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‘DTSA’: a new federal tool to protect trade secrets

beck-russellAfter five years in the making, the Defend Trade Secrets Act of 2016, amending the Economic Espionage Act of 1996 to create an entirely new federal private right of action for trade secrets misappropriation, was signed into law in the spring.

Summary

At a very high level, the DTSA creates a federal private right of action for companies seeking to protect their trade secrets; gives automatic access to federal courts; provides a (very limited) right to seize property “necessary to prevent the propagation or dissemination of the trade secret”; permits the recovery of treble damages and attorneys’ fees; and (to obtain those enhanced damages) requires companies to provide notice that employees have the right to confidentially disclose trade secrets (to government authorities and attorneys) for the purpose of reporting or investigating a suspected violation of law or in a sealed complaint or other sealed court (or other proceeding) filing.

DTSA’s amendments to EEA

The Economic Espionage Act, 18 U.S.C. §§1831-39, was enacted in 1996. It has two operative sections: 1831(a), covering “economic espionage” (i.e., theft of trade secrets to benefit a foreign power), and 1832(a), covering “theft of trade secrets” (i.e., theft of trade secrets to benefit someone other than the owner of the secrets).

The DTSA makes several significant amendments to the EEA.

  • Federal private right of action (Section 1836(b))

Perhaps the single most significant aspect of the DTSA is that it creates a federal private right of action for owners of trade secrets seeking to protect their trade secrets.

This potentially is a game-changer, putting trade secrets (the largely ignored but fastest-growing category of intellectual property) on equal footing with patents, copyrights and trademarks, at least insofar as there is now federal private protection.

In most important respects, the EEA takes its definition of a “trade secret” from the Uniform Trade Secrets Act, which has been adopted in one form or another in all states but Massachusetts and New York (and North Carolina, although its statute has a substantially similar approach).

It bears noting, however, that there are significant variations in the formulations of the UTSA adopted around the country.

  • Federal court access (Section 1836(c))

The DTSA also provides for current jurisdiction in federal and state courts (much like the Lanham Act). Instructively, the DTSA deleted the language in the EEA that had provided for exclusive federal court jurisdiction and replaced it with language providing for only “original jurisdiction” in the federal courts.

If the goal is to keep the action in state court (assuming no diversity of citizenship), a trade secret owner will need to forego the rights and remedies of the EEA and bring the action exclusively under state trade secrets laws (and other state laws).

Bringing an EEA claim will otherwise run the risk of having the case removed to federal court on the eve of a hearing on an emergency motion.

  • Ex parte seizure orders (Section 1836(b)(2))

The most controversial aspect of the DTSA is its ex parte seizure provisions.

Under the amended EEA, not only may owners (including licensees) of a trade secret bring a civil action, but “in extraordinary circumstances” they can obtain an “order providing for the [ex parte] seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.”

To establish the right to the order, the trade secret owner must satisfy substantial proof requirements, including establishing that otherwise available injunctive relief is insufficient, describing “with reasonable particularity the matter to be seized” and its location, and proving that if notice were provided, the person against whom the order would issue “would destroy, move, hide, or otherwise make such matter inaccessible to the court … .”

In addition, the trade secret owner cannot publicize the requested seizure and the court’s order will need to protect against publicity relating to the order.

In addition to other safeguards, if an order is issued, a hearing must follow as soon as possible, and, in any event, within seven days of the order.

If the court determines that the ex parte order was wrongfully obtained or is excessive, the injured party “shall be entitled to,” among other things, damages for lost profits and loss of goodwill, as well as punitive damages and attorneys’ fees.

  • Remedies (Section 1836(b)(3))

The EEA provides not only for ex parte seizures (as described above) and injunctive relief (see below), but for the recovery of “actual loss” (what people generally think of as lost profits), unjust enrichment damages that are not included in actual loss, and, in lieu of either of those, a reasonable royalty.

The EEA also provides for exemplary damages (double the damages award, for a total of treble damages) for willful and malicious misappropriation. Similarly, it permits recovery of attorneys’ fees by the trade secret owner when the misappropriation was willful and malicious, and by either side when the other litigates in bad faith.

  • Immunity and related notice requirements (Section 1833(b))

The DTSA makes clear that an employee (defined to include an independent contractor) has the right to disclose trade secrets and other confidential information in limited circumstances related to the reporting or investigation of suspected illegal conduct or in confidential filings (i.e., filings under seal) in a lawsuit or other proceeding.

However, as to the former, any disclosure must be made (1) in confidence (2) to a federal, state or local government official, or to an attorney (3) “solely for the purpose of reporting or investigating a suspected violation of law … .”

For an employer to qualify for recovery of exemplary damages and attorneys’ fees, it must provide notice of the immunity “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.”

Such agreements may include the obvious (such as nondisclosure agreements, confidentiality agreements and noncompetes) and the not-so-obvious (such as severance and separation agreements that contain confidentiality provisions).

The notice can be in the agreements themselves or by way of a reference to the employers’ reporting policy (in, for example, an employee handbook).

Perhaps the single most significant aspect of the DTSA is that it creates a federal private right of action for owners of trade secrets seeking to protect their trade secrets.

This potentially is a game-changer.

In addition, the notice requirement applies only to agreements entered into following the DTSA’s enactment. Accordingly, existing agreements are not subject to the notice requirement.

  • Impact on the inevitable disclosure doctrine (1836(b)(3))

The DTSA authorizes the issuance of injunctions to prevent any “actual or threatened misappropriation … .”

This same language (as it appears in the UTSA) has been interpreted by some courts to permit a court — even in the absence of a noncompetition agreement — to prevent an employee from taking a job with a competitor when the employee’s work would inevitably lead to the use or disclosure of the former employer’s trade secrets.

The doctrine, known as the “inevitable disclosure doctrine,” originated in PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995).

To prevent the EEA from being interpreted this way (in which the employee in good faith merely remembers trade secret information from a prior employer), the DTSA expressly states that an injunction may not “prevent a person from entering into an employment relationship” and any “conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows … .”

The actual impact of this language remains to be seen. For example, the inevitable disclosure doctrine typically applies only when an employee engages in wrongful conduct, not when the employee merely remembers information.

Accordingly, the doctrine is not applied quite as expansively as the limiting language in the EEA would suggest. In addition, the EEA’s language does not appear to preclude reliance on the inevitable disclosure doctrine under state trade secrets laws.

  • Exceptions to misappropriation (Section 1839(5))

The conduct that constitutes misappropriation of trade secrets will be familiar to lawyers who practice in this area. It is the same conduct defined in the UTSA (section 1(2)): acquisition through improper means and wrongful disclosure or use of a trade secret. (Each is detailed in the new EEA language.)

While the UTSA identifies, in the comments section, exceptions to conduct that might otherwise constitute misappropriation (most notably, reverse engineering and “independent invention”), the DTSA includes reverse engineering and “independent derivation” as exceptions in the text of the statute.

The fact that the exceptions appear in the body of the statute is of no moment. What is significant, however, is the difference in the language: “independent derivation” arguably suggests that the misappropriator can cleanse his or her conduct by modifying a stolen trade secret and then using only the modified secret. In contrast, “independent invention” presumes that the invention did not start with (i.e., derive from) a misappropriated trade secret.

Additional changes not included in amended EEA

In addition to the amendments to the text of the EEA, the DTSA makes several other changes to existing law.

First, the DTSA makes the violation of the EEA a predicate offense under RICO.

Second, the DTSA requires recurring reports on the status and impact of trade secrets laws and best practices for the use of the ex parte seizure provisions.

Third, Congress states its perception (among other things) that the EEA “applies broadly to protect trade secrets from theft … .” Accordingly, expect to see an expansive reading of the language. (This language seems designed to temper the rule of lenity, i.e., the canon of construction that requires a narrow interpretation of statutes that are both criminal and civil, when the intent of the legislature is not otherwise clear.)

Where are we headed?

The DTSA was designed to enhance the protections available to trade secret owners. The DTSA is not, however, the only tool available to protect trade secrets; state trade secrets laws and noncompete agreements are used to protect trade secrets as well. Accordingly, not only are we likely to see a significant increase in the number of trade secret cases in federal courts (we have already seen a number of cases filed, and one reported decision being issued, under the DTSA), we are likely to see enhanced focus on state trade secret and noncompete laws.

While there have been efforts to restrict noncompetition agreements federally and in some states (and to expand their enforceability in other states), the Obama administration has largely indicated that, based on preliminary research, it sees noncompetes as a necessary, though over-used, tool to protect corporate innovation.

Further, in order to qualify for the enhanced damages and attorneys’ fees available in trade secrets cases under the EEA, companies need to amend any contracts they have with employees governing the use of trade secrets or other confidential information to provide notice of the employee’s right to confidentially disclose trade secrets in connection with the reporting of suspected violations of law.

Russell Beck is a business and intellectual property litigator and founding partner of Beck, Reed, Riden. He can be contacted at rbeck@beckreed.com.

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