On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (DTSA), creating, for the first time, a private federal civil cause of action to remedy the misappropriation of trade secrets.
DTSA amends the Economic Espionage Act of 1996, which itself was amended by the Foreign and Economic Espionage Penalty Enhancement Act of 2012. See 18 U.S.C. § 1831 et seq. Under those Acts, the theft of trade secrets can be a federal crime, but before DTSA, federal civil suits were limited to actions by the U.S. Attorney General for injunctive relief. DTSA creates a federal civil cause of action for the theft of trade secrets, with a full panoply of remedies available, including actual damages, injunctive relief, and punitive damages. Below, we identify some of DTSA’s key features and limitations and highlight several implications for trade secret owners.
1. Interaction With State Law
With the enactment of DTSA, businesses have an additional tool in their arsenal for protecting against the misappropriation of trade secrets. However, unlike other areas of federal law that protect intellectual property, DTSA does not broadly preempt the body of state law that has exclusively governed trade secrets in the civil context for many years.
Precisely how DTSA interacts with existing state law—including state commonlaw causes of action often relevant to trade secrets claims but foreclosed by many states’ versions of the Uniform Trade Secrets Act (UTSA)—may be the subject of future disputes. Moreover, there may be instances where state law provides broader protection for trade secrets than federal law. This means that trade secret owners still must carefully consider the applicable law when drafting nondisclosure agreements or taking other steps to enforce their trade secret rights.
2. DTSA's Reach
DTSA allows “owner[s]” of trade secrets to sue for alleged misappropriation, but only “if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” This limitation on DTSA’s coverage is unlikely to be a significant hurdle for large companies that use trade secrets in connection with products or services distributed nationwide or globally, but state law is still most likely the primary way for local businesses to protect trade secrets such as customer lists and pricing information.
Importantly, under 18 U.S.C. § 1837, a portion of the Economic Espionage Act of 1996 that was unchanged by DTSA, DTSA appears to reach at least some conduct occurring outside the United States, namely, conduct by a defendant who is a U.S. citizen or corporation or where “an act in furtherance of the [misappropriation] was committed in the United States.”
DTSA’s definitions of “trade secret” and “misappropriation” are similar to UTSA’s definitions, with “misappropriation” focused on the acquisition, disclosure, or use of a trade secret by “improper means.” Unlike UTSA (but similar to the law as it has developed through courts interpreting UTSA provisions), DTSA defines “improper means” to expressly exclude “reverse engineering, independent derivation, or any other lawful means of acquisition.”
DTSA includes a threeyear statute of limitations that incorporates a discovery rule. DTSA also makes clear that, for limitations purposes, “a continuing misappropriation constitutes a single claim of misappropriation.” In other words, a trade secret owner may not sit on her rights, waiting for damages to accrue as a trade secret is used, before bringing a civil suit.
Additionally, DTSA does not apply retroactively; rather, it applies to misappropriation occurring on or after the date of DTSA’s enactment (May 11, 2016).
3. Protection for Whistleblowers
DTSA also carves out an exception to encourage individuals to report suspected theft of trade secrets. In the one area where DTSA purports to supersede state law, DTSA provides immunity—from civil or criminal liability “under any Federal or State trade secret law”—for disclosing a trade secret either (1) in confidence to a government official or an attorney, “solely for the purpose of reporting or investigating a suspected violation of law” or (2) “in a complaint or other document” filed under seal “in a lawsuit or other proceeding.”
Moreover, employers are required to “provide notice of [this] immunity . . . in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” This provision applies to employment contracts executed or updated after the date of DTSA’s enactment (May 11, 2016), and employers can comply by identifying to the employee “a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law.” Importantly, for purposes of the whistleblower provision, DTSA defines “employee” to include “any individual performing work as a contractor or consultant for an employer.”
If the employer fails to provide the proper notice, it cannot obtain an award of exemplary damages or attorneys’ fees against an employee who misappropriates trade secrets. Accordingly, employers should amend any contract templates governing the use of company trade secrets or other confidential information to ensure that appropriate notice provisions are included in any agreement signed or updated after May 11, 2016. Employers also should amend their employee manuals and policy documents to spell out their policies on reporting concerns with respect to the use of confidential or trade secret information.
4. DTSA's Ex Parte Seizure Provisions
Highlights of DTSA include its procedural mechanisms for protecting against or limiting the extent of trade secret misappropriation. In particular, under DTSA, a trade secret owner may apply to a federal court—through an affidavit or verified complaint filed on an ex parte basis—for an order to seize property “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” Although DTSA empowers federal courts to grant such civil seizure orders, they are not required to do so, and courts’ discretion is limited to “extraordinary circumstances” and situations where the court can “clearly” find “from specific facts” that a number of particular requirements are satisfied. Among other things, the court must find that:
- “immediate and irreparable injury will occur if such seizure is not ordered”;
- “the applicant is likely to succeed” in proving both the existence of a trade secret and its misappropriation by the target of the requested seizure order;
- the trade secret owner has “describe[d] with reasonable particularity the matter to be seized and, to the extent reasonable under the circumstances, identifie[d] the location where the matter is to be seized”; and
- “the person against whom seizure would be ordered, or persons acting in concert with such person, would destroy, move, hide, or otherwise make such matter inaccessible to the court” if advance notice of the seizure were provided.
When a seizure order is issued, law enforcement officials who execute the seizure are to place the seized property in the court’s custody, and the court is required to “secure the seized material from physical and electronic access during the seizure and while in the custody of the court.” The court then must hold a hearing no later than seven days following the seizure, at which time the party that sought the order must prove “the facts supporting the findings of fact and conclusions of law necessary to support the order.”
DTSA also attempts to restrict trade secret owners from using the civil seizure provisions for unfair competitive advantage. For example, when a court issues a seizure order, it also must “take appropriate action to protect” the target of the order from any publicity by the trade secret owner about the seizure. DTSA also creates a cause of action for “damages by reason of a wrongful or excessive seizure.”
Because of the potential for abuse with ex parte seizures, it will be important to closely monitor the developing case law to understand the types of circumstances where courts allow for such extraordinary relief, as well as the nature of damages awards for wrongful or excessive seizures, which potentially could act as a significant deterrent to bringing seizure actions. In addition, DTSA itself requires the Federal Judicial Center to develop a set of “best practices” for courts to follow in ordering the seizure of confidential information and securing it once obtained.
5. Inevitable Disclosure
In a departure from some state laws, DTSA appears to prohibit courts from issuing injunctions based on the concept of inevitable disclosure—the notion that certain circumstances make misappropriation of a trade secret inevitable. In particular, DTSA does not allow injunctive relief that “prevent[s] a person from entering into an employment relationship” based “merely on the information the person knows,” and instead requires courts to base injunctive relief on “evidence of threatened misappropriation.” The kind and amount of “evidence of threatened misappropriation” necessary to obtain an injunction is likely to be the subject of future disputes.
6. Remedies for Trade Secret Misappropriation
Remedies for trade secret misappropriation under DTSA are similar to those available under UTSA, including injunctive relief as well as damages for actual loss, unjust enrichment, or, in lieu of other damages, a reasonable royalty. Punitive damages and attorneys’ fees are available under DTSA for willful and malicious misappropriation, although punitive damages are capped at two times the damages awarded.
DTSA’s injunction provisions seek to impose a balance between the kind of restrictions necessary to protect trade secrets, and restrictions that go too far and unduly restrain competitive activity. Nonetheless, the scope of injunctive relief is likely to be heavily contested in many trade secrets cases, just as it often is in actions pending under state law. For example, injunctive relief for “actual or threatened misappropriation” is expressly limited to avoid undue restrictions on employment. Such injunctions must not “prevent a person from entering into an employment relationship.” In addition, recognizing the difficulties of crafting appropriate injunctive relief in some cases, DTSA empowers a court, “in exceptional circumstances that render an injunction inequitable,” to enter an injunction that “conditions future use of the trade secret upon payment of a reasonable royalty for no longer than the period of time for which such use could have been prohibited.”
* * *
In sum, DTSA represents an important step in shoring up the nation’s laws against the misappropriation of trade secrets, though it remains to be seen how its procedural aspects, such as the civil seizure provisions, will function in practice. Moreover, because DTSA does not preempt the existing body of state trade secrets laws, DTSA will not create uniformity in the law, nor does DTSA provide trade secret owners with a simple answer to the question of where to sue after a trade secret has been stolen. Rather, trade secret owners still must assess the relevant state laws, alongside DTSA, in determining how to protect—and then where to enforce—their trade secret rights.