President Obama Signs Federal Defend Trade Secrets Act

On May 11, 2016 – after years of bipartisan negotiation resulting in widespread support from both sides of the political aisle, as well as from the business community – President Obama signed the Defend Trade Secrets Act of 2016 (DTSA), the long-proposed legislation that establishes a federal trade secrets law.

Before the DTSA, companies seeking civil remedies for misappropriation of their trade secrets were generally limited to state law enforcement. Although 48 states have adopted the Uniform Trade Secrets Act (UTSA) in some form, there are significant differences among the states in the application of the UTSA. Moreover, companies were usually limited to litigating in state court, except in cases where federal diversity jurisdiction exists. Some jurisdictions, but not others, had allow federal courts to hear trade secret claims along with claims under the federal Computer Fraud and Abuse Act where employees exceeded their authorization to access trade secret materials from their company computers. In short, there was no consistent nationwide scheme for enforcement of trade secret protection.

The DTSA amends the federal Economic Espionage Act of 1996 to create, for the first time, a federal civil remedy for the misappropriation of trade secrets. This new law provides a clear path to enforce trade secret rights in federal court. Proponents of the DTSA argue that this will lead to more uniformity and predictability in applicable standards. However, that remains to be seen. The DTSA does not preempt any existing state laws governing trade secret enforcement. Accordingly, to the extent that state laws differ from each other and the DTSA, the differences will likely persist despite the new federal scheme.

Federal vs. State Trade Secret Protections

The interplay between federal and state trade secret law may create differing protections depending on which law is invoked. State laws differ substantially concerning policies reflecting mobility of employees. For example, many states recognize an “inevitable disclosure” doctrine that allows a court to enjoin an employee from accepting a similar job at a competitor if the similarity and competitive relationship between the employers make it “inevitable” that the employee would use trade secrets gained from a former employer. Several states, including California, have specifically rejected the “inevitable disclosure” doctrine as an unlawful restraint on employee mobility. The DTSA similarly rejects the doctrine by providing that federal courts may not use the DTSA to enjoin “a person from entering into an employment relationship.” But the DTSA does allow courts to impose certain restrictions on employment, the “conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows.” In other words, the DTSA does not authorize injunctions against employment or restrictions, unless there is some evidence of threatened misappropriation extending past an employee’s mere knowledge of information. Yet since the DTSA does not preempt state law, it could provide pendant jurisdiction for federal courts to issue similar injunctions under existing state laws. Thus, the DTSA could give federal courts the jurisdiction to use state law to issue injunctions that the DTSA itself prohibits.

Because state laws are not preempted, litigants will need to carefully consider which laws to use in enforcing trade secrets, including examining differences in statutes of limitation, attorneys’ fees, enhanced damages, and recoverable damages. For example, where actual damages cannot be proved, California allows a reasonable royalty to be assessed, but only for as long as it would take to develop the trade secret without regard to the misappropriation. The DTSA contains no such express limitation.

Civil Seizure Remedy and Protections

The federal DTSA contains several significant new provisions that are not found in current state trade secret laws. The most important of these new provisions is likely to be the civil seizure remedy – available only in extraordinary circumstances – whereby an aggrieved plaintiff can obtain an ex parte order, subject to several conditions, providing for the seizure of property necessary to prevent the propagation of dissemination of the trade secrets. In making the civil seizure procedure available, the DTSA requires exacting findings of fact to support the order and detailed descriptions of property to be seized. Interestingly, the DTSA also provides privacy protection to the person subject to the seizure order to preclude the plaintiff from publicizing the seizure. When civil seizure is ordered, a “Seizure Hearing” must be held within seven days of the order in which the plaintiff must prove the facts necessary to support the order. Accordingly, plaintiffs seeking to use the seizure process would be well-advised to have their factual investigation completed before seeking relief. The seizure process is clearly not intended to be a tool for early discovery of potential trade secret misappropriation.

Whistleblower Immunity and Employers’ New Obligation to Disclose

In addition, the DTSA contains new provisions to protect whistleblowers who disclose alleged trade secrets in confidence to the government. Reacting to a concern that non-disclosure obligations in employment contracts may act to prevent people from disclosing evidence of criminal conduct, the DTSA provides civil and criminal immunity for the disclosure of a trade secret that is made “in confidence to a Federal, State, or local government official, directly or indirectly, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law.” Significantly, the DTSA requires employers to provide a notice of this immunity to any employee in any contract governing the use of trade secrets or other confidential information. Accordingly, companies nationwide will need to revisit their employment agreements and confidentiality agreements to ensure they contain this required notice.

The DTSA gives companies that are victimized by trade secret theft a new and powerful tool to obtain relief in federal court. Moreover, the new law will likely open the doors to federal courts for state law claims that have been historically litigated exclusively in state courts. Yet the differences in existing state laws will likely persist and provide interesting forum choice issues for years to come.

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Copyright : Mykhaylo Palinchak