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Federalization of Trade Secret Law

By Thea E. Reilkoff

The Defend Trade Secrets Act of 2016 (DTSA) was signed into law by President Obama on May 11, 2016. The DTSA creates a private civil cause of action in federal court for misappropriation of a trade secret “related to a product or service used in, or intended for use in, interstate or foreign commerce.” The DTSA amends the existing Economic Espionage Act of 1996 (EEA), which criminalizes trade secret theft, and makes trade secrets a national priority, affording a level of protection already provided for patents, copyrights, and trademarks.

Prior to enactment of the DTSA, plaintiffs were limited to civil remedies under state law. While 48 states have adopted some form of the Uniform Trade Secrets Act (UTSA), trade secret owners have criticized differences in the laws, as well as differences in application of the law, discovery rules, and procedural requirements between states for creating unpredictability and hampering their ability to develop a uniform policy for protecting intellectual property.

In a nutshell, the DTSA shares similarities with the UTSA, including award for attorneys’ fees, double damages for willful and malicious misappropriation, and a three-year statute of limitations, but it also contains important distinctions. Most significant are provisions allowing for ex parte seizures, limiting injunctions against a former employee’s employment with a competitor, and providing protections for whistleblowers. The DTSA also adopts the EEA definition for “trade secret,” which may be broader than the UTSA.

Ex Parte Seizures

Under the DTSA, courts can impose an ex parte seizure of “property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” Under the ex parte seizure, no advanced notice is provided to the defendant. To prevent or limit abuse, the law places several limitations on the property seizures including restricting issue of a court order to “extraordinary circumstances.” Nonetheless, it is a remedy that is currently unavailable under the UTSA.

Protection of Employee Mobility

Unlike the UTSA, the DTSA explicitly bars courts from providing injunctive relief that would “prevent a person from entering into an employment relationship” or “otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.” Furthermore, any orders placing conditions on a former employee’s employment relationship must be “based on evidence of threatened misappropriation and not merely on the information the person knows.” This is in contrast to the inevitable disclosure doctrine applied by some states, which allow a party to enjoin a former employee from entering into employment with another company if it would inevitably result in the use of the party’s trade secrets.

Whistleblower Immunity

The DTSA grants immunity from civil and criminal liability under both state and federal trade secret law for whistleblowers who disclose trade secrets “in confidence to a Federal, State or local government official, either directly or indirectly, or to an attorney” where such disclosure is “solely for the purpose of reporting or investigating a suspected violation of law.” Additional protection is provided to individuals filing “a lawsuit for retaliation by an employer for reporting a suspected violation of law” provided the filing is made under seal. Most importantly, the law requires employers to provide notice of the whistleblower immunity the DTSA provides. The law states that employers must “provide notice of the immunity set forth in the [the DTSA] in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” “Employee” is defined as including “any individual performing work as a contractor or consultant for an employer.” Notice is required for “contracts and agreements that are entered into or updated after the date of enactment.” Under the DTSA, employers who fail to comply with the notice requirement may not be awarded exemplary damages and attorney fees in an action against the employee to whom notice was not provided.

“Trade Secret”

The DTSA defines “trade secret” to mean:

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.

Although similar to the eight categories listed in the UTSA (formula, pattern, compilation, program, device, method, technique, or process), there are variations among state laws that trade secret owners need to be aware of.

Takeaways

  • In order to take advantage of the DTSA, owners of trade secrets must take reasonable measures, as required under state law, to keep such information secret.
  • Trade secret owners should carefully consider the variations in the state and federal laws and application of those laws before seeking remedies for misappropriation. The DTSA does not preempt state law, but provides another forum.
  • Employers should take action now to modify policies and new or updated employment agreements to ensure compliance with the DTSA’s whistleblower immunity notice provision.

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