United States: A Comparison of Major Provisions of The Defend Trade Secrets Act to Those of The Model Uniform Trade Secrets Act

The Defend Trade Secrets Act of 2016, Pub. L. 114-153, ("DTSA") was signed into law by President Obama on May 11, 2016, and took effect immediately.[i]  This act constitutes a major expansion of federal law pertaining to the protection of trade secrets.  Most significantly, it introduces a new federal civil cause of action for trade secret misappropriation and places original jurisdiction for that action in the federal district courts.  Among other provisions, the DTSA allows for ex parte seizure orders, creates immunity from trade secret misappropriation actions for whistleblowers, imposes requirements on employers to notify their employees of the whistleblower immunity, and grants trade secret owners the right to file a submission under seal before their trade secret may be disclosed in court.

While most areas of intellectual property law are governed by federal law, trade secret law has historically been primarily governed by state law.  In particular, the Uniform Trade Secrets Act ("UTSA"), a model statute codifying the principles of common law trade secret protection, has been adopted in some form by 47 states (excluding Massachusetts, New York, and North Carolina) as well as by the District of Columbia.  Although the various state trade secret statutes are based on the language of the UTSA, implementations and interpretations vary between jurisdictions.

The DTSA is modeled in many respects after the UTSA.  Accordingly, the substantive provisions governing federal actions under the DTSA bear many similarities with those of state laws modeled after the UTSA.  That said, there are some notable differences between the two.  Note that the following comparison is primarily directed to the UTSA generally, and does not account for differences in implementation and interpretation which exist from state to state.

Definition of a Trade Secret

One difference between the DTSA and the UTSA is the language defining "trade secret."  Under the UTSA a trade secret must derive independent economic value from not being "generally known to . . . other persons who can obtain economic value from its disclosure or use."[ii]  Under the DTSA, the information constituting a trade secret must derive independent economic value from not being "generally known to . . . another person who can obtain economic value from its disclosure or use."[iii]  In practice, however, this difference is not likely to result in the DTSA and the UTSA having different scopes.

Remedies

The remedies available in DTSA actions differ from those available in UTSA actions.  In particular, the DTSA narrows the relief available to an employer in an action against an employee or former employee.  Both actions allow a court to enjoin actual or threatened misappropriation.  The DTSA, however, expressly prohibits injunctions under certain circumstances.  First, an injunction may not issue that prevents a person from entering into an employment relationship.[iv] An injunction may place conditions on such employment, but those conditions must be based on "evidence of threatened misappropriation and not merely on the information the person knows."[v]  Second, an injunction may not issue that conflicts with an applicable state law prohibiting restraints on the practice of a "lawful profession, trade, or business."[vi]

Attorney's fees and punitive damages are available under the UTSA.  In DTSA actions, however, an employer may only recover these forms of damages in an action against an employee if the employer satisfied the whistleblower immunity notice requirement.[vii]  The whistleblower immunity and the notice requirement are discussed further below.

Of note, it is unclear how this provision will apply when an action is brought jointly against an employee and a third party, e.g. a new employer.  In DTSA actions brought against a former employee and that employee's new employer, failure to provide whistleblower immunity notice may prevent recovery of punitive damages and attorney's fees against the new employer; reciprocally, bringing a DTSA action against a former employee's new employer but not against the former employee may cure a failure to comply with the whistleblower immunity notice requirement.

DTSA actions provide access to a new ex parte civil seizure provision,[viii] which states, in part:

the court may, upon ex parte application but only in extraordinary circumstances, issue an order providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.[ix]

The statute enumerates the requirements that must be met before an order may issue,[x] elements the order must contain,[xi]  the manner in which the seizure must be executed,[xii] and post-seizure actions that must or may be taken.[xiii]  An order may only issue if an injunction constitutes inadequate relief because the enjoined party  "would evade, avoid, or otherwise not comply with such an order" and, if given notice, would "destroy, move, or otherwise make such matter inaccessible to the court."  Further, the applicant must be likely to succeed in showing that the information is a trade secret and the person against whom seizure would be ordered misappropriated the trade secret or conspired to misappropriate it.  Procedurally, the court must hold a hearing within seven days of issuing the order.  At the hearing, the party who obtained the order has the burden to prove the findings of fact and conclusions of law necessary to support the order.  A person who suffers damage as a result of a wrongful or excessive seizure has a cause of action against the person who requested the seizure.[xiv]  See Appendix B for the full list of requirements.

Ex parte civil seizure orders are not new to intellectual property enforcement.  In a trademark infringement action, a court may issue an ex parte civil seizure order under 15 U.S.C. § 1116(d)(1)(A) .  In a copyright infringement action, a court may issue an ex parte civil seizure order under 17 U.S.C. § 503.  The requirements that must be met for both orders are similar to the requirements for ex parte civil seizure under the DTSA.[xv]

Civil seizure under the DTSA differs from its predecessors, however, as to what may be seized.  In instances of civil seizure under copyright or trademark law, seizure generally must be limited to infringing goods or evidence of infringement.  Under the DTSA, a court may order seizure of "property necessary to prevent the propagation or dissemination of the trade secret."  This language does not expressly recite that the seized goods must embody or contain the trade secret or provide evidence of misappropriation.    It is unclear what types of property, in practice, will be subject to seizure.  Possible examples are devices containing trade secret information such as cell phones or laptops, devices with the potential to transmit trade secret information such as email servers, or products created using the trade secret which could be reverse engineered in a manner which would expose the trade secret, documents that may refer to other documents containing trade secrets, and documents that may suggest the substance, location or value of the trade secret.  The DTSA does indicate that the order must be restricted to encompass only the "narrowest seizure of property necessary" to prevent propagation and dissemination of the trade secret, and that the seizure must "to the extent possible, . . . not interrupt the legitimate business operations of the person accused of misappropriating the trade secret."[xvi]

Whistleblower Immunity and Employer Notice Requirements

The DTSA provides for whistleblower immunity from both federal and state trade secret misrepresentation actions.[xvii]  An individual faces no criminal or civil liability for disclosure of a trade secret if that disclosure is made solely for the purpose of reporting or investigating a suspected violation of law and is made in confidence to a government official or an attorney.[xviii]  Additionally, an individual faces no criminal or civil liability if disclosure of the trade secret is made "in a complaint or other document filed in a lawsuit or other proceeding" if that filing is made under seal.[xix] An individual who files an anti-retaliation lawsuit against an employer for reporting a suspected violation of law may disclose a trade secret to his attorney and "use the trade secret information in the court proceeding."[xx]

Employers are required to give notice of this new whistleblower immunity "in any contract or agreement with an employee [or other individual performing work as a contractor or consultant] that governs the use of a trade secret or other confidential information."[xxi]  This notice requirement went into effect immediately upon the law being enacted on May 11, 2016, and applies to all agreements or contracts "entered into or updated" after the law was enacted.[xxii]  The DTSA allows compliance by reference to a policy document that "sets forth the employer's reporting policy for a suspected violation of the law" and is provided to the employee.[xxiii]  If an employer fails to comply with these notice requirements with respect to an employee, the employer cannot recover punitive damages or attorney's fees in a DTSA action against that employee.[xxiv]

Protection for Trade Secrets in Court Proceedings

The DTSA provides trade secret owners with a code language to protect their trade secrets from being revealed in court.  It states, in part:

The court may not authorize or direct the disclosure of any information the owner asserts to be a trade secret unless the court allows the owner the opportunity to file a submission under seal that describes the interest of the owner in keeping the information confidential.[xxv]

Courts were obligated to preserve the secrecy of alleged trade secrets in trade secret misappropriation actions before the DTSA was enacted.[xxvi]  Courts, however, often have different views as to what information is properly subject to an under seal filing, when it is subject to secrecy and as what procedures are required for preserving secrecy.  Accordingly, a trade secret owner could not always be sure if and to what extent (e.g., during trial) secret information presented to the court would remain secret.  The DTSA framework gives trade secret owners an opportunity to clearly identify what information should remain secret and why that information should remain secret.  If a proper submission is made, the court is obligated under the DTSA not to authorize or direct disclosure.  This provision allows trade secret owners the opportunity to defend their trade secrets with more confidence that they will not be exposed to the public.

This new provision is likely available to trade secret owners in proceedings arising under the DTSA or the Economic Espionage Act.  There is potential that its availability could be broader[xxvii] or narrower,[xxviii] discussed further in the footnotes.

Procedural Hurdles to Advancing Trade Secret Misappropriation Suits

DTSA actions arise in federal courts, under federal law, and accordingly avoid procedural hurdles that are found in certain states.  Even among states which have adopted the UTSA, the procedural aspects of UTSA actions may vary based on the civil procedure of that state.  In some cases, those procedural hurdles may be substantial.  For example, California trade secret misappropriation actions are subject to California Code of Civil Procedure § 2019.210 which reads, in part:

In any action alleging the misappropriation of a trade secret under the [California] Uniform Trade Secrets Act . . . , before commencing discovery relating to the trade secret, the party alleging the misappropriation shall identify the trade secret with reasonable particularity . . . .

In many cases, this provision has proven to be a significant obstacle to trade secret misappropriation plaintiffs in California.   The bounds of complex trade secrets are not always clear.  If a plaintiff identifies the trade secret too broadly, or describes in too much of the environment in which the trade secret is used, the court may find that the information was known generally in the industry and therefore is not protected under the California UTSA.  If a plaintiff identifies the trade secret too narrowly, the court may find that it was not misappropriated.  A common tactic employed by defendants in trade secret actions in California is to avoid responding to discovery simply by alleging that the alleged trade secrets lack particularity.  This has in many instances lead to lengthy cycles of repeated motion practice and hearings before courts simply to ascertain whether the trade secret has been identified with reasonable particularity, all of which necessarily occurs prior to discovery.  By avoiding such procedural hurdles, DTSA actions may operate more efficiently and enable plaintiffs that could not have effectively advanced a misappropriation action under their state's law.  In jurisdictions like California, the lack of procedural hurdles under the DTSA may increase the actual or perceived ability to advance court actions seeking to secure relief against misappropriation..

Choice of Law Conflicts

By filing a DTSA action instead of a UTSA action, a plaintiff may avoid choice of law conflicts to the extent that they apply to different states' trade secret law or different states' procedural law.[xxix]  Choice of law conflicts will not, however, be entirely absent in DTSA actions.  They may arise to the extent that different jurisdictions have different laws which "prohibit restraint on the practice of a lawful profession, trade, or business,"[xxx]  which provision is an express restriction on the scope of injunctive relief under the DTSA.

Conclusion

It is expected that UTSA actions will still have a role in trade secret enforcement.  UTSA actions  may provide opportunities to pursue alternate claims that are not subject to certain unsettled aspects of the DTSA.  They may be preferable where a plaintiff specifically wishes to seek a remedy excluded from DTSA actions such as an injunction prohibiting a former employee from entering into an employment relationship with a competitor.  They may also be useful where an employer wishes to pursue punitive damages and attorney's fees but failed to comply with the DTSA whistleblower immunity notice requirement.

In many cases, however, potential plaintiffs will find the new DTSA federal civil trade secret misappropriation action to be an attractive means of protecting their trade secrets or seeking redress for their misappropriation.  The DTSA may serve to expand interest in trade secrets and their viability for protecting secret information as an alternative to other forms of intellectual property, such as patent rights.  For now, we must wait and see how federal trade secret law develops.

[i]     The slip law text of the DTSA can be found at: https://www.congress.gov/bill/114th-congress/senate-bill/1890/text .  It amends §§ 1832, 1833, 1835, 1836, 1838, and 1839 of the United States Code.  Unless otherwise stated, citations to the United States Code within this document are to the code as amended by the DTSA.

[ii]     UTSA § 1(4)(i) (emphasis added).  The UTSA can be found at: http://www.uniformlaws.org/shared/docs/trade%20secrets/utsa_final_85.pdf

[iii]    18 U.S.C. § 1839(3)(B) (emphasis added).  Before the DTSA, § 1836 stated that information constituting a trade secret must derive independent economic value from not being "generally known to . . . the public."

[iv]    § 1836(b)(3)(A)(i)(I).

[v]     Id.

[vi]    § 1836(b)(3)(A)(i)(II).

[vii]   § 1833(b)(3)(C) ("If an employer does not comply with the notice requirement in subparagraph (A), the employer may not be awarded exemplary damages or attorney fees under subparagraph (C) or (D) of section 1836(b)(4) in an action against an employee to whom notice was not provided").

[viii]   § 1836(b)(2).

[ix]    § 1836(b)(2)(A)(i).

[x]     § 1836(b)(2)(A).

[xi]    § 1836(b)(2)(B).

[xii]   § 1836(b)(2)(C)-(E).

[xiii]   § 1836(b)(2)(F)-(H).

[xiv]   § 1836(b)(2)(G).

[xv]   See 15 U.S.C. § 1116(d)(3)-(11); 17 U.S.C. § 503(a)(3); 18 U.S.C. § 1836(b)(2).

[xvi]   18 U.S.C. § 1836(b)(2)(B)(ii).

[xvii] See 18 U.S.C. § 1833(b).

[xviii] § 1833(b) (1)(A).

[xix]   § 1833(b) (1)(B).

[xx]   § 1833(b) (2).

[xxi]   § 1833(b)(3)(A).

[xxii] § 1833(b)(3)(D).

[xxiii] § 1833(b)(3)(D).

[xxiv] § 1833(b)(3)(C).

[xxv] § 1835(b).

[xxvi] See Uniform Trade Secrets Act § 5 ("a court shall preserve the secrecy of an alleged trade secret by reasonable means"); 18 U.S.C. § 1835 ("the court shall enter such orders and take such other action as may be necessary and appropriate to preserve the confidentiality of trade secrets").

[xxvii] The provision is in § 1835(b).  The language of § 1835(a) is limited to proceedings arising under chapter 90 of title 18 of the United States Code.  The language of § 1835(b), however, does not expressly contain any such limitation.  If courts interpret § 1835(b) to be independent of § 1835(a), then § 1835(b) could give trade secret owners the right to file a submission arguing that their trade secrets should be protected from disclosure in any federal action; even, perhaps, in cases in which the owner is not a party.

[xxviii] The changes to § 1835 which create § 1835(b) are contained in § 3 of the DTSA.  All of the other changes in § 3 relate to criminal prosecution under the Economic Espionage Act.  §1835(a) applies to "any prosecution or other proceeding under [chapter 90 of title 18 of the United States Code]."  It is possible that Congress overlooked the "or other proceedings" language, understood § 1835(a) to apply only to criminal Economic Espionage Act prosecutions, and therefore intended § 1835(b) to apply only to Economic Espionage Act prosecutions.  The Economic Espionage Act can be found at: https://www.gpo.gov/fdsys/pkg/STATUTE-110/pdf/STATUTE-110-Pg3488.pdf .

[xxix]See, e.g., Christopher Cox, A Recurring Question In Calif. Federal Trade Secrets Cases, Law360, December 9, 2014 (outlining a federal district court split on whether California Code of Civil Procedure § 2190.210 applies in federal court).

[xxx]  See 18 U.S.C. § 1836(b)(3)(A)(i)(II).

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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