On May 11, 2016, the Defend Trade Secrets Act of 2016 (DTSA) officially became law, creating for the first time a federal private civil cause of action for misappropriation of trade secrets. The DTSA is actually an amendment to the Economic Espionage Act, which was passed 20 years ago and provides for criminal prosecution of trade secret theft.
Prior to the DTSA, civil actions for trade secret misappropriation were governed solely by state law. Over the years, 48 out of 50 states have adopted some form of the Uniform Trade Secrets Act (UTSA). The two exceptions are Massachusetts, which adopted its own trade secret statute distinct from the UTSA, and New York, which has relied on common law alone.
Many viewed this state-by-state approach as inadequate. The application of state-specific nuances in the law led to unpredictability, and the lack of federal law governing conduct that increasingly involved interstate or foreign activities caused jurisdictional and choice-of-law issues, including concerns that US companies had insufficient recourse against trade secret thieves operating overseas. In such cases, access to federal courts was not automatic. Such access required either diversity of citizenship or supplemental jurisdiction based on another asserted claim arising under federal law.
In view of these concerns, Congress has proposed various federal trade secrets bills over the past several years. Finally, with broad bipartisan support, the DTSA passed in spring 2016.
Importantly, the DTSA does not preempt state trade secret misappropriation laws. Parties may still pursue claims based on state law. But in cases with a nexus to interstate commerce, plaintiffs also will have access to the new federal statutory regime. Some parties have argued that having access to both state and federal causes of action may actually create complexity rather than engendering a more harmonized body of law, but that remains to be seen. Based on the substantial overlap in the DTSA’s and the UTSA’s definitions of “trade secret” and “misappropriation,” one might expect that DTSA and UTSA claims in the same case will not differ much from a substantive perspective. Likewise, DTSA remedies are similar to UTSA remedies: injunctive relief, compensatory damages (in the form of actual damages, unjust enrichment or reasonable royalties), enhanced damages for willful and malicious misappropriation (capped at two times compensatory damages) and attorneys’ fees (in cases involving bad faith or willful and malicious conduct). Nonetheless, there are differences between the DTSA and the UTSA, and having a new federal cause of action available should compel plaintiffs to weigh carefully which claim or claims to pursue, and where to file such claim.
A key feature of the DTSA that has received significant attention is the ex parte seizure provision, 18 USC § 1836(b)(2), which is a new remedy not available under state versions of the UTSA, although UTSA plaintiffs may have had similar vehicles of relief, such as a temporary restraining order. Under the DTSA, per a plaintiff’s expedited, unilateral request, courts may order law enforcement to seize property “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” This procedure is intended only for emergency situations to prevent or mitigate immediate and irreparable injury when less severe procedures would be ineffective. Indeed, this provision requires “extraordinary circumstances” and, if abused, can result in damages against the seizing party. To that end, the movant must post a bond sufficient to cover such damages if the seizure was unwarranted.
In addition, satisfying the threshold requirements for an ex parte seizure is not easy. A plaintiff must prove that the defendant actually possesses the misappropriated information and must identify “with reasonable particularity” the property to be seized and its location. Once seized, that property remains safeguarded by the court pending an expedited hearing on the propriety of the seizure.
Another key aspect of the DTSA remedies provision is the inclusion of employee mobility protections similar to protections in states that reject the “inevitable disclosure” doctrine. Section 1836(b)(3)(A)(i) restricts injunctive relief that would “prevent a person from entering into an employment relationship,” requiring that such relief be “based on evidence of threatened misappropriation and not merely on the information the person knows.” Notably, the law explicitly seeks to avoid conflicts with existing state employment laws—an area where disputes are expected to arise given that the DTSA is likely to be asserted against former employees.
Yet another employee protection of the DTSA is the immunity provided to whistleblowers who might disclose confidential information when reporting unlawful activities to government officials or as part of an anti-retaliation lawsuit. Under § 1833(b), employers are required to provide notice to employees of this immunity protection in any agreement governing the use of trade secret or other confidential information. As a result, it is important for companies to review and, if necessary, modify their standard employment and non-disclosure agreements to bring them into compliance with the DTSA.
The DTSA is silent on whether the plaintiff must first identify its asserted trade secrets with reasonable particularity before conducting any discovery. This is a fundamental statutory protection for defendants in certain states, such as California. Federal courts have grappled with whether this provision (Cal. Civ. P. Code § 2019.210) is applicable in federal cases under the Erie doctrine.
The DTSA recognizes the great economic harm inflicted on US businesses by theft of trade secrets, particularly by overseas entities. The law requires the US Attorney General and other agencies to report to Congress (within the next year and biannually thereafter) on the breadth and extent of this threat, as well as on any hurdles preventing trade secret owners from avoiding misappropriation by foreign actors and recommendations for further reducing the threat. At a time when many innovators are carefully evaluating whether to guard their intellectual property as trade secrets or patents (particularly in view of legal developments that have invalidated many patents), this new law signals that trade secret protection in the United States is becoming more muscular.