Quirky Question #277: Passage of the Defend Trade Secrets Act
Question: I saw something on the news about some new trade secrets legislation. What’s going on with that? Will it help employers better protect their trade secrets?
Answer: By Joel O’Malley
Indeed, employers have something to cheer about with the passage and anticipated signature of the Defend Trade Secrets Act of 2016! The Act, passed by the U.S. Congress on Wednesday, April 28, 2016, will provide several new tools to legally protect companies’ trade secrets and obtain relief when trade secrets have been stolen. Among other things, the law opens the door for suits in federal court for damages or injunctive relief, and, in certain cases, allows for ex parte seizure orders for companies fearful of the propagation or dissemination of trade secrets. The bill is headed to the White House for expected signature by President Obama, and will be effective immediately once it is signed into law.
The Defend Trade Secrets Act of 2016 (DTSA) is modeled largely on existing state laws preventing the misappropriation of trade secrets. Like most state laws, the DTSA includes as a “trade secret” all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and regardless whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing. To be considered a trade secret, the owner of the information must take reasonable measures to keep the information secret, and the information must derive independent economic value from not being generally known and not being readily ascertainable through proper means. The DTSA also defines “misappropriation” similarly to state law definitions. Finally, the DTSA provides remedies similar to those found in various state law trade secret provisions—including injunctive relief, actual damages, exemplary damages for willful and malicious misappropriation, and attorneys’ fees.
The DTSA, though, is different from state trade secret laws in several important respects.
First, the DTSA provides a federal private right of action for trade secret misappropriation claims. In order to get into federal court based on the statute’s provision of federal question jurisdiction (as opposed to diversity jurisdiction), the products or services as issue must be used in or intended for use in interstate or foreign commerce. This is likely not a difficult test for most companies seeking to protect their trade secrets. What this means in practice is that a company now has the option of suing a competitor or former employee in federal court, even when the competitor and/or former employee are in the same state as the plaintiff company. The DTSA’s passage has the potential of creating a single, unified body of trade secret law that businesses and practitioners can rely upon, instead of having to navigate potentially disparate state laws. The DTSA does not preempt existing state laws, though, so suing in state court would still be an option.
Second, the DTSA allows for a court’s ex parte civil seizure of property necessary to prevent the propagation or dissemination of trade secrets. In “extraordinary circumstances,” a concerned company can petition a federal court to order the seizure by federal marshals, without notice to the defendant, of “property necessary to prevent the propagation or dissemination” of the stolen trade secrets. This protection goes well beyond what a court typically is willing to order under existing state laws. To obtain such an order, the applicant must provide security sufficient to cover damages for wrongful or excessive seizure, and after seizure, the court must hold a “seizure hearing” where the plaintiff must show the order was necessary. Victims of wrongful seizure may be entitled to damages and attorneys’ fees.
Third, the DTSA’s reach potentially extends to foreign misappropriation. If the entity that misappropriated the trade secret is based in the U.S., or if some part of the misappropriation happened in the U.S., then the DTSA potentially applies (although this may be subject to some interpretation by courts after the law goes into effect).
Fourth, because the DTSA expressly provides immunity for disclosures made to the government or in a court filing – including the use of such information in whistleblower suits – employers must notify their employees, independent contractors, and consultants of these immunities in any contract or agreement that governs the use of a trade secret or other confidential information. Notification can take place through cross-reference to a standalone policy that is separately provided to the individual. The failure to comply with this notice requirement could preclude the employer from recovering exemplary damages or attorneys’ fees.
In light of DTSA’s pending enactment, employers should be aware both of the new tools available to protect their trade secrets, and the potential perils of new or existing employees taking competitors’ trade secrets and disclosing or using them at work, which can expose the company, not just the newly hired employee, to potential liability. Employers should consider taking the following steps:
- Take inventory of the assets sought to be protected as trade secrets
- Implement steps to protect those assets, including through protective onboarding and offboarding strategies, workplace policies and procedures, physical and electronic access restrictions, and third-party confidentiality agreements
- Update offer letters and non-compete, non-disclosure, non-solicitation, confidentiality, invention and assignment, and return of property agreements, in particular to ensure proper immunity notices are included
- Follow up with former employees after they have left employment with reminders of their confidentiality obligations
- Require new hires to provide assurances that they do not have, and will not use, their former employers’ trade secrets
The DTSA reflects the importance of protecting trade secrets and provides helpful new strategies of safeguarding companies’ intellectual assets. For more information on the law or next steps, feel free to contact Dorsey & Whitney’s labor and employment attorneys.