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Commercial LitigationTrade Secrets

President Signs Defend Trade Secrets Act: Five Must-Know Takeaways for Your Business

May 11, 2016

Commercial LitigationTrade Secrets

President Signs Defend Trade Secrets Act: Five Must-Know Takeaways for Your Business

May 11, 2016

Back to Fish's Litigation Blog

 

Today President Obama signed the long-awaited Defend Trade Secrets Act (“DTSA”) into law, which was passed by Congress on April 27, 2016.  An extension of the Economic Espionage Act of 1996, the DTSA provides for a federal private cause of action for trade secret misappropriation.  One of the biggest developments in intellectual property law in years, the DTSA will go into effect immediately and applies to any misappropriation of trade secrets falling under the DTSA on or after the date of its enactment.

Traditionally, trade secret misappropriation has been the domain of state law and protection.  With the prevalence of so many individuals and companies operating across state lines, however, protecting one’s trade secrets under potentially fifty different states’ trade secret laws can be difficult and unpredictable.  For this reason, forty-eight out of fifty states have adopted some variation of the Uniform Trade Secrets Act (“UTSA”), which was intended to create more uniformity.  Although the UTSA was a step in the right direction, variations of the UTSA were adopted from state to state and each state has developed its own interpretation of the UTSA.  Hence, lack of uniformity remains an issue.  The passing of the DTSA offers further promise of uniformity for those operating in multiple states.

Although it will be many years—through interpretations of the courts—before the full scope and impact of the DTSA is understood, we highlight five key takeaways from the DTSA that every company interested in protecting trade secrets or understanding the federal law governing trade-secret theft should know:

  1. Civil Seizure is Permitted in Extraordinary Circumstances

One of the most notable provisions in the DTSA is that it provides the court authority to issue civil seizure orders in “extraordinary circumstances” upon an ex parte application—an authority that is not provided for in the UTSA and the trade secret laws of many states.

The seizure order may provide for the seizure of property “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.”  There are strict requirements under the DTSA for the issuance of the seizure order, however, and the court must “provide for the narrowest seizure of property necessary.”  The DTSA requires protection to the defendant as to the publicity of the seizure and, once the property is seized, it is taken into the custody of the court.  Once in the court’s possession, it must take specified measures to protect the materials’ confidentiality.  For example, if the seized material is on a storage medium, the court shall prohibit that medium from being connected to a network or the Internet.  Moreover, the appointment of a special master is allowed to isolate the misappropriated trade secret information and return all other unrelated property.

If the ex parte seizure order is issued, the court must set a hearing within seven days of the order.  At the hearing, the party who obtained the seizure order has the burden of proof to support the findings and conclusions of the order, or the order will be dissolved or modified.  If a person suffers damages due to a wrongful or excessive seizure order issued against them, the DTSA provides that person a cause of action against the applicant.

  1. Liability and Remedies for Trade Secret Misappropriation Under the DTSA are Defined Similarly to the UTSA

There are many similarities between the DTSA and the UTSA, which is helpful because it contributes to efforts of states to date to create uniformity.  The definition of “misappropriation” in the DTSA is almost identical to the definition of “misappropriation” in the UTSA, and the minor differences appear to be more cosmetic than substantive.

Also similar to the UTSA are the remedies provided by the DTSA.  Insofar as monetary relief, the DTSA provides for (1) damages for actual loss caused by the misappropriation, (2) damages for unjust enrichment caused by the misappropriation to the extent it is not addressed by the actual loss, and (3) in lieu of damages measured by any other methods, a reasonable royalty is permitted.  Moreover, in the case of willful misappropriation, both the DTSA and UTSA allow for an additional two times the damages awarded.

Like the UTSA, the DTSA also provides for an injunction in certain situations, including in cases of “actual or threatened misappropriation.”  Finally, the DTSA provides for the recovery of attorneys’ fees when a claim of misappropriation is brought in bad faith, a motion to terminate an injunction is made in bad faith, or the trade secret is willfully and maliciously prosecuted.

  1. No Preemption of State Law by the DTSA

Any time a new federal law is passed, its effect on state law through preemption is always an issue.  But here, Congress made clear that the DTSA does not preempt any state law, as a provision of the DTSA states “[n]othing in the amendments made by this section shall be construed to . . . preempt any other provision of law.”

As a result, trade secret owners now have alternative options to protect their trade secrets.  Depending on the facts and venue considerations in a given case, a trade secret owner may decide to (1) bring the trade secret action in federal court under the DTSA (where the trade secret owner could also potentially bring state law claims in federal court), or (2) bring state law trade secret claims in state court.

  1. Whistleblower Protections are Provided and Employers Are to Provide Employees Notice of the Whistleblower Protections in Employment Agreements or Policies

The DTSA also encourages the reporting of trade secret violations by providing a safe harbor to whistleblowers who turn trade secrets over to the government.  To protect whistleblowers, the DTSA provides civil and criminal immunity for any confidential disclosure of a trade secret to his or her attorney, the government, or in a court filing under seal—so long as the purpose is for reporting or investigating a suspected violation of law.   Moreover, if the whistleblower files a lawsuit for retaliation against an employer by virtue of him or her reporting a suspected violation, the whistleblower may also use the trade secret information in that anti-retaliation lawsuit.

For employers, the provision on whistleblower protection includes a key provision that will affect employment agreements going forward.  Specifically, the DTSA requires that employers provide employees notice of the aforementioned immunity in any employment contract that governs the use of trade secret or confidential information.  The notice of the immunity must either be explicitly provided for in the employment contract or, at a minimum, the contract must include a cross reference to a company policy document that includes a discussion of the immunity.  If an employer does not include the notice in the employment contract, the employer is prohibited from being awarded exemplary damages or attorneys’ fees in a later suit under the DTSA in an action against the employee to whom notice was not provided.  As such, if employers wish to maintain the availability of exemplary damages and attorneys’ fees in a DTSA lawsuit, most employers will now need to update the language used in any new employment agreements that concern trade secrets or confidential information.

  1. A Bi-Annual Report on Foreign Theft of Trade Secrets is Created

Finally, the DTSA requires the Attorney General to submit a bi-annual report to the Committees on the Judiciary in the House of Representatives and Senate that includes, among other things, reporting on the scope and breadth of theft of trade secrets from United States companies that is occurring outside the United States and the extent such trade secret theft is being sponsored by foreign governments and agents.  The report must also include a discussion of the availability of mechanisms for United States companies to prevent misappropriation of trade secrets abroad and an identification any country whose laws on trade secret theft are a significant problem for United States companies.

Although this provision may not be of direct significance to United States companies or individuals looking to protect their trade secrets, the provision is worth noting because at least part of the original intent of a federal trade secret cause of action was to help prevent trade secret theft by foreign entities.  The DTSA fails, however, to provide any protection to United States companies for trade secret theft occurring abroad that does not already exist by virtue of state trade secret laws.  But perhaps the bi-annual reporting is a step in the right direction and may ultimately encourage treaties or international conventions in the future that address issues with trade secret theft occurring abroad.

Blog Authors

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Natalie L. Arbaugh | Principal

Natalie Arbaugh is a trial lawyer and Principal in the Dallas office of Fish & Richardson. Ms. Arbaugh has a passion for top-notch client service, creative problem solving, and courtroom excellence.  Natalie’s clients view her as a trusted legal advisor—a collaborative...

Rex Mann | Attorney - Dallas, Texas
Rex Mann | Associate

Rex Mann is an Associate in the Dallas office of Fish and Richardson. Rex’s practice focuses on intellectual property and business litigation, often serving clients in the technology space, where he focuses on taking the...

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