Key Notes:

  • New federal cause of action for trade secret misappropriation now available, with additional tools for plaintiffs.
  • State law is not preempted, giving prospective plaintiffs alternatives and choices.
  • Employers should amend employee agreements and policies to obtain full benefits of the new legislation in case of future lawsuits.

The Defend Trade Secrets Act of 2016 (Act), signed by President Obama on May 11, 2016, creates for the first time a federal private civil right of action for the misappropriation of trade secrets. As previously described in Thompson Hine's April 29, 2016 bulletin, “Congress Passes Federal Trade Secret Law,” the Act largely follows substantive provisions of the Uniform Trade Secrets Act (UTSA), and therefore closely tracks the trade secrets laws of most states. While not as extensive as some prior draft trade secret legislation, the Act provides potent additional weapons to a trade secret plaintiff’s arsenal, though the federal claim does not come without potential risk. The Act also has implications for employee handbooks and other agreements with employees (or consultants and contractors) regarding trade secrets.

Key Provisions of the Defend Trade Secrets Act

  • The Act adds a civil right of action in federal court for misappropriation of trade secrets used in interstate commerce. The definitions of “trade secrets” and “misappropriation” are essentially identical to the UTSA definitions, with the addition of language clarifying that “reverse engineering” and “independent derivation” are not considered misappropriation and with the requirement that the trade secrets be related to a product or service used (or intended to be used) in interstate or foreign commerce.
  • The Act authorizes injunctive relief to prevent actual or threatened misappropriation, as well as damages measured by actual loss, unjust enrichment or a reasonable royalty, largely tracking the analogous terms of the UTSA.
  • The Act permits courts to award punitive damages of up to two times the amount of the plaintiff’s actual damages (again, similar to the UTSA) and attorneys’ fees where a misappropriation is willful or malicious, and also provides for an award of attorneys’ fees to a defendant if a claim of misappropriation is made in bad faith, which may be established by circumstantial evidence.
  • Claims for misappropriation must be brought within three years of the “date on which the misappropriation … is discovered or by the exercise of reasonable diligence should have been discovered.” This is comparable to the UTSA, but some states have differing statutes of limitations.
  • The Act expressly authorizes a court to issue ex parte orders for the seizure of computers or other evidence in “extraordinary circumstances” where an injunction or other order under Civil Rule 65 would be inadequate to achieve compliance and where “immediate and irreparable injury will occur if such seizure is not ordered.” The Act indicates that the seizure provisions are intended for circumstances where the subject of the order “would destroy, move, hide, or otherwise make such matter inaccessible to the court.” Seized evidence is held by the court itself, and the applicant for the seizure order is not permitted to participate in the seizure. The Act includes additional protections for the rights of defendants subject to seizure orders, including prompt hearings and protections against publicity for seizure orders. There is no comparable provision in the UTSA.
  • The Act applies “with respect to any misappropriation of a trade secret … for which any act occurs on or after the date of the enactment of this Act.”

Implications for Employee Policies and Agreements

The Act expands existing Economic Espionage Act language regarding immunity from liability for confidential disclosure of a trade secret to a government official or in a court filing, and notably requires employers to provide notice (including by reference to a policy document) of these immunity provisions in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” This provision applies to contracts or agreements entered into, or updated, after the enactment of the Act, and the definition of “employee” for this purpose includes a contractor or consultant. Failure to notify an employee as required under the Act prevents an employer from being awarded exemplary damages or attorneys’ fees in an action pursuant to the Act against that employee.

Accordingly, employers should consider amending employment agreements and policy documents addressing confidential information and trade secrets in order to prevent the loss of important deterrents and remedies in any future claims against employees.

Implications for Trade Secret Litigation

While the Act does not preempt existing law and indeed does not significantly change substantive law, some local legal variations exist that may continue to favor state court litigation over use of the new federal remedy. Parties intending to assert trade secret claims should continue to consider the advantages and disadvantages offered by state law and a state court forum as opposed to federal law and forum.

The ex parte seizure order provisions of the Act could change the ways that trade secret cases are routinely litigated, though it remains to be seen how courts may interpret the “extraordinary circumstances” warranted for the issuance of a seizure order. At a minimum, the potential for ex parte seizure could enable a plaintiff to obtain an order seizing computers or other evidentiary materials before a defendant has even been served with the lawsuit, and/or provide a plaintiff with significant leverage over a litigation opponent.

One unintended side effect of the Act may be to bring major merits issues in a trade secret case - identification of trade secrets and specific facts about misappropriation - to the forefront early on. In cases where federal jurisdiction is predicated only on the Act rather than on diversity jurisdiction, a defendant might allege lack of subject matter jurisdiction, claiming that there was no “misappropriation,” that the information in question was not, in fact, a “trade secret,” or perhaps even that the information wasn’t related to a product or service used in interstate or foreign commerce. An early subject matter jurisdiction challenge may change the focus and direction of litigation and require additional fact-gathering at the outset of litigation.

Conclusion

The Act does not change substantive trade secret law in most jurisdictions, or reduce the burden on trade secret owners to protect their trade secrets from disclosure. The Act provides additional choices and tools for parties who find themselves the victim of trade secret misappropriation, including the powerful new weapon of an ex parte seizure. Local variations in state laws, which are not preempted under the Act, may still provide comparative advantage or disadvantage relative to the Act in some jurisdictions. Employers should update employment agreements and policies relating to trade secrets and confidentiality to fully comply with the Act and to maximize both its deterrent effect and the availability of remedies in any future action.