With a stroke of the pen, President Obama signed into law the first-ever federal trade secrets regime, opening federal courthouse doors to all trade secrets litigants. While federal subject matter jurisdiction is widely heralded as welcome news, there are some surprising provisions in the Defend Trade Secrets Act of 2016 (the DTSA) that could deliver a crushing blow to anyone on the receiving end of them.
The DTSA amends the Economic Espionage Act to create a civil action for trade secrets misappropriation. The DTSA’s goal is to harmonize trade secret law by giving litigants a basis for federal jurisdiction claims. Right now, trade secrets law is based mostly on the Uniform Trade Secrets Act (the Uniform Act). Every state has adopted a form the Uniform Act, except New York and Massachusetts. But even with this widespread adoption, many states have codified their own, customized version of the Uniform Act, which can lead to conflicting precedent and forum shopping. For example, in Pennsylvania, the term “customer list” is specifically included in the definition of “trade secret,” but the Uniform Act does not include customer list within the same definition. Differences like this make it difficult for companies with a national presence to protect their trade secrets in a consistent manner. The hope is that the DTSA will lead to a relatively uniform body of case law governing trade secret disputes. Importantly, however, the DTSA does not preempt state laws already addressing trade secrets protection. It just gives litigants a new avenue for addressing them in federal court.
There are a couple of new twists, however. The DTSA gives immunity for employees and contractors who disclose trade secrets under certain circumstances. The DTSA also mandates that employers give notice of this immunity in any confidentiality or trade secret agreement with employees or contractors. If employers fail to do so, they will not be able receive the remedies under the DTSA, including exemplary damages (up to twice the amount of actual damages) and attorneys’ fees for willful or malicious violations. Employers need to incorporate the immunity notice into their relevant employment agreements and policies as soon as practicable.
Historically, trade secret theft was purely a criminal matter under the Economic Espionage Act. This tradition of relegating federal trade secrets cases to the criminal arena might explain the most draconian provision in the DTSA — civil seizure. Here’s what you need to know about this watershed development in trade secrets law.
How to Obtain a Seizure Order
Under the DTSA, a court may — upon ex parte application and based on an affidavit or verified complaint showing that the circumstances are extraordinary — “issue an order providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” This provision does not find a counterpart in state law, and will undoubtedly add a new and extremely contentious layer to many federal trade secrets cases.
To issue a seizure order, a court must find “that it clearly appears from specific facts” that each of the following elements is present:
- other forms of relief would be inadequate because the defendant “would evade, avoid, or otherwise not comply with such an order”;
- failure to seize the property will cause the moving party immediate and irreparable damage;
- the balance of harms, including potential harm to third parties, weighs in favor of seizure;
- the movant is likely to succeed in showing that the property at issue is a trade secret and that the defendant either misappropriated it or conspired to do so;
- the person against whom seizure would be ordered “has actual possession of the trade secret and any property to be seized”;
- the matter to be seized is described with reasonable particularity, as is its location (to the extent possible);
- if given notice of the possibility of seizure, the party in possession would “destroy, move, hide, or otherwise make such matter inaccessible to the court”; and
- “the applicant has not publicized the requested seizure.”
How a Seizure Order will be Executed
While the fact that civil seizure is possible is surprising enough, equally surprising is the way in which the DTSA allows for the seizure to be conducted. The statute provides that a federal law enforcement officer shall serve the seizure order and “shall carry out the seizure under the order” (emphasis added). The court has the option of allowing state or local law enforcement officials to participate in the seizure, but neither the applicant nor any agent of the applicant is permitted to do so.
A technical expert unaffiliated with either party may participate in the seizure, but only at the request of law enforcement officials (not at the request of either party) and only “if the court determines that the participation of the expert will aid the efficient execution of and minimize the burden of the seizure.”
What to Expect Post-Seizure
Those who seek seizure should be clear that obtaining a seizure order is not a short-cut to getting the property at issue back. Rather, the court will retain exclusive custody over the property until both parties have been heard, and may appoint a special master “to locate and isolate all misappropriated trade secret information and to facilitate the return of unrelated property and data from whom the property was seized.”
Additionally, a seizure order may not be used as a shaming device to facilitate settlement. The DTSA requires the court to take “appropriate action to protect the person against whom [a seizure order] is directed from publicity, by or at the behest of the person obtaining the order, about such order and any seizure under such order.” In other words, if you obtain a seizure order, mum’s the word.
A hearing will be held within seven days after a seizure order is issued, unless the party against whom the order is directed agrees to a later date, and the moving party must post a bond in an amount to be determined by the court.
Those who believe they were damaged by a wrongful or excessive seizure may bring a cause of action against the party who sought the order. This potential for yet another layer of litigation underscores the importance of seeking seizure only when — and to the extent — it is necessary to do so.
The DTSA, which carries a three-year statute of limitations and will not apply retroactively, significantly changes the landscape of trade secrets litigation both by virtue of placing these cases in federal court and by adding the powerful threat of civil seizure. As is so often the case, though, with great power comes great responsibility, and litigants who play fast and loose with a seizure order could find the tables turned on them. Case law on this portion of the DTSA is likely to burgeon for years to come, providing needed insight into the practical contours of this important new element of trade secrets law.