Client Alert: Newly Enacted Defend Trade Secrets Act (DTSA), What You Need to Know
On May 11, 2016, The Defend Trade Secrets Act of 2016 (“DTSA”) became law. The United States Senate and House of Representatives approved the legislation with bipartisan support. The DTSA creates a federal civil cause of action for misappropriation of trade secrets regardless of the amount in controversy or the addition of another federal claim. Before this legislation, plaintiffs were forced to initiate the vast majority of trade secret claims in state courts. The DTSA is the third attempt since 2014 to create a federal civil cause of action for trade secret misappropriation, picking up and leaving out several terms and provisions along the way.
The DTSA is, in many ways, similar to the Uniform Trade Secrets Act (“UTSA”). The DTSA includes many of the important definitions used by the UTSA such as a provision allowing the award of attorney’s fees, provisions providing for an award of double damages for willful and malicious misappropriation, and the same statute of limitations The Acts also have important differences—most importantly the DTSA contains a provision allowing for ex parte seizures and employment protections. The provisions of the DTSA serve as both a sword and a shield, empowering trade secret holders while providing protections to subjects of a DTSA action and employees reporting suspected violations of the law. Below is a summary of the DTSA’s important provisions and the potential ramifications for businesses.
Application: The DTSA’s provisions apply to any misappropriation of a trade secret on or after the date of enactment of the Act.
Ex Parte Seizure: In addition to creating a private right of action for plaintiffs, the DTSA authorizes ex parte civil seizure “of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” An ex parte seizure order may only issue upon “extraordinary circumstances.” To order an ex parte seizure, a court must find it “clearly appears” from “specific facts” that:
- An order issued pursuant to Rule 65(b) of the Federal Rules of Civil Procedure, or another form of equitable relief, would be inadequate;
- An immediate and irreparable injury will occur if such seizure is not ordered;
- The harm to the applicant outweighs the harm to the legitimate interests of the subject of the order and substantially outweighs the harm to any third party whom may be affected;
- A likelihood of success in showing that (i) the information is a trade secret; and (ii) the subject of the order misappropriated, or conspired to misappropriate, the trade secret by improper means;
- The subject against whom the seizure would be ordered has actual possession of the trade secret and any property to be seized;
- The application describes with reasonable particularity the matter to be seized and, to the extent reasonable under the circumstance; identified the location where the matter is to be seized;
- The subject of the order (or those in concert with the subject) would destroy, move, hide or otherwise make such matter inaccessible to the court, if the applicant were to proceed on notice to such person; and
- The applicant has not publicized the requested seizure.
Any ex parte seizure order must set a date for hearing at the earliest possible convenience, but not later than 7 days after the order has issued, unless the parties consent to some other date. The order must also generally include: (i) findings of fact and conclusion of law, (ii) provide for the narrowest seizure of property necessary; (iii) be accompanied by an order protecting the seized property from disclosure; (iv) guidance to law enforcement executing the seizure delineating the scope of the official’s authority; and (v) require the person obtaining the order to provide security for the payment of damages that any person may be entitled to recover as a result of a wrongful or excessive seizure or wrongful or excessive attempted seizure.
The court may appoint a special master to locate and isolate all misappropriated trade secret information. Subjects of an order who suffer damage by reason of a wrongful or excessive seizure have a cause of action against the applicant.
Remedies: The DTSA makes both an injunction and an award of damages for the misappropriation of a trade secret available to plaintiffs. Injunctions may issue under the following circumstances:
- To prevent any actual or threatened misappropriation on such terms as the court deems reasonable, provided that the order does not –
- Prevent a person from entering into an employment relationship; or
- Otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade or business;
The above protection on employment relationships mandates that any condition on employment requires evidence of threatened misappropriation, not merely information the person knows. The provision is included to protect employee mobility. This language negates the potential that the “inevitable disclosure doctrine” will be used to prevent and employee from taking a new job. The provision that an order does not conflict with an applicable state law means that state law variation on restrictive covenants may result in varying outcomes.
If determined appropriate by the court, it may require affirmative actions to be taken to protect the trade secret. In exceptional circumstances that render an injunction inequitable, a court may condition future use of a trade secret upon payment of a reasonable royalty. The court may award damages for actual losses caused by the misappropriation; damages for unjust enrichment not addressed in computing damages for actual losses; or, in lieu of damages measured by any other method, a reasonable royalty for the misappropriator’s unauthorized disclosure or use of the trade secret. If a trade secret is willfully and maliciously misappropriated, the court may award double the damage amount as punitive damages.
Attorneys’ Fees: If a claim of misappropriation is made in bad faith, which may be established by circumstantial evidence, a motion to terminate an injunction is made or opposed in bad faith, or the trade secret was willfully and maliciously misappropriated, the court may award reasonable attorneys’ fees to the prevailing party.
Definitions:The DTSA’s definition of “trade secret” is similar to the UTSA definition.
- The term “trade secret” means 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—
- the owner thereof has taken reasonable measures to keep such information secret; and
- 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 DTSA’s definition of “misappropriation” and “improper means” is identical to the UTSA’s definition in all material respects. The DTSA explicitly excludes reverse engineering, independent derivation, or any other lawful means of acquisition as “improper means.”
Whistleblower Immunity: The DTSA includes a provision granting immunity from civil and criminal liability under any federal or state trade secret law for disclosure of a trade secret that is made:
- In confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and
- Solely for the purposes of reporting or investigating a suspected violation of the law; or
- In a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.
Trade secrets may also be disclosed to the attorney of individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law if the individual files any document containing the trade secret under seal; and, does not disclose the trade secret, except pursuant to court order.
Importantly, for all contracts and agreement entered into or updated after the date of enactment of the DTSA, employers must provide notice of these immunity provisions in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” An employer may accomplish this by providing a cross-reference to a policy document provided to the employee that sets for the employer’s reporting policy for a suspected violation of law. If an employer fails to provide the proper notice, the employer will lose its ability to be awarded exemplary damages or attorneys’ fees.
Miscellaneous Provisions: The DTSA includes a provision labeled the “Sense of Congress.” The section outlines Congress’ findings that “trade secret theft, wherever it occurs, harms the companies that own the trade secrets and the employees of the companies.” A “Best Practices” provision directs the Federal Judicial Center to develop recommended best practices for the seizure of information and the storing of information and media once seized. The DTSA increases the criminal penalty of an organization for trade secret theft from a maximum of $5,000,000.00 to the greater of $5,000,000.00 or three times the value of the trade secret to the victim, including research and development costs.
Potential Impact and Commentary:
The DTSA provides businesses with a potent new avenue to protect their trade secrets. It certainly allows plaintiffs to now decide whether they would prefer bringing their claims for misappropriation of trade secrets in state or federal courts. One potential result of the DTSA is the creations of a more harmonized and uniform standard and system so companies can receive protection for their trade secrets in every jurisdiction. Now, the jurisdiction in which the misappropriation occurs can play a significant role in determining whether there is even protection for the information. Commentators that opposed the bill are concerned that the ex parte seizure provision “can be used to effectively shut-down legitimate competition[.]” They also voice concerns regarding the reach of the federal courts’ jurisdiction over trade secret claims and the DTSA’s impact on employee mobility (both for employees and the employers that seek to hire them). In the wake of the DTSA, companies should:
- Update their policies, training procedures and employment agreements to give notice of the governmental immunity provision of the DTSA and ensure their definition of a “trade secret” complies with the DTSA;
- Develop procedures for employees to report suspected violation of law;
- Determine whether the company possesses information that qualifies as a “trade secret” and take steps to protect that information;
- Understand the advantage and disadvantages of bringing a trade secret misappropriation action in feral court and consider whether your particular state’s trade secret laws are more favorable than the DTSA;
- Consider the impact of the DTSA when hiring a competitor’s employee.
If you have any questions about the topics covered in this Alert, please contact any member of Greensfelder’s Securities and Financial Services Group or your regular Greensfelder contact.