The Defend Trade Secrets Act: Key elements and procedures for private trade secret owners

By Robert B.G. Horowitz (BakerHostetler)

Posted: 20th October 2017 08:41

The Defend Trade Secrets Act of 2016 (“DTSA”), Pub. L. No. 114-153, effective on May 11, 2016, is landmark legislation in the field of intellectual property law. The law was created to reduce trade secret theft and, for the first time, provides a federal private civil cause of action for trade secret misappropriation exists.
 
The DTSA is an extension of the Economic Espionage Act of 1996, 18 U.S.C. Sections 1831-1839 (subsequently amended in 2012 by the Foreign and Economic Espionage Penalty Enhancement Act of 2012, Pub. L. 112-269), which criminalised certain trade secret misappropriations. Prior to DTSA, standing under the EEA was limited to the U.S. Attorney General, and private owners of trade secrets were limited to state law remedies for trade secret misappropriation. Most states – except for New York and Massachusetts -- adopted the Uniform Trade Secrets Act (“UTSA”) created by the Uniform Law Commission in 1979 (and subsequently amended in 1985) to provide some uniformity for trade secrets cases. Variations in UTSA exist, though, among the states that adopted it. DTSA now standardises trade secret protection and gives certainty to trade secret owners.
 
DTSA’s features
Federal court access; non-exclusive jurisdiction: private litigants, asserting claims for misappropriation of trade secrets, now may access federal courts which have original jurisdiction of civil actions brought under DTSA. 18 U.S.C. Section 1836(c). However, to be the subject of a DTS action, a trade secret must be “related to a product or service used in, or intended for use in, interstate or foreign commerce”. 18 U.S.C. Section 1838. So, an intrastate use of a trade secret will not qualify as a violation of DTSA. Jurisdiction over DTSA claims is also non-exclusive, so that a trade secrets owner may assert a DTSA violation in a state court.
 
Expansive definition of “trade secret”
The DTSA adopts the definition of “trade secret” in the EEA, which is “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 memorialised physically, electronically, graphically, photographically, or in writing”, providing the owner has “taken reasonable measures” to maintain secrecy and the information derives actual or potential economic value from not being generally known to, and being readily ascertainable via proper means by, “another who can obtain economic value from its disclosure or use”. 18 U.S.C. Sections 1839(3)(A) and (B). [Emphasis added]. In contrast, the trade secret definition under UTSA -“information, including a formula, pattern, compilation, program, device, method, technique, or process…”, is narrower. The DTSA’s definition covers every conceivable type of trade secret.
 
Ex parte seizure orders
A singular difference between the DTSA and state trade secret laws is the provision for ex parte seizure orders. Under the DTSA a court may grant an ex parte seizure order for seizing and recovering stolen trade secrets, in extraordinary circumstances to “prevent the propagation or dissemination” of the trade secret in dispute. 18 U.S.C. Section 1836(b)(2)(A)(i).
 
To prevent possible abuse of ex parte seizure orders, a trade secrets owner must satisfy very stringent requirements for the issuance of such an order, which strongly suggests such orders will issue in extreme situations only. Moreover, in an unusual provision, DTSA provides that seized materials shall be taken into the court’s custody, as opposed to a third-party’s custody, where they shall be secured from access during the seizure and while in such custody. Seized materials shall not “be connected to an electronic network or the Internet” without the parties’ consent until the seizure hearing. The court also shall keep such materials in confidence unless the defendant consents to their disclosure. A special master may also be appointed to “locate and isolate” all misappropriated trade secret information and “facilitate the return of unrelated property and data” to the accused. 18 U.S.C. Section (b)(2)(D).

At the seizure hearing, the trade secret owner’s burden is to prove the facts supporting the findings of fact and conclusions of law in the seizure order. If that burden is not met, the seizure order shall be dissolved or modified. Moreover, the defendant or any person harmed by seizure may seek dissolution or modification of a seizure order at any time upon notice to the trade secret owner. 18 U.S.C. Section 1836 (b)(2)(F) .
 
Injunctive relief, damages and attorneys’ fees
The DTSA provides for injunctive relief to prevent actual or threatened misappropriation on “reasonable terms”, provided an injunction does not restrict a person from entering into an employment relationship. Any conditions on employment contained in an injunction must be based on evidence of threatened misappropriation and “not merely on the information the person knows”. Nor may an injunction conflict with an applicable state law “prohibiting restraints of the practice of a lawful profession, trade, or business”. These provisions apparently reject the “inevitable disclosure” doctrine (i.e., that an employment necessarily will require disclosure of a trade secret by undertaking an employment) and the “memory rule” adopted in some states that information residing in one’s memory can constitute trade secret misappropriation.
 
Damages for actual loss also are available as well as damages for unjust enrichment that are not accounted for in computing actual damages. The statutes also provides for a reasonable royalty “in lieu of damages measured by any other methods”. If the misappropriation is willful and malicious, a court may award double damages. 18 U.S.C. Section 1836(b)(3)(B) and (C). Notably, the laws in some states, such as Ohio, permit a court to award treble damages for willful and malicious appropriation. Ohio Rev. Code Sec. 1333.63(B).
 
Reasonable attorneys’ fees may be awarded where a claim of misappropriation is made in bad faith, a motion to terminate an injunction is made or opposed in bad faith, or if a trade secret was willfully and maliciously misappropriated. 18 U.S.C. Section 1836(b)(3)(D).
 
Whistleblower immunity
The DTSA protects from liability and criminal prosecution employees, independent contractors and consultants who disclose a trade secret to a government official or in a court filing to report or investigate a suspected violation of law. Nor is there liability or possibility of prosecution for disclosure of a trade secret to an employee’s attorney for use in an anti-retaliation suit against an employer, if the individual’s disclosure is made: a) in a document filed under seal; and b) the individual does not disclosure the trade secret except pursuant to court order. 18 U.S.C. Section 1833 (b)(1) and (2).
 
The DTSA also requires an employer to provide notice about immunity under the DTSA in any contract or agreement with an employee governing the use of trade secrets or other confidential information. This requirement is also met if an employer cross-references such an agreement to a policy document provided by the employer to the employee that specifies the employer’s reporting policy for suspected illegal activity. 18 U.S.C. Section 1833 (b)(3)(B). Should an employer not comply with the notice requirement, then that employer cannot obtain exemplary damages or attorneys’ fees under DTSA in an action against the employee. 18 U.S.C. Section 1833 (b)(3)(C). These requirements apply to contracts and agreements entered into or updated after DTSA’s effective date.
 
Statute of Limitations
The DTSA provides a three year statute of limitations from the time of discovery of the misappropriation, or when it should have been discovered by reasonable diligence. A continuing misappropriation is construed as a single claim of misappropriation. 18 U.S.C. Section 1836(d).
 
DTSA’s effect: While providing uniformity of law and benefiting trade secrets owners, DTSA will inevitably cause more trade secret litigation in both federal and state courts. Federal courts most likely will need to deal with any differences between the DTSA and relevant state law. Moreover, employers should now revise their employment agreements to provide sufficient notice per DTSA’s requirements.
 
Robert (“Red’) B.G. Horowitz, concentrates on intellectual property law focusing on trademark issues, copyright issues, and trade secrets issues, and counsels hedge funds on patent infringement matters.
 
Since 2002, Red has been listed in the Legal Media Group's Guide to the World's Leading Trade Mark Law Practitioners and is named in the 2012 through 2016 editions of World Trademark Review's WTR 1000—The World's Leading Trademark Professionals. He also was listed in Best of the Best – USA, 2015 and 2016 editions. Red has lectured at bar associations and foreign intellectual property law associations, and presented an online CLE course in trademark law. He also has lectured about the Defend Trade Secrets Act which became law during May, 2011.

Robert can be contacted on +1.212.589.4240 or by email at rhorowitz@bakerlaw.com

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