United States: New US Law Provides For Federal Private Cause Of Action For Trade Secret Misappropriation

On May 11, 2016, President Barack Obama signed the Defend Trade Secrets Act of 2016 ("DTSA"),1 which creates a new federal private cause of action for trade secret misappropriation. The DTSA amends Chapter 90 of Title 18 of the US Code regarding the protection of trade secrets, which had previously only provided for criminal penalties. On April 4, 2016, the US Senate passed the DTSA, Senate Bill 1890, by a vote of 87-0, and on April 27, 2016, the US House of Representatives passed the bill by a vote of 410-2.

Under the DTSA, the owner of a trade secret may bring a civil action for acts of misappropriation occurring on or after the date of enactment of the DTSA if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce. The remedies available include damages and injunctive relief, as well as seizure of "property necessary to prevent the propagation or dissemination of the trade secret" based on an ex parte application by the trade secret owner to a court. The DTSA also provides for security and protection of the subject trade secrets while in the custody of the court.

Misappropriation and Remedies Under the DTSA

The acts for which a person may be civilly liable for trade secret misappropriation under the DTSA are similar to those specified in the Uniform Trade Secrets Act ("UTSA"), as the DTSA's added definition of "misappropriation" is virtually identical to that in the UTSA.2 Generally, acts of misappropriation include acquisition or disclosure of a trade secret that was acquired by improper means, or where there was a duty to maintain the secrecy of the trade secret, or where the trade secret was acquired by accident or mistake. Excluded from the definition of "improper means" are acts of "reverse engineering, independent derivation, or any other lawful means of acquisition."

The remedies available under the DTSA include injunctions and various forms of damages. An injunction may prevent actual or threatened misappropriation, but may not prevent a person from entering into an employment relationship, and any conditions placed on employment may be based only on evidence of threatened misappropriation (and may not be based merely on the information the person knows—a deviation from the so-called "inevitable disclosure doctrine"). The injunction may also require affirmative actions to protect the trade secret or (in exceptional circumstances that render an injunction inequitable) condition future use of the trade secret upon payment of a reasonable royalty for a certain period of time.

The damages available range from actual loss, to unjust enrichment, to reasonable royalties. Exemplary damages of not more than two-times the actual damages are also available in instances of willful and malicious misappropriation. Finally, reasonable attorney fees may be available to the prevailing party where 1) the trade secret is willfully and maliciously misappropriated, 2) the claim of misappropriation is made in bad faith (which may be shown by circumstantial evidence), or 3) a motion to terminate an injunction is made or opposed in bad faith.

The statute of limitations (SOL) applicable to a cause of action for trade secret misappropriation pursuant to the DTSA is three years, running from the date on which the misappropriation is discovered or should have been discovered. A continuing misappropriation is considered a single claim for purposes of the applicable SOL.

Civil Seizure

The DTSA permits a court, based on an ex parte application in "extraordinary circumstances," to issue an order seizing property "necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action." The applicant must provide an affidavit or verified complaint, and the requirements for issuing such an order are strict—including, among other things, that specific facts in the ex parte application demonstrate that "the party to which the order would be issued would evade, avoid, or otherwise not comply with such an order" and that the party named in the order misappropriated the trade secret or conspired to do so. In other words, ex parte orders may only be directed against wrongdoers, not against innocent third parties.

Any seizure order issued by a court also must comply with certain requirements, largely directed to ensuring that the seizure is narrow and minimally disruptive to legitimate business operations and protecting from disclosure the seized property until the parties have an opportunity to be heard in court. The order also must require the applicant who obtains the seizure order to provide security to cover damages for wrongful or excessive seizure or attempted seizure.3

Following a seizure order, the court must hold a seizure hearing, generally within seven days after the order has been issued. At the hearing, the party that obtained the order has the burden of proof to show the facts necessary to support the order. If that party fails to meet its burden, the order shall be dissolved or modified appropriately.

Security and Protection of Materials in the Custody of the Court

According to the DTSA, any materials seized pursuant to a court order must be taken into the custody of the court, and the court is required to secure the material from physical and electronic access. If the materials are (or are stored on) a "storage medium," the court is required to prohibit the medium from being connected to a network or the Internet, unless the parties otherwise consent. The court is also required to protect the confidentiality of seized materials that do not relate to the subject trade secret. The court may appoint a (nondisclosure-bound) special master to locate and isolate the trade secret material and facilitate return of unrelated property and data to the person from whom the material was seized. Further, a party who has an interest in the material seized may make a motion to encrypt the material. Such a motion may be heard ex parte.

Miscellaneous

In addition to creating the first federal private cause of action for trade secret misappropriation, the DTSA amends several aspects of the existing statutes related to criminal liability and addresses other issues. For example, it increases the fines available for criminal theft of trade secrets from not more than $5,000,000 to "not more than the greater of $5,000,000 or 3 times the value of the stolen trade secret to the [violating] organization, including expenses for research and design and other costs of reproducing the trade secret that the organization has thereby avoided."

The DTSA also provides for immunity for confidential disclosure of a trade secret to a government official or a lawyer solely for the purpose of reporting or investigating a suspected violation of law, or disclosure made in a court filing if made under seal. The DTSA further protects from liability anti-retaliation plaintiffs who disclose trade secrets to their lawyers and use the trade secrets in court filings, as long as the filings are under seal and the plaintiff does not disclose the trade secret, except pursuant to court order. Employers are required to provide notice of the foregoing immunity in any contract or agreement (either new or updated after enactment of the DTSA) that governs the use by an employee (including contractors or consultants) of trade secrets or other confidential information. This can be accomplished by providing the notice directly in the contract or agreement, or by cross-referencing a policy document provided to the employee that shows the employer's reporting policy for suspected violations of the law. The penalty for an employer failing to provide the required notice is the unavailability of exemplary damages or attorney fees for any willful, malicious, or bad faith actions, as discussed above, against the employee to whom notice was not provided.

Conclusion

The DTSA will provide an important new tool for pursuing those who misappropriate trade secrets and may provide added incentive to use trade secret protection, where appropriate. Private causes of action for trade secret misappropriation currently vary state by state, and this new federal cause of action should enhance the ability of owners to enforce their trade secrets. The availability of a civil seizure, in addition to flexible injunctive relief and a variety of damages models, makes the DTSA a potentially powerful weapon. As with any new law, however, much will depend on its application in the courts. Moreover, considering the ongoing existence of state-based trade secret laws, trade secret owners will want to carefully consider the legal mechanism best suited to their needs in any particular case. Separately, employers should be aware of the new required notice that, under the DTSA, will need to accompany contracts and agreements with employees (and contractors and consultants) governing the use of trade secrets and other confidential information.

Footnotes

1. The text of the bill can be found at https://www.congress.gov/bill/114th-congress/senate-bill/1890/text.

2. Existing 18 U.S.C. § 1839(3) contains a definition of "trade secret" that is likewise similar to that in the UTSA.

3. The DTSA provides a cause of action for a person who suffers damage from wrongful or excessive seizure, which is not limited by the posted security. The relief available is the same as under section 34(d)(11) of the Trademark Act of 1946, which includes "damages for lost profits, cost of materials, loss of good will, and punitive damages in instances where the seizure was sought in bad faith, and, unless the court finds extenuating circumstances, to recover a reasonable attorney's fee." 15 U.S.C. § 1116(d)(11).

Originally published May 11, 2016

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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