THE DEFEND TRADE SECRETS ACT

by

Michael Small

The Defend Trade Secrets Act (DTSA) of 2016 has allowed the protection of trade secrets to expand towards the federal court system, making it one of the most dynamic changes to intellectual property protection in years (Goldman, 2015).  Signed in 2016 under the Obama Administration, the Act has provided an avenue for trade secret owners to use private federal lawsuits/court to challenge those that have allegedly stolen their trade secret.  Prior to this Act, only state law could have been applied to trade secret violations, with punishments/costs varying between state courts due to the protection granted by the Uniform Trade Secrets Act[1] (UTSA).  Both have set a foundation for trade secret definition and fines for conviction, but the DTSA grants more power for trade secret owners to protect their company’s profits.

The DTSA builds upon the 1996 Economic Espionage Act (EEA), which specializes in dealing with industrial espionage.  It has intensified the fines for convicted trade secret appropriators to be greater than $5 million plus three times the value of the stolen trade secret.  In addition, it grants the trade secret owner the right to request the U.S. government to acquire any and all assets deemed necessary to prevent further spread of the stolen secret through the process of applying for an ex parte seizure[2] (Congress, 2016).  Although a hearing is required after a week of filing the seizure for proof of the intention to use, distribute, or destroy the secret, no notification is required to be given to the accused (unlike the UTSA), which greatly reduced the odds of the valuable trade secret being devalued or tampered/destroyed.  This has given trade secrets owners a larger edge in power in terms of defending their intellectual property.

In addition to giving trade secret owners more control over their intellectual property, it has also given the accused party certain levels of protection as well depending on the trade secret involved.  If the business model of the secret could be deemed illegal or unethical, the individual/party with that secret could seek a pardon under the DTSA upon revealing the information.  Under normal circumstances, they would have been considered whistleblowers who would have been convicted to the fullest extent of the law along with the company. However, the DTSA grants legal immunity to those that release the information to government officials (in confidence) of the trade secret if it is proven that the secret violates U.S. law (Congress, 2016).  Notably, companies must now inform and/or educate their employees about this immunity, or else forfeit their right for winning exemplary damages or attorney fees against an employee regarding trade secret violation[3] (Morning, 2016, p. 22).  This protection granted towards whistleblowers acts as a check and balance for trade secret owners should the secret not comply with the U.S. law.

While it has granted trade secrets owners greater protection against trade secret theft, there have been a number of criticisms regarding the DTSA’s usage.  Some argue that it gives trade secret owners too much control, as trade secrets are intertwined with a large part of any business, particularly in the hiring/firing phase of the workplace.  In addition, the seizure usage could give trade secret holders an anti-competitive advantage to other companies.  For instance, Goldman (2015) cites multiple incidents of the Immigration and Customs Enforcement’s (ICE) frequent seizures of domain names as proof of the damages caused by ex parte seizures, causing damage to about 84,000 different websites[4] (p. 302).   This led to him making a conclusion about this power, in that “because ICE’s erroneous seizures are tantamount to shutting down legal speech, the seizures of completely legal domain names raise obvious Constitutional problems” (p. 300).  Ultimately his argument points out that the grant of ex parte seizures to trade secret owners could lead to equal, if not more damages like the incident above to smaller, innocent businesses, and can lead to abuse and/or suppression of Amendment 1 against other competitors if granted to trade secret holders. The legal immunity granted to whistleblowers is also argued to be a problem, as the whistleblower in mind would still have to go through reputational damage regardless of the outcome of the federal case.  In general, the allocation of resources to federal lawsuits would also make court costs go up significantly compared to keeping the case at the state level.  Goldman, Levine, Sadine and Seaman (2015) argue against the DTSA in their letter,[5] regarding that “median litigation costs through the end of discovery ranged from $250,000 in cases where less than $1 million was at stake, to over $1.6 million in cases where over $25 million was at risk” (p. 6).   Although there have been many criticisms over the Act, the impact and execution of the DTSA has yet to be fully realized because of its recent ratification as of 2016.  More cases will need to apply the DTSA before its overall impact can be fully analyzed.

In conclusion, the DTSA could be considered a spiritual successor to the UTSA, which gave each state the power to enforce trade secret violations.  However, there are significant difference between the DTSA and the UTSA.  In particular, the DTSA can be considered a specialization of the UTSA, focusing primarily on trade secret cases that involve out-of-state and foreign commerce, allowing for companies to protect trade secrets against out-of-state and foreign rivals.  Unlike the UTSA, it also has the potential to grant whistleblowers legal immunity if the trade secrets they have stolen were reported to be illegal to government officials.  The decision to use UTSA or DTSA comes with notable benefits and challenges for all sides involved, though DTSA appears to be a very promising extension to the protection that trade secrets need to give itself an equal level of protection with the other aspects of intellectual property.

Difference Between the Defend Trade Secrets Act and Uniform Trade Secrets Act
  Defend Trade Secrets Act Uniform Trade Secrets Act
Trade Secret Definition/Coverage “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,” [6] (Cornell, 2016). “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,” [7] (Uniform Law, 1985, p. 5).
Prosecution Trade secret lawsuit can be prosecuted up to Federal court.  State procedural hurdles are ignored, except for the following condition:

·         If jurisdiction law does not permit restriction of practicing in a lawful profession, trade, or business[8] (Cornell, 2016).

Trade secret lawsuit can be prosecuted up to State court.  Conflict for prosecution can occur when states have different UTSA standards.
Injunctions Available for employer against employee or former employer, except in situations below:

·         Cannot prevent accused from entering employment relationships

·         Cannot conflict with state law that does not permit restriction of practicing in a lawful profession, trade, or business (Cornell, 2016).

Available for both employer and employee.
Whistleblower Immunity Status Guarantees whistleblower protection if trade secret contains information that violates U.S. law (and is reported to government official in confident). Does not guarantee whistleblower protection.
NDAs in Court Trade secret owners can file a case under seal before going to court to avoid secret disclosure Trade secret disclosure protection will vary state by state.  Not always guaranteed due to differing UTSA standards in each state.
Ex Parte Seizure Grants an ex parte seizure for trade secret owners under certain conditions; prevents the accused from being notified about seizure. Unavailable; requires the accused party to be notified of any seizure of assets before execution.

Conditions vary with each state due to differing UTSA standards.

Attorney Fees and Damage Rewards Available for proven and/or threatened counts of misappropriation, though employer/plaintiff must take into consideration:

·         If employer has not made employee aware of whistleblower immunity status granted by DTSA, attorney fees and damages may not be awarded.

Available for proven and/or threatened counts of misappropriation.

 

 

 

Trials Involving the DTSA

The following is a summary of some of the trials that have occurred with the implementation of the DTSA.

Bonamar v. Turkin and Supreme Crab

Bonamar, a crab supplier, accused his ex-VP Turkin for sharing trade secrets (customer and pricing information) to Indonesian rival, Supreme Crab, after receiving phone calls from customers about receiving cheaper crab meat prices after Turkin’s departure and employment into Troy at Supreme.[9]  Bonamar sued under the DTSA and the Florida UTSA for breach of contract.  Turkin argued that the information was not secretive.  Both reached a settlement before a final decision was reached.[10]

Ooo Brunswick Rail Mgmt. v. Sultanov

After Brunswick noted suspicious behavior in the defendant and confirmed that defendant’s work email showed messages sent to his personal email containing confidential documents, in combination with his refusal to return the company owned laptop/phone and prohibited contact with a former employee and a creditor of the company, Brunswick sued under DTSA and ordered an ex parte seizure of the defendant’s assets, one of the first times the order was requested.[11]  The ex parte seizure request was denied,[12] and instead ordered a temporary restraining order to the defendant to cease spreading of information.  This case is still ongoing.

Henry Schein, Inc. v. Cook

In the case of Henry Schein, Inc. v. Cook, a temporary restraining order was granted for the plaintiff against the defendant from accessing misappropriated data and contacting former clients involved with the business upon leaving the job and joining a rival competitor’s business.[13]  The reasoning for the restraining order was argued by the judge himself,[14] noting a likelihood of damage that Cook can cause to the plaintiff beyond a reasonable doubt.  This case has concluded.

M.C. Dean, Inc. v. City of Miami Beach

M.C. Dean filed a DTSA lawsuit against City of Miami Beach for exchanging confidential employee records to Local 349.[15]  The lawsuit was dismissed as the plaintiff was unable to show proof that he took reasonable measure to keep his trade secret confidential.[16]

 

 

 

References

Bonamar v. Turkin and Supreme Crab, 1:16-CV-21746 (Federal Court, FL. 2016).

Congress. (2016). S.1890 – Defend Trade Secrets Act of 2016. Retrieved from https://www.congress.gov/bill/114th-congress/senate-bill/1890

Cornell University Law School. (2016). 18 U.S. Code § 1836 – Civil proceedings. Retrieved from https://www.law.cornell.edu/uscode/text/18/1836

Cornell University Law School. (2016). 18 U.S. Code § 1839 – Definitions. Retrieved from https://www.law.cornell.edu/uscode/text/18/1839

Deakins, O. (2016). California court declines to issue DTSA Seizure order.  Lexology. Retrieved from http://www.lexology.com/library/detail.aspx?g=eebcad49-339a-4faa-88d1-9a73bb6a1a76

Goldman, E. (2015). Ex Parte Seizures and the Defend Trade Secrets Act. Washington and Lee Law Review Online, 72 (2-4), 284-307.

Goldman, E., Levine, D., Sadine, S., & Seaman, C. (2015). Professors’ letter in opposition to the Defend Trade Secrets Act of 2015. Stanford University. Retrieved from https://poseidon01.ssrn.com/delivery.php?ID=7931160040731200161070200841150000991220220370160060650771160130051240100951190050270000611190430190591240980230290791121241010270530580760460070250920640930660710410390340090750890840991131131111271090850291060

Henry Schein, Inc. v. Cook, 16-cv-03166-JST (Federal Court, N.D. Cal. 2016).

M.C. Dean, Inc. v. City of Miami Beach (Federal Court, FL. 2016).

Mornin, J. D. (2016). What you need to know about the Defend Trade Secrets Act. Intellectual Property & Technology Law Journal28 (9), 20-23.

Ogletree, D. (2017). California court declines to issue DTSA seizure order. Lexology. Retrieved from http://www.lexology.com/library/detail.aspx?g=eebcad49-339a-4faa-88d1-9a73bb6a1a76

Ooo Brunswick Rail Mgmt. v. Sultanov, 5:17-cv-00017-EJD (Federal Court, N.D. Cal. 2017).

Smith, D. (2016). Bonamar, ex-VP Turkin reach settlement in trade secret theft suit. Under Current News. Retrieved from https://www.undercurrentnews.com/2016/08/05/bonamar-ex-vp-turkin-reach-settlement-in-trade-secret-theft-suit/

Tigar, J. (2016). Henry Schein, Inc. v. Cook. Trade Secrets Institute. Retrieved from http://tsi.brooklaw.edu/cases/henry-schein-inc-v-cook

Toren, P. J. (2016). The Defend Trade Secrets Act. Intellectual Property & Technology Law Journal28 (7), 3-12.

Uniform Law. (1985). Uniform Trade Secrets Act with 1985 Amendments. Retrieved from http://www.uniformlaws.org/shared/docs/trade%20secrets/utsa_final_85.pdf

 

 

[1] Each state that verified the UTSA into law made their own interpretations as to what is enforced, such as the California Uniform Trade Secrets Act (CUTSA), the Florida Uniform Trade Secrets Act (FUTSA), and so forth.

[2] An ex parte seizure allows for a company to request a federal judge to approve a seizure of assets without the presence of the other party.

[3] See Joseph Morning, What you need to know about the Defend Trade Secrets Act. Intellectual Property & Technology Law Journal, 28 (9), (Sep. 2016).

[4] Although the assets seized by ICE were labeled under copyright and trademark infringements, the same ex parte seizure procedure had been applied, and it has been proven that the seized assets were not infringing on any rights, a reoccurring error with ICE’s request (Goldman, 2015, pp. 300-301).  See Eric Goldman, Ex Parte Seizures and the Defend Trade Secrets Act, 72 (2-4), Washington and Lee Law Review Online, (Nov. 30, 2015).

[5] Professors’ letter in opposition to the Defend Trade Secrets Act of 2015, in which 42 law professors state their argument against the DTSA, ranging from ex parte seizure abuse to damages to smaller companies, in an attempt to persuade the chairman to not approve of the bill. For more details, see Goldman, Levine, Sadine & Seaman. Professors’ letter in opposition to the Defend Trade Secrets Act of 2015., Stanford University, (Nov. 17, 2015), https://poseidon01.ssrn.com/delivery.php?ID=7931160040731200161070200841150000991220220370160060650771160130051240100951190050270000611190430190591240980230290791121241010270530580760460070250920640930660710410390340090750890840991131131111271090850291060

[6] See U.S. Code § 1839 – Defines trade secrets in terms of DTSA.

[7] See Section 1.4 of the Uniform Trade Secrets Act – defines trade secrets in terms of the UTSA.

[8] See 18 U.S. Code § 1836 – Civil proceedings that affect DTSA’s application in certain states depending on job practice

[9] See Bonamar v. Turkin and Supreme Crab, 1:16-CV-21746 (Federal Court, FL. 2016).

[10] Turkin agreed to “return and destroy any and all data, documents, and materials pertaining to Bonamar’s business in his possession … Supreme and Turkin must not use any information received” (Smith, 2016, para. 6).  See Jason Smith, Bonamar, ex-VP Turkin reach settlement in trade secret theft suit. Under Current News (Aug. 5, 2016), https://www.undercurrentnews.com/2016/08/05/bonamar-ex-vp-turkin-reach-settlement-in-trade-secret-theft-suit/

[11] See Ooo Brunswick Rail Mgmt. v. Sultanov, 5:17-cv-00017-EJD (Federal Court, N.D. Cal. 2017).

[12] The court argued that “its preservation order, along with its directive that the employee not access the disputed devices and the requirement that the employee bring the devices to the next court hearing, was sufficient protection of the evidence” (Deakins, 2017).  See Ogletree Deakins, California court declines to issue DTSA Seizure order.  Lexology. (Jan. 17, 2017), http://www.lexology.com/library/detail.aspx?g=eebcad49-339a-4faa-88d1-9a73bb6a1a76

[13] See Henry Schein, Inc. v. Cook, 16-cv-03166-JST (Federal Court, N.D. Cal. 2016).

[14] Judge Tigar (2016) argued for the restraining order, noting that “(1) there was a likelihood of irreparable injury to HSI, (2) HSI was likely to succeed on the merits, (3) Cook was not likely to suffer undue hardship, and (4) public interest would be served by protecting trade secrets” (para. 4).  See Jon Tigar, Henry Schein, Inc. v. Cook. Trade Secrets Institute, (Jun. 10, 2016), http://tsi.brooklaw.edu/cases/henry-schein-inc-v-cook

[15] See M.C. Dean, Inc. v. City of Miami Beach (Federal Court, FL. 2016).

[16] The contracts M.C. Dean presented to the case were nonbinding and therefore were not enough to prove that he went through significant means of protecting his trade secret.

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