In response to escalating global trade secret theft, President Biden signed into law the Protecting American Intellectual Property Act of 2022 (PAIPA) on January 5, 2023. This new act, mainly a response to the surging incidents of intellectual property thefts traced back to China, is a two-pronged law that provides the president with broad powers to identify and penalize foreign entities engaged in trade secret theft. This blog post will explore PAIPA's two core elements mandated to the president:
Identifying and reporting foreign entities or individuals involved in trade secret theft
Imposing stringent sanctions against these entities or individuals
The Legal Framework
The PAIP Act mandates the president (1) periodically identifies and reports to Congress any foreign entity or individual determined to have participated in trade secret theft, and (2) imposes at least 5 or more sanctions against these individuals or entities.
Prong 1: Reporting Requirement
The PAIP Act requires the president to identify in a report to Congress those companies and individuals who the president determines is (a) "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;" or (b) "has provided significant financial, material, or technological support for, or goods or services in support of, … such theft" (§ 2 (a)(1)(A)(i)).
In other words, the PAIPA tasks President Biden with an essential job: to pinpoint foreign companies or individuals involved in significant trade secret theft from US entities or persons. The entities under this scrutiny include those:
Engaged in substantial theft of US trade secrets
Providing goods or services that assist or profit from foreign trade secret theft
Owned or controlled, in any manner, by foreign entities or persons
Holding executive positions (like CEOs) or board memberships in foreign entities
The act mandates that the president submit this list to Congress within 180 days of the Act's enactment. The report will detail not only who has participated in or profited from the theft, but how they benefited (§ 2(a)(1)(B),(C)). Interestingly, parties who can be included on this list can extend beyond expected direct perpetrators to parent companies, CEOs, and board members.
Prong 2: Sanctions
The PAIPA empowers the president to impose stringent sanctions on the foreign individuals and entities identified and named in the report. These sanctions can be severe, encompassing property and visa-blocking for individuals, along with property or export-blocking sanctions for entities (§ 2(b)).
Sanctions Applicable to Entities
For entities, the president must impose a minimum of five sanctions from an extensive list of economic measures designed to prevent, curb, and penalize illicit activities. The list of sanctions includes, but is not limited to:
Block and prohibit all transactions relating to US property and property interests
Prohibit any US financial institution from making a loan in excess of $10 million to the entity in any given year
Prevent the US government from procuring any goods or services from the entity
Deny visas to and exclude entry of corporate officers, principals, or shareholders with controlling interests in the entity
Designate the entity to the Entity List maintained by the Bureau of Industry and Security of the Department of Commerce
(Note: the PAIPA authorizes a notable sanction that gives US authorities the ability to freeze the assets of foreign individuals or entities implicated in the theft of trade secrets, as provided under sections § 2(b)(1)(A) and § 2(b)(2)(A) respectively.)
Sanctions Applicable to Individuals
For foreign individuals identified, the president must impose all of the following sanctions:
Block and prohibit all transactions in property and interests in property if they are in or come within the US, or are or come within the possession or control of a US person
Block the person from entering the US
Deny a visa or other documents to enter the US (including any benefits from the Immigration and Nationality Act)
Revoke any current US visa previously granted
The difference here is that the foreign individual is ineligible to block entry into America and ineligible to receive any visa.
Implications
The introduction of annual public PAIPA listings may impact corporate due diligence in substantial international business transactions. These listings add to a growing portfolio of the government lists to be monitored. Foreign entities will also need to be prepared to justify that intellectual property in their portfolios has been lawfully developed or obtained.
Although the new law may serve as a potent deterrent to international trade secret theft targeting American companies due to the potentially grave consequences of a PAIPA listing, it might also prompt increased legal disputes over the nature of the property allegedly stolen. These controversies could question whether the so-called stolen property genuinely constitutes a "trade secret" under the Act's purview.
The PAIP Act represents a notable shift in US policy, vesting the president with the authority to impose sanctions on any foreign entity deemed to have stolen American trade secrets. Despite its origin as a response to surging IP theft traced back to China, the Act's language is broad and indiscriminate, leaving questions about its specificities.
Open Questions
The PAIP Act borrows from 50 US Code § 1704 that entrusts the president with the power to enact regulations, but leaves questions about the broad authority of the executive branch with limited judicial oversight. What is the process by which President Biden makes determinations to who should be included in the sanction list? What is specifically considered a “significant threat to economic stability”? Can foreign entities and individuals contest inclusion into the sanction list?
The PAIPA has no provision for judicial review before or after the president decides to report a foreign entity or person. This curious absence means that the determination of whether an entity or individual is guilty of trade secret theft is purely an executive decision, with the power resting solely with the president, rather than being a finding of fact established in court. The absence of a process for judicial review could potentially spark legal battles over the constitutionality of its enforcement mechanisms, with critics questioning the integrity of such a unilateral decision-making process.
Additionally, questions linger regarding how PAIPA will complement existing trade secret protections–such as the Defense of Trade Secrets Act of 2016 (DTSA, 18 U.S.C. § 1831-1832). The DTSA, an amendment to the Economic Espionage Act (EEA), also tackles trade secret theft but mandates due process rights, including a trial. How will PAIPA align with these existing protections, and will it be able to satisfy both substantive and procedural due process?
Conclusion
Despite leaving behind several open questions, the Protecting American Intellectual Property Act of 2022 ushers in a new era for trade secret protection. The introduction of the PAIPA represents a significant advance in US trade secret protection policy. Its stringent measures, broad scope, and strong sanctions provide a strong deterrent against significant theft of trade secrets by foreign actors. President Biden's first report to Congress comes out on June 8, 2023, which will provide guidance on the outcome and intensity of the recent PAIP Act's enforcement.