Seyfarth Synopsis: A new federal civil cause of action is now available to trade secrets owners seeking to pursue claims of trade secret misappropriation under the Defend Trade Secrets Act (“DTSA”). To take full advantage of the remedies provided under the DTSA, companies have an immediate obligation to provide certain disclosures in all non-disclosure agreements with employees, contractors, and consultants that are entered into or updated following today. Our post provides a brief history and summary of the DTSA, and, notably, provides business owners a list of tips and strategies to implement in light of the DTSA’s passage.
Today, President Obama signed into law the Defend Trade Secrets Act of 2016, which Congress passed on April 27.
What does the passage of the DTSA mean for your company? In a nutshell, it means your company can now pursue claims for trade secret misappropriation in federal court like other forms of intellectual property (i.e., patent, trademark, copyright) and seek remedies such as a seizure order to recover misappropriated trade secrets. It also serves as a reminder that trade secrets can be highly valuable to your company and that you should ensure that your company has identified such assets and put in place reasonable secrecy measures to protect them.
Below, we provide an overview of the DTSA’s key provisions. We also provide tips and strategies in light of the passage of the DTSA.
What Does the DTSA Provide?
The DTSA authorizes a civil action in federal court for the misappropriation of trade secrets that are related to a product or service used in, or intended for use in, interstate or foreign commerce. Prior to the passage of the DTSA, civil trade secret claims were solely a matter of state law, with 48 states having adopted some version of the Uniform Trade Secrets Act (“UTSA”) and the remaining states recognizing common law claims for misappropriation of trade secrets. While the DTSA does not displace these state law claims, it provides a federal civil claim above and beyond the state law claims that previously existed.
How Does the DTSA Work?
The DTSA creates a uniform standard for trade secret misappropriation by expanding the Economic Espionage Act of 1996 (“EEA”) to provide a federal civil remedy for trade secret misappropriation. The DTSA also provides pathways to injunctive relief, monetary damages, and other remedies in federal court for companies whose trade secrets are misappropriated, including via ex parte property seizures (subject to various limitations). Through the ex parte seizure provision, a plaintiff can seek to have the government seize misappropriated trade secrets without providing notice to the alleged wrongdoer. The DTSA further harmonizes the differences in trade secret law under the UTSA and provides more uniform discovery procedures.
What Are the Significant Provisions of the DTSA?
The DTSA provides aggrieved parties with legal recourse in federal court via a federal trade secret cause of action (whereas previously, relief was only available under the state law UTSA or common law claims), as well as new remedies, including a seizure order. Below are the key provisions of the statute:
- The DTSA provides for actual damages, restitution, injunctive relief, significant exemplary relief (up to two times the award of actual damages), and attorney’s fees.
- Ex parte property seizures are available to plaintiffs, but subject to limitations. As noted above, an ex parte seizure means that an aggrieved party can seek relief from the court against a party to seize misappropriated trade secrets without providing notice to the alleged wrongdoer beforehand. As a measure to curtail the potential abuse of such seizures, the DTSA prohibits copies to be made of seized property, and requires that ex parte orders provide specific instructions for law enforcement officers performing the seizure, such as when the seizure can take place and whether force may be used to access locked areas. Moreover, a party seeking an ex parte order must be able to establish that other equitable remedies, like a preliminary injunction, are inadequate.
- Injunctive relief for actual or threatened misappropriation of trade secrets is available in federal court. However, a court will not enjoin a person from entering into an employment relationship unless there is a showing through evidence of “threatened misappropriation and not merely on the information the person knows.” This language was included in the DTSA to guard against plaintiffs pursuing “inevitable disclosure” claims.
- The statute of limitations is three years. A civil action may not be commenced later than 3 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.
- A whistleblower immunity provision exists to protect individuals from criminal or civil liability for disclosing a trade secret if it is made in confidence to a government official, directly or indirectly, or to an attorney, and it is made for the purpose of reporting a violation of law. Similarly, a related provision states that an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding as long as the individual files any document containing the trade secret under seal and does not disclose the trade secret, except pursuant to court order.
- The immunity provision places an affirmative duty on employers to provide employees notice of the new immunity provision in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” This notice provision applies to contracts and agreements that are entered into or updated after the date of DTSA’s enactment (May 11, 2016).
- An employer will be in compliance with the notice requirement if the employer provides a “cross-reference” to a policy given to the relevant employees that lays out the reporting policy for suspected violations of law. Should an employer not comply with the above, the employer may not recover exemplary damages or attorney fees in an action brought under the DTSA against an employee to whom no notice was ever provided. Curiously, the definition of “employee” is drafted broadly to include contractor and consultant work done by an individual for an employer.
- The “Trade Secret Theft Enforcement” provision increases the penalties for a criminal violation of 18 U.S.C. § 1832 from $5,000,000 to the greater of $5,000,000 or three times the value of the stolen trade secrets to the organization, including the costs of reproducing the trade secrets.
- The DTSA further amends the RICO statute to add a violation of the Economic Espionage Act as a predicate act.
What Distinguishes the DTSA from the UTSA?
Because claims may still arise under states’ varied versions of the UTSA , it is important to highlight the important ways in which the DTSA differs from the UTSA. Most notably, the DTSA opens the federal courts to plaintiffs in trade secrets cases. The DTSA also allows for an ex parte seizure order. A plaintiff concerned about the propagation or dissemination of its trade secrets would be able to take proactive steps to have the government seize misappropriated trade secrets prior to giving any notice of the lawsuit to the defendant.
Nevertheless, the ex parte seizure order is subject to important limitations that minimize interruption to the business operations of third parties, protect seized property from disclosure, and set a hearing date as soon as practicable. As referenced above, the ex parte seizures are limited and may only be instituted in “extraordinary circumstances.”
The DTSA also contains no language preempting or displacing other causes of action that may arise under the same common nucleus of facts of a trade secret claim, unlike the UTSA as interpreted by some states which preempt such claims.
As also noted above, unlike the UTSA, the DTSA also provides protection to “whistleblowers who disclose trade secrets to law enforcement in confidence for the purpose of reporting or investigating a suspected violation of law,” and the “confidential disclosure of a trade secret in a lawsuit, including an anti-retaliation proceeding.”
Why Employers or Businesses Should Care and What They Should Do
Here are some tips and strategies we believe will assist employers and business owners in complying with and taking full advantage of the relief available under the DTSA:
- Update: Starting immediately, all non-disclosure agreements with employees, contractors, and consultants that are entered into or updated following today must contain disclosures of the DTSA’s immunity provisions (either set forth directly in the agreement or in a policy that is cross-referenced in the agreement). Employers who fail to provide these disclosures cannot recover exemplary damages or attorney fees in an action brought under the DTSA against an employee to whom no notice was provided. Consequently, employers should immediately update their standard agreements to include the required disclosure language. Remember that employee is broadly defined under the DTSA to include contractor and consultant work done by an individual for an employer.
- Review: Have qualified counsel review policies and relevant agreements to ensure that they contain the required language noted above. Additionally, ensure that your company is using non-disclosure agreements with your employees and that such agreements have clear definitions of trade secrets and confidential information and are not overly broad.
- Ensure and Protect: Do you have valuable information that could be protected as a trade secret? First, identify valuable sources of information in your organization. You should then check to see how your company protects such information. You will only be able to pursue trade secrets claims if you can show that your company employs reasonable secrecy measures to protect its trade secrets. Check out one of our recent webinars discussing best practices for the proper treatment of trade secret information. We have found that a trade secret audit with the assistance of counsel can be valuable for companies trying to identify and protect their trade secrets.
- Prepare: To protect your company’s trade secrets and avoid DTSA claims against your company, maintain proper on-boarding and off-boarding procedures and counsel your employees regarding the handling and further protection of your company’s confidential and trade secret information, including recurring employee training. Also closely monitor relationships with vendors and contractors who may have access to your company’s trade secrets and confidential information and ensure that there are appropriate protections in place.
It will be a brave new world with the passage of the DTSA. Federal courts will likely become the new forum for trade secret litigation. Make sure that your company is ready.