United States: The Defend Trade Secrets Act: What Does It Really Mean For Employers? The Good, The Bad And The Ambiguous, Part 4

In Part 1 and Part 2 of this series of posts, we began the discussion of what the Defend Trade Secrets Act (DTSA), enacted in May 2016, really means for employers in defending their trade secrets. In particular, we addressed some of the "good" the DTSA offers for employers, including: (1) a clear path to federal court, (2) ex parte seizure orders and (3) international application. In Part 3, we addressed the bad — four potential downsides of the DTSA for employers, including mandatory disclosure of whistleblower protections. In this final Part 4, we outline questions left unanswered by the DTSA which are worth watching for future developments.

The Ambiguous:

  1. When does a defendant have a counter-claim for wrongful seizure? The DTSA provides that a party may assert a counterclaim if it "suffers damage by reason of a wrongful or excessive seizure." Damages for such counterclaims may exceed the amount of security posted with the court by the seizing party, and a party damaged by a wrongful seizure may recover attorneys' fees as well as "damages for lost profits, cost of materials, loss of good will, and punitive damages in instances where the seizure was sought in bad faith." Unfortunately, the DTSA provides no clear explanation of what constitutes a "wrongful" or "excessive" seizure. Assuming some measure of damages, will a counterclaim exist any time a seizure is ordered of any information on which the seizing party's DTSA claim eventually fails? What will be considered "excessive" seizure of property or information? Given the procedural safeguards through which a litigant must navigate to obtain an order of seizure, it is unlikely that courts will be presented with opportunities to provide guidance on wrongful or excessive seizures any time soon.
  1. Will the DTSA impact state law "inevitable disclosure" claims? As noted in Part I, the DTSA prohibits injunctions which would limit new employment of an employee based "merely on the information the person knows." However, many believe that courts are generally becoming more reluctant under state laws to find "threatened" misappropriation or fashion injunctive relief under the inevitable disclosure theory (which allows a court to find that a former employee would disclose proprietary information in their position with a new employer, even if there is no evidence of actual disclosure, based on what the employee knows and learned from working with the former employer). Will the DTSA further that trend?
  1. What limitations will be placed on DTSA's application to international trade secret theft? Although U.S. organizations or individual citizens/permanent residents can be held liable under the DTSA for extra-territorial misappropriations, others may be held liable only if "an act in furtherance of the offense was committed in the United States." The outer reaches of what will be considered acts "in furtherance of the offense" of trade secret misappropriation are undetermined and will likely be influenced by past precedent under the Economic Espionage Act.
  1. Might the DTSA permit damages for inevitable disclosure despite prohibiting injunctive relief? The DTSA's provisions against inevitable disclosure as a basis for limiting employment appear only in its provisions regulating injunctive relief and do not appear in its provisions permitting damages. This leaves room for debate as to whether the DTSA may permit damages to a jilted employer under that theory.
  1. Will uniformity in application of the DTSA be achieved? Although the laws of most states are premised upon the Uniform Trade Secrets Act (UTSA), many are still replete with state-specific distinctions. The type of information protectable as a trade secret varies among state laws. Further, the DTSA itself defines trade secrets slightly differently than the UTSA, such as by specifying that it is the trade secret owner who must have made the efforts to maintain secrecy of the trade secret. Uniformity in application of the DTSA will, therefore, not be achieved if federal courts are influenced by the trade secrets laws of the state in which they sit. Further, because the DTSA is also based in large part upon the UTSA, margins for distinction similar to those which developed among the states may also develop among the federal district and circuit courts.

In the end, the DTSA offers plenty of good, a little bad, and a few issues that remain unclear. Cases and decisions will help, but in the meantime, all wise employers will want to make sure they understand the DTSA and how it may impact their business and employees.

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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