Client Bulletin #578

What is Coca-Cola’s secret recipe? How does Thomas’ English Muffins get all those “Nooks & Crannies”® in its muffins? And how does Krispy Kreme make its signature lighter-than-air doughnuts? These are the type of trade secrets that these companies, and others, are extremely careful to protect. Now they will have an additional federal remedy at their disposal for any would-be thieves of those secrets.

President Obama signed into law yesterday the Defend Trade Secrets Act of 2016, the nation’s first federal trade secret protection act with civil remedies.The new law recently passed both the House and Senate with overwhelming bipartisan support – and now comes the more intriguing issue of not only what the statute provides, but also what its practical effect might be on companies seeking to protect their confidential information.

The DTSA is effective immediately for any misappropriation (as defined in the statute) “for any act which occurs on or after the date of the enactment of this Act.

Overview of the DTSA

Trade secrets have long been the only type of intellectual property not protected by an owner’s ability to file civil lawsuits under federal law. Instead, those protections have come through state court remedies, with most states having enacted their own version of the Uniform Trade Secrets Act that has long been the basis for statutory trade secret protections. Although there are definite pros and cons to having individual state laws protecting trade secret misappropriation, those laws have also resulted in different approaches to the basic definition of what a trade secret is and what steps a company must take to protect a particular process or piece of information as a trade secret.

Now, for the first time, the DTSA provides a new federal remedy which at least enables the potential for a more uniform approach to trade secrets protection – although its practical effect upon companies long accustomed to state law actions remains to be seen. One of the more intriguing aspects of the DTSA is whether its broad civil remedies will actually be taken advantage of in most trade secret litigation. This is especially true when the “trade secret” is a more localized argument of customer lists and pricing, or cost data, rather than some confidential manufacturing process, research and development innovation, or strategic marketing plan whose overall importance to a company might warrant the DTSA’s additional steps for proving trade secret misappropriation. Not to mention the generally more methodical approach of federal courts, and the involvement of Justice Department officials for remedies such as search and seizure with its corresponding potential loss of control that inherently comes with government activity.

A New Claim with Familiar Remedies

In short, the DTSA amends the Economic Espionage Act of 1996, 18 U.S.C. § 1831 et seq.,which has previously been limited to federal criminal remedies for trade secret misappropriation, with investigations and prosecutions conducted by the U.S. Attorney’s office. Section 1836 of the Espionage Act has now been amended to allow the owner of a trade secret to bring a civil action if the misappropriated trade secret is “related to a product or service used in, or intended for use in, interstate or foreign commerce.” Remedies for this new claim include damages for the actual loss caused by the misappropriation, damages for unjust enrichment (to the extent not captured by actual losses), and injunctive relief to prevent any actual or threatened misappropriation. In exceptional circumstances in which an injunction is inequitable, a court may condition future use of the trade secrets upon payment of a reasonable royalty. If a plaintiff can establish that the trade secret was “willfully and maliciously appropriated,” the court can award exemplary damages of up to two times the amount of actual damages. Reasonable attorney’s fees may also be awarded to the prevailing party in a DTSA case, as well as to a defendant if the claim of misappropriation is made in bad faith. There is a three-year statute of limitations for DTSA claims.

The Ex Parte Seizure Order

Although the structure and function of the DTSA claim itself is similar to states’ laws based on the Uniform Act, the statute does provide for one extreme remedy that is very different. Specifically, under the DTSA and based upon an affidavit or verified complaint, the court mayissue 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” based on an ex parteapplication (that is, without prior notice to the defendant or defendant’s attorney) when the court finds that it “clearly appears from specific facts” that

  • A temporary restraining order issued pursuant to Rule 65(b) of the Federal Rules of Civil Procedure would be inadequate;
  • An immediate and irreparable injury will occur absent seizure;
  • The harm to the plaintiff (applicant) outweighs the harm to the defendant (opponent) and significantly outweighs the harm to any third parties;
  • The plaintiff is likely to show that the information is a trade secret, that the defendant misappropriated the trade secret by improper means or conspired to use improper means to do so, and the defendant actually possesses the trade secret and any property to be seized;
  • The application describes with reasonable particularity the matter to be seized and, to the extent reasonable under the circumstances, the location of the matter to be seized;
  • The defendant or persons acting with the defendant would destroy, hide, or otherwise make the matter inaccessible to the court if on notice; and
  • The plaintiff has not publicized the requested seizure.

Upon a successful application, a court can order federal marshals to seize “property necessary to prevent the propagation or dissemination” of the misappropriated trade secret. This seizure remedy has long been part of the Economic Espionage Act’s criminal provisions, but has now been expanded to the civil arena as well.  Specifically, Section 2(b)(2)(B) of the DTSA sets forth requirements for the seizure order itself, which include providing the narrowest seizure necessary, restricting access by the plaintiff (although not necessarily entirely), providing guidance to law enforcement officers executing the seizure, setting a date for a hearing no later than seven days after the order issues, and requiring the plaintiff to provide security for the payment of damages resulting from wrongful or excessive seizure or attempted seizure. The court is also under an obligation to protect the defendant from publicity about the order. (The statute does not specify what this means.) Any materials seized must be secured by the court from physical and electronic access, presumably by either party. In addition, the court may appoint a Special Master to locate and isolate all misappropriated trade secret information and facilitate the return of unrelated property and data to the person from whom the property was seized.

After the court issues a seizure order, it sets a hearing date. At the seizure hearing, the burden is on the plaintiff to prove that facts and conclusions of law "necessary to support the order" are still in effect. If the plaintiff cannot do so, the seizure order will be dissolved, or modified appropriately. The defendant may file a motion with the court at any time to dissolve or modify the order after giving notice to the plaintiff. In the event that a defendant suffers damage by reason of a wrongful or excessive seizure, the defendant is entitled to the same relief as provided for under Section 34(d)(11) of the Lanham Act, which provides that a party is entitled to "relief as may be appropriate, including damages for lost profits, cost of materials, loss of good will, and punitive damages in instances where the seizure was sought in bad faith, and, unless the court finds extenuating circumstances, to recover a reasonable attorney's fee."

Employee Immunity and Notice Requirement

The DTSA contains a separate section protecting whistleblowers with respect to trade secret misappropriation. Section 7 of the DTSA provides for criminal and civil immunity from suit for any individual who discloses a trade secret in confidence to the government solely for the purpose of reporting a suspected violation of law, or in a complaint or other pleading if the filing is made under seal. In the context of a lawsuit in which the plaintiff alleges retaliation for engaging in activity protected by the DTSA, the plaintiff may disclose the trade secret to his or her attorney and use the trade secret information in the court proceeding. However, any document containing the trade secret that is filed with the court must be filed under seal, and the plaintiff may not otherwise disclose the trade secret.

Employers are required to provide notice to their employees regarding these immunity provisions under the DTSA if they want to take advantage of certain remedies. The statute says that the notice shall be provided “in any contract or agreement with an employee that governs use of a trade secret or other confidential information.” In addition to (or in lieu of) revising any confidentiality or other agreements to provide this notice within the actual agreement, an employer may also provide a cross-reference to a separate policy document that sets forth its reporting policy for any suspected violations of law. If an employer does not comply with these notice requirements, then the employer may not recover exemplary damages or attorneys’ fees against an employee to whom notice was not provided. As a result, companies should strongly consider including the immunity notice provision in all confidentiality agreements or policies – both by revising current versions and by drafting future versions for employees, vendors and other third parties that may be exposed to their trade secrets and other confidential information.

Potential Benefits of the DTSA

One of the most valuable aspects of the DTSA is that it provides a statutory basis for employers to litigate trade secret misappropriation claims in federal court – valuable, that is, if the employer wants to be in a federal venue and determines that the DTSA’s potential remedies are worth the additional effort that federal lawsuits require. Previously, a trade secrets case could be litigated in federal court only if there was an accompanying federal claim to the lawsuit or if “diversity” existed between the parties (in other words, everyone on the plaintiff’s side resided in different states from everyone on the defense side and more than $75,000 was in controversy). But under the DTSA, the parties will be able to rely on “federal question” jurisdiction, which allows the case to be brought in federal court regardless of any other claim, or where the parties reside or how much money is at issue.

Employers often prefer to be in federal court, as opposed to state court, for most employment law claims like discrimination and harassment. However, that preference is usually based on the well-developed body of federal law in the employment realm and how federal judges are usually more open to considering pretrial motions to dismiss a meritless claim. The DTSA at least creates the possibility that a similar body of uniform, or at least more predictable, trade secrets law will be developed in the future. If so, then this same employer preference may come to pass in the future, especially for multi-state corporations who want to avoid the differences that often exist in various states statutes based on the Uniform Act.

The DTSA may also make some welcome procedural changes in addition to these substantive changes. For example, by litigating in federal court and using the DTSA’s new provisions, an employer may be able to sidestep some of the burdens of engaging in discovery across multiple states. Among other things, the DTSA provides for nationwide subpoena power in certain circumstances.

Finally, the DTSA may provide advantages with respect to the enforcement of certain court orders, such as temporary restraining orders and preliminary injunctions. Since those are “interlocutory” orders rather than final judgments, they can often be difficult to enforce across state lines, at least in a timely manner – and the Uniform Enforcement of Foreign Judgments Act, which addresses final orders and judgments issued in another state, normally doesn’t apply. The DTSA should help to alleviate this problem.

Limitations of the DTSA

All of that having been said, it is not clear that the DTSA is an unmitigated boon for businesses. Although the DTSA has the potential of creating a more uniform body of federal trade secrets law, there is no guarantee that will actually happen. The DTSA does not preempt states’ trade secret laws; those state laws remain in effect. Accordingly, there is no requirement that an employer even allege a DTSA claim when pursuing a trade secret action. If anything, especially until we see how the DTSA actually develops now that it’s the law, we expect companies to continue asserting state-law trade secret misappropriation claims with the DTSA as a potential alternative claim as well.

Companies that for whatever reasons may prefer litigating in state court had better think twice before adding a DTSA cause of action to their lawsuits because they would create a federal question for which the defendant may prefer a federal venue. If a state court lawsuit contains a DTSA claim, the defendant can remove the case to federal court.

The ex parte seizure provision looks great on paper, but there are serious questions of how often it will be invoked and what circumstances would have to exist for a court to find that a TRO or preliminary injunction would not be sufficient under Rule 65 of the Federal Rules of Civil Procedure. Moreover, a trade secret claim is often (though not always) brought in tandem with a breach of contract claim for violation of a non-compete or non-solicitation agreement. The DTSA in no way addresses these types of agreements, so the typical route of obtaining a temporary restraining order followed by a preliminary injunction remains in place. In other words, the ex parte seizure order is only a partial remedy, at best, in certain cases.

A further potential complication under the DTSA exists for those cases involving both trade secret and non-compete/non-solicitation claims. The DTSA affirmatively states that an injunction may be granted as long as it does not “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.” The intent behind this provision appears to be to limit the DTSA’s injunctive remedies to those instances where trade secret misappropriation has actually occurred, or where “true” misappropriation is being threatened. The intent may also be an indirect reference to a trade secret doctrine known as “inevitable disclosure” – i.e., when an individual or entity may be enjoined from employment or other activities based on a theory that trade secrets of another would be “inevitably” used or disclosed in the process. Once again, this is an unanswered question for the untested DTSA, but it could result in more court scrutiny to a companion covenant not to compete claim. It’s worth noting that President Obama issued last week a report on non-competition agreements criticizing “non-compete abuse” and calling for further study on the issue.

How Companies Can Prepare

  • Review your company’s policies and agreements to ensure that they contain the required language under the DTSA, including its whistleblower and retaliation provisions. This is important because the failure to include required language eliminates an employer’s ability to obtain exemplary damages and attorneys’ fees. Additionally, make sure that your company is using confidentiality agreements with employees, contractors, and vendors, and that the agreements clearly identify the trade secrets and other confidential information you want to protect.
  • Implement measures that reasonably protect the secrecy of your company’s trade secrets and other confidential information, including the development of a “trade secret protection program” that includes limited access to the information, confidential markings, and other steps to preserve appropriate secrecy. In addition, review your company’s hiring, orientation, and termination procedures to ensure that reasonable efforts are being made to prevent newly hired and departing employees from improperly using, disclosing, or taking the company’s trade secrets. All of these steps are especially important based on DTSA and existing state law requirements to take reasonable steps to preserve the secrecy of any confidential information that the company may want to consider a “trade secret.” In fact, absent these steps a company is likely to lose any argument that specific information even constitutes a “trade secret,” much less that it should be protected through a misappropriation claim.
  • Before a claim arises, review the laws for the states where your company does business, and identify the pros and cons of proceeding under state law, or the DTSA, or both. That way, your company can not only proceed quickly and decisively if injunctive relief is needed, but also make a more informed decision as to which laws and which forums are best suited for protecting your trade secret rights.

Overall, it remains to be seen just how valuable the DTSA will be in fighting trade secret misappropriation. But the good news is that employers now have yet another way to protect their most important information from unfair competition – and for the first time, that path is in federal civil court.

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