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Defend Trade Secrets Act Signed Into Law

Posted: June 3, 2016

On May 11, 2016, the Defend Trade Secrets Act (DTSA) of 2016 was signed into law. The DTSA was unanimously passed in the Senate and ratified in the House by a vote of 410-2. The DTSA became immediately effective for all trade secret misappropriations occurring after the date of enactment.

The DTSA is an addition to the Economic Espionage Act (18 U.S.C. §1831 et seq.), the 1996 federal criminal trade secrets statute. Prior to enactment of the DTSA, only the government could prosecute trade secret misappropriation at the federal level. Private civil actions, on the other hand, could only be brought in state court, likely under a version of the Uniform Trade Secrets Acts, which has been adopted by 48 states.

The DTSA now enables private parties to file civil actions for trade secret misappropriation in federal district court. In large part, the DTSA mirrors the Uniform Trade Secrets Act.

What is a Trade Secret?

A "trade secret" is defined in the Act as "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, the another person who can obtain economic value from the disclosure or use of the information."

In other words, there are two key components to whether something is a "trade secret": (1) it is something that a company has taken steps to keep secret; and (2) the company derives value from the secret. Classic examples are the formulas for Coca-Cola and KFC Original Recipe.

What does the DTSA provide?

An owner of a trade secret that has been misappropriated may bring a civil action if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce. Therefore, in order to proceed under the DTSA, the trade secret must be "related to a product or service used in, or intended for use in, interstate or foreign commerce." In some circumstances, it may be that the product or service does not meet this requirement, and can only be brought in state court.

There is also a statute of limitations of three years from the discovery of the misappropriation or from the time it should have been discovered by the exercise of reasonable diligence.

Important provisions of the DTSA:

Ex Parte Seizures:

  • An ex parte (without notice) civil seizure order may be sought in "extraordinary situations" with respect to "property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action." Potential examples of such property may include computers, network hardware and digital storage media that were or could still be used by a defendant.
  • The requirements for an ex parte seizure order are similar to those for a temporary restraining order, i.e., such a seizure order may only be used where other equitable relief would be inadequate because it would be avoided or evaded by a defendant. A seizure order can only be issued upon proof of "immediate and irreparable injury" with equities balanced in favor of the plaintiff. The plaintiff must also establish a likelihood of success on the merits of the misappropriation claim.
  • To balance the potential harm to the defendant, the statute includes a number of procedural safeguards, including: (i) the seizure order must “provide for the narrowest seizure of property necessary” and must be executed by law enforcement officials (although technical experts may accompany); (ii) a bond sufficient to cover damages should the seizure turn out to be wrongful or excessive must be posted; (iii) the court must provide specific guidance to the officials executing the seizure that "clearly delineates" the scope of their authority and details how the seizure must be conducted; and (4) the hearing date related to any seizure must also take place within seven days.
  • If faced with an ex parte seizure order, the business team and/or technical personnel should consult counsel immediately and take great care not to interfere with the execution of a seizure order. Developing a procedure if faced with an ex parte seizure order when law enforcement officials are at the company is too late. One should proactively develop internal and external response plans for properly handling the receipt of a seizure order.

Injunctive Relief against a former employee:

  • An injunction may be granted to prevent any actual or threatened misappropriation. A concern with this is that it may be used by employers to prevent a departing employee from taking a job with a competitor.
  • Therefore, key limitations to the injunctive relief provision of the DTSA include that the injunction (1) cannot prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows; and (2) cannot otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.
  • It is not stated what the "applicable State law" is. For example, is it the law of the state in which the action is brought, or is it the law of the state where the former employee is going?
  • In any event, this is a departure from the Uniform Trade Secrets Act, which permitted injunctions against "threatened misappropriation" without the aforementioned restrictions, because some feared that the “inevitable disclosure doctrine,” which has been expressly rejected in some states, might be used by federal judges to block an employee from taking a new job.

Damages and Attorney's Fees:

  • Damages for trade secret misappropriation are available in the form of actual losses to the plaintiff, and the value of any separate unjust enrichment on the part of a defendant. Alternatively, damages calculated based on a reasonable royalty for the unauthorized disclosure or use of the trade secret may be awarded.
  • Enhanced damages of up to two-times damages otherwise awarded may be available for willful and malicious trade secret misappropriation.
  • Legal fees may be awarded to a prevailing party, either plaintiff or defendant, where a claim for misappropriation is made in bad faith, a motion for injunctive relief is opposed in bad faith, or the trade secret was "willfully and maliciously misappropriated."

Whistleblower Protection:

  • There is whistleblower immunity from divulging a trade secret when a person discloses a trade secret to any federal, state or local government official or agency, or to any attorney, solely for the purpose of reporting or investigating a suspected violation of law, or when the disclosure is part of litigation and is filed under seal.
  • There is also whistleblower immunity when someone files an action based on employer retaliation for reporting a suspected violation of law. In this case, one may also disclose the trade secret to that person's attorney and use it in court provided such filings are made under seal.

Employer Requirements:

  • Companies should review and, if necessary, update their employment and confidentiality agreements and handbooks.
  • A company is only eligible to recover double damages and attorneys' fees in trade secret litigation if it provides notice to an employee of the whistleblower and confidentiality provisions. The notice requirement may also be met by the employer providing the employee with a cross-reference to a policy document that sets forth the employer's reporting policy for a suspected violation of law.
  • The term "employee" is defined broadly to include both traditional employees and independent contractors.
  • While the failure to include notice of whistleblower immunity bars the employer from seeking exemplary damages and legal fees in an action against an employee that was not given notice, the DTSA does not otherwise penalize the employer.
  • Since many companies use a variety of agreements to protect confidential information, including employment agreements, standalone confidentiality and inventions agreements, and separation agreements as well as handbooks and policy statements, an immediate review of these documents for compliance should be performed.