The Defend Trade Secrets Act of 2016 (“DTSA”), was signed into law by President Obama on May 11, 2016. The new statute creates broad private federal cause of action for trade secret misappropriation and has been hailed as “the most sweeping change to the nation’s intellectual property laws in a generation or more.”1 Under DTSA, relief not generally available under prior law will now be permitted, such as ex parte seizure orders. DTSA also includes new requirements, such as the requirement that employers provide employees with notice of immunities available under DTSA in order to preserve their rights to certain relief. Accordingly, clients need to review their current policies and procedures, not only to ensure compliance with DTSA requirements, but to maximize the enforceability of trade secrets as part of their overall IP protection strategy.
Background:
One goal of DTSA was to stem the growing tide of trade secret theft. A 2013 report referenced during DTSA legislation reported that losses due to trade secret theft could be measured in the hundreds of billions of dollars and in millions of jobs.2 Foreign entities, through cyberespionage and other means, were increasingly the culprits.3 That same year, Attorney General Eric Holder said, “There are only two categories of companies affected by trade-secret theft: those that know they’ve been compromised and those that don’t know yet.”4
Another goal of DTSA was to bring uniformity to trade secret civil litigation by allowing cases to be brought in federal court under DTSA if “the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.”5 Prior to DTSA, most states had adopted the Uniform Trade Secrets Act of 1985 (“USTA”). However, various states and state courts modified or interpreted USTA provisions differently, resulting in a hodgepodge of state laws and enforcement results. While DTSA provisions largely mimic provisions of the USTA, there are differences.
While the future impact of DTSA is debatable, the need for companies to understand DTSA and to protect their trade secrets is not. This is especially true in light of the increasing theft of trade secrets. As explained below regarding specific DTSA provisions, companies should use the enactment of the new statute as an opportunity to review their trade secret portfolios and protection practices in light of DTSA, and take action accordingly to fully protect their trade secrets.
Key Provisions:
Ex Parte Seizures. The most controversial difference between UTSA and DTSA is that DTSA empowers federal courts, “in extraordinary circumstances,” to issue an ex parte order – i.e. without notice to the alleged thief – “providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret.” 6
The need for such a remedy was based, at least in part, on the testimony of industry insiders. For example, one pharmaceutical company representative testified that they “often run into situations” where, after an employee has left, the company finds there has been a download of documents containing trade secrets from that employee’s computer.7 The representative testified that a seizure provision would allow the company to “go to Federal court and in one action kick out an ounce of prevention rather than worrying about a pound of cure a week or two later, when we can get the … State courts involved[.]”8
Accordingly, it is imperative that companies institute practices to detect trade secret misappropriation as soon as possible. Given the right set of circumstances, this will then allow them to seek and obtain an ex parte seizure order in order to minimize the damaging effects of such a theft. This is especially important at present, when trade secrets can be easily disseminated through electronic means.
Immunity Notice Requirements. Another difference between existing state law and DTSA is that under DTSA, “[a]n individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret” in certain situations.9 Specifically, such immunity is granted to individuals that (1) disclose a trade secret in confidence to a government official or an attorney solely to report or investigate a violation of the law, (2) disclose a trade secret to an attorney or in court proceedings in connection with a lawsuit alleging retaliation by an employer for reporting a suspected violation of the law, and (3) disclose or use a trade secret in any lawsuit filing, as long as filed under seal.
In the event such an individual is an employee, and the employer does not provide appropriate notice to such person of the availability of such immunities, that employer cannot be awarded exemplary damages (up to two times actual damages), or attorney fees, in a trade secret suit against any such person to whom such notice was not provided.10
Specifically, DTSA provides that for an employer to preserve its rights to exemplary damages and attorney fees, the employer “shall” provide notice to an employee of his or her immunity rights “in any contract or agreement with an employee that governs the use of trade secret or other confidential information,” or by cross-referencing a policy document provided to such employee.11 Employers should know that DTSA defines “employee” to “include[] any individual performing work as a contractor or consultant.”12 This requirement is for all agreements entered into or updated after DTSA enactment, i.e., after May 11, 2016.13
Accordingly, companies should take immediate steps revise all contracts or agreements (1) that relate to trade secrets or other confidential information, (2) with any employee, contractor, or consultant, and (3) that are to be entered into or updated after May 11, 2016.
Employee Mobility. Under the “inevitable disclosure doctrine” employed by many state courts, employers have been able to enjoin employees from taking a new job merely because of what they knew – without any evidence of actual misappropriation – by showing that the new job would inevitably lead to a disclosure of the employer’s trade secrets. Under DTSA, a court 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.”14
Given the increased right of employment mobility provided under DTSA, it is important that companies revisit their employee practices. Not only should employee agreements be reviewed, companies should institute appropriate employee exit strategies. For example, reminding a departing employee of their trade secret obligations should be part of every exit interview, preferably coupled with a written acknowledgement of such obligations signed by the departing employee. As another example, the employee’s next employer should be contacted in writing and warned that the employee is restricted from disclosing or using trade secrets relating to certain areas of knowledge such as manufacturing, formulas, customers, etc. This prevents the next employer from later claiming innocent use of any such trade secrets.
DTSA Does Not Preempt State Law. DTSA specifically provides that it does not preempt state trade secret law. Accordingly, DTSA will add to the complexity of trade secret litigation. As an example, a plaintiff may now choose to bring trade secret civil litigation under DTSA, under state law, or both — depending upon which strategy is the most advantageous.
Further, because decisions under DTSA will be made by federal district court judges in each state, it can be presumed that DTSA provisions will not only be interpreted differently between such judges, but that such judges may be pre-disposed or influenced by the pre-existing state laws and precedents of their jurisdiction.
Accordingly, companies should work with legal counsel in determining how differences between existing state laws and DTSA may work to their advantage. For example, DTSA defines what constitutes a trade secret differently than, and arguably broader than, the definition provided under state law. Accordingly, companies may need to reevaluate their confidential information, and whether it should be guarded under trade secret precautions.
More importantly, state trade secret law under UTSA requires that in order confidential information to be maintained as a trade secret, it must be “the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”15 DTSA, on the other hand, requires that the “owner thereof has taken reasonable measures to keep such information secret.”16 While it is unlikely that DTSA will be interpreted to require different measures to keep such information secret, this is a good time for companies to revisit the measures they do use. This is critical because confidential information qualifies as a trade secret only if appropriate measures are taken to keep it secret, such as by (1) restricting access to such information, (2) using contracts to restrict employees and others from using or disclosing such information, and (3) providing notice to others of their trade secret obligations. Examples of each would be (1) using passwords to restrict electronic access to trade secrets, (2) using appropriate nondisclosure agreements, and (3) again, instituting employee exit interview strategies in order to place exiting employees, and their future employers, on notice of their trade secret obligations.
Practice Points:
In enacting DTSA, Congress recognized the ever-increasing importance of trade secrets in the competitive global marketplace. DTSA also reflects a recognition of the limitations inherent in using patents to protect certain key intellectual property; including continuing uncertainties concerning the patent eligibility of some technologies. DTSA is a significant attempt to address the uneven application of trade secret protection under state laws and the difficulty in enforcing trade secrets in foreign venues.
Given the extreme value of trade secrets, and the growing threat of trade secret theft, it would behoove businesses to reassess and audit their trade secret protection practices in light of DTSA, and take appropriate steps to protect those trade secrets. In order to get the most out of the new enforcement options in DTSA, clients must make sure that their policies and procedures meet the requirements of the Act, and also serve to maximize the protection of trade secrets and other IP assets.
This includes, for example, revising all contracts or agreements relating to trade secrets or other confidential information with any employee, contractor, or consultant to provide the notices required by DTSA. In addition, companies should evaluate their policies concerning restrictive covenants and non-competition agreements to ensure that they are appropriate and meet the requirements of state law. Finally, clients should audit their current practices for safeguarding trade secrets and confidential information to make sure that the information is protected from recent advances in cyberespionage, and also to enhance the ability to win in litigation in the event that, despite those precautions, trade secrets are misappropriated or fall into the hands of a competitor.
1 Maxwell Goss, What the Defend Trade Secrets Act Means for Trade Secret Defendants, PatentlyO, (May 5, 2016), http://patentlyo.com/?s=defend+trade+secrets+act.
2 The IP Commission, Report Of The Commission On The Theft Of American Intellectual Property, 11 (May 2013), http://www.ipcommission.org/report/IP_Commission_Report_052213.pdf.
3 Id. at 3.
4 S. Rep. No. 114-220, at 2 (2016).
5 18 U.S.C. § 1836(b)(1); DTSA § 2(a).
6 18 U.S.C. § 1836(b)(2)(A)(i); DTSA § 2(a).
7 Economic Espionage And Trade Secret Theft: Are Our Laws Adequate For Today’s Threats? Before S. Comm. on the Judiciary, 113th Cong. (2014) at 15 (statement of Douglas K. Norman, Eli Lilly & Co.)
8 Id.
9 18 U.S.C. § 1833(b); DTSA § 7.
10 18 U.S.C. § 1833(b)(3); DTSA § 7.
11 Id.
12 18 U.S.C. § 1833(b)(4); DTSA § 7.
13 DTSA § 2.
14 18 U.S.C. § 1836(b)(3)(A); DTSA § 2.
15 UTSA § 1(4)(ii).
16 18 U.S.C. § 1839(3)(B); DTSA § 2.
