On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (“DTSA”). The DTSA was introduced in both houses of Congress, with bipartisan support in late July 2015, as an attempt to create a uniform body of law for trade secret protection. On April 4, 2016, the Senate unanimously passed the bill (with amendments from the Senate Judiciary Committee), and shortly thereafter on April 27, 2016, the U.S. House of Representatives voted 410-2 to pass the DTSA.
Historically, civil actions aimed at preventing or redressing actual or threatened trade secret misappropriation were governed by state common law. The Uniform Trade Secrets Act (the “UTSA”), published by the Uniform Law Commission in 1979 and amended in 1985, was promulgated to provide a legal framework to foster uniformity among state trade secret laws, codifying “the basic principles of common law trade secret protection.” UTSA with 1985 Amendments, Prefatory Note 1 (Unif. Law Comm’n 1985). As of today, 48 of 50 states have adopted some variation of the UTSA, but significant substantive and procedural differences often exist among the specific trade secret statutes enacted in these states.
The DTSA, which would allow companies for the first time to file civil lawsuits for trade secrets theft under the federal Economic Espionage Act, represents a sea change in trade secret law. Some key provisions include:
Federal Court Subject Matter Jurisdiction. The DTSA allows businesses and other trade secret owners to bring suit in federal court to enforce their intellectual property rights. The statute specifically provides that “district courts of the United States shall have original jurisdiction of civil actions brought under this section.” But importantly, unlike patent or copyright law, federal jurisdiction through the DTSA is limited to cases arising under the commerce clause of the U.S. Constitution. Specifically, to trigger federal question jurisdiction for actual or threatened trade secret misappropriation, the trade secret must be “related to a product or service used in, or intended for use in, interstate or foreign commerce.” 18 U.S.C. § 1832(b)(1).
This provision has raised the question of how courts will interpret the phrase “related to a product or service used in, or intended to be used in interstate or foreign commerce.” If a trade secret does not relate to a product or service involved in interstate commerce, a federal court sitting in diversity would arguably be required to apply state substantive laws to a trade secret misappropriation claim despite the enactment of the DTSA.
Further, the DTSA specifically states that it does not preempt any other provision of law and thus will not replace existing state law, allowing trade secret owners faced with actual or threatened trade secret misappropriation the option of whether to enforce their rights in state or federal court and the potential advantages and drawbacks of each forum.
- Ex Parte Seizure Provision. One of the provisions that has garnered much attention is the seizure provision that allows a plaintiff to request, through an ex parte proceeding, seizure of any property “necessary to prevent the propagation or dissemination of the trade secret that is subject to the action.” Id. § 1832(b)(2)(A)(i). The seizure provision may be used “only in extraordinary circumstances,” and a seizure order may only be issued when other forms of equitable relief are inadequate. Id. §§ 1832(b)(2)(A)(i) & 1832(b)(2)(A)(ii)(I).
Due to the potential draconian effect of a seizure, the burden for obtaining a seizure under the DTSA is high. The plaintiff must first show, among other things, that “the harm to the applicant of denying the application outweighs the harm to the legitimate interests of the person against whom seizure would be ordered” and “substantially outweighs the harm to any third parties who may be harmed by such seizure.” Id. § 1832(b)(2)(A)(ii). A plaintiff must also show that “the person against whom seizure would be ordered, or persons acting in concert with such person, would destroy, move, hide, or otherwise make such matter inaccessible to the court, if the applicant were to proceed on notice to such person.” Id.
The DTSA also provides that, if a seizure is ordered, the order must, among other things, “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.” Id. § 1832(b)(2) (B)(ii). The DTSA also provides that the court shall take appropriate measures to protect the confidentiality of seized materials that are unrelated to the trade secret information ordered seized unless the person against whom the order is entered consents to disclosure of the material. Id. § 1832(b)(2)(D)(iii).
If a seizure order is issued, a hearing must also be scheduled within seven days where the person against whom the order is entered will have an opportunity to be heard. Id. §§ 1832(b)(2)(B)(v), 1832(b)(2)(F). A defendant who suffers damages by reason of a wrongful or excessive seizure has a cause of action against the applicant and can recover damages including lost profits and punitive damages. Id. 1832(b)(2)(G)
Although the language of the seizure provision seeks to balance a legitimate need to protect information with protections against seizures procured through bad faith, companies hiring employees from competitors should ensure that adequate procedures and safeguards exist to avoid even the appearance of misappropriation and that any onboarding process for new employees require acknowledgement from incoming employees that they have not brought with them any information from their previous employer. Otherwise, companies could subject themselves to the possibility of a potentially devastating ex parte seizure and/or exposure for treble damage awards.
Whistleblower Protection & Notice of Immunity from Liability
The DTSA provides whistleblower protection against criminal and civil liability to those who disclose trade secrets in confidence to a government official or an attorney “solely for the purpose of reporting or investigating a suspected violation of law” or in a complaint or other document filed in a lawsuit or other proceeding if such filing is made under seal. 18 U.S.C. §1833(b)(1).
This provision includes a “notice” requirement which states that “an employer shall provide notice of the immunity set forth in this subsection in any contract or agreement with an employee that governs the use of a trade secret or other confidential information” entered into or updated after May 11, 2016 Id. §1833(b)(3). Rather than including notice provision in every agreement, an employer can be in compliance with the notice requirement if the employer provides 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 comply with such notice requirement will result in the employer not be entitled to exemplary or attorney fees in an action against an employee to whom notice was not provided. Id. For the purposes of the immunity “notice” requirement, “employee” is defined to include those performing work as a contractor or consultant of an employee. Id. §1833(b)(4)
Thus, it is important to include in all agreements with employees, contractors, and consultants entered into or updated after May 11, 2016 a notice provision and/or reference to a company policy setting forth such notice. The notice should inform employees that they cannot be held civilly or criminally liable for:
- Disclosure of a trade secret that is made in confidence to a government official or to an attorney solely for the purpose of reporting or investigating a suspected violation of law;
- Disclosure of a trade secret that is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal;
- Employees should also be notified that an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret under seal; and does not disclose the trade secret, except pursuant to court order.
Now that the DTSA has become law, it is important for companies to be aware of its key provisions and their implications on, among other things: hiring and other human resource decisions; confidentiality policies; decisions regarding how and in what forum to pursue trade secret enforcement litigation, and the potential risks and exposure associated with actual or threatened misappropriation relating to employment mobility.