Five Things to Know About the Defend Trade Secrets Act

trade-secret-binder-1On April 27, 2016, Congress passed the Defend Trade Secrets Act (“DTSA”), which President Obama is scheduled to sign later today. The DTSA extends the current Economic Espionage Act of 1996 (“EEA), which criminalizes trade secret thefts, to the civil arena. This means for the first time, trade secret owners can now bring suits in federal district courts, without having to resort to another basis for jurisdiction, such as the ill-fitting Computer Fraud and Abuse Act. While not without critics, the DTSA is a major step forward in the protection of intellectual property in the United States, not least because federal law now fully recognizes four types of intellectual property (patents, copyrights, and trademarks). This article highlights five important things that every trade secret owner should know, which includes almost every company in the U.S.

1. The DTSA Provides for Civil Action in Federal Court

The DTA will amend the Economic Espionage Act of 1996 to provide that: “An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” Thus, the DTSA provides for as broad a basis for jurisdiction as is permitted under the Commerce Clause of the Constitution. Indeed, Congress amended the EEA in 2012 to include identical language for criminal violations in response to an appellate court decision that held that the use of a trade secret did not meet the then requirement that a trade secret must be “related to a product or service used in or intended for use in” commerce. This means that under the DTSA, for example, that a federal court could have jurisdiction over a claim of the misappropriation of a trade secret that used exclusively on an internal basis by the victim or one that is related to a product or service that is in the development stage so long as the trade secret is related to a product that is intended for use in interstate commerce. There are very few trade secrets that would seemingly fail to meet this requirement.

2.  Misappropriation

Misappropriation under the DTSA, in general, includes: without permission (A) obtaining a trade secret that was knowingly obtained through improper means or (B) disclosing or using a trade secret without knowing either (1) that it is a trade secret or (2) that it was obtained through improper means. The “improper means” include “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.” However, misappropriation does not include “reverse engineering, independent derivation, or any other lawful means of acquisition.”  These potential defenses are consistent with the existing body of trade secret law under state laws and the EEA.

The definition of “misappropriation” is almost identical to the definition of “misappropriation” under the UTSA, but differs in several key respects from the definition of “misappropriation under the EEA. For example, the EEA does not explicitly provide that the “disclosure” of a trade secret is a violation. There have been no reported cases under the EEA as to whether mere disclosure meets the definition of misappropriation, and it will be interesting to see whether courts treat what constitutes misappropriation differently under the EEA as compared to the DTSA.

3.  The Definition of a “Trade Secret” is Generally Broader than Under State Law

The DTSA adopts the EEA’s broad definition of a 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.” In short, almost every type of information can qualify as a trade secret under the EEA so long as: (1) the information is actually secret; (2) the owner took reasonable measures to maintain that secrecy; and (3) independent economic value is derived from that secrecy. By comparison the UTSA identifies, by way of example, eight specific types of trade secret information; “formula, pattern compilation, program device, method, technique or process.” Whether this difference will matter remains to be seen.

A second and potentially more important difference is that the EEA’s definition, and now the DTSA’s definition of trade secrets encompasses information in any form, “whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.” While, the meaning of this language has not been addressed in the more 20 years since the enactment of the EEA, the language suggests that information “stored” only in an individual’s memory can be the subject of a civil claim for theft of trade secrets.

Finally, the EEA also previously provided that a trade secret must “derive independent economic value … from not being generally known to, …the public.” Under this standard, information that was known in an industry but was not known to the public could theoretically still meet the definition of a trade secret. Without deciding this issue, an appellate court in an EEA case used the example of “Avogadro’s number” to illustrate the difference between “public” and “person who can obtain economic value from its disclosure or use, pointing out that this number has been known to chemists since 1909, but not to the general public and certainly cannot be considered a trade secret. Now by amending section 1839, Congress has made clear that the relevant test is whether the information is generally known by “another person who can obtain economic value from the disclosure or use of the information,” which is the same standard as under the UTSA.

4.  The DTSA Provides for Ex Parte Seizures

The DTSA makes the remedy of ex parte seizures available to plaintiffs, which allows a plaintiff to seek to have the government seize misappropriated trade secrets without providing advance notice to the defendant. This is perhaps the most controversial provision of the DTSA and there is no comparable provision in any state law. This is potentially an extremely powerful remedy for plaintiffs and is intended to stop the dissemination of a trade secret, especially to overseas, before its value has been lost through public disclosure. Because Congress recognized the potential for abuse of this provision, the DTSA prohibits copies to be made of seized property, and requires the ex parte orders to provide specific instruction for law enforcement when the seizure can take place and whether force may used to access locked areas. In addition, a party seeking an ex parte seizure must first establish with the court that other less drastic remedies, like a preliminary injunction are inadequate

5.  The DTSA Protects Whistle Blowers

The DTSA seeks to protect whistle blowers from criminal or civil liability for disclosing a trade secret if the disclosure is made in confidence to a government official, directly or indirectly, or to an attorney, and it is made for purpose of reporting a violation of law. Employers have an affirmative duty to provide employees notice of the new immunity provision in “any contract or agreement with employee that governs the use of a trade secret or other confidential information.” To be in compliance, an employer can, among other things, provide a “cross-reference” to a policy given to the relevant employees that describes the reporting policy for suspected violations of law. Failure to comply means that the employer may not recover exemplary damages or attorney fees in an action brought under the DTSA for theft of trade secrets against an employee to whom no notice was provided. The definition of “employee” is drafted broadly to include contractor and consultant work performed by an individual for an employer.


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Join the Discussion

6 comments so far.

  • [Avatar for dnae]
    May 12, 2016 04:23 pm

    This seems like good news as an investor in a startup with IP that is safer as trade secret due to encrypted engineering algorithms. Whereas a patent of such could be black-boxed by foreign competitors.

  • [Avatar for Pia Owens]
    Pia Owens
    May 12, 2016 11:31 am

    I think there’s a typo in #2 above that changes the meaning: “(B) disclosing or using a trade secret without knowing either (1) that it is a trade secret or (2) that it was obtained through improper means.”

    “Misappropriation” is defined in the law as, among other things, disclosure without “express or implied consent” by a person who used improper means to get the information or knew or had reason to know that it was secret. I think the “express or implied consent” was left out of #2 above.

  • [Avatar for Night Writer]
    Night Writer
    May 11, 2016 03:40 pm

    @2 I agree completely. It creates another potential lawsuit. Plus, imagine trying to hire someone from Google. Google will extend this trade secret stuff into a web that entangles every employee.

    My prediction: this act will weaken patents as much as the AIA did.

  • [Avatar for Appearance of ...]
    Appearance of …
    May 11, 2016 03:23 pm

    Chilling effect on startups? Startup founders, in addition to facing the problem of weaker patent protection and uncertain patent eligibility, will now also have to convince nervous investors that no trade secrets are involved. Given that this extends to human memory, this will be difficult. I have a bad feeling about this…

  • [Avatar for Charles Ankner]
    Charles Ankner
    May 11, 2016 01:58 pm

    “In my day” (about a year ago) my Pat Attys (KARL STORZ hired guns) considered NDAs as protection from theft of patent rights, and confidentiality in the contractual relationship itself – only. Trade Secret protection in reality was seen as illusory. Once it’s gone… it’s gone.

    Possibly a product by process “secret”; but almost always better to pat than hide.

    Maybe… this has changed. But I’m very skeptical. The AIA is no picnic, but I’m digging the micro-entity status.

  • [Avatar for Dan]
    May 11, 2016 08:47 am

    Let’s add a sixth: In a recent blog post Prof. Crouch notes that as soon as the DTSA is signed [likely 05/12/2016] all employers must provide a notice-of-immunity to their employees and contractors “in any contract or agreement with an employee [or independent contractor] that governs the use of a trade secret or other confidential information.”

    This notice-of-immunity obligation will require every company in the U.S. that has its employees and contractors sign nondisclosure agreements to amend their agreements to include the notice.


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