How the Recently Passed Defend Trade Secrets Act of 2016 Affects Your Business
Recently, U.S. Congress passed the landmark Defend Trade Secrets Act of 2016 (DTSA), which will now make its way to the desk of President Obama, who has already voiced his support and indicated that he intends to sign the DTSA into law. How does the DTSA affect your company? In short, it means that the federal courthouse doors are now open!
Misappropriation of Trade Secrets
Traditionally, lawsuits for misappropriation of trade secrets have been fought in state court and under state law. Out of the 50 states (with New York and Massachusetts being the only outliers), 48 have adopted the Uniform Trade Secrets Act (UTSA). While the UTSA does provide for some level of commonality among state trade secret laws, the UTSA was adopted by the individual states with many variations and state courts have developed their own, individual jurisprudence for interpreting their respective state versions of the UTSA. This has resulted in significant state specific differences. Thus, while the DTSA does not preempt the UTSA, it does provide plaintiffs with an additional federal venue to bring trade secret and misappropriation claims.
Trade secrets owners will now be free to seek redress for trade secret misappropriation in federal court, which would allow them to bring their rights into alignment with those long enjoyed by owners of other forms of intellectual property. The DTSA authorizes the filing of a civil action in federal court for the misappropriation of trade secrets that is related to a product or service used in, or intended for use in, interstate or foreign commerce.
Fundamentally, the DTSA seeks to expand the Economic Espionage Act of 1996 to:
- Provide a federal civil remedy for trade secret misappropriation, and
- Provide parties pathways to injunctive relief and monetary damages, to include ex parte property seizures, in federal court to help prevent disclosure of trade secrets and to account for economic harm to companies whose trade secrets are misappropriated.
What Does the Defend Trade Secrets Act Provide?
As provided in other federal intellectual property statues, the DTSA provides for actual damages, restitution, injunctive relief, significant exemplary relief (up to two times the award of actual damages), and attorneys’ fees. One distinguishing feature of the DTSA provides plaintiff with the ability to obtain an ex parte seizure of property to prevent the dissemination of a trade secret. This feature can be particularly attractive to a plaintiff seeking to ensure that their trade secrets are kept as secure as possible pending resolution of a matter.
Under the DTSA, an ex parte seizure order allows an aggrieved party to seek relief from the court to seize misappropriated trade secrets without providing notice to the alleged wrongdoer beforehand. However, these ex parte seizures are only permitted under extraordinary circumstances. It is clear that an ex parte order should not be issued by a court unless the plaintiff can demonstrate that other equitable remedies, like a preliminary injunction, are inadequate and after balancing the interests of all the parties.
The DTSA also protects individuals who might be charged with trade secret misappropriation issues. This may present planning challenges for employers. For example, the DTSA provides a barrier against a plaintiff’s assertion of claims for misappropriation of trade secrets under a theory of inevitable disclosure that results from the hire of a new employee. Under this theory, despite the plaintiff‘s best efforts, misappropriation could be asserted as the new employee will “inevitably disclose” trade secrets in the course of their job responsibilities. The DTSA prevents a court from granting injunctive relief if it would prevent a person from entering into an employment relationship and allows the court to place conditions on that employment relationship only upon a showing through evidence of “threatened misappropriation and not merely on the information the person knows.”
The DTSA further provides protection for whistleblowers and confidential disclosures of trade secrets within a lawsuit, including anti-retaliation proceedings. This immunity provision acts to protect individuals from criminal or civil liability for disclosing a trade secret if it is made in confidence to a government official (directly or indirectly) or to an attorney, and it is made for the purpose of reporting a violation of law. This provision places an affirmative duty on employers to provide employees notice of the new immunity provision in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” Under the DTSA, employers are required to give notice to their employees about this immunity in their employment or confidentiality agreements or policies or they will be barred from obtaining attorneys’ fees or exemplary damages. Interestingly, the definition of “employee” under the DTSA is drafted broadly to include contractor and consultant work done by an individual for an employer.
This means that if an employee is signing a confidentiality agreement, the confidentiality agreement must be modified to account for DTSA's provisions on lawful disclosures. DTSA provides that employers can comply with this requirement by "cross-referenc[ing] to a policy document provided to the employee that sets forth the employer's reporting policy for a suspected violation of law." Thus, to lessen the burden, employers may be able to simply reference other policies that already exist, rather than modifying existing policies to comply with DTSA.
The statute of limitation for commencing an action under the DTSA is three years, which is identical to the statute of limitation period with which to file a UTSA claim.
To ensure that parties can avail themselves of the benefits of the DTSA, it is recommended that the company’s internal business and human resource policies be modified to reflect the changes proffered by the DTSA. At the very least, companies should have internal business policies in place to both identify and to internally protect proprietary trade secrets. Such business policies also necessarily require the allocation of capital to ensure the protection of identified company proprietary trade secrets.
It is also recommended that company human resource policies provide for proper on-boarding and off-boarding procedures and contain language required under the DTSA, such as the proper notice of the immunity provision previously described. Any employee non-disclosure agreements must also have clear definitions of “trade secrets” and “confidential information” that are not overly broad.
While the DTSA should be a welcomed addition to a company’s ability to protect its proprietary trade secrets, your best strategic move in some situations may be to forgo federal court and DTSA, and instead pursue state law claims in state court. However, a company’s ability to pursue trade secret and misappropriation claims and to seek and obtain additional remedies has been expanded greatly by the passage of the DTSA. But only if the company is positioned to take advantage of the opportunity.