On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016, ushering in what is widely considered to be the most significant trade secret reform in almost two decades.
The DTSA creates, for the first time, a federal claim for misappropriation of trade secrets. This means companies can pursue a trade secret claim in federal court like other forms of intellectual property (patents, copyright, trademarks). Up to this point, trade secrets were protected only under state law, with most states adopting their own version of the Uniform Trade Secrets Act. It also requires that a new notice be provided to all employees. The DTSA doesn’t eliminate the various state trade secret rights. Rather, it is intended to complement the state laws and add an additional layer of protection for trade secret owners.
How Does It Work?
The DTSA expands the Economic Espionage Act of 1996 to provide a federal civil cause of action for trade secrets “related to a product or service used in, or intended for use in, interstate or foreign commerce.” It provides victims of trade secret theft with a pathway to a number of remedies, including:
- Injunctive relief;
- Damages for actual losses and damages for unjust enrichment, or in the alternative a reasonable royalty for the unauthorized use or disclosure;
- Exemplary damages (up to two times the award of actual damages) when the misappropriation is willful and malicious. Attorneys’ fees are also available for bad faith misappropriations.
There is also a new “ex parte seizure” provision, which allows plaintiffs to ask a federal court to order the seizure of property “necessary to prevent the propagation or dissemination of the trade secret.” The ex parte seizure application can be brought without any notice to the alleged wrongdoer. In essence, this procedure will apply in extreme circumstances and allow a plaintiff worried about the dissemination of its trade secrets to take proactive steps to protect them. To temper potential abuse of the procedure, the DTSA sets a high standard that a plaintiff must meet in order to obtain an ex parte order, including showing that other remedies, like a preliminary injunction, would be inadequate. It also prohibits copies being made of the seized property and requires that ex parte orders provide specific instructions to law enforcement officers performing the seizure.
Another key difference between pursuing claims under the DTSA compared to state law is the lack of a pre-discovery trade secret disclosure requirements in the DTSA. In California, as well as many other states, plaintiffs are required to identify each allegedly stolen trade secret with reasonable particularity before discovery begins. This is not the case with the DTSA, which will likely simplify the discovery process with uniform procedures in federal court.
Other Important Provisions
The DTSA includes whistleblower immunity provisions, protecting from liability a whistleblower who discloses trade secret information to a government official or attorney for the purposes of reporting a suspected violation of the law. It also exempts someone who discloses the information under seal in a lawsuit. Employers must include a notice of this immunity in any agreement with employees, contractors and consultants that “governs the use of a trade secret or other confidential information.” Not doing so puts the employer at risk of being unable to recover exemplary damages or attorneys’ fees from that person if the employer were to sue them under the DTSA. This notice requirement only applies to agreements entered/updated after May 11, 2016.
There is also a three year statute of limitations on trade secrets claims under the DTSA. The clock begins on the date the misappropriation is discovered, or when it should have been discovered through reasonable diligence. Further, the “Trade Secret Theft Enforcement” provision increases the penalties for a criminal violation from $5 million to the greater of $5 million or three times the value of the stolen trade secrets.
Why Is This Important?
One 2014 estimate calculated that trade secret theft costs American businesses $500 billion annually. There has been a strong desire for a federal private cause of action to help stem this tide, which has provided the DTSA with broad support.
To qualify as a trade secret, the information must derive its value from being generally unknown to the public. In order to avail themselves of the protections provided under the DTSA and various state laws, companies should identify confidential information that merits protection as a trade secret and take measures to maintain its secrecy. Trade secret claims can only be pursued if the company can show it took reasonable measures to protect the trade secrets.
What Steps Should a Company Take?
At a minimum, companies should review non-disclosure agreements with employees and contractors to ensure they contain the disclosures required by the DTSA’s immunity provisions. These agreements should not be overly broad and have clear definitions of trade secrets and confidential information.
Here is an example of language a company can use in its agreements with its employees or consultants to meet the NTSA’s notice requirement:
Defend Trade Secrets Act. Pursuant to the Defend Trade Secrets Act of 2016, [Employee/Consultant] acknowledges that he or she shall not have criminal or civil liability under any Federal or State trade secret law for the disclosure of a trade secret that is made (i) in confidence to a Federal, State or local government official, either directly or indirectly, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law or (ii) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. In addition, if [Employee/Contractor] files a lawsuit for retaliation by the Company for reporting a suspected violation of law, [Employee/Contractor] may disclose the trade secret to his or her attorney and may use the trade secret information in the court proceeding if [Employee/Contractor] (x) files any document containing the trade secret under seal and (y) does not disclose the trade secret, except pursuant to court order.