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Finally a Federal Cause of Action for Trade Secrets? Defend Trade Secrets Act of 2016 Passed by Senate Judiciary

February 1, 2016

Commercial LitigationTrade Secrets

Finally a Federal Cause of Action for Trade Secrets? Defend Trade Secrets Act of 2016 Passed by Senate Judiciary

February 1, 2016

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On Thursday, January 27, 2016, the Senate Judiciary passed a voice vote in favor of the Defend Trade Secrets Act of 2016.  The bill, which was spearheaded by Sens. Orrin Hatch (R-Utah) and Chris Coons (D-Del), continues the efforts of the legislature over the last couple of years to create a federal private cause of action for trade-secret theft.  While recent efforts have failed, they reveal a clear momentum in favor of federal protection.

Currently, trade secrets are generally protected by state law under a particular state’s version of the Uniform Trade Secrets Act (UTSA), which was promulgated in an effort to provide a unified legal framework to protect trade secrets.  All states except New York and Massachusetts have a uniform act that generally follows the UTSA, with New York and Massachusetts instead protecting trade secrets under the common law of those jurisdictions.

Trade secrets are also protected under state criminal laws as well as federal criminal law under the Economic Espionage Act of 1996.  But the Economic Espionage Act of 1996 provides only for criminal cases lodged by federal prosecutors. Recognizing that “trade secret theft, wherever it occurs, harms the companies that own the trade secrets and the employees of the companies,” the Defend Trade Secrets Act (see amendments here and here) seeks to change that by paving the way for companies to bring a civil cause of action in federal court for theft of their trade secrets.

In addition to building upon the Economic Espionage Act, including its definition of a “trade secret” contained, the bill seeks to provide for injunctions, civil seizure orders preventing the dissemination of the subject trade secret(s), preservation of evidence and damages.  The amendments approved by the Committee on Thursday propose:

  • A definition of “misappropriation” of a trade secret generally consistent with that contained in the UTSA and related state uniform acts;
  • Stringent requirements for obtaining a seizure order, making clear that such order will issue only in “extraordinary circumstances”;
  • Requirement of proof of “actual or threatened misappropriation” in order for an injunction to issue, but while expressing the clear intent to not restrict employee mobility (the order cannot “prevent a person from entering into an employment relationship”);
  • The provision of damages for actual loss caused by the misappropriation, damages for unjust enrichment, and reasonable-royalty damages, as well as exemplary damages in an amount not more than 2 times the amount of damages awarded (a provision which previously provided for trebled damages);
  • Statute of limitations of 3 years after the date the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered (shortening the limitations period from the previously proposed 5 years);
  • Whistleblower protections for individuals who disclose trade secrets to the government and in the context of retaliation lawsuits; and
  • An award of attorneys’ fees to the prevailing party 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.

To “reduce the threat of and economic impact caused by the theft of the trade secrets of the United States companies occurring outside the United States,” the Act also would require an annual Report on Theft of Trade Secrets occurring abroad to be made by the Attorney General to the Committee on the Judiciary of the House of Representatives and the Senate.

It is unclear when the bill might be presented to the Senate for a floor vote and when the House may consider the issue, though it has attracted bipartisan support in both chambers of Congress and has received endorsements from a number of industry stakeholders.  The House introduced its own version of the DTSA in July 2015, which now has more than 100 co-sponsors.

Senator Hatch applauded the bill’s passage stating, “The Judiciary Committee’s overwhelming vote in support of the Defend Trade Secrets Act demonstrates the importance and timeliness of this legislation. I hope the Senate will follow suit and act promptly to safeguard American ingenuity and give companies the legal protections they deserve. Not only has our bill attracted overwhelming bipartisan support in both chambers of Congress; it has also garnered endorsements from a wide-array of industry stakeholders who know firsthand the economic losses caused by trade secret theft.  Both Republicans and Democrats agree that this bill is critical for American property rights and innovation. . . . We need this bill now more than ever to keep America competitive in the global economy.”

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