Trade secrets form one of the most valuable assets of technology companies. The protection of trade secrets is widely seen as essential to foster innovation and economic growth. This past year, both the United States (U.S.) and the European Union (EU) adopted highly significant legislative changes that will impact trade secret protection. These changes require immediate attention. Below, we examine these changes and their possible impact on the aerospace, defense, and government services (ADG) industry in 2017.
The U.S. Defend Trade Secrets Act
In May 2016, the Defend Trade Secrets Act of 2016 (DTSA) was enacted creating a new federal civil cause of action for trade secret misappropriation. The DTSA is effective immediately. Before the DTSA, trade secret misappropriation claims were asserted under state laws that largely follow the Uniform Trade Secrets Act (UTSA). The DTSA does not displace those state laws, but creates new obligations and federal remedies for businesses seeking to protect their trade secrets. By providing the option to bring trade secret misappropriation claims in federal court, the DTSA gives employers and other trade secret owners immediate access to a federal court, broad federal discovery (e.g., nationwide subpoena power), the availability of an array of federal remedies, and the opportunity for federal enforcement of judgments.
The DTSA now also provides a uniform definition of trade secrets1 and a uniform standard for misappropriation,2 which clearly defines when acquisition and disclosure or use of trade secrets is considered as misappropriation.
Perhaps most significantly, the DTSA authorizes ex parte seizure orders, which are not only available as a remedy, but also to preserve evidence. The ex parte seizure order is a form of extraordinary relief and therefore is available only in “extraordinary circumstances” specified in the statute.3 The DTSA also provides certain whistleblower immunities to employees who disclose trade secrets to federal, state, or local officials for the purpose of reporting and investigating a suspected violation of law.4
The remedies available under the act are robust. The DTSA not only provides for injunctive relief to prevent actual or threatened misappropriation, but also allows trade secret owners to recover actual losses and unjust enrichment (to the extent not duplicative of actual losses) from the party found to have misappropriated the trade secret. Finally, in lieu of both of those remedies, the trade secret owner may be awarded a reasonable royalty for the unauthorized disclosure or use of the trade secret. Exemplary damages are available in cases of willful or malicious misappropriation and are limited to double the compensatory award.
What should one do now?
Trade secret holders should take action to establish and/or review their trade secret portfolio management systems. Trade secret holders are best prepared for any litigation if they maintain an effective trade secret portfolio management system that captures, catalogs, documents, and maintains adequate control over all trade secrets.
Also, the DTSA imposes new and additional notice obligations on employers relating to its whistleblower protection provisions. Trade secret holders should immediately work with their human resources department and counsel to put effective systems in place to ensure compliance with these provisions.
Finally, businesses that operate in an environment in which competitors hold trade secrets are now at risk that their competitors could assert misappropriation and seek a seizure order. Companies should assess that risk and consider establishing a disaster recovery plan that would ensure business continuation in the event that an ex parte seizure order disrupts normal business operations.
European Trade Secrets Directive
Currently, there is no uniform protection – not even a uniform definition – of a trade secret within the EU member states. However, on 26 May 2016, the European Council adopted the Trade Secrets Directive (TSD), which will create a more harmonized framework of trade secret protection in the EU by June 2018.
The TSD establishes new standards for the protection of trade secrets and thus identifies legal requirements that must be met by companies to enjoy protection of their trade secrets. The most important change is a uniform definition of the trade secret throughout Europe. Although such a uniform definition is in general very welcome, the TSD’s definition poses some challenges for trade secret holders. First, it establishes protection for trade secrets only if “reasonable steps” have been implemented to keep the information secret; it is unclear what “reasonable” means in this context. A trade secret holder will thus need to sufficiently document steps taken to keep trade secrets confidential in order to establish that the TSD’s protections should apply.
The TSD defines what acts are lawful and unlawful with respect to trade secrets and identifies remedies for trade secret misappropriation. Importantly, once the TSD is implemented, reverse engineering will be considered lawful in the EU, which is currently not the case in every EU member state. The TSD also provides that certain actions taken by whistleblowers will not be covered by the TSD. The remedies provided by the TSD are those that are typical in IP litigation: injunctions; damages; recall and destruction of the infringing product; accounting, and preliminary measures. In addition, the TSD provides some procedural provisions, e.g., means to disseminate the trade secret information.
Unlike the DTSA, the TSD is not directly applicable but has to be implemented by the EU member states into national law by June 2018. If a member state fails to implement the directive in due time, the TSD is either directly applicable or the national laws have to be interpreted in the light of the TSD. It is also important to note that the TSD only determines the minimum amount of protection that EU member states must enact. This means that the EU member states may adopt stricter rules for protection, which may be especially relevant for the “reasonable steps” necessary to keep the information secret as requirement for any protection.
Trade secret holders in the UK must consider the impact of the TSD despite Brexit. Depending on when Brexit is finalized, the TSD might be directly applicable before the UK has left the European Union. In addition, the need for trade secret protection does normally not end at the boarders of a company’s homeland. If a trade secret holder in the UK wishes to seek protection of its information within the rest of the EU, it will need to comply with the requirements of the TSD.
What should one do now?
Companies will have to adjust to these EU new standards and should consider the following actions.
As explained above, under the TSD, businesses must take reasonable steps to keep trade secret confidential, be it through comprehensive non-disclosure measures, documentation of non-disclosure measures, or other means. One way to ensure reasonable steps are being met is to carry out a trade secret audit. Such an audit should examine (1) what is worthy of protection (e.g., what is valuable know-how?); (2) whether there are any on-going processes in place to examine protection of your strategies and contracts; (3) whether existing protection measures are sufficient; and (4) whether these protections are effectively documented.
Companies should also review their contracts to assure they provide maximum trade secret protection. Trade secret holders should be sure to define the scope of contractual use and assess contractual protection measures and confidentiality clauses. Recipients of trade secrets should also review their warranties and protection against third party claims for misuse of trade secrets.
On a more general level, there are some practical steps that businesses can take to keep information secret (e.g., education of employees about the importance of confidential information and best practices; restrictive covenants/gardening leave provisions in employment contracts; ensure proper documentation around creation and disclosure of confidential information; physical security measures; and review IT security including monitoring of access to know-how and trade secrets).