Act and the criminal act require that a person “knowingly” engage in theft of trade secrets. But, since the Act fails to include a definition for “theft” of trade secrets, this issue may be determined in litigation.

Procedure for Identification and Appeal

Noticeably, the Act also fails to include a procedure for the President to identify persons to be sanctioned under the Act. It is not clear at this stage whether individuals or entities can petition for sanctions of certain individuals, or what evidence the President must use in order to determine whether a foreign person “knowingly” committed “significant theft” of trade secrets. 

The Act also fails to set a procedure for individuals or entities to challenge any sanctions that are imposed on them under the Act. It is therefore likely to face various challenges in litigation.

Potential for New Regulation

The law does allow the President to prescribe regulations for the implementation of the law, pursuant to 50 U.S.C. § 1704. This gives the executive branch an opportunity to address some of the issues listed above. But there isn’t much time. The law requires the President to present the first report within 180 days of the enactment of the Act, which sets the first deadline for July 4, 2023. In addition, the law is set to sunset 7 years after it is enacted, so the law doesn’t have much time to make an impact. By this Independence Day, we will see how any of these issues are resolved, if at all.

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Andrew M. Spitzer
Associate – Chicago
Phone: +1.312.840.3281
Michael H. Jacobs
Partner – Washington, D.C.
Phone: +1.202.624.2568