President Obama signed the Defend Trade Secrets Act (“DTSA”) into law on May 11, 2016, addressing a long-felt need for uniformity in trade secret law by establishing a national trade secret protection standard. Recognized by many as the largest expansion in federal law in intellectual property since the Lanham Act in 1946, the DTSA creates a new federal civil cause of action for trade secret misappropriation. Unlike copyrights, trademarks and patents, which have long been regulated by federal law, prior to the DTSA’s enactment, trade secret disputes were governed almost exclusively by state law. To date, 47 states and the District of Columbia have adopted some version of the Uniform Trade Secrets Act, although these various state statutes are anything but “uniform,” providing different definitions of the terms “trade secret” and “misappropriation,” as well as different remedies to successful plaintiffs. State-by-state variations in trade secret law have led to inconsistent and unpredictable outcomes, forcing plaintiffs to pursue their claims in state court, unless they could establish federal jurisdiction either through diversity of citizenship of the parties or by tacking on an additional federal claim.
Under the DTSA, the owner of a trade secret that has been misappropriated may now bring a civil action in federal court “if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” Notably, the DTSA does not preempt state trade secret law; rather, the two regimes will operate in parallel, with plaintiffs having the option of filing suit in either federal or state court. The decision of whether to litigate a trade secret dispute in federal or state court is dependent on the factual circumstances presented by each case. Many plaintiffs will likely be drawn to federal court based on the broad discovery rules and the perception that they are better equipped to handle multijurisdictional and international cases, as well as complex litigation involving technical issues. Trade secret disputes involving purely intrastate commerce will remain within the sole purview of state law.
The DTSA’s provisions largely mimic those of the Uniform Trade Secrets Act, although there are several new and noteworthy provisions of which trade secret owners should be aware:
- Whistleblower Immunity and Notice Requirement: The DTSA includes a “safe harbor” provision that shields individuals from both civil and criminal liability for disclosing a trade secret either (i) in confidence to a government official or an attorney solely for the purpose of reporting or investigating a suspected violation of law, or (ii) in a complaint or other pleading if the filing is made under seal. Employers must provide notice of these whistleblower protections in all agreements with employees, contractors and consultants that govern the use of trade secrets or other confidential information entered into (or amended) on or after May 12, 2016. Such notice may be given either in the agreement itself or through a cross-reference to a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law. Failure to provide the required notice makes several of the DTSA’s statutory remedies — including exemplary damages and attorneys’ fees — unavailable in subsequent litigation. Companies would benefit from consulting with counsel to ensure compliance with the DTSA’s notice requirement before entering into any new agreements (or amending existing agreements) with employees, contractors and consultants.
- Ex Parte Seizure: The DTSA also contains a controversial provision that permits a trade secret owner to request that federal marshals seize “property necessary to prevent the propagation or dissemination” of a stolen trade secret, without providing any advance notice to the alleged thief. This relief is available only in “extraordinary circumstances,” and parties that are injured by “wrongful or excessive seizure” may be entitled to recover damages and attorneys’ fees. Undoubtedly, courts will be forced to set the bounds of wrongful or excessive seizure, and trade secret owners should tread cautiously in requesting ex parte seizures until courts have had an opportunity to interpret the phrase. Nevertheless, this presents a powerful new tool for fighting theft of trade secrets.
- Employee Mobility: Some states that have adopted the Uniform Trade Secrets Act have embraced the inevitable disclosure doctrine, which allows an employer to enjoin a former employee from working for a competitor on the sole basis that the employee has knowledge of trade secrets that will inevitably be disclosed in his new position. The DTSA expressly rejects this doctrine, providing instead that an injunction preventing a person from entering into an employment relationship must be based on “evidence of threatened misappropriation and not merely on the information the person knows.”
U.S. businesses suffer billions of dollars in losses annually as a result of trade secret theft. With the enactment of the DTSA, trade secrets are finally taking their place alongside copyrights, trademarks and patents as the fourth pillar of intellectual property worthy of federal protection. However, in order to reap the full benefits of the DTSA, companies must be aware of the notice requirements imposed by the law and take proactive steps to ensure compliance.