Major Revisions to Federal Trade Secrets Law Now in Effect – Defend Trade Secrets Act of 2016 Signed by President Obama

On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (“DTSA”). This law substantially revises federal trade secret practice in the United States. Most notably, the DTSA creates a mechanism for private civil trade secret claims to be pursued directly in federal court. The law is also significant for its tremendous bipartisan support, passing by a 410-2 margin in the House of Representatives and by unanimous vote in the Senate. Companies and employers with an interest in protecting trade secrets from theft, and the lawyers who represent them, would be wise to closely review the new protections and potential pitfalls of the law.

Trade Secret Protection, Pre-DTSA

The United States Patent and Trademark Office defines a trade secret as information used in business that “give[s] an opportunity to obtain an economic advantage over competitors who do not know or use it.” The United States guarantees protection of trade secrets by virtue of its membership in the World Trade Organization and as a signatory to the Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS”). Trade secret protection in the United States largely has been maintained under state law. Forty seven states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands have enacted the Uniform Trade Secret Act (“UTSA”) to provide trade secret protection at the state level. Massachusetts introduced legislation to enact the UTSA in 2013, which remains pending. The Commonwealth does recognize the right to trade secret protection under several other sources of law, including G.L. c. 93, § 42 (prohibiting trade secret misappropriation) and G.L. c. 266, § 30(4) (creating criminal penalty for trade secret theft). Massachusetts also recognizes that trade secret misappropriation can form the basis of liability under Chapter 93A, the Commonwealth’s consumer protection statute.

Protection against trade secret misappropriation has been present at the federal level. For example, under the Economic Espionage Act of 1996 (“EEA”), codified at 18 U.S.C. §§ 1831-1839, trade secret theft could give rise to criminal liability, and the Attorney General could bring a civil action to enjoin further violation of the law. These mechanisms have operated in tandem with state law to provide trade secret owners with legal protection and judicial recourse.

Trade Secret Protection in a Post-DTSA World

The DTSA contains several significant, substantive changes to existing federal trade secret law and practice. The Act does not preempt existing state trade secret laws, however; these remedies are still available. The federal changes instead supplement the state protections.

Several of the key changes are highlighted below.

  • Right to Private Civil Suit Now Available under the EEA

Section 2 of the DTSA amends the EEA’s civil proceedings language, codified at 18 U.S.C. § 1836, to permit private parties to institute, directly in federal court, civil lawsuits seeking relief for trade secret misappropriation. Formerly, the owner of a trade secret would seek civil recourse under state law. Liability under federal law could be imposed criminally, through federal prosecution. Under the DTSA, federal district courts are given original jurisdiction over civil trade secret disputes.

  • “Seizure” of Trade Secret Property to Block Further Misappropriation

Section 2 of the DTSA contains another tool for trade secret owners to protect their confidential information: the “seizure” provision. This section allows a trade secret owner to apply ex parte for an order directing seizure of “property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” Notably, this provision does not enable the subject of such an order to request a hearing on the order’s merits before it is issued. Others in the field have noted a connection between permitting ex parte seizure and protecting one’s trade secrets from cybersecurity threats. The DTSA seeks to balance the potentially broad, and drastic, effects of this procedure with further language stating that if the order is granted, and seizure is later discovered to have been “wrongful,” the person suffering damage from the order can seek damages from the order’s applicant.

  • “Whistleblower” Immunity for Government Investigations and Court Filings

Section 7 of the DTSA affords criminal and civil immunity under state and federal law to individuals who disclose trade secrets to the government, if that disclosure is made during the government’s investigation of potential legal violations, or in court filings, if those filings are made under seal. The law further requires employers to notify their employees of this immunity in any contract or agreement made with the employee that “governs the use of a trade secret or other confidential information.” Failure to comply with the notice requirement can bar the employer from awards of exemplary damages or attorneys’ fees in any suit instituted against the employee to whom notice has not been provided.

Takeaways for Companies and Employers with Trade Secret Interests

The DTSA provides a new, federal layer of protection to trade secret owners who seek to ward off theft of their confidential information. The right to institute a federal civil suit for trade secret claims is a tempting weapon for trade secret owners to wield. Companies and employers seeking to protect trade secrets should be mindful of the distinctions between the DTSA and existing state law, however, and should consider the possibility that state law may still provide a better avenue for relief. An informed trade secret owner therefore may choose to seek relief under state rather than federal law, in much the same way that individuals may seek protection under state employment law rather than under analogous federal provisions.

Companies and employers may also wish to tread lightly when seeking to avail themselves of the “seizure” provision. The manner in which courts will interpret this language remains to be seen. Trade secret owners may wish to refrain from aggressively seeking seizure until additional judicial guideposts have been established that clarify the means by which liability for “wrongful” seizure can be avoided.

Finally, employers seeking to protect trade secrets should be wary of the whistleblower protections embodied in the DTSA. Current employment manuals and contracts may need to be amended to reflect these new protections. A failure to amend such language could result in limited recovery to an employer seeking to remedy a trade secret misappropriation by an employee. Employers should carefully review the language in their current manuals and employee contracts. Employers should also ensure that any amendments made will balance the DTSA’s requirements with the continued protection of the employer’s legal interests.

KATHERINE A. KELTER

Posts by Kate

Leave A Comment