Proprietary Information
& Trade Secrets

The Economic Espionage Act of 1996 (18 USC 1831-39) defines trade secrets as all forms and types of financial, business, scientific, technical, economic or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if:

  • The owner thereof has taken reasonable measures to keep such information secret, and; 
  • The information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by the public.

There is no general definition for proprietary information in the U.S. legal code. The Federal Acquisition Regulation (48 CFR 27.402 Policy) does, however, provide a definition.

"…contractors may have a legitimate proprietary interest (e.g., a property right or other valid economic interest) in data resulting from private investment. Protection of such data from unauthorized use and disclosure is necessary in order to prevent the compromise of such property right or economic interest, avoid jeopardizing the contractor’s commercial position, and preclude impairment of the Government’s ability to obtain access to or use of such data."

This regulation is intended to protect from disclosure outside the government proprietary information that is provided to the government during a bidding process. Exemption 4 of the Freedom of Information Act exempts from mandatory disclosure information such as trade secrets and commercial or financial information obtained by the government from a company on a privileged or confidential basis that, if released, would result in competitive harm to the company, impair the government's ability to obtain like information in the future, or protect the government's interest in compliance with program effectiveness. The law on Disclosure of Confidential Information (18 USC 1905) makes it a crime for a federal employee to disclose such information.

State laws may also apply to unauthorized disclosure of proprietary or trade secret information.

Statutory/Regulatory Responsibilities & Obligations"

Safeguarding Proprietary/Trade Secret Information

Effective enforcement of laws governing unauthorized disclosure of proprietary or trade secret information generally requires that the owner of this information must have taken reasonable measures to safeguard it from unauthorized disclosure.

Reasonable measures include building access controls, escorting visitors, marking sensitive documents, non-disclosure agreements, and shredding material when no longer needed.

In the case of defense contractors, the government contract may require a contractor to follow certain safeguarding requirements. The government, in turn, is required to protect proprietary or trade secret information submitted to it during the bidding process (FAR 14.401). Bids must be "kept secure" and remain "in a locked bid box or safe."

Marking Proprietary/Trade Secret Information

Effective enforcement of laws governing unauthorized disclosure of proprietary or trade secret information generally requires that this information be clearly identifiable through appropriate markings. The nature of these markings is left to the discretion of the company. The terms "Company Sensitive" or "Company Proprietary" are sometimes used.

In soliciting bids, the government is required to inform potential contractors how to mark proprietary information (FAR 15.407) to ensure its protection. When a contract is granted, a data rights clause must be included in the contract (FAR (52.227-14) to advise the contractor how to mark proprietary data for protection. The title page and each page containing proprietary information must be marked. The regulations provide no guidance on marking of electronic media while on an electronic system (screen display or file marker).

Enforcement

The Economic Espionage Act contains two separate provisions that make the theft or misappropriation of trade secrets a federal criminal offense. The first provision, under Section 1831, is directed toward foreign economic espionage and requires that the theft of a trade secret be done to benefit a foreign government, instrumentality, or agent. In contrast, the second provision, under Section 1832, makes the commercial theft of trade secrets a criminal act regardless of who benefits.

A defendant convicted of economic espionage under Section 1831 can be imprisoned for up to 15 years and fined $500,000 or both. Corporations and other organizations can be fined up to $10 million. A defendant convicted for theft of trade secrets under Section 1832 can be imprisoned for up to 10 years and fined $500,000 or both. Corporations and other entities can be fined no more than $5 million.

Three other laws apply to disclosure of specific types of proprietary information, especially disclosure by government personnel:

  • For knowing disclosure of non-government information to which a government agency has gained access in connection with a procurement action, Title 41 USC 423 - Procurement Integrity, provides both civil and criminal penalties. The criminal penalty is up to five years imprisonment. The civil penalty is a fine up to $100,000. This applies mainly to government employees who receive non-government information, but also to non-government personnel who receive sensitive procurement information from government (for example, if government gives industry a bid package containing information from a potential subcontractor). This procurement integrity law applies only prior to the award of a contract. Once a contract has been awarded, other laws with lesser penalties may apply.
  • Title 18 USC 1905 applies to disclosure by a government employee of any information provided to the government by a company or other nongovernment organization, if the provider of the information identified it as proprietary or as being provided to the government in confidence. The penalty is mandatory removal from office (termination of employment), and the offender may be fined not more than $1,000 and imprisoned not more than one year.
  • For disclosure of non-government financial information in the custody of the government, civil remedies are allowed under 12 USC 417 Civil Penalties, which also requires the director of the Office of Personnel Management (OPM) to conduct an investigation and recommend disciplinary action on federal employees found culpable.

Legal & Regulatory Authorities
Title 5 USC 552(b) – Exemption b.(4),- Freedom of Information Act.
Title 12 USC 3417 – Right to Financial Privacy, Civil Penalties.
Title 18 USC 1831–39 - Protection of Trade Secrets [Chapter 90].
Title 18 USC 1905 – Disclosure of Confidential Information.
Title 41 USC 423 – Procurement Integrity.
Executive Order 12600 – Predisclosure Notification Procedures for Confidential Commercial Information.
Title 5 CFR 734 – Employee Responsibilities and Conduct.
Title 36 CFR 1234.10 Paragraph l.
FAR 3.104-1 – Procurement Integrity, General (48 CFR).
FAR 3.104-3 – Statutory Prohibitions and Restrictions (48 CFR).
FAR 14.401 – Receipt and Safeguarding of Bids (48 CFR).
FAR 15.407 - Solicitation Provisions (48 CFR).
FAR 27.4 – Rights in Data and Copyrights (48 CFR).
FAR 52.215-12 – Restriction on Disclosure and Use of Data (48 CFR).
FAR 52.227-14 – Rights in Data (48 CFR).

Related Topic: Economic Espionage Act of 1996.

 

<-- PrevNext -->
SECURITY BRIEFING TABLE OF CONTENTS