Tailoring a Public Policy Exception to Trade Secret Protection

California Law Review VOL. 105 FEBRUARY 2017 NO. 1 Copyright © 2017 by California Law Review, Inc., a California Nonprofit Corporation Tailoring a Public Policy Exception to Trade Secret Protection Peter S. Menell* The growing importance of information resources as well as mounting threats to proprietary information in the digital age propelled federalization of trade secret protection onto the national legislative agenda during the past year. This salience provided a propitious opportunity to address a critical, overlooked failing of trade secret protection: the lack of a clear public policy exception to foster reporting of illegal activity. The same routine nondisclosure agreements that are essential to safeguarding trade secrets can be and are used to chill those in the best position to reveal illegal activity. Drawing on classic law enforcement scholarship as well as established institutions for protecting proprietary information, this Article proposes a sealed disclosure/trusted intermediary exception to trade secret protection. This approach safeguards trade secrets while promoting effective law enforcement. The Article also recommends that nondisclosure agreements prominently include notice of the law reporting safe harbor to ensure that those with DOI: http://dx.doi.org/10.15779/Z388Z8Q Copyright © 2017 Peter S. Menell * Koret Professor of Law and Director, Berkeley Center for Law & Technology, University of California, Berkeley, School of Law. I thank Michael Birnhack, Thomas Cotter, Amos Israel, Mark Lemley, Gideon Parchomovsky, James Pooley, Claire Sylvia, and participants at workshops at Bar Ilan University, Harvard Law School, and the Bay Area IP Scholarship group for comments on this project. I also thank Andrea Hall and Matthew Malady for excellent research assistance. An earlier draft of this Article attracted the attention of congressional staff members working on the Defend Trade Secrets Act of 2016. Section 7 of that legislation (“Immunity from Liability for Confidential Disclosure of a Trade Secret to the Government or in a Court Filing”) implements the proposals set forth in this Article. I thank Alexandra Givens for reaching out to me. 1 2 CALIFORNIA LAW REVIEW [Vol. 105:1 knowledge of illegal conduct are aware of this important public policy limitation on nondisclosure agreements and exercise due care with trade secrets in reporting illegal activity. Based on an earlier draft of this Article, Congress adopted a whistleblower immunity provision as part of the Defend Trade Secrets Act of 2016. Introduction ........................................................................................................ 3 I. The Trade Secrecy/Law Enforcement Tension ............................................... 8 A. Trade Secret Protection .................................................................. 11 1. Development of Trade Secret Protection ................................. 11 2. Guiding Principles: Commercial Morality and Technological Progress ............................................................ 14 3. Modern Contours of Trade Secret Protection .......................... 15 B. Law Enforcement and Whistleblowing Policies ............................ 18 1. The Rule of Law and Reporting of Illegal Activity ................. 21 2. Encouraging Reporting of Illegal Conduct: Whistleblowing Laws .............................................................. 24 a. The False Claims Act ........................................................ 24 b. Dodd-Frank Securities Whistleblower Incentives and Protections .................................................................. 27 c. IRS Whistleblower Informant Awards Program ............... 29 II. The Amorphous State of the Public Policy Exception ................................. 29 A. Trade Secrecy and Contract Law ................................................... 30 B. Whistleblower Laws ...................................................................... 31 C. A Catch-22 for Whistleblowers ..................................................... 35 III. The Interplay of Trade Secrecy and Whistleblowing ................................. 36 A. The Psychology of Whistleblowing ............................................... 37 B. Empirical Research on Whistleblowing......................................... 42 IV. Tailoring a Trade Secret Public Policy Exception ...................................... 44 A. Reconciling Law Enforcement and Trade Secrecy Protection ...... 46 B. Supporting Institutions and Models ............................................... 48 1. Governmental Trade Secrecy Law and Policy......................... 48 2. Attorney Responsibility and Litigation Protective Orders ....... 50 3. Whistleblower Protection Models ........................................... 51 a. State Law Models ............................................................. 51 b. HIPAA Whistleblower Protection Provisions................... 52 c. SEC Regulations ............................................................... 53 C. The Sealed Disclosure/Trusted Intermediary Safe Harbor ............ 54 D. Stress Testing the Sealed Disclosure/Trusted Intermediary Safe Harbor .................................................................................... 55 1. Potential Leakage..................................................................... 56 2. Alternatives and Complements ................................................ 56 3. Limitations: The Challenge of Whistleblowing When the 2017] TRADE SECRET PUBLIC POLICY EXCEPTION 3 Intermediary Is Not Trustworthy ............................................. 59 V. Implementing a Trade Secret Public Policy Safe Harbor: The Defend Trade Secrets Act of 2016 ..................................................................... 61 Conclusion ........................................................................................................ 62 INTRODUCTION Trade secrets are the most pervasive form of intellectual property in the modern economy.1 Nearly every enterprise—whether for-profit or not—seeks to protect information about its operations, strategy, technology, funding, personnel, and customers. Employers of all types routinely require their employees and contractors to sign restrictive nondisclosure agreements (NDAs)2 and return confidential information upon their departure or completion of services.3 Without such restrictions, these enterprises would jeopardize trade secret protection4 and risk violating privacy and other laws.5 Notwithstanding their national importance and unlike patent, copyright, and trademark protection, trade secrets have been protected principally through state law.6 Although most states have adopted a version of the Uniform Trade Secrets Act (UTSA),7 there remain significant differences among state regimes as well as variations in state court systems.8 The confluence of an increasingly high-technology economy and risin (...truncated)