Both houses of Congress have passed and the President has recently signed the “Defend Trade Secrets Act of 2016.” For the first time, individuals and businesses will have the right to file a federal lawsuit to remedy the theft of trade secrets. Currently, individuals and businesses have only a federal criminal statute – the Economic Espionage Act – and state law rights to remedy trade secret theft. All 50 states have their own trade secret laws (and 48 of the fifty states have adopted a version of the Uniform Trade Secrets Act). The Defend Trade Secrets Act does not expressly preempt the existing state statutes.
The legislation adds 18 U.S.C. §1836(b) to permit an “owner of a trade secret that is misappropriated” to “bring a civil action . . . if the trade secret is related to a product or service used in, or intended to be used in, interstate or foreign commerce.” A trade secret is information (a) which the owner takes reasonable measures to keep secret; and (b) has independent economic value by not being readily ascertainable by another person who can benefit from the information.
The Defend Trade Secrets Act provides a variety of remedies:
- Injunctions to prevent the actual or threatened misappropriation, including ordering affirmative actions to protect a trade secret;
- Damages for the actual loss to the owner of the trade secret;
- Damages for unjust enrichment obtained by the misappropriator of the trade secret;
- Royalties in lieu of damages;
- Punitive damages (of not more than two times the remedial damages) if the trade secret was willfully and maliciously misappropriated;
- Attorney fees to the prevailing party if the other party acted in bad faith or acted willfully and maliciously; and
- Civil seizure to prevent the propagation or dissemination of the trade secret.
The most significant and controversial remedy is the remedy of civil seizure. Upon the request by one party and without notifying the other party, a court may order federal officials to seize and deliver the materials to the custody of the court. The civil seizure is limited to “extraordinary circumstances” in which immediate and irreparable injury will occur, and must be followed by a hearing. If the civil seizure is later determined by be wrongful or excessive, then the party suffering the damage has the right to recover from the proponent of the civil seizure.
The new legislation also modifies employment law by:
- Prohibiting injunctions by federal courts that prevent an employee from working for a new employer if the rationale for the injunction is that the employee will “inevitably disclose” trade secrets to the new employer;
- Granting immunity to employees, contractors, and consultants for disclosing a trade secret to a government official for the purpose of reporting or investigating a suspected violation of law (i.e. whistleblowers);
- Granting immunity to employees, contractors, and consultants that use trade secrets as a defense against an employer’s lawsuit, where the employee, contractor, or consultant alleges retaliation by the employer for the reporting of a violation of law; and
- Requiring confidential information and trade secret agreements to provide express notice to employees, contractors and consultants of the grants of immunity if the employer wants to benefit from the Defend Trade Secrets Act.
The Defend Trade Secrets Act provides new rights and protections for trade secrets “misappropriated” after the date of enactment. However, to obtain the full benefits of the Act, businesses need to determine (a) whether their trade secrets have “reasonable measures” in place to protect them, and (b) promptly revise their policies, handbooks, and standard contracts governing the use of trade secrets to add the required notice provision. Since the Act applies to all contracts with employees, consultants, and contractors, this review should also include supply chain and other contracts with vendors, customers, service providers, joint venturers, and similar businesses that frequently contain confidentiality and trade secret provisions and others who might also be deemed “contractors or consultants” under the new law.