On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act (DTSA), the most significant federal trade secrets legislation to be enacted in decades, and perhaps ever. Under the DTSA, trade secrets owners will, for the first time, receive the federal legal protection that already exists for owners of trademarks, copyrights and patents. The DTSA will likely impact every business that owns and seeks to protect trade secrets and other confidential commercial information.
The DTSA won overwhelming bipartisan support in Congress. The Senate passed the bill unanimously in early April, and the House approved it by a 401-2 vote on April 27. The DTSA, which took effect upon enactment, applies to any act of misappropriation occurring on or after May 11. The DTSA is codified at 18 U.S.C. §1836(b) and amends the Economic Espionage Act, 18 U.S.C §1831 et seq.
The DTSA establishes a uniform national trade secret protection standard, including the right to file suit in federal court for misappropriation of trade secrets related to products or services “used in, or intended for use in, interstate or foreign commerce.” Because it establishes a uniform legal framework, this law should promote greater consistency in resulting federal trade secrets decisions. Further, the seizure and prevailing party remedies incorporated into the DTSA are likely to create a strong deterrent against theft of trade secrets.
Under the DTSA, trade secret lawsuits involving only local products or services will continue to be litigated in state court. Federal courts, however, now possess jurisdiction over trade secret cases involving interstate or international commerce. The DTSA creates a uniform standard for what constitutes trade secret theft in cases brought under the Act, but does not displace state law claims.
In “extraordinary” circumstances, federal courts may order the ex parte seizure of property to prevent improper dissemination of the trade secret and to avoid immediate harm to the trade secret’s owner. The bill sets forth the grounds for a seizure order, including a showing of misappropriation by “improper means,” which excludes reverse engineering, independent derivation, or other lawful means of acquisition. Any seized property is protected from copying or disclosure, and a hearing is required as soon as practicable after the ex parte seizure.
The DTSA provides that trade secret owners have three years from when the alleged misappropriation is discovered, or should have been discovered, to file suit. Civil damages for misappropriation may be awarded based on actual loss, unjust enrichment or a reasonable royalty calculation. The remedies available under the Act include actual damages, restitution, injunctive relief, exemplary damages in an amount not more than two times the actual loss, and reasonable attorneys’ fees for willful and malicious misappropriation. The maximum penalty under the Economic Espionage Act is now “the greater of either $5,000,000 or 3 times the value of the stolen trade secret,” including design and research expenses and other costs. As with certain state trade secrets statutes, if a claim of misappropriation is made in bad faith, the defendant may be awarded its reasonable attorneys’ fees. The DTSA also includes limited exceptions for liability, such as for disclosures to law enforcement officials related to discussions of possible violations of law, and sealed disclosures to a court as part of anti-retaliation litigation.
Although it is too early to predict how the courts will interpret the DTSA, we will closely monitor future cases and developments, including with respect to the following:
- Impact on state law claims. The DTSA does not preempt state law causes of action, but instead provides a separate and additional basis to assert eligible federal trade secrets claims in federal court. Accordingly, the 48 states that have enacted some form of the Uniform Trade Secrets Act (UTSA) will maintain their own statutory protections for trade secrets. Further, the DTSA may provide a statutory cause of action to claimants in New York and Massachusetts, the two states that have not adopted the UTSA.
- Impact on litigation volume and cost. Some commentators predict that the DTSA will increase litigation and inject greater complexity and cost into trade secrets litigation. The likelihood of more complex and costly trade secrets cases may, in part, result once parties and courts begin grappling with the meaning of the new provisions and how they apply in practice.
- Impact on plaintiffs’ rights. Certain sections of the DTSA offer plaintiffs new rights and remedies. These provisions include the language empowering the courts to enter ex parte orders for the seizure of property necessary to “prevent the propagation or dissemination of the trade secret that is the subject of the action.”
- Impact on defendants’ rights. The DTSA also includes provisions that may prove beneficial to defendants, such as a procedure allowing defendants to bring a cause of action for wrongful seizures, a limitation on injunctions to protect employment relationships, and a fee-shifting provision for misappropriation claims asserted in bad faith.
- DTSA’s seizure provision. The most controversial section of the DTSA authorizes ex parte seizures when an injunction is inadequate and plaintiff shows a need to protect against misappropriation by “improper means,” as defined in the statute. This provision is likely to receive significant early attention in the courts as plaintiffs seek to invoke this remedy.
- Immunity from liability in whistleblower actions. The DTSA grants immunity from liability for the confidential disclosure of a trade secret to federal, state or local government officials when reporting a suspected violation of law or in a court filing made under seal. Specifically, the DTSA states that “[a]n employer shall provide notice of the immunity set forth in this subsection in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” Accordingly, employers should consider modifying their non-disclosure agreements and employment agreements to accommodate this significant change in the law. Failing to do so will preclude a company from recovering certain DTSA remedies in subsequent cases.