On May 11, 2016, President Obama signed the Defend Trade Secrets Act of 2016 (“DTSA”) into law, after the bill passed Congress with broad bipartisan support from both the Senate (87-0) and the House (410-2) in April. The DTSA was passed in light of Congress’ understanding that misappropriation of trade secrets is an increasingly serious problem in need of national attention.1 The arrival of a new, federal cause of action can be expected to drive an increased number of trade secret cases to the federal courts. Since federal courts have historically had a more limited and different perspective than state courts in trade secret cases, and since the DTSA has introduced some new options that were not previously available under the Uniform Trade Secrets Act (“UTSA”), the new statute will have an impact not only on litigation options, but also on IP strategy. Because the DTSA imposes some new procedural hurdles to plaintiffs seeking exemplary damages and attorneys’ fees, businesses would do well to examine their procedures for protecting trade secrets to ensure their eligibility under the statute.
Before the DTSA, federal law protected trade secrets through the Economic Espionage Act of 1996 (“EEA”), which provides criminal sanctions for trade secret misappropriation.2 Civil actions for trade secret theft, however, could only be brought under state law, generally under each state’s adoption of the UTSA.3 The DTSA amends the EEA or 18 U.S. Code Chapter 90 to create a federal private cause of action for trade secret misappropriation.4 It was enacted to address a growing concern of national and international companies about the safety of their highly valuable trade secrets and has been described by some as the “most significant expansion of federal law in intellectual property since the Lanham Act in 1946.”5 The DTSA broadly defines the concepts of “trade secret” and “misappropriation” in a way similar to the UTSA. Its provisions are also generally aligned with those of the UTSA, with a few exceptions as noted below.
The DTSA does not preempt state trade secret law6 and the two regimes will operate in parallel. An owner of a trade secret that has been misappropriated may bring a civil action under the DTSA “if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.”7 Trade secret owners who desire to litigate in federal court will therefore be saved the effort of tacking an additional federal claim or establishing diversity of citizenship of the parties. Though most trade secret cases involve disputes with employees or former employees, federal courts have seen a much larger percentage of business-to-business disputes, which make up roughly 40% of federal cases, compared with only 20% of trade secret cases in state courts.8 Also, most federal trade secret litigation involves technical trade secrets, whereas cases brought in state court have chiefly been disputes concerning business information. It is likely that these past plaintiff preferences for the types of cases to bring in federal court, and the question of whether federal discovery and other procedures will be of benefit to a particular case, will inform the decision of whether to sue in federal or in state court.
An important distinction between the DTSA and the UTSA that has received much media attention lies in a novel provision of the DTSA that allows “the seizure of property necessary to prevent the propagation or dissemination of the trade secret [at issue]” upon ex parte application by the trade secret owner (and without a hearing or response from the opposing party).9 The availability of this civil seizure remedy is, however, limited to “extraordinary circumstances.”10 The trade secret owner bears the burden to establish, with specific facts, a series of elements such as immediate and irreparable injury without the seizure, favorable balance of harm, likelihood of success, and knowledge of the location of the property to be seized. Furthermore, the owner must show that a normal preliminary injunction or temporary restraining order “would be inadequate . . . because the party to which the order would be issued would evade, avoid, or otherwise not comply with such an order.”11
The DTSA also sets forth requirements for the seizure order issued by the court, which include providing the narrowest seizure necessary, restricting access to the seized property by the applicant for the seizure order, scheduling a seizure hearing within seven days after the order issues, and requiring the applicant to provide an adequate security.12 While providing a handy tool for owners to prevent an otherwise imminent disclosure of trade secrets, the seizure provision has been criticized by some as creating substantial opportunity for abuse. In particular, a trade secret owner may be able to have a defendant’s key assets seized to temporarily shut down the defendant’s business.13 In recognition of the fact that seizure hearings are a legal innovation that may introduce unforeseen challenges to the courts, the DTSA expressly authorizes judges to modify discovery time limits otherwise dictated by the Federal Rules of Civil Procedure to give courts the flexibility needed to refine the details of this procedure.14
Like the UTSA, the DTSA authorizes courts to grant injunctive relief, damages for actual loss and unjust enrichment, enhanced damages up to double actual damages for willful and malicious misappropriation, and a provision for the award of attorneys’ fees upon a finding of bad faith.15 Also like the UTSA, the DTSA provides for an alternative award of a reasonable royalty under certain exceptional circumstances in which damages cannot otherwise be proved. The DTSA does not adopt the inevitable disclosure doctrine--to the contrary, it explicitly limits the injunctive relief to protect employee mobility. Injunctions under the DTSA that would prevent an employee from entering into a new employment relationship must be “based on evidence of threatened misappropriation and not merely on the information the person knows.”16
In addition, the DTSA immunizes, from liability under federal or state trade secret laws, “whistleblower” employees who disclose trade secrets in confidence to government officials “solely for the purpose of reporting or investigating a suspected violation of law.”17 Employers are also required to provide notice of such immunity in contracts governing “the use of a trade secret or other confidential information.”18 Failure to provide the required notice will bar employers from seeking exemplary damages or attorney’s fees in litigation against former employees. For this reason, businesses would be wise to revisit their employee agreements, NDAs, and other contracts to ensure compliance with the DTSA’s new notice requirements.19
In conclusion, the DTSA opens the door for companies to bring trade secret misappropriation claims in federal court. The choice of whether a plaintiff should bring a DTSA claim in federal court, or pursue UTSA claims in state court will depend on a variety of factors. Plaintiffs who stand to benefit from the discovery options and nationwide subpoena power of the federal courts, who have need of the expedited seizure procedure offered by the DTSA, and those with complex cases that straddle multiple state or international boundaries can be expected to take advantage of the federal forum. To preserve eligibility to seek enhanced damages and attorneys’ fees under the new statute, companies that rely on trade secret protection should update their contractor agreements, employment agreements, and, in some cases, their NDAs to ensure compliance with the DTSA’s notice requirements.