Why it matters

Passed by an overwhelming majority of the federal legislature, the Defend Trade Secrets Act (DTSA) became law with President Barack Obama's signature on May 11, 2016. The measure establishes for the first time a private right of action for misappropriation of trade secrets under federal law and permits companies to pursue an injunction against violations of trade secret theft as well as damages for violations that have already occurred. Intended to create a uniform national standard for trade secret law, the DTSA does not preempt state law. The statute provides authorization for ex parte seizure orders but includes immunity provisions for certain employee activities, such as making disclosures of confidential information to the government. Employers should familiarize themselves with the new law, which took immediate effect.

Detailed discussion

With the enactment of the Defend Trade Secrets Act (DTSA), employers have a private right of action under federal law for trade secret misappropriation for the first time. The bill—which passed the House of Representatives with a 410-2 margin and the Senate by a vote of 87-0—took immediate effect. The amendment to the Economic Espionage Act granted federal district courts original jurisdiction over trade secret disputes, including contract and tort claims.

Pursuant to the new statute, employers may sue for unlawful misappropriation and may also seek an injunction against trade secret theft that occurs on or after the date of enactment. Employers may recover damages for actual loss caused by the misappropriation, as well as damages for unjust enrichment (to the extent not addressed by actual loss), and a reasonable royalty is permitted where damages cannot be measured by other methods. For willful misappropriation, employers may double their damages.

"Trade secret" is defined to include all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and regardless of whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if the owner has taken reasonable measures to keep such information secret and the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by the public.

The DTSA broadly defines "misappropriation" as "the acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means" or the "disclosure or use of a trade secret of another without express or implied consent by a person who (i) used improper means to acquire knowledge of the trade secret; (ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was (I) derived from or through a person who had used improper means to acquire knowledge of the trade secret, (II) acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret, or (III) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or (iii) before a material change of the position of the person, knew or had reason to know that (I) the trade secret was a trade secret and (II) knowledge of the trade secret had been acquired by accident or mistake."

"Improper means" covers theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, and espionage through electronic or other means but excludes reverse engineering, independent derivation, or any other lawful means of acquisition.

The DTSA provides for ex parte civil seizure of property when a plaintiff can show it is "necessary to prevent the propagation or dissemination of the trade secret," without a hearing or answer from the defendant. However, the statute made clear that seizure orders should only be used in "extraordinary circumstances" and crafted as narrowly as possible to achieve the stated intent (with a requirement that the plaintiff demonstrate the defendant has "actual possession" of the trade secret or property, among others).

Defendants can also seek damages (such as lost profits, for example) if a seizure is implemented and later found to be wrongful.

The law carves out an exception providing both criminal and civil immunity for employees under the DTSA for making disclosures of confidential information to the government to investigate potentially illegal activity, in court filings, or in connection with whistleblower retaliation claims. Pursuant to the statute, employers must provide workers with notice about their immunity in any contract or agreement that involves trade secrets or confidential information. The failure to provide notice precludes employers from later recovering attorneys' fees and exemplary damages in a subsequent DTSA action.

State law claims of trade secret theft are not preempted by the statute, leaving employers with the option to pursue multiple theories of misappropriation under both federal and state law. The DTSA contains a three-year statute of limitations.

To read the Defend Trade Secrets Act, click here.