chevron-down Created with Sketch Beta.
January 19, 2017 Articles

The Defend Trade Secrets Act of 2016: A Summary

The act marks a critical advancement in trade secret law.

By Maria L. Kreiter

On May 11, 2016, President Barack Obama signed into law the Defend Trade Secrets Act of 2016 (DTSA), which creates a federal cause of action for trade secret misappropriation and gives trade secret owners the ability to request seizure of stolen trade secrets. State trade secret protections remain available and will parallel the additional federal rights created by the DTSA, which include enhanced damage provisions for willful and malicious misappropriation. As a result, the federal courts are likely to see an increase in what are often high stakes, complex trade secret cases.

Overview and Key DTSA Provisions
Trade secrets have historically received protection under state laws, most notably the Uniform Trade Secrets Act (UTSA), a model law that has been adopted by 48 states. The Economic Espionage Act of 1996 (EEA) made trade secret theft a federal crime, although a private party could not bring a civil lawsuit based on the EEA, and only a select number of EEA cases are prosecuted each year. The DTSA amends the EEA to allow private party claims and includes definitions for the terms “misappropriation” and “improper means,” which are similar to the definitions provided in the UTSA. Key DTSA provisions include the following:

Federal civil actions for trade secret misappropriation. The DTSA allows private parties to bring a federal claim for trade secret misappropriation if “the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” 18 U.S.C. § 1836(b). Because of the extremely broad statutory scope, trade secret owners, in essence, now have the right to file suit in federal court based on a new federal cause of action. Before the DTSA, a plaintiff could litigate in federal court only if diversity or supplemental jurisdiction requirements were met; an independent civil claim did not exist under federal law.

Effective date. Trade secret owners now have the choice to file suit in federal court as long as the alleged trade secret theft occurred on or after May 11, 2016.

Ex parte seizures. The DTSA allows a trade secret owner to request seizure of misappropriated property by law enforcement, without any advance notice to the alleged thief. The DTSA has a number of safeguards meant to prevent the misapplication of this provision. For example, before a seizure order is issued, the plaintiff must establish that an ordinary injunction would not remedy the perceived damage because of the likelihood that the accused will destroy or hide the property. An ex parteseizure applicant will be required to post bond to cover any damages if the seizure is determined to be wrongful. The issuing court will also be required to schedule an adversarial hearing to assess the merits of the seizure at the earliest possible time. Moreover, the court, and not the applicant, will take custody of any seized property.

No preemption of state law. The DTSA does not preempt state law trade secret misappropriation rights and remedies, such as those afforded under the UTSA.For that reason, trade secret owners now have an additional source of protection and the ability to forum-shop.

Bad-faith provisions. Counsel should be mindful of the DTSA’s provision allowing for the recovery of attorney fees for actions brought in bad faith.

Whistleblower protection and affirmative duties required of employers. The DTSA also contains a whistleblower immunity provision that makes clear employees will not be found liable for trade secret misappropriation if reporting legal violations to the government. It is important to note that the DTSA requires employers to notify their employees about the immunity provision “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” Accordingly, the DTSA places an affirmative duty on employers to provide employees notice of the DTSA’s immunity provision when negotiating employee-related agreements. If an employer fails to comply with the DTSA’s immunity provision, it may be prevented from recovering exemplary damages or attorney fees in an action brought under the law against an employee to whom no notice was provided.

Impact of the DTSA
Implications of the DTSA include the following:

  • The option of a federal forum adds complexity to the decision of where to file a trade secret misappropriation suit. Counsel should consider case complexity; whether a state judge or a federal judge in the particular jurisdiction would be more inclined to issue an injunction; whether a state judge or a federal judge would be more likely to award DTSA bad-faith damages to a defendant; the scope of discovery available to federal court plaintiffs under the Federal Rules of Civil Procedure, including nationwide subpoena power, compared with state law discovery rules; and the likely case duration in each of the potential forums.
  • Employers must provide employees notice of whistleblower protections in any contract governing trade secrets or confidential information. Failure to do so may deprive the employer of DTSA punitive damages and attorney fees.
  • In the long term, the current state-by-state differences in the definition of trade secrets (for example, some state definitions include customer lists, computer programs, and actual or potential customers, while some do not) may give way to a uniform federal standard created as DTSA precedent develops.

The DTSA will bring more federal court trade secret misappropriation litigation and will undoubtedly have an impact on employment and intellectual property law. Dozens of federal suits have already been filed, most of which assert DTSA claims, as well as claims under state uniform trade secret laws and a variety of common-law claims. As a result, we will soon see a body of federal case law develop interpreting the DTSA. The new law marks a critical advancement in trade secret law.

Keywords: litigation, business torts, Defend Trade Secrets Act, private cause of action, ex parte seizure, whistleblower protection, bad faith  

Maria L. Kreiter – January 19, 2017