United States: Trade Secrets Going Federal: President Obama Signs Into Law Landmark Defend Trade Secrets Act Requiring Immediate Action By All Employers

Last Updated: May 20 2016
Article by David Barmak, David M. Katz and Richard G. Gervase

On Wednesday, President Obama signed into law the groundbreaking Defend Trade Secrets Act (DTSA)1, which for the first time creates a federal civil remedy for trade secret misappropriation and provides uniformity (and hopefully predictability) to what has, until this point, been a patchwork body of law applied disparately among the states. (Our prior coverage of the DTSA can be found here, here and here.) And while the DTSA does not preempt state law, it does provide an additional layer of protection and uniformity to trade secrets. The landmark DTSA represents bipartisan legislation which passed last month in an overwhelming 410-2 vote in the House of Representatives and a unanimous vote in the Senate. The DTSA will change how companies address trade secret misappropriation for years to come, but it also has provisions relating to confidentiality agreements with employees that require immediate attention by all employers.

Access to Federal Courts

Up until now, companies typically had to sue in state court under state law to protect their trade secrets. Though most states have adopted some form of the Uniform Trade Secrets Act (New York and Massachusetts are notable exceptions), application of that body of law has been rather inconsistent. For example, different states define "trade secrets" differently, with some having a novelty requirement and others being more protective of customer lists. In addition, states have different statutes of limitations and provide for different remedies. The DTSA now allows companies to file civil trade secret theft lawsuits in federal courts, which can more ably handle multi-jurisdictional and international cases (e.g., sweeping discovery instruments such as nationwide subpoena power) and complex litigation often involving highly technical facts. Moreover, over time, federal courts across the country are likely to develop a relatively uniform body of law applying the DTSA, in stark contrast to the current situation in which the states often take widely disparate approaches to dealing with trade secret misappropriation.

Defining Trade Secret

The DTSA broadly defines the term "trade secret" to mean "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 (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) 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." On its face, this definition does not require the trade secret to be novel and appears broad enough to include customer lists, as well as other business and financial information of value, provided the additional definitional elements are met.

Civil Seizure and Other Remedies

One of the DTSA's most noteworthy (though controversial) tools is a provision allowing for ex parte seizure orders. In other words, a company can seek to have federal marshals, without notice, seize "property necessary to prevent the propagation or dissemination" of a stolen trade secret. A seizure order would require a showing of irreparable injury and of likely success in showing (1) that the information is a trade secret, and (2) that the person named misappropriated the information or conspired to do so "by improper means," which is defined to include theft and misrepresentation, but which excludes reverse engineering, independent derivation or other lawful means of acquisition. One of the compromises in the final version of the law, however, is that ex parte seizures are available in "extraordinary circumstances," such as when a trade secret could be destroyed if the perpetrator had advance notice. The DTSA also permits recovery of attorneys' fees and other remedies for parties who suffer damage through a wrongful or excessive seizure order, e.g., those obtained in bad faith, so employers would be well-advised to seek seizure orders judiciously.

In addition to civil seizure, the DTSA provides employers with a bevy of other remedies, including a wide array of injunctive relief, various forms of compensatory damages, punitive damages, attorneys' fees and even criminal penalties. Specifically, a court may grant an injunction to prevent any actual or threatened misappropriation, provided that the injunction does not "prevent a person from entering into an employment relationship." Where appropriate, an injunction may require affirmative actions to protect the trade secret. Further, in "exceptional circumstances that render an injunction inequitable," the court may condition future use of the trade secret on the payment of a reasonable royalty. Following a finding of misappropriation, a court may also award damages. Where the trade secret is "willfully and maliciously misappropriated" a court may award punitive damages doubling the damage award. A court may also award attorneys' fees where the misappropriation was in bad faith. The DTSA also includes a statute of limitations that bars a civil action from being brought later than three years after the date the misappropriation is discovered (or should have been discovered with the exercise of reasonable diligence), thus bringing uniformity to the disparate statutes of limitations applied under state law.

In addition to civil penalties, the DTSA also brings heightened criminal penalties. Specifically, criminal penalties, which were formerly capped at $5 million, are now increased to the greater of $5 million or three times the value of the stolen trade secrets. The DTSA also amends the Racketeer Influenced and Corrupt Organizations Act (RICO) to add economic espionage and theft of trade secrets to the list of RICO's "racketeering activities" or predicate acts.

Whistleblower Immunity

All employers should take special note of the DTSA's whistleblower immunity provisions because they require immediate revisions to agreements, entered into on or after May 11, 2016, containing confidentiality, non-disclosure and intellectual property ownership provisions, as well as to whistleblower and confidentiality policies found in handbooks and elsewhere. The DTSA includes a safe harbor for "whistleblower" employees providing the whistleblower with immunity from any criminal or civil liability under any federal or state trade secret law for disclosure of a trade secret that is made in confidence to an attorney or federal, state, or local governmental official "solely for the purpose of reporting or investigating a suspected violation of law," or in a filing in a lawsuit made under seal.

As noted above, among the remedies available under the DTSA to companies electing to sue former employees for trade secret theft are punitive damages and attorneys' fees. In order for companies to avail themselves of these remedies, they must however comply with the DTSA's notice provision, advising signatories to non-disclosure agreements (NDAs), confidentiality agreements and the like (including, for example, employment agreements with confidentiality provisions) of the whistleblower immunity noted above. One way (indeed, the most conservative way) to accomplish that is to add language to an NDA explaining whistleblower immunity rights. This method, however, may provide rogue employees with a "road map" concerning how to lawfully disclose trade secrets or otherwise spark nefarious ideas into the minds of disgruntled employees. So, companies should also consider a different approach: taking advantage of the DTSA's "policy document" provision which considers an employer "to be in compliance with the notice requirement ... if the employer provides a cross-reference to a policy document provided to the employee that sets forth the employer's reporting policy for a suspected violation of law." Either way, however, in order for employers to possibly recover attorneys' fees and be awarded punitive damages, confidentiality agreements entered into or amended from here on out must include either the required notice or cross-reference a policy document (e.g., whistleblower policy, code of conduct, etc.) which includes a statement about the DTSA's whistleblower immunity. The latter practice may well be preferable to drawing needless attention to the whistleblower safe harbor directly in the NDA or other confidentiality agreeement, which is likely to be found in an employment agreement, offer letter or other document that is highly scrutinized by employees during the onboarding process.

Employer Takeaways

The DTSA's enactment provides the perfect opportunity for companies to take stock of their valuable trade secrets and to create or button up (see whistleblower immunity section above) their agreements containing confidentiality, non-disclosure and intellectual property ownership provisions, given the new tools at their disposal aimed at protecting what is often companies' lifeblood: their trade secrets (which now become the fourth member of the family of federally protected intellectual property law, joining patents, copyrights and trademarks). At a minimum, employers should not enter into new confidentiality agreements with their employees (or amendments to their existing agreements) without discussing with counsel the DTSA requirement that employees be provided notice of their whistleblower immunity either in the agreement itself or through a cross-reference to an appropriately worded policy.

Footnote

1 The “Defend Trade Secrets Act of 2015,” S. 1890, amends the Economic Espionage Act, 18 U.S.C. §1836(b), to create a federal civil remedy for trade secret misappropriation and unjust enrichment where the trade secret "is related to a product or service used in, or intended for use in, interstate or foreign commerce."

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Authors
David Barmak
David M. Katz
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