The Legislation Has Implications for Employers and Trade Secret Holders Nationwide

HIGHLIGHTS:

  • The U.S. House of Representatives has passed the Defend Trade Secrets Act (DTSA), significant legislation that proposes to amend the Economic Espionage Act. The DTSA had previously passed the Senate and is expected to be signed into law by President Obama.
  • DTSA, if enacted, would federalize a civil right of action for employers, contractors and companies who pursue trade secret misappropriation claims, bringing this category of intellectual property into the already federalized arenas of copyright, trademark and patent claims.
  • DTSA provides a welcome federal coherence to trade secret law, expanding the options for trade secret owners to protect their rights while balancing the legitimate interests of defendants and third parties.

The U.S. House of Representatives passed the Defend Trade Secrets Act (DTSA) on April 27, 2016, significant legislation that proposes to amend the Economic Espionage Act. The DTSA had previously passed the Senate and is expected to be signed into law by President Obama.

If enacted, DTSA will for the first time federalize a civil right of action for employers, contractors and companies who pursue trade secret misappropriation claims. The statute will at long last bring this category of intellectual property into the already federalized arenas of copyright, trademark and patent claims. The legislation expressly reflects the "sense of Congress that trade secret theft occurs in the United States and around the world" and "wherever it occurs, harms the companies that own the trade secrets and the employees of the companies."

To date, most private parties litigating trade secret theft claims did so under various iterations of the Uniform Trade Secrets Act, which has been adopted in differing forms in 47 states and the District of Columbia. These state trade secret statutes, while based on a uniform act, at times have led to different results in trade secrets cases due to variations in statutory definitions and state court interpretations.

Common Federal Framework

In contrast, DTSA would provide a common federal framework and develop a body of federal law for private owners of trade secrets. Employers and other trade secret owners may bring a civil misappropriation action in federal court – without the need to establish diversity of citizenship – "if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce." Their remedies include injunctive relief and several forms of monetary damages measured by the actual loss caused by misappropriation, any unjust enrichment not addressed in computing damages for actual loss, or in exceptional cases by a reasonable royalty. DTSA further provides for up to double damages as well as reasonable attorneys' fees when willful and malicious misappropriation has been shown. Claims under DTSA must be brought within three years after the date the misappropriation is discovered or should have been discovered by the exercise of reasonable diligence.

One unique feature of the DTSA is ex parte civil seizure. Under this provision, the federal court may issue an order providing for seizure by law enforcement officials of property necessary to prevent the propagation or dissemination of the trade secret at issue in the action. To obtain such extraordinary relief, the federal court must find that it clearly appears from specific facts that: 1) a preliminary injunction or temporary restraining order would be inadequate because the defendant would evade, avoid or not comply with such an order if notice were given; 2) an immediate and irreparable injury will occur if such seizure is not ordered; 3) the harm to the applicant outweighs the harm to the legitimate interests of the defendant and any third parties who may be harmed by such seizure; and 4) the applicant is likely to succeed in showing that the information is a trade secret and the party against whom seizure is ordered has misappropriated the trade secret or conspired to do so and has actual possession of it.

Immunity Section and Improper Means

Another notable feature of the DTSA is the immunity section, which provides that individuals shall not be held liable for disclosure of a trade secret that is made in confidence to government officials or to an attorney and solely for the purpose of reporting or investigating a suspected violation of law, or where made in a complaint or other document filed in a proceeding if such filing is made under seal. For employers, DTSA provides an affirmative obligation to notify employees of these immunities.

The DTSA definition of "improper means" underlying a trade secret's misappropriation includes breach or inducement of a breach of a duty to maintain secrecy, theft, bribery, misrepresentation or espionage through electronic or other means. However, DTSA clarifies that improper means "does not include reverse engineering, independent derivation, or any other lawful means of acquisition."

Takeaways for Employers

In sum, DTSA provides a welcome federal coherence to trade secret law, expanding the options for trade secret owners to protect their rights while balancing the legitimate interests of defendants and third parties. With these new rights, however, will come new obligations. Employers in particular will need to review their employment and consulting agreements to address these new legal standards and provide the required notice of immunities. A substantial increase in the number of trade secret misappropriation claims brought in federal courts should also be expected.