New Federal Trade Secret Law Takes Effect!
May 31 2016
So what is a trade secret? Generally, a trade secret is information that the owner has taken reasonable measures to keep secret, derives independent economic value from not being generally known, and cannot be readily ascertainable by proper means, such as reverse engineering or independent development. Many businesses rely on trade secret protection rather than patent protection for confidential information such as product recipes (e.g., the recipe for Coca-Cola), software algorithms (e.g., Google’s search engine), customer lists, business plans, wholesale price lists, and manufacturing processes for semiconductor chips. Trade secrets have the advantage that they are protected indefinitely as long as they remain a secret, unlike patents and copyrights that expire after a specific time period. Of course, a disadvantage of trade secrets is that they can be lost instantly and forever if they are disclosed or independently developed by another. But, unlike other forms of intellectual property, such as patents and copyrights, until now federal law applied only to criminal prosecution for trade secret misappropriation. As a civil matter, trade secrets were only protected under state law. That all changed on May 11, 2016, when President Obama signed the Defend Trade Secrets Act (“DTSA”), which amends the Economic Espionage Act to create a federal civil cause of action for trade secret misappropriation. The DTSA, codified as 18 U.S.C. §1836(b), went into effect when it was signed and applies to any misappropriation that occurs on or after that date.
Trade secret misappropriation can occur in a variety of circumstances. One of the most common is when an employee leaves one company to a join competitor or a start-up and impermissibly takes protected business or technical information belonging to their former employer to the new company. As another example, hackers capitalizing on computer security weaknesses pose a threat for the misappropriation of a company’s trade secrets. To protect against such misappropriation, 48 states (all except New York and Massachusetts, which still rely on common law) have adopted some version of the Uniform Trade Secrets Act (“UTSA”), providing some uniformity in trade secret law. But there are still a number of significant differences between the states’ laws as adopted, and it can be difficult, if not impossible, to enforce state laws when misappropriators flee the state or country with the trade secrets. For example, it can be difficult or impossible to effect service of process and obtain discovery to prove misappropriation outside of a state’s jurisdiction. One goal of the DTSA, which in many aspects mirrors the UTSA, is to provide a harmonized federal trade secret law, which will allow businesses that operate across multiple states to have uniform policies for protection and enforcement of trade secrets.
It, however, is important to note that the DTSA does not preempt state laws, but instead it provides an additional layer of potential protection on top of the state laws. This complication has led some to argue that the DTSA will increase legal costs and increase the number of trade secret lawsuits. For example, we can expect plaintiffs to bring both state and federal claims because differences between the state and federal laws may make it possible for a plaintiff to win under one law but not the other. More claims implicating differing state and federal laws will likely lead to higher costs for litigation. Further, more plaintiffs may be willing to pursue trade secret claims because it will be easier to file the claims in federal court, and some plaintiffs prefer federal court for complex lawsuits such as trade secret cases. The volume of trade secret lawsuits may also increase because plaintiffs will effectively be given two bites at the apple (state claims and federal claims in the same lawsuit), which likely gives them a higher probability of success.
Unlike the UTSA, the DTSA includes a seizure provision that allows a court to issue an order to seize the allegedly stolen trade secret items (e.g., hard drives and flash drives containing trade secrets, software, hardware, and lists) in the defendant’s possession. The plaintiff can request and receive an order for this seizure ex parte, which means without having to inform the defendant. The goal is to allow recovery of the misappropriated items before the defendant can move, hide or destroy them. Early recovery also can minimize the harm caused by the misappropriation. The DTSA has numerous safeguards designed to avoid abuses of this seizure provision. It also provides a cause of action for wrongful or excessive seizure.
Once misappropriation is proven, the DTSA provides for damages. The Court can grant an injunction. But if exceptional circumstances render an injunction inequitable, a court can order a reasonable royalty for the continued use of the trade secret. The DTSA also provides for compensatory damages for either 1) actual loss of the trade secret and any unjust enrichment not compensated as part of the actual loss or 2) a reasonable royalty. Exemplary damages up to two times the actual damages can be awarded for willful and malicious misappropriation. For cases involving bad faith or willful misappropriation, a party can also recover attorneys’ fees. It is important to note that under the DTSA, injunctive relief cannot be used to prevent a person from entering into an employment relationship merely based on the information the person knows. Rather, an injunction must be based on evidence of actual or threatened misappropriation. Further, an injunction preventing or limiting employment cannot conflict with an applicable state law prohibiting restraints on the practice of a lawful profession, trade, or business. This limitation appears to recognize that certain states place limits on the applicability of non-compete agreements. It is interesting to note that the White House also recently released a report criticizing certain types of non-compete agreements and state laws that broadly enforce them.
The DTSA also provides whistleblower immunity from liability for confidential disclosure of a trade secret to the government for the purpose of reporting or investigating a suspected violation of law or in a sealed court filing in a lawsuit. The DTSA places the burden on employers to notify employees, including any individuals such as contractors and consultants, of these whistleblower immunity provisions. Failure to do so comes with a penalty. If an employer sues an employee for trade secret misappropriation, unless the employer has provided the employee with notice of the whistleblower immunity, the employer is prohibited from recovering attorneys’ fees and exemplary damages. The notice must be in writing in any agreement governing the employee’s use of trade secrets or confidential information.
The DTSA will have an immediate impact on all businesses. Every new or modified employment agreement and contract with a non-disclosure or confidentiality clause will need to be revised. Further, trade secret protection only exists to the extent that reasonable efforts have been made to keep the information secret. Don’t risk losing valuable intellectual property because you didn’t take the time to enter into a non-disclosure agreement, password protect accounts, encrypt data, train employees, mark documents as confidential, etc. Take this opportunity to evaluate whether your company’s trade secrets are adequately protected and put into place additional safeguards as necessary. While trade secrets can be extremely valuable, that value can evaporate instantly if the secret is disclosed.