New Defend Trade Secrets Act

By Samantha Leiner

Congress added a new section to the federal criminal trade secret law enacted on May 11, 2016, which allows owners of a trade secret to now file a civil action for misappropriation of that trade secret.  See 18 U.S.C. § 1836(b). The new act is referred to as the Defend Trade Secrets Act of 2016 (DTSA).

 

Before the addition of the DTSA, trade secret misappropriation issues were governed by state laws, in which 47 states have adopted their trade secret laws from by the Uniform Trade Secret Act (UTSA).   The UTSA was published in 1979, and amended in 1985, in an effort to make the ever-growing state common law on trade secrets more uniform throughout the country.  The three states that have not adopted the UTSA are New York, North Carolina, and Massachusetts.

While the DTSA and the UTSA share some common aspects, there are three major differences between them.

Filing an Ex Parte Application for the Seizure of the Misappropriator’s Property

The first major difference between the DTSA and the UTSA/state laws is that the DTSA allows for trade secret owners to file (and the court to order) an ex parte application  for the seizure of the trade secret misappropriator’s “property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action” as a preventative measure and only in extraordinary circumstances.  18 U.S.C. § 1836(b)(2)  The eight requirements for the court to order a civil seizure are: 1) relief under Fed. R. Civ. P. 65 would be inadequate; 2) an immediate and irreparable harm will occur if not ordered; 3) harm to applicant would be greater than the other party’s legitimate interests; 4) the applicant is likely to succeed in showing the information is a trade secret and the opposing parting either misappropriated the trade secret by improper means or conspired to use improper means to misappropriate a trade secret; 5) the other party has possession of the trade secret and any property to be seized; 6) the application is detailed as to what property would be seized; 7) if applicant were to give notice of seizure to the other party, that party would destroy or otherwise make inaccessible the property to be seized; and 8) the requested seizure has not been publicized by the applicant. See 18 U.S.C. § 1836(b)(2); see also Fed. R. Civ. P. 65 (Remedies under Rule 65 includes preliminary injunctions, injunctions, and temporary restraining orders).

Ex parte seizures are not a new concept to intellectual property overall.  In both copyright infringement actions and trademark infringement actiosn the court may issue an ex parte civil erizure order.  See 15 U.S.C. § 1116(d)(1)(A) (trademark ex parte seizures); see also 17 U.S.C. § 503 (copyright ex parte seizures).  The requirements for both trademark ex parte seizures and copyright ex parte seizures are similar to the requirements for ex parte seizures under the DTSA listed above.  However, the DTSA’s civil seizure differs from the trademark and copyright ex parte seizures as far as what may be seized.  Usually, in trademark and copyright ex parte seizures, the seizure is limited to infirnging goods or evidence of infringement.  However, the DTSA states that a court can order seizure of “property necessary to prevent the propagation ro dissemination of the trade secret.” 18 U.S.C. § 1836(b)(2)(A)(i). This language in the DTSA does not specifically state what the ex parte seizure is limited to.  Possibilities of property that may be seized would be devices contaning trade secret information, like cell phones, computers, or tablets; devices in which the trade secret can be potentially transmitted, like email servers; products that were created using the trade secret, which could be reverse engineered by others exposing the trade secret.  While the DTSA is fairly broad in what can be seized, it limits the ex parte seizure to the “narrowest seizure of property necessary,”, and the seizure cannot unnecessarily interupt business operations of the accused persons or companies misappropriating the trade secret.  18 U.S.C. § 1836(b)(2)(B)(ii).

Public Policy Immunity 

The second major difference between the DTSA and the UTSA/state laws is that the DTSA includes a section that creates a public policy immunity to people who disclose a trade secret through confidential disclosure to the government, to report or investigate any violation of law, or is made in a court filing, if under seal.  See 18 U.S.C. § 1833.  This exception offers protection to whistleblowers, in which the government incentivizes citizens to help uphold the law. Before the DTSA was enacted, companies would use the various state trade secret laws against whistleblowers who used trade secret information to reveal to the state or federal government illegal activity their employer was involved in.  This is because state trade secret laws that were adopted from the UTSA do not have protection for whistleblowers.  Additionally, the whistleblower or other individuals may reveal the trade secret during a lawsuit for retaliation when the trade secrets are revealed under seal.

However, the DTSA does not protect a whistleblower from the consequences of violating a confidentiality agreement that the whistleblower signed with the company.  Because violating a confidentiality agreement can bear even harsher consequences than the DTSA, there seems to still be a disincentive for whistleblowers to reveal the secrets to the government or in trial.

Further, the DTSA incentivizes employers to inform their employees of the whistleblower protection in the DTSA by awarding exemplary damages or attorney fees to the employer in an action against an employee to whom notice of the whistleblower protection was provided.

 

Difference Between the Act’s Definition of a Trade Secret and the UTSA’s Definition

 

The third major difference between the UTSA and the DTSA is the definition of what a “trade secret” is.  The DTSA adopts the same definition as the Federal Economic Espionage Act, which is enacted under 18 U.S.C. § 1839.  Applying the same definition from the criminal statutes, such as the Federal Economic Espionage Act, to the civil statute, the DTSA, broadens the reach of the new statute to protect more secrets than the UTSA.  The UTSA’s definition of a trade secret is “‘[t]rade secret’ means information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”  Uniform Trade Secret Act, § 1(4).  While the DTSA’s definition of a trade secret is “‘trade secret’ means 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, another person who can obtain economic value from the disclosure or use of the information.”  18 U.S.C. § 1839(3).  The DTSA’s definition clearly broadens the definition from the UTSA to include new forms of trade secrets, such as plans, designs, prototypes, procedures, and codes, whether tangible or intangible.  However, the DTSA’s definition does limit the industries the information is about to financial, business, scientific, technical, economic, or engineering information.

The broadening of the forms the trade secret can take provides an avenue for protection to persons who would not be able to sue under the limited UTSA definition of what a trade secret is.  This means more people will be able to sue for trade secret misappropriation in federal court than were ever able to under the UTSA or state law.

Remedies Available under the DTSA

Another difference between the UTSA and the DTSA is that the remedies differ.  While both the UTSA and the DTSA provide for enjoining against actual or threatened trade secret misappropriation, the DTSA prohibits injunctions in certain cases: (1) an injunction cannot prevent a person from entering into an employment relationship; and (2) an injunction cannot interfere with applicable state law prohibiting restraints on the practice of “lawful profession, trade or business.” § 1836(b)(3)(A)(i)(II).  The first prohibition on injunctions for trade secret misappropriation under the DTSA seems to further and mirror California’s view that there can be no prohibiting former employees to have job mobility in the future.  This view is taken from California’s strict anti-non-competition stance on laws.

Additionally, granting injunctions (a remedy provided in the DTSA) can be seen as limiting a former employee’s movement to a competing company.  The DTSA allows for an injunction to be granted against a former employee if the threat of misappropriation is based on evidence and not speculation or that the former employee merely knows of the information.  However, the DTSA provides that this provision of allowing an injunction against a former employee will not be applicable if the proper “state law prohibit[s] restraints on the practice of lawful profession, trade, or business.” A prime example of this would be the anti-non-competition stance of California, where a law or the effect of a law cannot limit a former employee’s potential future employment relationships.  California is unlike any other state when it comes to non-competition, because in most states “reasonable” non-competition agreements are allowed, while in California all non-competition agreements are void.

Further, attorneys’ fees and punitive damages are available under both the UTSA and DTSA, but the DTSA limits attorneys’ fees and punitive damages to employers who gave notice to the employee/former employee of the whistleblower immunity protection of the DTSA.  In DTSA actions where an employer suse a former employee and the employee’s current employer, the failure to provide the notice will prevent an employer from being awarded attorneys’ fees and punitive damages.  However, a loophole to the employer having to give notice to an employee of the whistleblower immunity, is for the employer to only sue the former employee’s current employer, and not the former employer.

The Non-Preemptive Nature of the DTSA

Under this new statute, Congress made sure it was not disturbing any state laws already in place by not making the  DTSA preemptive of state law.  Congress simply wanted to create another avenue for trade secret owners when their trade secret is misappropriated.

Conclusion

The new statute seems to open up more avenues for trade secret owners to protect their rights, and seems to give the owners more rights than the UTSA or state law.

 

 

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