An Initial Look at PAIPA’s Scope and Legal Risks

The passage of the Protecting American Intellectual Property Act of 2022, 35 USC § 1709 (PAIPA), earlier this year underscored Congress’s continued aggressive approach to protecting domestic trade secrets from misappropriation by foreign actors. PAIPA mandates the imposition of sanctions from a sanctions menu where the president finds that a “foreign person” has either engaged in or is providing significant support for a “significant theft” of trade secrets of US persons. 

The deadlines for action under PAIPA have come and gone, but there has been no reported activity under the statute to date. The president has not executed a delegation of authority under the statute, and the initial mandatory report deadline, July 4, 2023, came and went without action by the president or any agency purporting to act pursuant to PAIPA.

While there has been no imposition of sanctions pursuant to its authorities to date, the clock continues to run, and it is only a matter of time before the administration is called to task and action is demanded, or taken, by Congress.

In our prior publication at the time of passage, we described PAIPA’s requirements, including a number of unresolved questions. Until both the required delegations of authority occur, and the initial report is issued, the exact manner in which these expansive authorities will be used remains uncertain.

PAIPA’s Unique Scope

Signed into law by US President Joseph Biden on January 5, 2023, PAIPA mandates sanctions on entities and individuals identified as having committed “significant thefts of trade secrets” belonging to US persons where the trade secret theft is “reasonably likely to result in, or has materially contributed to, a significant threat to the national security, foreign policy, or economic stability of the United States.”

While co-sponsors of PAIPA—which, by designating only trade secrets, does not cover patent, trademark, or copyright infringement—pointed to the People’s Republic of China as one of the legislation’s targets, the text of the statute is not limited to a single country.

A number of factors differentiate PAIPA from its sanctions predecessors, including the following:

• It is specific to the theft of trade secrets (if “significant”), not other intellectual property (IP).
• There is no need for a specific governmental ownership interest.
• There are few standards or definitions for key terms used in the statute.
• Certain sanctions are mandatory (from the designated menu of sanctions).
• The statute broadly covers those benefiting from others’ trade secret theft, not just those committing trade secret theft.
• PAIPA requires that the trade secret theft either
  • be reasonably likely to result in a significant threat to the national security, foreign policy, or economic health or financial stability of the United States, or
  • have materially contributed to a significant threat to the national security, foreign policy, or economic health or financial stability of the United States.
• Inclusion of undefined, and harms beyond national security and foreign policy, to include “economic health” and “financial stability” of the United States opens a new realm for sanctions.

Numerous Questions Remain

Without a delegation of authority, implementing regulations, or an initial report, numerous questions remain. PAIPA has the potential to be not only a significant governmental tool to address IP losses and their impact on national security, but also to allow private parties to weaponize sanctions in trade secret litigation (or threats of litigation).

Until the administration or Congress acts, however, the breadth of that impact remains uncertain, not least because the statute leaves so many things unanswered. Among the unaddressed questions are the following:

• While PAIPA incorporates by reference the broad definition of trade secrets found in 18 USC § 1839, implementing regulations will need to discern whether, for example, the analysis will require consideration of the restatement rules or whether other standards will apply.
• Since trade secrets are primarily governed by state law, will the administering agency develop its own standards?
• What will be the impact if the trade secrets are the subject of current or threatened litigation? Nothing in PAIPA prohibits the imposition of sanctions while litigation is ongoing, but to do so impacts rule of law issues that may ultimately be decided by the judge handling the case.
• Does there have to be an Economic Espionage Act (EEA) case pending? Does the US Department of Justice (DOJ) have to be involved already?
• Can the sanctions standard differ from the EEA standard used by DOJ and, if so, how?
• What evidentiary standard will apply to PAIPA determinations of trade secret theft? The statute only states that the “President determines.” Will parties (or the court if there is active litigation) ever know if/what standard used?
• Will courts consider PAIPA sanctions determinations as part of their decision-making and will Chevron deference apply to those decisions?

Legal Risks under PAIPA

While the full scope of risk remains to be seen, a key means of avoiding these sanctions will be through measures that ensure respect for IP rights. Trade secret theft arises most frequently through either the misuse of information obtained via cooperative agreements or through the hiring of competitor personnel. Because PAIPA applies only where a party has “knowingly engaged in, or benefitted from, significant theft of trade secrets of United States persons,” compliance measures should go a long way toward avoiding becoming a target of these new sanctions. These may include

• implementing trade secret compliance policies and procedures,
• training employees on both the fundamentals of trade secret requirements and PAIPA, and
• auditing functions where trade secret theft is most likely.

Our Continuing Evolution of US-China Relations: 2023 and Beyond webinar series, examined the US Congress’s anticipated policy and legislative impacts. The series addressed interrelated issues affecting global business and focus on intellectual property, sanctions, export controls, risk factors, and the potential for an outbound investment regime.