United States: Federal Trade Secret Law Gives Businesses New Means To Protect Their Rights

Today, President Obama signed into law the Defend Trade Secrets Act of 2016 ("the DTSA") after its near-unanimous passage by both the U.S. House of Representatives and U.S. Senate in April 2016. Effective immediately, the DTSA grants trade secret owners a private right of action with a three-year statute of limitations to pursue in federal court any misappropriation of a trade secret that occurs on or after the date of enactment.

The DTSA expands federal protection for trade secrets to a level more aligned with federal protections for trademarks, copyrights and patents. This should generally be welcome news to businesses that already rely upon trade secrets (or are considering greater reliance on trade secrets in light of decreasing availability of patent protections for certain technologies) to protect "financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes[.]" 18 U.S.C. § 1839(3).

The DTSA addresses the following trade secrets-related issues:

  • No preemption of state law trade secret claims despite offering the potential for a new, uniform federal body of trade secrets law: A new federal cause of action opens federal courts to ordinary trade secret misappropriation litigation, but state law trade secret misappropriation rights and remedies remain available to owners if they elect to invoke them (whether in tandem with federal claims or independent of federal claims).

    • The upshot of the new federal claim will likely allow businesses to realize efficiencies of federal practice (e.g., nationwide subpoena service); litigate before a bench with deeper experience in complex, inter-jurisdictional disputes; and (perhaps ideally) craft a uniform body of federal trade secret law subject to U.S. Supreme Court review. 
  • Remedies: Traditional injunctive relief; damages; "exemplary damages," which are not to exceed double damages; and attorneys' fees. Attorneys' fees are available where misappropriation is "willful and malicious," a claim of misappropriation is filed in bad faith or a motion to terminate an injunction is made or opposed in bad faith.

    • Limitations on the scope of authorized injunctive relief: Federal courts do not have the power to "prevent a person from entering into an employment relationship" on account of trade secrets, though courts can impose conditions on employment to the extent they are based on evidence of threatened misappropriation and not merely on account of a person's knowledge of certain information and do not otherwise conflict with state laws prohibiting restraints on practice of a lawful profession, trade or business.
  • Ex parte civil seizure is a significant new form of injunctive relief: Available under "extraordinary circumstances" where typical injunctive relief would be insufficient or ineffective, civil seizure is designed to help businesses use the courts to temporarily seize "property necessary to prevent the propagation or dissemination of the trade secret" pending a full hearing. Any seized material is taken into the custody of the court, and it may be collected with the assistance of "independent experts" unaffiliated with the party requesting seizure or special masters. 
  • Required contents of a seizure order: A court may issue an ex parte seizure order that includes, among other things, a finding that:

    • other forms of equitable relief would be inadequate;
    • immediate and irreparable injury will occur absent seizure;
    • the party seeking seizure will likely prevail in showing that the targeted party "misappropriated the trade secret" and has "actual possession" of it and any physical property to be seized;
    • the party subject to the seizure order would destroy, move, hide or otherwise make the trade secret matter inaccessible to the court if on notice of the potential litigation; and
    • the party seeking the seizure has not publicized the request. 
  • Protections to persons or entities subjected to the seizure order: Given the extraordinary nature of the seizure remedy, courts will:

    • generally protect the confidentiality of seized materials unrelated to the trade secret information seized;
    • schedule a hearing at least within seven days after the seizure order's issuance; and
    • determine an adequate security to be paid by the party obtaining the seizure order to cover (at least in part) the damages that any person may be entitled to recover as a result of a wrongful or excessive seizure or attempted seizure. 
  • Notice of immunity for confidentially disclosing a trade secret for purposes of reporting or investigating an alleged legal violation: In agreements governing the use of a trade secret or other confidential information with an employee, contractor or consultant signed or updated after the DTSA's enactment, employers have to explain that a confidential disclosure to government officials or attorneys "solely" for purposes of reporting or investigating a "suspected violation of the law" (or disclosures made in an under-seal complaint) is immune from civil and criminal liabilities under federal and state trade secret laws. Alternatively, trade secret owners may cross-reference an applicable policy addressing the same issue.

    • Risk of not including this notice: A trade secret owner loses the right to seek fee-shifting or exemplary damages for misappropriation. 
  • Criminal penalties for organizational misappropriation are enhanced: The DTSA amends the Economic Espionage Act of 1996 to increase the maximum penalty for a criminal violation from $5 million to "the greater of $5,000,000 or 3 times the value of the stolen trade secret to the organization, including expenses for research and design and other costs of reproducing the trade secret that the organization has thereby avoided[.]" 
  • Racketeer Influenced and Corrupt Organizations Act (RICO) predicate offenses expanded to include foreign economic espionage and criminal theft of trade secrets.

What This Means for Employers

Employers may want to familiarize themselves with the immediately effective DTSA and develop and revise confidentiality and trade secrets provisions in employment agreements and standalone confidentiality and trade secrets agreements to include the new disclosure immunity notices (or cross-reference applicable policies). Although pre-enactment agreements governing use of confidential information or trade secrets are grandfathered, employers that take these remedial steps promptly will preserve their right to seek attorneys' fees and exemplary damages in the event of an actionable willful and malicious misappropriation down the road.

Employers should also consider using this opportunity to evaluate whether they are adequately protecting their intellectual property portfolio (including trade secrets, patents, copyrights and trademarks), particularly in light of the changing patent landscape and the greater federal protections now available for employers' trade secrets.

Employers that frequently litigate trade secret, confidentiality or restrictive covenant cases should also work with legal counsel to consider whether the employer's standard approach to litigating these matters should be revisited to account for the DTSA's new protections and the instant availability of a federal forum in many cases where state law litigation had been the only possible means of protecting trade secrets.

If you have any questions about this Alert, please contact any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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