May 13, 2016

Move Over, There Is a New Kid In Town: Defend Trade Secrets Act Opens the Door to Federal Court for Civil Trade Secret Claims

Arnold & Porter Advisory

On May 11, 2016, President Obama signed into law S. 1890, which establishes a federal claim for trade secret misappropriation. Here is what you need to know.

Make It So

After more than three years of stagnation, the Defend Trade Secrets Act of 2016 (DTSA) recently sailed through both the Senate (voting 87-0) and the House (voting 410-2). The Obama Administration voiced strong support for the bill even before it passed the Senate, and President Obama quickly signed the bill into law. While there has been much debate, the proverbial jury is still out on whether this will be a bane or boon to companies and to the economy in general.

One to Rule Them All … Sort Of

Modeled after the Uniform Trade Secrets Act, the DTSA will amend the Espionage Act of 1996 to create a federal civil remedy for trade secret misappropriation similar to that available in the patent, copyright, and trademark contexts. Although the DTSA is billed as simplifying litigation by providing one comprehensive national law, it will not (and cannot) preempt the existing patchwork of state trade secret law. So, just as the federal Lanham Act coexists with state trademark law, the DTSA will coexist with state trade secret law. Accordingly, as long as interstate commerce is implicated, a plaintiff will be able to allege trade secret misappropriation under federal law, state law, or both.

With Great Power Comes Great Responsibility

The DTSA includes controversial new civil seizure rules allowing plaintiffs to request – in an ex parte proceeding without an answer from the accused party – that the court order federal law enforcement officials to seize any property "necessary to prevent the propagation or dissemination of the trade secret." The DTSA does, however, include important limitations that empower the courts to prevent abuse of the powerful ex parte seizure provisions. For one, such orders are only to be issued where it "clearly appears from specific facts" that "extraordinary circumstances" exist warranting seizure, and the criteria for establishing such circumstances are explicitly laid out in the text of the DTSA. Further, the plaintiff must describe "with reasonable particularity the matter to be seized" and establish that the target has "actual possession" of the trade secret and the property to be seized. Additionally, the target of such an order can seek damages against the plaintiff for a "wrongful or excessive" seizure or attempted seizure.

It should be noted the DTSA's ex parte seizure remedy is not the first of its kind. In fact, similar remedies are available under both the Copyright Act and the Lanham Act, and its use (or abuse) under the DTSA will likely follow a pattern similar to that seen in the copyright and trademark arenas.

Nothing is Inevitable

Thanks to a last-minute tweak by Sen. Dianne Feinstein of California, the DTSA does not 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." Rather, courts can grant inunctions "to prevent actual or threatened misappropriation," but only where the injunction is "based on evidence of threatened misappropriation and not merely on the information the person knows."

Employers On Notice: Give Notice!

An important provision of the DTSA requires employers to provide notice of the immunities for disclosure of trade secrets in certain circumstances "in any contract or agreement with an employee that governs the use of a trade secret or other confidential information." Failure to do so precludes the employer from being awarded exemplary damages or attorney fees in an action against an employee to whom notice was not provided. While the notice requirement is not retroactive, employers should be careful to include notice provisions in any applicable contracts entered into or updated after May 11, 2016.

While opening the door to the federal courts for civil enforcement of trade secrets will almost certainly result in an increase in trade secret litigation, only time will tell how the effects of the DTSA will ultimately play out. Because the DTSA is based on the Uniform Trade Secrets Act, which was adopted in large party by 48 states (all but New York and Massachusetts), we should not see a dramatic shift in the scope of trade secret liability.

Do you want to know more? We've prepared a more in-depth analysis.

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