United States: The Defend Trade Secrets Act: A Remedy Background And Implementation

The recent passage of the Defend Trade Secrets Act ("DTSA") creates a new, powerful remedy for trade secret holders in an era where misappropriation and theft of trade secrets is on the rise. With the developing landscape of cybersecurity and globalization, an increased demand exists from both companies and consumers1 for further trade secret protections. Recent cyber attacks involving "hacktivists"2 and foreign entities have highlighted the change in the traditional actors who misappropriate trade secrets.3 The involvement of foreign actors and governments as offenders of trade secret theft and cyber espionage, coupled with the shift from hard data storage to electronic storage and the growth of the Internet, have made trade secret protection and enforcement actions increasingly complex. Technological developments allowing information to easily and quickly pass through domestic and international jurisdictions have also made trade secret protection more difficult.

Although existing state laws4 and federal statutes (e.g., the Economic Espionage Act ("EEA")5 and the Computer Fraud and Abuse Act ("CFAA"))6 provide specific recourse, certain gaps in trade secret law and a lack of uniformity have persisted. For example, the CFAA provides a private civil cause of action for persons or businesses, but federal courts are divided as to whether the CFAA applies only to true "computer hacking" activity or more broadly to misappropriation of proprietary information or trade secrets without accessing a computer.7 To answer this, and remedy other shortcomings in the EEA and CFAA, the legislature introduced and passed an amendment to the EEA—the Defend Trade Secrets Act—which now allows for a federal private civil cause of action for the misappropriation of trade secrets.

Background: The Economic Espionage Act

As amended, the EEA makes the theft of a trade secret a federal crime where (a) the information is stolen for monetary gain and (b) when the theft "relates to a product in interstate or foreign commerce,"8 or "when the intended beneficiary [of the stolen trade secret] is a foreign power."9 The two main sections of the EEA that govern trade secrets are § 1832, regarding the theft of trade secrets, and § 1831, regarding economic espionage. The statute provides significant penalties, including imprisonment for up to ten years for trade secret theft, and up to fifteen years for economic espionage, as well as substantial fines.10 Additionally, a court may assign the same penalties for attempt or conspiracy for either offense.11 The EEA did not provide a civil private right of action.12

The elements of trade-secret theft and economic espionage are substantially similar, with a few key differences. For example, trade secret theft requires: (i) an "intent to have the information benefit someone other than the owner";13 (ii) "an intent to injure the owner";14 and (iii) the misappropriated trade secret must relate to "or include[] . . . a product that is produced for or placed in interstate or foreign commerce."15 In contrast, economic espionage "must involve an intent to benefit a foreign entity or at least involve the knowledge that the offense will have that result."16 Economic espionage does not require an intent to injure the trade secret owner or a commerce nexus.17

A unique feature of the EEA is its extraterritorial application. The EEA's legislative history "specifically identifie[s] the circumstances under which [Congress] intended the economic espionage and theft of trade secrets provisions to apply overseas."18 The EEA "applies to conduct occurring outside the United States if – (1) the offender is a natural person who is a citizen or permanent resident alien of the United States, or an organization organized under the laws of the United States or a State or political subdivision thereof; or (2) an act in furtherance of the offense was committed in the United States."19 The EEA does not protect American businesses in cases where the offender is a foreign national and the "act" wholly occurs in a foreign country. This limitation on the extraterritoriality of the EEA is a noteworthy restraint on the criminal jurisdiction of this statute abroad.

Although not included in the statute's text, the Attorney General of the United States has agreed in writing that "for a period of five years, the Department of Justice would require that all prosecutions brought under the EEA must first be approved by the Attorney General, the Deputy Attorney General or the Assistant Attorney General of the Criminal Division."20 The requirement of prosecutorial approval for both §§ 1831 and 1832 lasted for a period of five years, until October 11, 2001.21 The Attorney General subsequently renewed the prosecutorial approval requirement for § 1831 (economic espionage), but no longer required approval for § 1832 (trade secret theft).22 Prosecutors are still strongly urged to consult with senior officials before initiating a § 1832 case.23

The EEA, while a powerful tool in prosecuting trade secret thefts, has only provided for criminal liability. The DTSA creates a civil cause of action, which will result in a more uniform and robust federal regime for addressing trade secret misappropriation.

Defend Trade Secrets Act: Overview

The DTSA amendment to the EEA adds an additional layer of protection for trade secret owners. The principal provision of the DTSA will be codified at 18 U.S.C. § 1836(b) and reads: "An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce."24 This new subsection creates a federal private, civil cause of action for the misappropriation of trade secrets that satisfy the commerce nexus required by the EEA.25 The DTSA also promotes uniformity by defining the terms "trade secret" and "misappropriation" in language identical to the Uniform Trade Secrets Act ("UTSA").26 Additionally, the DTSA, like the UTSA, expands the scope of liability for misappropriation by "permit[ting] trade secret owners to sue not only for the actual or threated 'disclosure or use' of their trade secrets 'without express or implied consent,' but also for the 'acquisition' of their trade secret by 'a person who knows or has reason to know that [they] w[ere] acquired by improper means."27

Notably, the DTSA does not preempt state trade secret laws. The DTSA will not prevent victims of trade secret theft from pursuing both federal and state civil causes of action.28

Congress tried—albeit unsuccessfully—to enact similar legislation in the past.29 Now, however, a bipartisan group of both legislators introduced the DTSA in both the Senate and House in July 2015, noting that state laws have not afforded enough protection to stop "interstate theft" and the current federal criminal law regime is "insufficient."30 The overwhelming level of bipartisan support for the DTSA led to almost unanimous votes in both the Senate and the House.

Actions and Significant Provisions

Both versions of the DTSA were introduced on July 29, 2015, with the goal of a bipartisan bill that will "harmonize" trade secret law, offer damages and injunctions for private civil actions, and "be consistent" with existing remedies for other forms of intellectual property.31 However, the Senate version of the bill was ultimately the version that received the most traction and encompassed what became the final language of the bill.

Many of the modifications addressing initial concerns with the Senate version of the DTSA were discussed at a December 2, 2015 hearing.32 The comments and concerns raised during the December 2015 hearing resulted in an amended version of the DTSA, via a substitute version and separate amendment, and was favorably voted out of Committee for consideration by the entire Senate on January 28, 2016.33

The January 28, 2016 amendments to the DTSA address the issues raised in the December 2015 hearing, including many of the more controversial sections, such as the ex parte seizure provisions and injunctive remedies.34 In order to achieve the goal of uniform standards for trade secret law, the Judiciary Committee amended the definition of a trade secret to track the definition in the UTSA.35 The Committee also changed the statute of limitations for actions brought under this section from five years to three years to be consistent with the UTSA.36 Another significant change the Committee made to align the DTSA with the UTSA was to lower the amount of exemplary damages from three times to two times total compensatory damages.37

To address concerns of potential abuse, the Committee clarified that an ex parte seizure is only available in "extraordinary circumstances," and "the target of the seizure must be in 'actual' possession of the trade secret and property to be seized."38 Additionally, only federal law enforcement can carry out the seizure with specific instructions from a federal district court on the timing of seizures and whether law enforcement can use force to access locked areas.39 The court may also appoint a special master to confidentially sort through the seized materials "to locate and isolate all misappropriated trade secret information and to facilitate the return of unrelated property and data to the person from whom the property was seized."40 In "exceptional circumstances" where an injunction is inequitable, a court may "condition[] future use of the trade secret upon payment of a reasonable royalty for no longer than the period of time for which such use could have been prohibited."41

The DTSA will also allow for attorney's fees for actions brought under this provision where "the misappropriation is made in bad faith . . . , a motion to terminate an injunction is made or opposed in bad faith, or the trade secret was willfully and maliciously misappropriated."42

 To balance concerns regarding employee mobility with protections for trade secrets, the new language provides that injunctive relief may not be granted if it would "prevent a person from entering into an employment relationship."43 The new language further provides that a court may only restrict employment if there is "evidence of threatened misappropriation." Employment restrictions may not be based solely on the fact that a person possesses proprietary information.44 Employment restrictions may not conflict with existing state laws "prohibiting restraints" on lawful employment.45

The substituted version of the DTSA also included an amendment to § 1832 of the EEA, entitled "Trade Secret Theft Enforcement."46 This section will increase criminal penalties for trade secret theft and adds a provision that will allow trade secret owners to file a sealed statement with the court explaining why the trade secret should be protected.47 Lastly, this section amends the RICO Act to include violations of the EEA relating to economic espionage and the theft of trade secrets as a predicate act.48

Senators Grassley and Leahy also added a separate amendment that provides immunity from civil and criminal liability for whistleblowers if they disclose a trade secret in the context of reporting illegal activity.49 This section creates an "affirmative duty" on employers to give their employees notice of this new immunity provision in "any contract or agreement with an employee that governs the use of a trade secret or other confidential information."50 If an employer fails to comply, it may be barred from recovering attorney's fees or exemplary damages against an employee.51 Further, the definition of "employee" is construed broadly to include contractors and consultants.52

Commentary and Support

Immediately preceding the Senate Judiciary Committee's Executive Business Meeting on January, 28, 2016, Senator Hatch and Senator Coons, both authors and sponsors of the bill, published an article in support of the DTSA.53 Their article emphasized the lack of federal civil law protection for trade secrets and the harsh economic consequences of trade secret theft.54 The Senators also highlighted that even with DuPont's success pursuing a criminal investigation under the EEA for the theft of trade secrets relating to its Kevlar body armor, there is a lack of resources to investigate the growing number of trade secret theft cases.55 Senators Hatch and Coons called upon Congress to pass the DTSA, which has strong bipartisan and industry support.

The DTSA garnered wide support from both sides of the aisle in Congress and from numerous stakeholders. At the time of the December 2, 2015 hearing, the proposed legislation was supported by over forty companies and associations, including DuPont, the American Bar Association, Corning, Microsoft, Intel, General Electric, Biotechnology Industry Organization, Pfizer, Adobe, The Boeing Company, Nike, Procter & Gamble, U.S. Chamber of Commerce, and the Internet Commerce Coalition.56

On April 4, 2016, the Senate unanimously passed the DTSA, with a vote of 87-0, and has received positive support from the Obama administration.57 Notably, the House of Representatives also passed this bill on April 27, 2016, with a vote of 410-2, and garnered the same level of overwhelming bipartisan support. Once President Obama signs the bill into law, the law will go into effect on the day of enactment and will apply to any misappropriation that occurs on or after that day.58

Footnotes

1. While consumers are not typically direct targets of trade secret theft, the personal identifying information of consumers can be implicated in more general cyber attacks, such as those aimed at data mining for a business' trade secrets or proprietary information.

2. "Hacktivists" are a new type of cyber hacker that has emerged in the last several years. The difference between a cyber hacker and a "hacktivist" is that hacktivists have a more nuanced purpose in their hacking activities, such as protesting political and social injustices. See Natalie Wolchover, Best Hacks by the Hacktivist Group 'Anonymous,' LIVESCIENCE (Nov. 11, 2011, 10:33 AM), http://www.livescience.com/33599-best-hacks-anonymous-hacktivism.html (detailing noteworthy hacks by one of the more well-known hacktivist groups, Anonymous).

3. See e.g., Robert Hackett, Hackers Are Holding a Hollywood Hospital for Ransom, FORTUNE, (Feb. 16, 2016, 10:55 AM), http://fortune.com/2016/02/16/hollywood-hospital-hack-ransom/; Bob Orr, Why the U.S. was sure North Korea hacked Sony, CBS NEWS, (Jan. 19, 2015, 6:38 PM), http://www.cbsnews.com/news/why-the-u-s-government-was-sure-north-korea-hacked-sony/; Eric Tucker, Guilty plea in attempted cyber-attack on US govt. computers, YAHOO! NEWS, (Feb. 2, 2016, 6:21 PM), http://news.yahoo.com/guilty-plea-attempted-cyber-attack-us-govt-computers-202324618.html.

4. The different types of remedies available under state law are mostly civil causes of action, and depending on the circumstances of the case, can include possible claims for the misappropriation of trade secrets, other tortious acts related to business, contract law, duties of confidence, unfair competition law, employment law, and antitrust law. See David S. Levine & Sharon K. Sandeen, Here Come the Trade Secret Trolls, 71 WASH. & LEE L. REV. ONLINE 230, 244 (2015).

5. Economic Espionage Act of 1996, 18 U.S.C. §§ 1831-1839 (2012). The EEA was amended twice during the 112th Congress. The Theft of Trade Secrets Clarification Act of 2012 clarified the jurisdiction of § 1832 for the theft of trade secrets after the Second Circuit's decision in United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012). Theft of Trade Secrets Clarification Act of 2012, 18 U.S.C. § 1832(a) (amending § 1832 of the EEA). The second amendment, the Foreign and Economic Espionage Penalty Enhancement Act of 2012, increased the maximum fine levels for economic espionage. Foreign and Economic Espionage Penalty Enhancement Act of 2012, 18 U.S.C. § 1831(a), (b) (amending § 1831 of the EEA).

6. Computer Fraud and Abuse Act of 1986, 18 U.S.C. § 1030 (2012).

7. See David R. Fertig, Christopher J. Cox, & John A Stratford, The Defend Trade Secrets Act of 2015: Attempting To Make a Federal Case Out of Trade Secret Theft – Part I, 1 PRATT'S PRIVACY & CYBERSECURITY LAW REPORT 60, 61 (Oct. 2015). There is a split among the federal appellate courts as to what the phrase "exceeds authorized access means" in the CFAA—i.e., whether this phrase covers only access restrictions, or use restrictions as well. Stuyvie Pyne, The Computer Fraud and Abuse Act: Circuit Split and Efforts to Amend, BERKELEY TECH. L. J. (Mar. 31, 2014), http://btlj.org/2014/03/the-computer-fraud-and-abuse-act-circuit-split-and-efforts-to-amend/ ("The Ninth Circuit (since joined by the Fourth Circuit) held that one 'exceeds authorized access' to a computer by violating an access restriction (e.g., do not access File X), but not by violating a use restriction (e.g., do not use the computer for non-business purposes). This interpretation conflicts with the First, Fifth, Eighth, and Eleventh Circuits, which have held that use restrictions are within the scope of "exceeds authorized access.") (referencing United States v. Nosal, 676 F.3d 854 (9th Cir. 2012))).

8. CHARLES DOYLE, CONG. RESEARCH SERV., R42681, STEALING TRADE SECRETS AND ECONOMIC ESPIONAGE: OVERVIEW OF 18 U.S.C. 1831 AND 1832 at Summary (2014) (citing 18 U.S.C. § 1832 (2012) (theft of trade secrets)).

9. Id. at Summary (citing 18 U.S.C. § 1831 (2012) (economic espionage)).

10. Id. at 1 (citing 18 U.S.C. §§ 1832(a), 1831(a) (2012)).

11. Id. (citing 18 U.S.C. §§ 1831(a)(4), (5), 1832(a)(4), (5) (2012)).

12. Id. (citing 18 U.S.C. §§ 1832(b), 1831(b) (2012)).

13. Id. at 9.

14.Id.

15. Id. (citing 18 U.S.C. § 1832(a) (2012)) (internal quotation marks omitted).

16. Id.

17. Id.

18. Id. at 12 (citing H.R. REP. NO. 104-788, at 14 (1996) ("Territorial Application.--To rebut the general presumption against the extraterritoriality of U.S. criminal laws, this subsection makes it clear that the Act is meant to apply to the specified conduct occurring beyond U.S. borders. To ensure that there is some nexus between the ascertaining of such jurisdiction and the offense, however, extraterritorial jurisdiction exists only if the offender is a United States citizen or permanent resident alien, an organization substantially owned or controlled by United States citizens or permanent resident aliens, or is incorporated in the United States. Alternatively, extraterritorial jurisdiction will exist if an act in furtherance of the offense was committed in the United States.")).

19. Id. (citing 18 U.S.C. § 1837 (2012)).

20. Id. at 12 & n.78 (citing and quoting U.S. DEP'T OF JUSTICE, CRIMINAL RESOURCE MANUAL § 1122 (June 2015)).

21. U.S. DEP'T OF JUSTICE, CRIMINAL RESOURCE MANUAL § 1122 (June 2015).

22. Id.

23. Id. ("Approval for § 1831 cases should be obtained from the Assistant Attorney General for the National Security Division, through the Counterintelligence and Export Control Section. The approval requirement was not extended for cases under 18 U.S.C. § 1832, however, prosecutors are strongly urged to consult with the Computer Crime and Intellectual Property Section prior to filing charges under § 1832.").

24. Defend Trade Secrets Act, S. 1890, 114th Congress § 2(a) (2016) ("DTSA") (final text of bill).

25. See Fertig, Cox, & Stratford, supra note 7, at 63.

26. James Pooley, What You Need to Know About the Amended Defend Trade Secrets Act, PATENTLYO (Jan. 31, 2016), http://patentlyo.com/patent/2016/01/amended-defend-secrets.html. The UTSA was created as a model law as a means to codify "the basic principles of common law trade secret protection" and was an attempt to unify the development of trade secret law. UNIF. TRADE SECRETS ACT, prefatory note (1979). To date, almost all of the states and the District of Columbia have enacted the UTSA in some form, with the exception of Massachusetts, New York, and North Carolina. Even though the intent of the UTSA was to provide a uniform codification of the basic principles of trade secret protection, many states have altered the language of the UTSA in some way. The definitions in the DTSA intend to address this issue by creating a uniform set of definitions under federal law.

27. See Fertig, Cox, & Stratford, supra note 7, at 63-64 (citing Defend Trade Secrets Act, S. 1890, 114th Cong. § 2(b)(3) (2015)).

28. See Protecting Trade Secrets: the Impact of Trade Secret Theft on American Competitiveness and Potential Solutions to Remedy This Harm Before the S. Comm. on the Judiciary, 114th Cong. (2015) (statement of Tom Beall, Vice President and Chief Intellectual Property Counsel, Corning Incorporated, in response to a question from Senator Hatch) ("[T]his particular law is not intended to preempt state law.")(quoted language is from transcript of hearing).

29. Fertig, Cox, & Stratford, supra note 7, at 62.

30. Fertig, Cox, & Stratford, supra note 7, at 62.

31. PRESS RELEASE, OFFICE OF SEN. ORRIN HATCH, SENATE, HOUSE LEADERS INTRODUCE BIPARTISAN, BICAMERAL BILL TO PROTECT TRADE SECRETS (Jul. 29, 2015), available at http://www.hatch.senate.gov/public/index.cfm/2015/7/senate-house-leaders-introduce-bipartisan-bicameral-bill-to-protect-trade-secrets; see also H.R. 3326, 114th Cong. (2015); S. 1890, 114th Cong. (2015).

32. Defend Trade Secrets Act, S. 1890, 114th Cong. (2016), available at https://www.congress.gov/bill/114th-congress/senate-bill/1890/all-actions?q=%7B%22search%22%3A%5B%22%5C%22s1890%5C%22%22%5D%7D&resultIndex=1 (all actions related to the history of this proposed legislation).

33. No date has been set for the Senate to vote on S. 1890, but it has been placed on the Senate Legislative Calendar.

34. See Executive Business Meeting Before the S. Comm. on the Judiciary, 114th Cong. (2016), http://www.judiciary.senate.gov/meetings/executive-business-meeting-01-28-16 (links to text of substitute and Leahy-Grassley amendments to the DTSA).

35. Pooley, supra note 26.

36. Pooley, supra note 26.

37. See Pooley, supra note 26.

38. Pooley, supra note 26; see also DTSA,s § 2(a) (referring to the new language of §1836(b)(2)(A)).

39. Pooley, supra note 26; DTSA, § 2(a) (referring to the new language of §1836(b)(2)(B)(iv)).

40. Pooley, supra note 26; DTSA, § 2(a) (referring to the new language of §1836(b)(2)(D)(iv)).

41. DTSA, § 2(a) (referring to the new language of §1836(b)(3)(A)(iii)).

42. Id. (referring to the new language of §1836(b)(3)(D)).

43. Id. (referring to the new language of §1836(b)(3)(A)); see Pooley, supra note 26.

44. Pooley, supra note 26 (discussing the "inevitable disclosure" doctrine, which has been "misconstrued" as "the equivalent of a post-hoc judicially-imposed non-compete agreement," and how this change would eliminate the potential harmful impact of this doctrine as applied in various jurisdictions).

45.DTSA, § 2(a) (referring to the new language of §1836 (b)(3)(A)(i)(II)).

46. Id. § 3; Pooley, supra note 26. 

47. DTSA, § 3(a)(2)(A) (referring to the new language of §1835).

48. Id. § 3(a)(2)(A) (referring to the new language of §1835).

49. DTSA, § 7; see also Pooley, supra note 26.

50. DTSA, § 7(a)(3) (referring to the new language of §1833(b)(3)(A)).

51. Id. § 7(a)(3) (referring to the new language of §1833(b)(3)(C)).

52. Id. § 7(a)(3) (referring to the new language of §1833(b)(4)).

53. Senator Orrin Hatch & Senator Chris Coons, Pass the Defend Trade Secrets Act, THE HILL, (Jan. 27, 2016, 7:00 PM), http://thehill.com/opinion/op-ed/267205-pass-the-defend-trade-secrets-act.

54. Id.

55. Id. ("Last year, in fact, the Department of Justice brought only 15 criminal cases for trade secret theft.").

56. See Protecting Trade Secrets: the Impact of Trade Secret Theft on American Competitiveness and Potential Solutions to Remedy This Harm Before the S. Comm. on the Judiciary, 114th Cong. (2015) (statement of Senator Hatch) (listing companies and associations that have endorsed the DTSA) (language is from transcript of hearing); Gene Quinn, Defend Trade Secrets Act ready for markup in Senate Judiciary Committee, IPWATCHDOG (Dec. 2, 2015), http://www.ipwatchdog.com/2015/12/02/defend-trade-secrets-act-ready-for-markup-in-senate-judiciary-committee/id=63571/.

57. Richard Cowan & Andrew Chung, Senate unanimously approves trade secrets bill, REUTERS (Apr. 4, 2016, 6:35 PM), http://www.reuters.com/article/us-usa-trade-secrets-idUSKCN0X11Y3.

58. See Dennis Crouch, Implementing and Interpreting the Defend Trade Secrets Act, PATENTLYO (Apr. 27, 2016), http://patentlyo.com/patent/2016/04/implementing-interpreting-secrets.html?utm_target/=feedburner&utm_medium=email&utm_campaign=Feed%3A+PatentlyO+%28Dennis+Crouch%27s+Patently-O%29.

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Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.