Trade secrets law is poised to become federalized. After years of unsuccessful efforts to create a federal cause of action for trade secret theft, Congress has now passed The Defend Trade Secrets Act of 2016 (S.B. 1890). On April 4, 2016, the Senate unanimously passed the DTSA. On April 27, 2016, the House ratified the bill by a vote of 410-2. The Obama Administration has already expressed its strong support for this legislation and the President will likely sign it into law within the next couple of weeks. The DTSA will go into effect immediately upon enactment.
The DTSA creates a federal cause of action for trade secret misappropriation that largely mirrors the current state of the law under the Uniform Trade Secrets Act, which has been adopted by 48 states. The DTSA uses a similar definition of trade secrets, a three-year statute of limitations, and authorizes similar remedies found in current state laws. The DTSA also creates an ex parte seizure procedure for use in extraordinary circumstances where the party against whom the seizure is ordered “would destroy, move, hide, or otherwise make such matter inaccessible to the court, if the applicant were to proceed on notice to such person...” While the seizure may be carried out immediately, the new law provides that the court shall set a hearing not less than seven days after the issuance of the order. Finally, the law protects whistleblowers from retaliatory accusations of trade secret misappropriation, so long as the whistleblowers disclose trade secret information to government or court officials in confidence.
The DTSA will not preempt existing state law, which will preserve and afford plaintiffs options on whether to file federal or state claims and which court to select. It also notably omits any requirement for a trade secret plaintiff to describe its trade secrets with particularity, which is required under California Code of Civil Procedure § 2019.210. Significantly, the DTSA should also prohibit injunctive relief based on the inevitable disclosure doctrine, which has been rejected in a number of states, including California, and thus should not have a detrimental impact on employee mobility.
Thoughts on how you and your company can respond to the DTSA
First, you should update your employment and confidentiality agreements to disclose the whistleblower immunity provisions in the DTSA. These provisions extend immunity from criminal and civil liability to individuals who disclose trade secret information in confidence to federal, state, or local authorities, or to an attorney, for the purpose of investigating or reporting violations of law. The new law conditions recovery of exemplary damages and attorney’ fees by an employer on informing its employees and agents of the DTSA’s whistleblower protections. This information must be present (or at least cross-referenced) in any agreement governing the use of trade secrets and confidential information. Also, the DTSA only extends the whistleblower protections to cover confidential disclosures to government officials or the courts. As a result, a well-worded provision in an employment agreement will not only enhance your potential recovery from a rogue employee, but it will channel any well-meaning but misguided employees at your company to disclose any trade secret information to government officials, instead of to the media or self-publishing online.
Second, if you have declined to bring trade secret claims against departing employees because of the uncertainty of litigating in state court, consider whether filing suit in federal court would be palatable. Federal courts generally have smaller case loads, allowing them to more directly and efficiently manage the litigation activities, including electronic discovery, ameliorating some of the costs associated with litigating trade secret matters in state court. If you are seriously considering pursuing litigation through a trial and jury verdict, however, consult your outside counsel regarding your state’s jury rules. Many states permit a non-unanimous jury to return a verdict in favor of the plaintiff, which generally increases the likelihood of success of a trade secret claim in state court.
Third, take the opportunity to inventory your companies’ trade secrets and the protections in place to maintain the confidentiality of those secrets. Preventative measures are far more effective, and less costly, at keeping your secrets safe than methods designed to stuff the proverbial genie back in the bottle. Identify your core trade secrets and apply appropriate information security measures according to the value of those secrets.
Fourth and finally, depending on your company’s risk profile, develop response plans for suspected misappropriation and for receiving a seizure order. The new law provides that a party alleging misappropriation may obtain, upon an ex parte application to the court, a seizure order in “extraordinary circumstances”. Among other things, the seizure order provisions lay out a complex system under which information may be seized by federal law enforcement officers and retained in a confidential manner by the court. The law also provides for the appointment of a special master to locate and isolate misappropriated information. At the point you find yourself in the shoes of a trade secrets plaintiff, you may need to act very quickly, especially if you wish to use the new ex parte seizure procedures to reclaim your stolen information. Having a plan for what to do in the event of misappropriation will avoid unnecessary delays. On the other hand, if you or one of your employees is subject to a seizure order, you may not have the opportunity for a court hearing prior to the seizure order being carried out.
In addition, if you are in a very competitive space with fluid employee mobility, consider formalizing a seizure preparedness and response plan. The cautionary language of the DTSA seizure provisions should deter judges from permitting cavalier forays between competitors, but there is no guarantee that every judge will exercise restraint. You can prepare for such a worst-case scenario, such as by ensuring customer facing technology is redundantly hosted from different physical locations and that employees do not keep unique work product on the hard drives of their computers. You can also consider a response plan in place so that counsel can immediately respond by moving to dissolve a seizure order, opposing a motion for preliminary injunction, and seeking to modify a posted bond to allow for full recovery when your company sues for wrongful seizure.
The primary effect of the DTSA is to create a federal cause of action for trade secret misappropriation and ensure full access to the federal courts for trade secret litigants. Courts are likely to interpret provisions of the DTSA to be consistent with existing state law, but by federalizing trade secret law, Congress has paved the way for more consistency in an area of law that has been subject to the patchwork law of fifty states. While the ex parte seizure provision provides a powerful weapon, the amendments proposed by the Senate and approved by the House should ensure that seizure orders are limited to extreme circumstances, such as destruction of evidence. Looking prospectively, the DTSA should make trade secret litigation more predictable, as federal courts generate a body of binding federal jurisprudence in this area, and thereby making trade secrets an even stronger means of protecting a company’s intellectual property.