In a rare bipartisan effort, Congress passed the Defend Trade Secrets Act (DTSA) that will allow an owner of a trade secret to bring a misappropriation action in federal court. For the first time, companies seeking to protect their trade secrets will be able to file civil lawsuits for misappropriation under the federal Economic Espionage Act. The new law will apply to trade secrets related to a product or service used in, or intended for use in, interstate or foreign commerce. President Obama is expected to sign the bill into law very soon.
Protection of Trade Secrets
Many companies rely on a secret formula, process, or technique for their success. Consider, where would Coca-Cola or Kentucky Fried Chicken be without their secret recipes? Under current law, companies seeking to sue for misappropriation of a trade secret must rely on each state’s trade secret law and pursue their lawsuits in state court. Prosecutors may file criminal actions under the federal Economic Espionage Act for theft of trade secrets, but that statute did not provide a mechanism for filing a private federal civil suit – until now.
The DTSA amends the Economic Espionage Act to permit private parties to bring a civil lawsuit in federal court alleging trade secret misappropriation. It provides certain remedies, including injunctions, damages, and an unusual provision allowing for the civil seizure of property in extraordinary circumstances. Although the DTSA does not replace state trade secret laws, it offers an additional enforcement venue for the protection of trade secrets.
DTSA Provides Access To Federal Courts, Injunctions, Damages, and Seizure of Property
Employers need to understand the primary components of the DTSA in order to take advantage of this new avenue to protect valuable proprietary information. First, the DTSA opens the doors of federal courthouses to those alleging an actual or threatened trade secret misappropriation. As with other areas of employment law where there is an overlap of state and federal law, plaintiffs may choose whether to bring a misappropriation claim in state or federal court, depending on which law offers the most protection, more favorable discovery and motion practice, and greater damages. Federal protection for trade secrets should lead to a more consistent approach on what is protected as a “trade secret,” what constitutes a misappropriation, and what remedies are available. More predictable discovery and motion practice under federal court rules should help streamline costs while offering more uniformity in litigation across jurisdictions.
Second, the DTSA tries to balance the need to bolster protection of valuable trade secrets against the right of employee mobility by allowing for injunctions, but only in limited circumstances. Employers can seek an injunction to prevent actual or threatened misappropriation of a trade secret by an employee on terms that the court deems reasonable, as long as it does not prevent a person from entering into an employment relationship or circumvent state laws regarding restraints on employment, such as state non-compete laws. An injunction will not be granted based “merely on the information the person knows” but instead, must be based on evidence of threatened misappropriation.
Third, federal courts may award damages caused by the misappropriation of a trade secret, to include damages for actual loss, for any unjust enrichment not addressed in the damages for actual loss, or the imposition of a reasonable royalty for the misappropriator’s unauthorized disclosure or use of the trade secret. For a willful and malicious misappropriation, federal courts may award double damages and reasonable attorney’s fees. Courts also may award reasonable attorney’s fees to the prevailing party if a claim of misappropriation is made in bad faith, or a motion to terminate an injunction is made or opposed in bad faith.
In a unique provision, the DTSA allows the right to seek a civil seizure of property, but only in extraordinary circumstances. In such cases, a court may order the seizure of property when necessary to prevent the use or dissemination of the trade secret. If, however, the seizure is wrongful or excessive, the DTSA allows the individual whose property has been seized to sue for damages suffered as a result of the unlawful seizure. My colleague, Teague Donahey, provided an excellent summary of the DTSA and its seizure provisions in a recent article.
Safe Harbor For Whistleblower Disclosure of Trade Secrets
The DTSA offers safe harbor to individuals who disclose trade secrets to the government to investigate potentially illegal activity. Whistleblowers are granted civil and criminal immunity if they disclose a trade secret in confidence to a federal, state, or local government official, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law, or as part of a lawsuit or other proceeding when the disclosure is made under seal.
The new law also protects limited disclosure of trade secrets when an employee files a retaliation claim based on reporting a suspected violation of law against an employer. The employee must make such disclosures under seal and must not disclose the trade secret except pursuant to court order. Note that an “employee” is defined under the whistleblower immunity provision to include “any individual performing work as a contractor or consultant for an employer,” a broader definition than most other employment laws.
This immunity for use of trade secret information in an anti-retaliation lawsuit must be included in any contract or agreement that governs the use of trade secrets and other confidential information. Alternatively, employers may provide a cross-reference to a policy document that is provided to the employee that specifies the employer’s reporting policy for a suspected violation of law. Failure to comply with the notice requirement will result in the employer losing the ability to recover double damages and attorneys’ fees against the employee that might otherwise be available.
What You Should Do Now
If you use confidentiality or non-disclosure agreements that are designed to protect company trade secrets, review and revise future agreements to incorporate the DTSA’s whistleblower immunity notice. You’ll also want to consider expanding the venue language in your agreements to be sure you don’t exclude pursuing enforcement of the agreement in federal court.
If faced with a potential misappropriation of trade secrets, discuss with your legal counsel whether your state’s trade secret law or the new federal law (assuming it is signed into law) would provide the best enforcement mechanism. The DTSA provides an important avenue for increased protection of trade secrets but in some circumstances, state court may remain your best option.