Column: Federal Trade Secrets Act signed into law

Polak

Costa

By Jonathan G. Polak and Cristina A. Costa

On May 11, President Barack Obama signed the Defend Trade Secrets Act of 2016 into law, thereby creating, for the first time, a federal system of trade secrets law.

Historically, victims of trade secrets misappropriations were limited to the remedies provided by applicable state law. While each state’s regulatory scheme generally follows the same statutory blueprint — mirroring the framework provided by the Uniform Trade Secrets Act — major differences between state laws remain. The DTSA aims to provide greater predictability to trade secrets law across state boundary lines, allowing companies easier access to federal courts and governance under a uniform national law.

Importantly, the new law does not preempt state regulatory schemes. Rather, the DTSA supplements existing state law, offering a federal civil option for recovery.

The DTSA, which was introduced in its current form in July 2015 and passed by the Senate and the House of Representatives in April 2016, is not a stand-alone law. It is an amendment to the Economic Espionage Act of 1996, which criminalizes certain misappropriations of trade secrets. At bottom, the DTSA modifies the EEA’s definitions of “trade secret” and “misappropriation,” and includes three key provisions which extend the reach of the EEA to private civil actions and place new mandates on employers who contractually govern their employees’ use of trade secrets or other confidential information.

New definitions

Trade secret. Under the traditional definition, to be a trade secret, the information at issue must derive independent economic value “from not being generally known to, and not being readily ascertainable through proper means by, the public.” The DTSA removes “the public” as the relevant body of individuals and replaces it with “another person who can obtain economic value from the disclosure or use of the information.” In this way, the DTSA puts a sharper point on the standard for establishing a trade secret’s economic value.

Misappropriation. The DTSA adopts the comprehensive definition of “misappropriation” outlined in the Uniform Trade Secrets Act, which was not included in the definitions section of the original EEA. Under the DTSA, “misappropriation” is the acquisition, disclosure or use of a trade secret of another, without consent, by a person who knows or has reason to know that the trade secret was acquired by improper means or mistake or under circumstances giving rise to a duty to maintain the secrecy of the trade secret. “Improper means” do not include reverse engineering or other lawful means of acquisition.

Key provisions

Civil relief for trade secret misappropriations related to interstate commerce. Drawing its authority from the Constitution’s Commerce Clause, the DTSA allows “[a]n owner of a trade secret that is misappropriated [to] bring a civil action … if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” As previously discussed, this provision creates federal civil liability for the theft of trade secrets, a novel addition to U.S. Code.

Ex parte seizure of property. Perhaps most controversially, the DTSA permits the seizure of certain property upon ex parte application to a court with jurisdiction. However, such relief is only available in “extraordinary circumstances,” where seizure of the offending property is necessary to prevent the propagation or dissemination of the trade secret(s) at issue. As a safeguard, the DTSA includes a sister provision allowing for recovery where an individual has been damaged by wrongful or excessive seizure, adopting the relief offered by section 34(d)(11) of the Trademark Act of 1946. Within the next two years, we can expect the Federal Judicial Center to develop recommended best practices for seizing, storing and securing offending property under the Act.

Whistleblower protection and employer notice mandate: Lastly, the DTSA protects whistleblowers from liability (whether civil or criminal, state or federal) for the confidential disclosure of trade secrets made for the purpose of reporting or investigating a suspected violation of law. Employers who control employee use of trade secrets or other confidential information by contractual agreement with their employees must include information regarding this whistleblower immunity in such contracts. Failure to do so results in the employer forfeiting exemplary damages (up to two times the amount of compensatory damages) and an award of attorney fees in any action brought against an employee who was not properly notified. To protect these important means of recovery, employers would be well advised to review and possibly revise all contracts, agreements or policy documents referencing the use of trade secrets or other confidential information. Notably, the DTSA defines “employee” broadly so as to include independent contractors and consultants under the umbrella of individuals to whom employers must provide notice.

The DTSA is effective as of the day of its enactment, May 11, 2016, and applies to all acts relating to the misappropriation of trade secrets occurring on or after that date. In practice, employers who utilize trade secret protection plans would be wise to seek legal review of their contracts and other employee documents, lest unrevised documents prevent recovery of significant awards now available to them under the DTSA’s imposition of federal civil liability on trade secret offenders.•

Jonathan G. Polak and Cristina A. Costa are attorneys at Taft Stettinius & Hollister LLP and members of the firm’s intellectual property and litigation practice groups. They can be reached at [email protected] and [email protected]. The opinions expressed are those of the authors.