United States: New Federal Trade Secret Act Expands Trade Secret Rights

Trade secrets gained prominence as a federally protected form of intellectual property this week with the enactment of the Defend Trade Secrets Act of 2016 ("DTSA"). The DTSA provides federal civil protection against misappropriation of trade secrets. Victims of trade secret theft now have the right to assert federal claims of trade secret misappropriation in the federal district courts.

President Obama signed the DTSA into law on May 11, 2016. The Senate and the House of Representatives had overwhelmingly approved the new law, voting 87–0 and 410–2, respectively. The DTSA garnered bipartisan support based on the widely held belief that the law will aid American businesses in protecting their trade secrets in the global marketplace. The risk of trade secret misappropriation has never been greater due to the explosion of digitally stored information and the ease with which employees can use compact flash drives to take company trade secrets for improper purposes.

American industry lined up to support the DTSA by emphasizing its importance for protecting global competitiveness. More than 40 companies and industry organizations wrote Congress supporting the DTSA, and representatives from industry testified to the importance of the new law.

Highlights of the DTSA

The DTSA governs disputes over trade secrets that relate to a product or service used in, or intended for use in, interstate or foreign commerce.

The DTSA provides for all of the remedies typically available under state trade secret law, including injunctions, actual damages, unjust enrichment, royalties, exemplary damages, and attorneys' fees.

The DTSA also provides a new remedy of an ex parte civil seizure of property where the applicant seeks a seizure order without the other side being privy to the request. This civil seizure remedy has received substantial attention. Prompt seizure of property can aid in combating misappropriation and mitigating loss to companies. The DTSA allows a plaintiff to request that a district judge grant an order directing that federal law enforcement officials seize property when necessary to prevent the propagation or dissemination of trade secrets. The plaintiff must establish specific facts proving eight requirements: (1) inadequacy of an injunction or other equitable relief; (2) irreparable harm; (3) balance of harms favors the applicant; (4) likelihood of success; (5) the target possesses the trade secret and the property to be seized; (6) the request describes the property with reasonable particularity; (7) the target would destroy the property if the applicant proceeded with notice; and (8) the applicant has not publicized the requested seizure.

The statute further identifies requirements for the seizure order itself, including that it contain a statement of findings of fact and conclusions of law. Seizure orders must provide for the narrowest seizure of property necessary for the situation. Anyone harmed by a seizure order may file a motion seeking dissolution or modification of the order at any time. The DTSA contains many additional procedural rules governing civil seizures of property.

The DTSA expressly rejects the inevitable disclosure doctrine, which posits that a former employee will inevitably use a former employer's trade secrets at a new job. In contrast, the DTSA does provide for imposition of an injunction to stop threatened misappropriation. The DTSA allows the district judge to enjoin an individual "on such terms as the court deems reasonable." The DTSA provides, however, that an injunction cannot broadly prevent a person from entering into an employment relationship.

Individuals have immunity from liability for the disclosure of a trade secret if the disclosure is made in confidence to a government official or to an attorney for the purpose of reporting or investigating a suspected violation of the law. This immunity extends to disclosures made in a complaint or other document filed in a lawsuit if the filing is made under seal and in an anti-retaliation lawsuit. The DTSA imposes requirements on companies to provide notice of the immunity provisions in certain agreements governing use of trade secrets or other confidential information.

What Does the DTSA Mean for American Businesses?

Passage of the DTSA shows that trade secrets are taking greater prominence as a favored approach for intellectual property protection and as an alternative to patents. The DTSA also serves as a reminder that trade secret misappropriation remains a significant threat.

Companies should pay close attention to protection of their trade secrets. Under the DTSA, six types of information qualify as trade secrets: financial, business, scientific, technical, economic and engineering information. The DTSA identifies the following examples of trade secrets: 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. Notably, some of these forms of trade secrets are ineligible for patent protection.

Companies should work to identify their trade secret assets and then assess whether they have adequate security controls over their trade secrets. In addition, companies should consider performing a complete audit of their trade secret protection programs to ensure that best practices are in place for guarding these important intellectual property assets. Companies also should take care to ensure that they are not improperly in possession of any third party's trade secrets.

Conclusion

Enactment of the DTSA is a milestone. Federalization of civil trade secret law serves many important functions. The federal courts are well equipped to adjudicate complex intellectual property cases, whether the inventions are patented or held as trade secrets. Federal subpoena power will assist parties in conducting discovery in trade secret cases, and the new seizure provisions will provide needed relief in appropriate cases. The federal courts can more adeptly oversee trade secret disputes that go across borders. Passage of the DTSA likely will lead to increased reliance on trade secret protection and a more uniform approach to the administration of trade secret disputes across the country—benefiting the nation's businesses and industries.

Companies need to ensure that their employment agreements and nondisclosure agreements provide the required notice regarding the immunity provisions of the DTSA. For information on steps for employers to consider in providing notice of the immunity protections in the DTSA, see Jones Day's Alert: "Federal Defend Trade Secrets Act of 2016 Imposes New Notice Obligations on Employers."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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