"Defend Trade Secrets Act" Takes Effect, Creating New Rights and Obligations for Employers, and Reflecting Bipartisan Desire to Protect US Trade Secrets from International Theft

On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (S. 1890). The Defend Trade Secrets Act (DTSA) creates a federal, civil cause of action for misappropriation of trade secrets and provides plaintiffs a wide range of remedies, most notably including an ex parte seizure mechanism.

Notwithstanding the current political climate, the bill passed with widespread bipartisan support – 87-0 in the Senate and 410-2 in the House. This atypical cooperation across the aisle can be attributed, at least in part, to Congress's common cause of protecting US trade secrets from the governments of China and Russia, who the Office of the National Counterintelligence Executive (ONCE) reported to be "particularly aggressive and capable collectors of sensitive U.S. economic information and technologies."¹ According to ONCE, Chinese actors have shown themselves to be one of the world's most persistent collectors of trade secrets, and Russia has demonstrated sophisticated capabilities in doing the same.²

As noted above, this legislation creates a new cause of action and new remedies; it also creates a commission to study the incidence and effect of international theft of trade secrets. And, of immediate relevance, it creates new obligations on employers with regard to certain whistleblower protections for employees. We briefly describe the key provisions below, but how these provisions are ultimately interpreted and what deterrent effect they will have remains to be seen.

Private Federal Cause of Action for Misappropriation of Trade Secrets

Under the DTSA, federal district courts now have original jurisdiction over civil suits for misappropriation of trade secrets if the trade secret is "related to a product or service" and is "used in, or intended for use in, interstate or foreign commerce."³

First and foremost, it is important to understand that the DTSA explicitly states that this cause of action based on misappropriation of a trade secret does not preempt state law.⁴ Thus, state laws pertaining to trade secret protection and enforcement will remain in effect – and, they may be different in scope and coverage from the DTSA. Companies and individuals holding trade secrets will want to ensure their practices comply with the DTSA in addition to the existing relevant state laws.⁵

Additionally, causes of action under the DTSA brought in federal court (so long as interstate commerce is implicated) could provide a gateway for the same court to consider causes of action under state law if the plaintiff invokes supplemental jurisdiction. Conversely, plaintiffs might forego federal claims and sue in state court under existing state laws. These various combinations of options may ultimately lead to forum shopping – and creative forum selection clauses. Just as contracting parties often bifurcate dispute resolution between IP-related disputes and other claims (e.g., by sending IP-related disputes to litigation but keeping other claims in arbitration), parties may wish to establish or restrict by contract where disputes related to trade secrets may be brought.

Scope

In connection with this new cause of action, the DTSA both modifies several existing definitions within Title 18 and adds a few new ones. Notably, the definition of "trade secrets" has been amended by the DTSA as:

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 public another person who can obtain economic value from the disclosure or use of the information.⁶

This definition varies from the definition of trade secrets set out in the Uniform Trade Secrets Act (UTSA). There, "trade secret" is defined as "information, including a formula, pattern, compilation, program, device, method, technique, or process. . . ."⁷ Thus, the DTSA definition is, in some respects, broader than the UTSA definition; notably, however, the UTSA does not require that the owner of the trade secret take "reasonable measures to keep such information secret."⁸ Thus, a case for misappropriation of intellectual property may be treated differently depending on whether the litigation is brought in state or federal court.

Also of note is the new definition of "misappropriation" by "improper means." According to these definitions, theft of a trade secret is a subset of misappropriation by improper means – but misappropriation by improper means can also include bribery, misrepresentation, breach, or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.⁹ So far, the definition of "misappropriation" is in line with the UTSA;¹⁰ but the DTSA also specifies that misappropriation by improper means does not include reverse engineering, independent derivation, or any other lawful form of acquisition.¹¹ Both of these new definitions may alter the burden of proof on a plaintiff who wishes to invoke the DTSA. Finally, and notably, the DTSA is now a RICO predicate offense.¹²

Ex Parte Seizures

One of the most notable aspects of the DTSA is its ex parte seizure provision, which permits the Government to seize property of a third party if necessary to prevent the propagation or dissemination of a trade secret.¹³ The provision is reminiscent of similar remedies under both the Copyright Act and the Lanham Act.

The DTSA provides that this ex parte seizure mechanism may only be used in "extraordinary circumstances" where the applicant can successfully meet the high bar required to meet his or her burden to prove facts justifying the order.¹⁴ Congress has also attempted to circumscribe the provision by requiring that, in ruling on actions brought under the DTSA, courts balance interruptions to the business of third parties, as well as the legitimate interests of the party accused of wrongdoing against the harms that may occur to a trade secret owner as a result of misappropriation.¹⁵ This statutorily mandated balancing act begs for court interpretation – which may ultimately dictate how broad or narrow the application of ex parte seizures, and the DTSA in general, will be.

To further protect against misuse of the provision, a person who suffers damages by reason of wrongful or excessive seizure has a cause of action against the applicant. Thus, trade secret holders are advised to exercise caution and diligence before requesting an ex parte seizure.

Remedies

In addition to the ex parte seizure mechanism, the DTSA provides civil litigants traditional remedies for misappropriation of their trade secrets. First, the DTSA provides for limited injunctive relief, permitting the court to grant an injunction to prevent actual or threatened misappropriation "on such terms as the court deems reasonable."¹⁶ The DTSA does not, however, adopt the "inevitable disclosure" doctrine, through which employers in some states use trade secret laws to enjoin former employees from working in a job that would inevitably result in the disclosure of trade secrets. Instead, the DTSA provides that federal courts 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."¹⁷

Second, the DTSA provides for a variety of damages. The trade secret holder is either entitled to receive (i) actual damages for losses caused by the misappropriation plus damages for unjust enrichment, or (ii) reasonable royalties for the unauthorized use or disclosure of the trade secret. Additionally, the trade secret holder may receive double damages where it can be proved that the misappropriation was "willful and malicious,"¹⁸ or even treble damages for theft of a trade secret.¹⁹ These heightened damages could potentially send damages for theft of trade secrets skyrocketing.

Whistleblower Protection

Of immediate relevance to employers, the DTSA provides for whistleblower protection and anti-retaliation measures, and imposes new obligations on employers with respect to these protections. More specifically, the DTSA provides that an individual will not be held criminally or civilly liable for disclosures of an employer's trade secrets for the purposes of reporting a suspected violation of the law or in legal complaints, so long as such disclosures are made under seal.²⁰ Further, the statute provides that all employers must notify their employees, consultants, and independent contractors of this protection. The notification may be in the individual's employment or consultant agreement, or may be achieved by cross-reference to a policy document containing such a notice – but, without it, the employer may not be awarded exemplary damages or attorneys' fees.²¹ Thus, it is extremely important for companies who may wish to invoke the protections of the DTSA to provide this notice to their employees, consultants, and independent contractors.

USG Reports on Theft of Trade Secrets

Finally, the DTSA requires that the Attorney General and the Federal Judicial Center generate reports that are intended to assist clients, attorneys, and courts in understanding the contours of the Act.²² The Attorney General is instructed to generate biannual reports on various statistics and information relating to the theft of trade secrets, and the Federal Judicial Center is obligated to generate "best practices" for seizure and securing seized material.