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Congress Enacts Federal Trade Secrets Law

Posted: 05/03/2016
Services: Commercial Litigation | Labor and Employment | Trade Secrets


The U.S. House of Representatives recently passed legislation that would protect businesses from the growing threat of trade secrets theft.  Under the new legislation, businesses will have a new and powerful option to bring trade secret lawsuits using federal law, in addition to state law.  

On April 27, 2016, the U.S. House of Representatives passed long-proposed legislation that would federalize trade secrets law.  The vote of approval sends the bill to the White House for President Obama’s expected signature, which would bring the law into effect.  

The Defend Trade Secrets Act (DTSA) will amend the Economic Espionage Act, which currently only provides for criminal cases lodged by prosecutors, to create a private civil cause of action for trade secret misappropriation.  Previously, private civil cases of trade secret misappropriation have been purely a matter of state law. 

Virtually every business has protectable trade secrets.  A trade secret is a form of confidential business property or information that has economic or competitive value, including, but not limited to, customer lists, formulas, methods, algorithms, software programs, unique designs, industrial techniques and manufacturing processes.  Generally, a business must take reasonable steps to safeguard its trade secrets in order to protect them from disclosure.

One of the primary purposes of the DTSA is to make the law uniform through a single federal statute.  This will allow more predictable, nationwide case law to develop.  Litigants would also have easier access to federal courts, which are arguably better equipped to handle more diverse cases.  Access to federal courts will also provide businesses with a more uniform method to take action and protect against the disclosure of trade secrets.

The most controversial aspect of the DTSA since it was introduced in 2012 has been its provision allowing courts to issue ex parte seizure orders to prevent the dissemination of a trade secret.  The new bill has limiting language to address concerns about abuse of such orders, including an express proviso that it should only be used in “extraordinary circumstances.”  The bill also allows parties on the receiving end of such orders to seek damages if they feel that the provision has been abused.

The DTSA also provides strong protections for whistleblowers, establishing both criminal and civil immunity for employees who disclose trade secrets to the government as part of a whistleblower case.  Employers are required to notify workers in any contract that is related to trade secrets of their rights to turn over confidential information to the government under such circumstances.  

The new bill would not eliminate or preempt state laws that already exist, but rather provide an additional layer of protection.  Federal trade secrets law draws its authority from the Commerce Clause, and like the trademark law’s federal Lanham Act, the DTSA will co-exist with state-level trade secrets law. 

This legislation is significant because businesses that value trade secrets will likely encounter it every day.  For instance, trade secret issues arise with every employee hire and termination, and  every business contract containing a non-disclosure or confidentiality clause.  

Practical takeaways:
A trade secret is protected as long as a business takes steps to keep this information confidential.  Because virtually every business has some level of trade secrets, companies must institute special procedures to protect their trade secrets from competitors.  Businesses should identify the confidential information that merits protection as a trade secret and understand the new protections that the DTSA will provide.  This will occur at all levels of the employment relationship.  In order to take advantage of the new remedies under the DTSA, including exemplary damages and attorneys’ fees, businesses must provide notice to employees of their rights to disclose trade secrets to the government for the sole purpose of reporting a suspected legal violation.  Business should also review their policies and procedures, non-disclosure and non-solicitation agreements and other restrictive covenants to ensure compliance with the new law.  For specific guidance on conforming your practices to both the new and existing law, please contact Saul Ewing attorneys Dena Calo (DCalo@saul.com), Henry Platt (HPlatt@saul.com), Gary Eidelman (GEidelman@saul.com), or Brittany Medio (BMedio@saul.com). 

Please refer to http://tinyurl.com/BillS1890 for a complete version of the bill.