On May 11, 2016, President Obama signed the Defend Trade Secrets Act of 2016 (DTSA) into law. The DTSA amends the Economic Espionage Act to create a new federal civil cause of action for trade secret misappropriation. The DTSA is effective immediately.
Traditionally, lawsuits for misappropriation of trade secrets have been fought in state court and under state law. Nearly all states have adopted a version of the Uniform Trade Secrets Act (UTSA), with only New York and Massachusetts protecting trade secrets under common law. While the UTSA has provided general uniformity in state trade secret law, important differences between state laws and their application have developed, resulting in inconsistencies in the protection afforded to a company's or an individual's trade secrets.
Although trade secret theft is already a crime under federal law, the DTSA creates a federal private right of action for misappropriation of trade secrets under the Economic Espionage Act, allowing for the development of a more uniform body of federal law. The DTSA does not preempt state trade secret laws. Accordingly, companies and individuals will now have the option of seeking redress for trade secret misappropriation in either federal or state court.
Many elements of the DTSA track with the corresponding provisions of the UTSA. The UTSA and the DTSA similarly define what can be a trade secret and how a trade secret can be misappropriated. Both provide similar legal remedies for misappropriation. Under either, a trade secret plaintiff can seek an injunction to stop someone from using its trade secrets and assert a claim for money damages.
There are, however, several key differences between the laws. As summarized below, the DTSA:
Provides for a new remedy of ex parte seizures;
Provides for whistleblower immunity; and
Requires companies to notify workers of such immunity in any agreement governing the use of trade secrets or confidential information.
New Ex Parte Seizure Remedy. Going farther than state law, the DTSA empowers federal courts to order, in “extraordinary circumstances,” the seizure by the court of any property required “to prevent the propagation or dissemination of the trade secret” ex parte (that is, without a hearing or response from the opposing party). Such an order, once issued, may be executed with the aid of federal marshals.
In order for a court to issue a seizure order, the DTSA requires a finding of the following specific facts:
“Immediate and irreparable injury” would occur absent the seizure;
Actual possession by the defendant of the trade secret and any property to be seized;
A detailed description of the matter to be seized and the location where it is to be seized; and
That the person against whom seizure is sought will “destroy, move, hide or otherwise make such matter inaccessible to the court, if the applicant were to proceed on notice to such person.”
The DTSA includes several protections to defendants in connection with the civil seizure process. These include requirements that any seizure order must be directed to the narrowest seizure of property possible to protect the identified trade secrets, and that any order include provisions to prevent the disclosure of any of the seized information to the plaintiff until after the defendant has an opportunity to be heard in court. The DTSA also provides that a hearing must be held no later than seven days after any ex parte seizure order is issued. The DTSA empowers courts to award damages to defendants for abuses of the seizure remedy by claimants.
Whistleblower Protections. The DTSA includes a unique set of provisions designed to protect whistleblowers. The first provision grants immunity from civil or criminal liability to any individual who confidentially discloses a trade secret to an attorney, government official or a court solely for the purpose of reporting or investigating a suspected violation of law. The second provision grants the same immunity to an individual who files an anti-retaliation lawsuit against an employer for reporting a suspected violation of law. In both cases, any document containing the trade secret information must be filed under seal.
Notice Regarding Whistleblower Immunity. As discussed in our previous article "New Federal Legislation Creates Notice Requirement for Confidentiality Agreements," the DTSA comes with a new notice requirement. To reap the full benefits of the DTSA, businesses must include notice of the whistleblower immunity provision in any contract or agreement with an employee or consultant that governs the use of trade secrets or confidential information.
The notice must contain the following statements:
The employee cannot be held civilly or criminally liable for a disclosure made in confidence to a government official or an attorney, if made for the purpose of reporting or investigating illegal activity; and
The employee may disclose trade secrets to his or her attorney and use those trade secrets in a court proceeding.
This notice requirement applies to all contracts and agreements entered into after May 11, 2016.
You can comply with this notice requirement by providing "a cross-reference [in the contract or agreement] to a policy document provided to the employee or consultant that sets forth the employer's reporting policy for a suspected violation of law." Failure to comply with the notice requirements will cut off your ability to recover exemplary damages or attorney fees from an employee to whom notice was not provided.
Steps and Strategies
The following are steps and strategies businesses should take or consider to comply with and take full advantage of the DTSA:
Contract Review: You should amend all of your form agreements with employees, contractors and consultants that govern the use of trade secrets or confidential information to include the requisite whistleblower immunity notice provision or 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. This includes proprietary and invention agreements, nondisclosure and confidentiality agreements, independent contractor agreements and services agreements. You should also make sure these agreements have clear definitions of trade secrets and confidential information and are not overly broad.
Staff Training. You should develop and implement proper on-boarding procedures and recurring employee training about what information is confidential and how to protect it. Off-boarding procedures should also be developed and implemented to ensure employees don’t take secret information with them when they leave your employment. This includes information that may be stored on personal mobile devices.
Identify and Protect. You need to protect what you've already got. You should consider conducting an intellectual property audit with the assistance of counsel to identify valuable sources of information in your organization that may qualify for trade secret protection and develop and implement policies and procedures for the proper treatment of trade secret information.
For assistance with interpreting the new legislation, ensuring that your business complies with the act's notice requirements, developing proper staff training or conducting an intellectual property audit, please contact any member of our Technology and Intellectual Property Practice Group.