Explaining the Defend Trade Secrets Act

On May 11, 2016, President Obama signed the Defend Trade Secrets Act (DTSA) into law. This important new legislation creates a federal, private, civil cause of action for trade-secret misappropriation in which “[a]n owner of a trade secret that is misappropriated may bring a civil action . . . if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” Defend Trade Secrets Act of 2016, S. 1890, 114th Cong. § 2 (2016). The DTSA enjoyed wide, bipartisan support leading up to its enactment, passing in the House by a vote of 410-2 and passing unanimously in the Senate. For the first time, the DTSA gives American companies the opportunity to protect against and remedy misappropriation of important propriety information in federal court. Businesses should be aware of the salient provisions of the DTSA discussed below in order to adequately prepare to employ the protections of the DTSA.

A Federal Cause of Action

Before the enactment of the DTSA, in the absence of diversity jurisdiction or an independent federal cause of action, companies seeking redress for trade-secret misappropriation had no choice but to sue in state court, where laws protecting against trade-secret misappropriation tend to differ from state to state both in the text of the laws themselves and in their application. For instance, the definition of “trade secret” differs from state to state, and different statutes of limitations may apply, and different remedies may be available for trade-secret misappropriation. The DTSA provides a uniform statute to be applied nationwide in federal court. Although the DTSA will not preempt existing state trade-secret laws, it gives companies the powerful option of filing suit in federal court, thus adding an important additional tool for American companies, especially those with a national footprint, to enforce their intellectual property rights.

Definition of Trade Secret and Misappropriation

The DTSA provides uniform definitions for the critical terms “trade secret” and “misappropriation.” The DTSA’s definition of trade secret is broad, allowing a wide range of proprietary information to fall within the purview of trade-secret protection under the statute. Specifically, trade secret is defined as: “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 whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”

The acts that constitute misappropriation are also described specifically, giving welcome guidance to litigants. Under the DTSA, misappropriation is defined as follows:

1. acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
2. disclosure or use of a trade secret of another without express or implied consent by a person who—
   1. used improper means to acquire knowledge of the trade secret;
   2. at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was—
      1. derived from or through a person who had used improper means to acquire the trade secret;
      2. acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or
      3. derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or
   3. before a material change of the position of the person, knew or had reason to know that—
      1. the trade secret was a trade secret; and
      2. knowledge of the trade secret had been acquired by accident or mistake.

Civil Seizure and Other Remedies

One provision of the new DTSA that has generated much commentary in the run up to its enactment is the new civil seizure mechanism established by the statute. The civil seizure mechanism is a preventative tool employed prior to a formal finding of misappropriation in which a court, on ex parte application by a trade-secret owner, may “issue an order providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” Using this tool, an American company aware of a potential misappropriation of its trade secrets may be able to quickly prevent further dissemination of that proprietary information during the pendency of a DTSA case. Following issuance of a seizure order, the court is required to hold a seizure hearing wherein the party who obtained the seizure order has the burden to prove the facts underlying the order. Civil seizure may be ordered only in “extraordinary circumstances” and requires a showing that:

• an order pursuant to Fed. R. Civ. P. 65 or other equitable relief would be inadequate;
• an immediate and irreparable injury will occur if seizure is not ordered;
• harm to the applicant from denial of a seizure order: (1) outweighs the harm to the person against whom seizure is ordered; and (2) substantially outweighs the harm to any third parties by such seizure;
• the applicant is likely to succeed in showing that the person against whom the order is issued misappropriated or conspired to misappropriate a trade secret through improper means;
• the person against whom the order will be issued has possession of the trade secret and any property to be seized;
• the application describes with reasonable particularity the property to be seized and, to the extent reasonable under the circumstances, the property’s location;
• the person against whom seizure is ordered would destroy, move, hide, or otherwise make such property inaccessible to the court if put on notice; and
• the applicant has not publicized the requested seizure.

Upon a finding of misappropriation of a trade secret, the statute provides for additional remedies. A court may grant an injunction to prevent any actual or threatened misappropriation, provided that the injunction does not “prevent a person from entering into an employment relationship,” and that any conditions placed on employment are based on “evidence of threatened misappropriation and not merely on the information the person knows.” Where appropriate, an injunction may require affirmative actions to protect the trade secret. Further, in “exceptional circumstances that render an injunction inequitable,” the court may condition future use of the trade secret on the payment of a reasonable royalty. Following a finding of misappropriation, a court may also award damages. Where the trade secret is “willfully and maliciously misappropriated,” a court may award exemplary damages double the damages amount already awarded. A court may also award attorney fees where the misappropriation or claim of misappropriation was in bad faith, or where a motion to terminate is made or opposed in bad faith.

Whistleblower Immunity

The DTSA includes a safe harbor for whistleblower employees that provides for immunity from any criminal or civil liability under any federal or state trade-secret law for disclosure of a trade secret that is made in confidence to an attorney or federal, state, or local governmental official “solely for the purpose of reporting or investigating a suspected violation of law,” or in a filing in a lawsuit made under seal. It is important that employers pay close attention to the notice provision within the whistleblower immunity section of the statute because compliance with this notice provision may affect whether an employer can seek certain remedies under the statute. The remedies for companies suing former employees for trade-secret misappropriation under the DTSA include punitive damages and attorney fees. In order to take advantage of these remedies, however, a company must advise its employees of the existence of the whistleblower immunity. As such, companies should strongly consider updating their employment policies and agreements going forward to include either the required notice, or a cross-reference to a policy document that includes a statement about the DTSA’s whistleblower immunity.

Other Notable Provisions

The DTSA additionally mandates that, within one year of enactment and every six months thereafter, the Attorney General submit a publicly available report on, inter alia: (1) the scope and breadth of theft of trade secrets of American companies occurring outside of the United States; (2) the extent to which theft outside the United States is sponsored by foreign governments or instrumentalities; (3) the ability of trade-secret owners to prevent misappropriation of trade secrets outside of the United States; and (4) recommendations for actions that may be undertaken to reduce the threat of misappropriation of trade secrets of American companies occurring outside of the United States.

Additionally, although the DTSA expressly indicates that “[n]othing in the amendments made by this section shall be construed . . . to preempt any other provision of law” and thus will not preempt existing state trade-secret laws, one remaining open question is what the result will be where the definition of trade secret within the DTSA conflicts with a state’s common-law definition, or where there is a different conflict between the DTSA and a state’s common-law requirements concerning keeping protected trade secrets confidential.

The DTSA’s broad definition of trade secret, together with the prophylactic provisions of the statute, will provide a robust additional tool for American companies to prevent unauthorized disclosure of propriety information. Although open questions certainly remain about the breadth of this statute given its recent enactment, it seems clear that this new law will provide an additional avenue through which American companies can ardently protect their intellectual property, thus providing enhanced value to their shareholders.