Congress Creates Federal Civil Remedies for Misappropriation of Trade Secrets

By: Steven W. Hardy

On May 11, 2016 President Obama signed the Defend Trade Secrets Act (the “DTSA”) into law.

The DTSA introduces four significant changes to trade secrets law. They are:

  • Non-exclusive federal jurisdiction over trade secret claims
  • A civil seizure remedy
  • Immunity under federal and state law for disclosure of trade secrets when disclosing a suspected violation of the law to the government or in court documents filed under seal
  • A limitation on the damages that are available to employers who do not notify their employees of the immunity from liability for disclosing trade secrets to the government and the courts

A uniform law, but not as uniform as it could be

The substantive terms of the DTSA are generally the same as the Uniform Trade Secrets Act. Since the Uniform Trade Secrets Act has been adopted by all but two states, the DTSA makes no significant change to the substantive law in this area. Of course, to the extent that there are differences among the States in the language of the Uniform Trade Secrets Act, either as adopted or as interpreted by the different State courts, the DTSA should provide more uniformity in this area.

However, the DTSA does not preempt State law, so its passage could lead to increased ambiguity and confusion in States whose statutes differ materially from the text of the DTSA.

Civil seizure remedy

Unlike the Uniform Trade Secrets Act, the DTSA includes a civil seizure remedy. It provides for “seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” While this appears to create a powerful new remedy, a party must jump through significant hoops in order for a court to order seizure, and faces penalties if seizure is later found to be wrongful.

An application for seizure may be granted “in extraordinary circumstances” without notice to the party holding the property, but only if the applicant submits specific facts by affidavit showing (i) all other equitable relief would be inadequate, (ii) immediate and irreparable injury if seizure is not ordered, (iii) the harm to the applicant outweighs the harm to the person against whom seizure is ordered and substantially outweighs harm to third parties, (iv) a likelihood of success on the merits, and (v) the person against whom seizure is ordered would destroy, hide or otherwise make such property inaccessible to the court. The person obtaining the order is also required to provide adequate security for payment of damages in the event of wrongful or excessive seizure. The court is to hold a hearing within seven days of issuing a seizure order at which the person obtaining the order has the burden of proving facts necessary to support the order. The statute also provides a damage remedy for wrongful seizure.

Given the many limits and hurdles to this new seizure remedy, it is likely to be invoked only in extraordinary circumstances.

Limits on injunctions against former employees

The DTSA provides that courts may grant injunctions to prevent actual or threatened misappropriation, but places limits on injunctions affecting employment. A person cannot be prevented from entering into a new employment relationship, and conditions placed on employment must be based upon evidence of threatened misappropriation and not merely information the person knows.

Immunity for disclosure by whistleblowers and others

The DTSA provides immunity under federal and state law from civil and criminal liability for disclosure of trade secrets (i) in confidence to government officials for the purpose of investigating violations of the law, or (ii) in documents filed under seal in lawsuits. There is redundant protection for disclosure of trade secrets in lawsuits alleging retaliation for reporting suspected violations of the law.

Employers are required to give notice of immunity

Employers are required to provide notice of the immunity available under the statute in contracts that govern the use of trade secrets by employees. Disclosure can be made by cross reference to an employment policy document. The definition of “employee” includes individuals working as contractors and consultants. If an employer fails to include the required disclosure in a contract, the employer loses the right to seek attorneys’ fees and exemplary damages from the employee.

Definitions under the DTSA

The DTSA adds a private right of action to the criminal penalties for theft of trade secrets that were passed in 1996 as part of the Economic Espionage Act. See 18 U.S.C. § 1831 et seq. The Economic Espionage Act already included a definition of trade secrets that was substantially similar to the statutory definition of “trade secret” in the Uniform Trade Secrets Act. 18 U.S.C. § 1839(3). The DTSA adds a phrase to the definition of “trade secret” in the current statute to conform with the definition in the Uniform Trade Secrets Act, and also adds definitions of “misappropriation” and “improper” that, again, are almost the same as the definitions in the Uniform Trade Secrets Act. The following paragraphs contain these definitions.

Trade secret: The term “trade secret” means 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 another person who can obtain economic value from the disclosure or use of the information.

Misappropriation: The term “misappropriation” means—

(A) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or

(B) Disclosure or use of a trade secret of another without express or implied consent by a person who—

(i)    Used improper means to acquire knowledge of the trade secret;

(ii)   At the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was—

I.       derived from or through a person who had used improper means to acquire the trade secret;

II.     acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or

III.   derived from or through a person who owed a duty to the person seeking relief to maintain secrecy of the trade secret or limit the use of the trade secret; or

(iii)  Before a material change of the position of the person, knew or had reason to know that—

I.      the trade secret was a trade secret; and

II.    knowledge of the trade secret had been acquired by accident or mistake.

Improper: The term “improper” means—

(A) Theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means; and

(B) Does not include reverse engineering, independent derivation, or any other lawful means of acquisition.

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