The New Defend Trade Secrets Act: Finally, A Federal Tool to Protect Your Trade Secrets

I. Introduction

On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (DTSA). Amending the Economic Espionage Act of 1996 (EEA), the new law expands trade secret protection but also creates new obligations for employers in order to take full advantage of them. Importantly, the DTSA creates federal jurisdiction over trade secret theft. Prior to the DTSA, forty-eight states had adopted the Uniform Trade Secrets Act (UTSA), which provided for some uniformity among state trade secret laws. But, state interpretations of the UTSA led to inconsistencies across the states and raised difficulties in enforcing injunctive relief across state lines. The DTSA mirrors the provisions of the current UTSA but allows for better uniformity in enforcing, protecting, and valuing trade secret technology.

II. Key Provisions of the Act

1. Federal Civil Cause of Action

While the DTSA increases the maximum criminal penalty for organizations convicted of trade secret theft,¹ the legislation’s central element is the creation of a new federal cause of action for trade secret misappropriation.² Instead of preempting state law, the DTSA adds protection for trade secrets at the federal level by allowing trade secret owners to pursue federal civil remedies in addition to existing state remedies. By creating a federal civil remedy, the DTSA allows owners to seek nationwide relief and avoid the challenges of working through differing state trade secret laws. In addition, federal causes of action now exist for all four intellectual property forms. Previously, federal courts could only hear infringement claims in patent, trademark, and copyright cases while claims for trade secret theft were limited to state courts. Civil causes of action for trade secret theft will no longer be limited to state remedies.

2. Ex Parte Seizures in “Extraordinary Circumstances”

The most powerful tool afforded to trade secret owners is the ex parte seizure provision. If a party can show “extraordinary circumstances,” they can request an ex parte seizure of property “necessary to prevent the propagation or dissemination of the trade secret.”³ A requesting party must show specific facts that demonstrate the necessity of the seizure and the likelihood of success in the civil suit.⁴ A court issuing an order “must provide for the narrowest seizure of property” and “direct that the seizure be conducted in a manner that minimizes any interruption of the business operations of third parties and, to the extent possible, does not interrupt the legitimate business operations of the person accused of misappropriating the trade secret.”⁵

3. Remedies

The DTSA offers traditional remedies, including injunctive relief, compensatory and exemplary damages, and attorney’s fees. A court can grant an injunction to “prevent any actual or threatened misappropriation” of a trade secret.⁶ Injured parties can recover compensatory damages for actual loss and unjust enrichment caused by the misappropriation of the trade secret.⁷ Exemplary damages can be recovered by a party when the trade secret is “willfully and maliciously misappropriated” in an amount not greater than two times the compensatory damages awarded.⁸ In addition, attorney’s fees can be recovered when exemplary damages are awarded.⁹ Attorney’s fees can also be awarded if a claim for misappropriation is made in bad faith or a motion to terminate an injunction is made or opposed in bad faith.¹⁰

4. Civil and Criminal Immunity for Individuals Reporting a Violation of Law

To ensure that violations of law are adequately reported, the DTSA offers civil and criminal immunity for individuals who disclose trade secrets in certain situations. If an individual discloses a trade secret, either directly or indirectly, in confidence to a federal, state, or local government official and does so for the sole purpose of reporting a suspected violation of law, this individual will not be held criminally or civilly liable under any federal or state trade secret law.¹¹ The same protection extends to individuals who disclose trade secrets in a court filing made under seal.¹² The DTSA also specifically authorizes the disclosure of trade secrets in anti-retaliation lawsuits, provided the individual makes the disclosure to their lawyer, files under seal, and does not disclose the trade secret except pursuant to a court order.¹³

5. Notification Requirements for Employers

The DTSA requires that employers provide notice of the immunity provisions in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.”¹⁴ This requirement applies to all contracts and agreements entered into or updated after the date of enactment, May 11, 2016.¹⁵ Employees are defined broadly to include “any individual performing work as a contractor or consultant for an employer.”¹⁶ Employers can satisfy the requirement by cross-referencing to a policy document that details the employer’s reporting policies for suspected violations of law.¹⁷ If an employer fails to comply with the requirement, they cannot be awarded exemplary damages or attorney’s fees in an action against an employee to whom notice was not provided.¹⁸

III. Recommendations and Considerations

1. Updating and Revising Employment Agreements and Contracts

Employers should draft a standardized notification clause for inclusion in all newly drafted employment contracts and agreements. The DTSA does not specify the exact notification clause needed. It is unclear whether citing to the immunity provisions will suffice or whether an employer must reproduce the immunity provisions in their entirety. In addition, the DTSA does not specify whether the protections during anti-retaliatory lawsuits need to be included. Thus, employers should include the entirety of the immunity provisions and the anti-retaliatory lawsuit protections. Doing so ensures that any challenge by an employee claiming they did not receive adequate notice will fail, and employers will be able to utilize all remedies in the DTSA. The notice requirement does not affect existing employment contracts and agreements. But, if these agreements are updated or modified in any way, then they must include the notification clause. The same notification clause used for new contracts and agreements should be used on updated ones. Even though the notification requirement does not affect existing contracts, updating these agreements to include the notification provisions could remove any possibility of an employer not being able to exercise the full range of remedies available to them.

If employers choose not to include a notification clause in their employment contracts, they can still comply with the notification requirement by cross-referencing to their policies for reporting suspected violations of law. Again, the DTSA does not specify what the policy document must include. To avoid challenges to the sufficiency of the document, employers should include the immunity and anti-retaliatory lawsuit provisions and instructions on how employees should report suspected violations of law.

2. Utilizing Both State and Federal Causes of Action

Trade secret owners should consider a number of factors when deciding to bring a cause of action under federal or state law. Timing and federal jurisdiction must be considered preliminarily. The DTSA extends its federal civil cause of action to all acts of misappropriation occurring on or after the date of enactment. Thus, the federal remedy should be considered for misappropriation occurring on or after May 11, 2016. Misappropriation occurring prior to this date must be dealt with under state law. The DTSA’s federal jurisdiction requirement mandates that the misappropriation involve a trade secret that is “related to a product or service used in, or intended for use in, interstate or foreign commerce.” If this jurisdictional hook is not met, then the only recourse will be under state law.

Trade secret owners should consider where the misappropriation occurred. If misappropriation has occurred in a single state jurisdiction, it is possible that state trade secret law may provide an adequate remedy. When the trade secret has been removed to other states, the federal cause of action can provide a more effective remedy. Trade secret owners should also consider whether they face “extraordinary circumstances” that require a seizure of the property involved in the trade secret misappropriation. If so, owners can take advantage of the seizure provision under federal law. Protection offered for trade secrets during litigation is also another relevant consideration. The DTSA provides for various protections of this sort. If this consideration weighs heavily for an owner, then pursuing a recourse under federal law may be appropriate.

3. Allowing for Law Surrounding Ex Parte Seizures to Develop

Given the novelty of the seizure provision, it will take time for the law surrounding this new tool to develop. It is unclear how often parties will seek to use it and how often courts will grant these seizure requests. The DTSA does include safeguards to prevent abuses, but there remains the potential for this provision to be used in an abusive manner. Businesses may seek to use the seizure provision to disrupt the business activities of competitors.

IV. Current Cases Utilizing the DTSA’s Civil Cause of Action

In the brief period of time since enactment, trade secret owners have already brought claims under the DTSA’s new federal cause of action. In all four cases, the plaintiffs have brought a claim under state law alongside their federal claim.¹⁹ In one of the cases, plaintiff had brought a patent infringement action before the enactment of the DTSA. After passage, plaintiff amended their complaint to include both federal and state law claims for trade secret misappropriation.²⁰

V. Conclusion

Every business has trade secrets and needs to be proactive in its approach in considering how to protect those trade secrets and successfully using the DTSA to its advantage. The DTSA strengthens trade secret protections by providing a federal remedy alongside existing state law. By providing immunity for individuals who disclose trade secrets while reporting violations of law, the law also balances the goal of defending trade secrets with the need to encourage the reporting of illegal activities. Employers should welcome the new tools offered by the DTSA but also take diligent action to ensure compliance with their new obligations.