On May 11, 2016, the Defense of Trade Secrets Act (“DTSA”) was enacted into law. For the first time, there is a law providing for a civil federal cause of action for the misappropriation of trade secrets. In addition to allowing such lawsuits to proceed in federal court, the DTSA provides some new tools for protecting confidential information. The DTSA seeks to address the patchwork of differing state trade secrets laws and aims to provide predictability and consistency for businesses. This article addresses the key takeaways for businesses, as well as recommendations in light of the DTSA’s enactment.

Key Takeaways

The DTSA defines “trade secret”, “misappropriation”, and “improper means” consistent with most state trade secrets laws.

  • “Trade secret” means “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 whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) 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.”
  • “Misappropriation” means either (a) the acquisition of another’s trade secret by “improper means” (i.e., with knowledge or reason to know that this acquisition was by improper means); or (b) several scenarios involving the disclosure or use of such a trade secret without consent.
  • “Improper means” means “theft, bribery, misrepresentation, breach or inducement of breach of a duty to maintain secrecy, or espionage through electronic or other means.”

These definitions are substantially similar to most state trade secrets laws.

Importantly, the DTSA protects trade secrets that are related to a product or service used, or intended to be used, in interstate or foreign commerce. Although there are certainly some businesses that operate only intrastate, many companies operate across state lines or internationally, and these companies will be able to take advantage of the DTSA.

The DTSA does not apply retroactively. The DTSA provides relief for trade secrets that are misappropriated only after the date of enactment, i.e., May 11, 2016. In other words, the DTSA does not provide relief for misappropriation before enactment, even where a business does not discover such misappropriation until after enactment.

The DTSA does not preempt state laws. In contrast to federal patent and copyright law, the DTSA does not preempt state law. Thus, state trade secrets laws remain effective and likely largely unaffected. Where a state law provides for additional relief to what is provided for under the DTSA, most businesses will likely file DTSA claims in federal court in tandem with state law claims, over which the federal court will have supplemental jurisdiction.

The DTSA confers original, but not exclusive, federal jurisdiction. Even though the DTSA creates federal subject matter jurisdiction over DTSA claims, that does not mean that only federal courts may hear such claims. A trade secret plaintiff that prefers state court for strategic reasons is free to file its claim solely under state trade secrets law. Unless diversity jurisdiction exists, the trade secret defendant must remain in state court notwithstanding the DTSA.

The DTSA provides for similar, but not identical, remedies as provided for under many state trade secrets laws. The DTSA provides for injunctive relief to protect against actual or threatened misappropriation; damages for actual losses caused by misappropriation; damages for unjust enrichment; a reasonable royalty (in place of other damages); exemplary damages of up to twice the amount of actual damages or restitution in the case of willful and malicious misappropriation; and reasonable attorneys’ fees where the trade secret was willfully and maliciously misappropriated.

The DTSA includes heightened criminal penalties. Under the DTSA, the criminal penalty for an organization for trade secret theft is the greater of $5,000,000 or three times the value of the trade secret to the victim (including research and design costs).

The DTSA provides for an expansive remedy not provided for under state trade secrets laws: ex parte seizure. Perhaps the most drastic feature of the DTSA is the availability (albeit limited) of the ex parte seizure remedy. This remedy allows law enforcement to seize a defendant’s computers or other property without notice or opportunity to be heard. Specifically, the DTSA authorizes a federal court to “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.”

The prerequisites for obtaining a seizure order are numerous and precise. The court must find all of the following: (1) another form of equitable relief would be inadequate because the party to be enjoined would evade, avoid, or otherwise not comply; (2) immediate and irreparable injury will occur if such seizure is not ordered; (3) the harm to the applicant outweighs the interests of the party to be enjoined and substantially outweighs potential harm to third parties; (4) the application describes the matter to be seized with reasonable particularity; (5) the party to be enjoined has actual possession of the trade secret; (6) the application describes the matter to be seized with reasonable particularity; (7) the party to be enjoined would destroy, move, hide, or otherwise make such matter inaccessible to the court; and (8) the applicant has not publicized the request seizure.

Once granted, an ex parte seizure order must, among other things, include: (1) detailed findings of fact; (2) instructions providing for the narrowest seizure of property necessary; (3) detailed guidance to law enforcement for effectuating the seizure; and (4) instructions for protecting the seized property from disclosure.

Given these prerequisites, the circumstances in which a seizure order may be issued are substantially limited. Indeed, the DTSA recognizes that such an order should issue only in “extraordinary circumstances.” That said, where the prerequisites are satisfied, this remedy will allow businesses to quickly prevent further misappropriation and contain exposure of trade secrets while the DTSA case is pending.

The DTSA expressly rejects the “inevitable disclosure” doctrine. Although the DTSA provides for one new remedy in ex parte seizure, it also limits another injunctive remedy. Under some state laws, a court may enjoin an employee who has knowledge of certain trade secrets from joining a competitor based on the “inevitable disclosure” doctrine, which essentially posits that the employee will be assumed to disclose those trade secrets to the competitor. The DTSA expressly rejects this, and instead requires that any injunctive relief that would prevent or restrict a person’s employment must be “based on evidence of threatened misappropriation and not merely on the information the person knows.”

Additionally, the DTSA states that any injunction limitation that would prevent or restrict a person’s employment cannot conflict with state law regarding restraints on the lawful profession, trade, or business. For example, California law generally prohibits the use of non-competition agreements. Thus, under the DTSA, a California federal court cannot issue an injunction that contradicts California law on this issue.

The DTSA provides for whistleblower protection and correspondingly requires businesses to include certain whistleblower immunity notifications to employees, contractors, and consultants. The DTSA contains a provision requiring businesses to include an express, written whistleblower immunity notification for specific types of trade secrets disclosures in all agreements with employees, contractors, or consultants who perform work for the business that govern the use of a trade secret or other confidential information. This notification operates as an immunity provision that serves to protect individuals from both criminal and civil liability for disclosing a trade secret if made in confidence to a government official or attorney, so long as the disclosure is made for the purposes of reporting a violation of the law. The immunity notification can be either directly incorporated in the agreement or by cross reference to a separate policy document provided to the individual. This requirement applies only to agreements entered into on or after May 11, 2016. In other words, the DTSA does not mandate businesses to amend or supplement agreements that were executed before the DTSA was enacted into law. The following is proposed language to include in these agreements:

I understand that nothing in this Agreement prohibits me from reporting to any governmental authority information concerning possible violations of law or regulation and that I may disclose trade secret information to a government official or to an attorney and use it in certain court proceedings without fear of prosecution, liability, or retaliation, provided I do so in compliance with 18 U.S.C. § 1833.

A business’s adherence to the immunity notification requirement is critical, as failing to include such an immunity disclosure will foreclose the business from obtaining exemplary damages or attorneys’ fees (two of the most powerful remedies) under the DTSA against an employee, contractor, or consultant to whom such notification was not provided.

The DTSA has a three-year statute of limitations. Under the DTSA, the statute of limitations is three years “after the date on which the misappropriation with respect to which the action would relate is discovered or by the exercise of reasonable diligence should have been discovered. For purposes of this subsection, a continuing misappropriation constitutes a single claim of misappropriation.”

Recommendations

In order for businesses to take full advantage of this new law and fully protect their trade secrets and confidential information, it is recommended that businesses:

  • Take inventory of and review confidential and proprietary information and determine which information qualifies for trade secret protection under the DTSA and applicable state law;
  • Ensure that reasonable measures are in place to protect those trade secrets and confidential information and maintain their secrecy (this may include conducting an internal audit);
  • Review confidentiality, non-competition, and non-disclosure agreements with employees, contractors, and consultants to make sure that—in addition to the standard provisions—these agreements include specific references to (1) electronically stored information; (2) return-of-company-property protocol upon the termination of employment; and (3) former employee disclosure obligations to any new employer;
  • Immediately ensure that all agreements entered into on or after May 11, 2016 with employees, contractors, and consultants (including vendors, service providers, etc.) include the proper whistleblower immunity notifications, so that trade secrets and confidential information will receive the maximum protection under the DTSA; and
  • Implement written policies, and offer corresponding training, to complement confidentiality, non-competition, and non-disclosure agreements, specifically pertaining to electronic communications and the handling and monitoring of confidential corporate information.