New Protecting American intellectual Property Act authorizes sanctions for trade secret theft
26 January 2023
PAIP requires that the President submit a report to Congress within 180 days of passage (i.e., by July 4, 2023) and no less than annually thereafter, identifying non-US persons the President has determined:
- have knowingly engaged in, or benefitted from, significant theft of trade secrets from US persons,1 where such theft occurred after enactment of PAIP and is reasonably likely to result in, or has materially contributed to, a significant threat to the national security, foreign policy, or economic health or financial stability of the US
- have provided significant financial, material, or technological support for, or goods or services in support of or to benefit significantly from, such theft or
- is (i) an entity owned or controlled by, or that has acted or purported to act for or on behalf of, directly or indirectly; or (ii) a CEO or board member of, any of the foregoing
Sanctions, from the menu detailed in PAIP, must then be imposed on any person so identified:
- For entities, five or more sanctions must be applied from the menu of 12 possible sanctions. Noteworthy options include:
- blocking the property and interests in property of a targeted entity, and prohibiting all transactions therein, to the extent such property or interests in property are in the US, come within the US, or are or come within the possession or control of a US person (Blocking Sanctions)
- inclusion on the Entity List maintained by the Bureau of Industry and Security (BIS) of the US Department of Commerce, for activities contrary to the national security or foreign policy of the US
- restrictions on Export-Import Bank assistance, loans from US financial institutions and multinational organizations, and other financial sanctions
- prohibition on government procurement
- ban on certain banking transactions
- exclusion or sanctioning of corporate officers
- For individuals, Blocking Sanctions will apply, in addition to deemed ineligibility for visas or other admission or parole into the US.
Many of the contemplated sanctions carry potentially severe consequences. Application of Blocking Sanctions is especially severe. The property and interests in property of persons targeted by Blocking Sanctions (Blocked Persons) located in the US or within the possession or control of US persons are blocked (frozen). Further, US persons are prohibited from engaging in virtually any kind of transaction or dealing with or for the benefit of Blocked Persons, and Blocked Persons are effectively excluded entirely from the US.
Identification on the Entity List is also a significant consequence as it would effectively prohibit any targeted entity from receiving – via export or transfer – most US-origin goods, software, or technology, absent a (likely not forthcoming) license from the BIS. This restriction applies anywhere in the world, and can have a devastating effect on any entity that depends on any US-origin content in its supply chains.
PAIP also authorizes the imposition of sanctions on persons determined to have “provided significant financial, material, or technological support for, or goods or services in support of or to benefit significantly from” theft of trade secrets from US persons. This significantly increases the reach of PAIP by expanding the universe of sanctionable parties beyond those that actually engaged in theft of trade secrets. Accordingly, businesses should exercise caution in any dealings with persons that have been sanctioned pursuant to PAIP. Businesses should also exercise diligence as to prospective counterparties’ activities to ensure that prospective counterparties have not engaged, directly or indirectly, in potential theft of US trade secrets in such a way that could lead to exposure under PAIP.
Trade secrets under US law
Trade secrets are intellectual property rights to confidential information that may be licensed or sold. Unlike statutory intellectual property rights – such as patents, copyrights, and trademarks, which require some form of public disclosure – trade secrets are commercially valuable in part because they are maintained as confidential. Once a trade secret is disclosed to the public, it may be lost forever. Unlike patents, which are limited in duration and subject matter, the duration of a trade secret is potentially infinite (so long as it is not disclosed) and the scope of coverage may be broad. A trade secret can be any form or type of financial, business, scientific, technical, economic, or engineering information, tangible or intangible, whether or however stored, if the owner takes reasonable measures to keep the information secret, and the information derives independent economic value from not being generally known to the public.2 Although PAIP incorporates the definition of “trade secret” from US law, PAIP provides no definition for “significant theft” or “theft”, leaving it to the President to determine whether a “significant theft” of a trade secret has occurred.
Additional trade secret protections afforded under existing federal law
In 1996, Congress passed the Economic Espionage Act (EEA), creating a federal criminal cause of action for trade secret misappropriation. In 2016, Congress amended the EEA, enacting the Defend Trade Secrets Act (DTSA) as Section 1836 within the existing EEA. The DTSA created a federal civil cause of action for misappropriation of trade secrets “related to a product or service used in, or intended for use in, interstate or foreign commerce.” While the DTSA does not expressly apply to misappropriation occurring outside the US, the EEA expressly allows for its extraterritorial application, stating its provisions may apply to conduct occurring outside the US if: (i) the liable party is a US citizen, permanent resident or entity organized and existing under US federal or state laws; or (ii) an act in furtherance of the misappropriation occurred in the US.3
Some courts have broadly interpreted the DTSA’s application outside the US pursuant to the EEA’s extraterritorial provision. These decisions have allowed DTSA claims to proceed even in cases where the alleged misappropriation occurred entirely outside the US or the alleged “act in furtherance” was that of a third party.4 In such cases, courts have found that activities such as communicating with individuals in the US,5 attending trade shows in the US,6 recruiting employees in the US,7 and meeting with vendors in the US8 constituted “an act in furtherance of the offense.” Future rulings will serve to define the contours of the DTSA’s extraterritorial reach.
Under US law, victims of trade secret misappropriation occurring outside the US by non-US persons may also obtain relief at the US International Trade Commission (ITC). The ITC governs which products can be imported and sold in the US, and for this reason, the ITC may hear cases involving non-US conduct and persons so long as there is an importation of an accused product into the US and a resulting injury or threatened injury to a US industry. Specifically, Section 337 of the Tariff Act of 1930, as amended, makes unlawful any “unfair methods of competition” or “unfair acts” in the importation of articles.9 Under the broad language of this provision, parties may initiate investigations and obtain issuance of ITC exclusion orders if the elements of a violation of Section 337 are present. ITC exclusion orders may ban the sale for importation, importation, and sale after importation in the US, of infringing goods that have some nexus to the misappropriation.
The EEA, DTSA, and Section 337 all compliment PAIP in protecting US trade secrets from misappropriation by individuals and entities worldwide.
The precise impact of PAIP remains to be seen, as it will depend on the extent to which the US Government uses PAIP’s authorizations to sanction individuals or entities worldwide. Although PAIP mandates imposition of sanctions on any persons identified under PAIP by the President, the President has considerable discretion in determining if a person meets the PAIP criteria (absent any form of judicial finding), and waiver authority hard-wired into the statute itself. This means the President could choose to avoid imposing any sanctions if he/she does not identify any persons meeting the criteria detailed in PAIP and could waive the imposition of sanctions on any such identified person if in the national interests of the US. This expansive discretion also means that targeted persons may have limited judicial recourse to challenge a designation and resulting sanctions.
Though PAIP is silent on a specific class of targets or geography, comments from PAIP’s sponsors suggest that Chinese companies are a key focus, and use against Chinese firms accused of trade secret theft may be likely.
PAIP’s impact on trade secret dispute resolution remains to be seen. Companies or individuals accused of theft of trade secrets from the US may be eager to avoid incurring sanctions under PAIP; this could increase pressure to settle any outstanding trade secret-related disputes with US persons. However, there is no guarantee that the President or OFAC would refrain from imposing sanctions in the event of a settlement. Sanctions may also complicate dispute resolution, as settlements may become conditioned on the approval of OFAC if the non-US party were to become sanctioned.
Finally, any businesses – US or non-US – that are considering transactions of any kind with entities that have been associated with actual or alleged thefts of US trade secrets, or that operate in certain trade secret rich technology sectors, should be mindful of the risk of such entities becoming sanctioned under PAIP in the future, and account for this risk in diligence and negotiations. Businesses involved in actual or threatened trade secret litigation also need to account for this new law in assessing and managing their risk.
1. For PAIP purposes, “US persons” include (i) US citizens and permanent residents, (ii) entities organized under US law, including their foreign branches, and (iii) persons located in the US.
2. See 18 U.S.Code. § 1839(3).
3. See 18 U.S.C. §§ 1837, 1839(3).
4. See vPersonalize Inc. v. Magnetize Consultants Ltd., 437 F. Supp. 3d 860, 878-79 (W.D. Wash. 2020).
5. See MedImpact Healthcare Sys., Inc. v. IQVIA Inc., No. 19CV1865-GPC(LL), 2020 WL 5064253, at *15 (S.D. Cal. Aug. 27, 2020)
6. See, eg Motorola Sols., Inc. v. Hytera Commc’ns Corp., 436 F. Supp. 3d 1150, 1165 (N.D. Ill. 2020); see also Inventus Power, Inc. v. Shenzhen Ace Battery Co., No. 20-CV-3375, 2020 WL 3960451, at *7 (N.D. Ill. July 13, 2020).
7. See Micron Tech., Inc. v. United Microelectronics Corp., No. 17-CV-06932-MMC, 2019 WL 1959487, at *4 (N.D. Cal. May 2, 2019).