President Obama Signs Defend Trade Secrets Act
Victims of Trade Secret Misappropriation May Now Pursue Remedies in Federal Court
By Jeff Bartholmew
On May 11, President Obama signed into law the landmark Defend Trade Secrets Act (the “DTSA”), which will provide, for the first time, federal civil remedies for victims of trade secret misappropriation. Trade secrets now join the other traditional forms of intellectual property—patents, trademarks, and copyrights—for which a federal civil right of action is available to victims of infringement or misappropriation. With the recent passage of the America Invents Act, and as the Supreme Court has chipped away at protections previously existing under patent law, business-law and inventors may now choose to protect some of their intellectual property as trade secrets rather than to seek patent protection. The DTSA will make it more feasible to choose the trade secret protection alternative in certain cases. Readers should also keep in mind that, although patents have limited terms, trade secrets can provide value for as long as the secret remains a trade secret.
Prior to the DTSA’s enactment, victims of trade secret misappropriation were limited to pursuing remedies in state courts under the Uniform Trade Secrets Act (the “UTSA”), which has been adopted in almost all states. Despite the term “uniform,” however, not all states’ versions of the UTSA are identical, and the courts of each state have developed their own interpretations of that state’s version of the UTSA. For example, some state statutes specifically include customer lists within the definition of a trade secret, while other state statutes do not. Some states recognize the “inevitable disclosure” doctrine, described below, while others do not. The DTSA is intended eventually to provide trade secret owners with the predictability and uniformity that will result from a common federal framework for litigating trade secret misappropriation cases.
The DTSA is, in many respects, modeled after the UTSA. It does not, however, preempt any state trade secret laws, so plaintiffs will remain free to pursue claims under the applicable UTSA, under the DTSA in federal court, or under both. Of course, plaintiffs seeking to bring an action under the DTSA will need to demonstrate that the requirements for federal court jurisdiction have been satisfied—the trade secret must be “related to a product or service used in, or intended for use in, interstate or foreign commerce.”
- “Trade Secret.” The DTSA defines a “trade secret” broadly as “all forms and types of financial, business-law, 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.”
The DTSA’s legislative history states that its definition of a trade secret is not intended to be “meaningfully different” from state law. Nonetheless, there are differences in language between the DTSA and the UTSA, and business-law should consult with their counsel regarding both federal and applicable state case law for interpretations of those definitions when determining whether the UTSA, the DTSA, or both, may be applicable to a suspected case of misappropriation.
- “Misappropriation.” The DTSA’s definition of “misappropriation” is nearly identical to the UTSA’s definition and means generally the acquisition, disclosure, or use of a trade secret that was acquired by “improper means”.
- “Improper means includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.” This definition is also nearly identical to the UTSA’s definition, but the DTSA specifically excludes reverse engineering “or any other lawful means of acquisition” from its definition of “improper means.”
The remedies available to DTSA plaintiffs are generally the same as those provided under the UTSA, with the exceptions noted below. Those remedies include:
- Damages, Royalties, Attorney Fees. Following is a summary of the damages and other awards that a court may authorize in a DTSA case:
- damages measured by the actual loss to the victim of the misappropriation; and
- damages measured by the unjust enrichment caused by the misappropriation, to the extent not addressed in computing actual loss.
- In lieu of damages measured by any other methods, the court may impose liability for a reasonable royalty for the misappropriator’s “unauthorized disclosure or use of the trade secret.” Note that this language suggests that a person who, without authority, only discloses a trade secret but does not use it may be held liable for royalty payments, but this provision will need to be interpreted by courts in future cases.
- In cases of willful and malicious misappropriation, the court may award exemplary damages in the amount of two times actual damages.
- In cases of willful and malicious misappropriation, or in the event that a claim of misappropriation is made in bad faith, the court may award reasonable attorney fees to the prevailing party.
- Injunctions. A court may grant an injunction to prevent any actual or threatened misappropriation, but the injunction may not:
- (i) prevent a person from entering into an employment relationship (and any conditions placed on such employment must be based on evidence of threatened misappropriation and not merely on the information the person knows); or
- (ii) otherwise conflict with any state law prohibiting restraints on the practice of a lawful profession, trade, or business-law.
Courts in some states have adopted the “inevitable disclosure” doctrine, under which an employee may be enjoined from working for a competitor of his or her prior employer if the court determines that trade secret information he or she acquired in his or her previous employment will inevitably be disclosed to the new employer. The DTSA’s limitations described above with respect to injunctive relief make it clear that the federal law does not adopt the inevitable disclosure doctrine. Furthermore, an injunction issued under the DTSA may not conflict with an applicable state law (such as Colorado’s or California’s) that generally prohibits non-competition agreements or other restrictions against employment. The DTSA does, however, provide that an injunction may require affirmative actions be taken to protect the trade secret and, in exceptional circumstances in which an injunction would be “inequitable,” condition the future use of the trade secret (by the new employer) on the payment of a reasonable royalty.
- Civil Seizure of Property. Upon application of the party alleging the theft of its trade secret, “but only in extraordinary circumstances,” the federal court may order federal officers to seize property necessary to prevent the propagation or dissemination of the trade secret at issue. Moreover, the process for obtaining a seizure order from the court can be conducted ex parte, meaning without the presence of the property owner or any other parties present in court to argue their positions. This provision has no counterpart in the UTSA and is probably the most controversial provision in the DTSA. The DTSA does, however, include several safeguards and limitations (too numerous to cover here) intended to thwart or discourage an overzealous plaintiff seeking a civil seizure order. Nonetheless, this seizure provision may offer an effective remedy in those rare cases in which the court approves it.
The period of limitations for bringing an action under the DTSA is three years after the date on which the misappropriation is discovered or, by the exercise of reasonable diligence, should have been discovered. For purposes of calculating the limitations, a continuing misappropriation constitutes a single claim of misappropriation. These provisions are consistent with the UTSA’s limitations provisions.
Whistleblower and Anti-Retaliation Protections; Notification of Immunity
Other noteworthy provisions of the DTSA, also not found in the UTSA, are provisions that protect “whistleblowers” and plaintiffs in “anti-retaliation” lawsuits.
- Whistleblower Protections. The whistleblower provision immunizes individuals from liability (both criminal and civil) under any federal or state trade secret law for disclosing a trade secret either
- to a local, state or federal government official (directly or indirectly) or to an attorney solely for the purpose of reporting or investigating a suspected violation of law; or
- in a complaint or other document filed in a lawsuit or other proceeding, if the filing is made under seal.
- Anti-Retaliation Protections. An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to his or her attorney and use the trade secret information in the court proceeding, if he or she files any document containing the trade secret under seal and does not disclose the trade secret, except pursuant to court order.
- Notifications to Employees of Immunity. Employers are required to provide notice of the immunity described above to its employees in “any contract or agreement” that governs the use of trade secrets or other confidential information. This requirement can be met 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. The notification requirement applies to all contracts and agreements entered into or updated after May 11, 2016. An employer who fails to provide the required notice will not be able to recover the enhanced damages or attorney fees described above in any lawsuit against the employee who was not notified. One aspect of the notification provision that should not be overlooked is that “the term ‘employee’ includes any individual performing work as a contractor or consultant for an employer.” Accordingly, business-law should include the notification of immunity required by the DTSA in any agreement with employees as well as independent contractors such as consultants, advisors, or others who deal with trade secrets or proprietary information.