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Federal Legislation Changes the Trade Secrets Landscape

The Legal Intelligencer

Despite the political campaign season and after years of discussion, Congress has enacted federal legislation establishing a private right of action for misappropriation of trade secrets, ­vesting the federal courts with original jurisdiction over the litigation of such claims. On April 27, the U.S. House of Representatives overwhelmingly voted to send the Defend Trade Secrets Act of 2016 (DTSA) to President Obama for his signature. This vote followed the Senate's passage of the bill earlier in April by a vote of 87-0. After signaling his support for some time, the president signed the bill into law May 11.

With this legislation, Congress has ­recognized the growing importance of trade secrets to the U.S. economy and has given businesses confronted with trade secret theft another powerful weapon to secure ­injunctive relief and damages by granting federal question jurisdiction over trade secret misappropriation claims without the need for diversity or supplemental federal jurisdiction pursuant to 28 U.S.C. Sections 1332 and 1367. While protecting trade secrets has been a matter of state statute, common law and contract for decades, enactment of the DTSA places trade secrets on a par with patents, copyrights and trademarks, which have long been subjects of federal statute and litigation in federal courts. Contrasted with some of the recent narrowing of patent protection, the DTSA highlights the importance of trade secrets as one of the oldest and arguably most fundamental forms of intellectual property, and makes this type of intellectual property (IP) a matter of federal concern. In addition, creating a federal cause of action provides global and national plaintiffs with a more uniform structure for discovery and the opportunity to develop more uniform federal case law in this area.

The DTSA amends the federal Economic Espionage Act (EEA)—a tool for criminal enforcement of trade secret rights and theft—to permit the owners of trade secrets to bring suit in ­federal court for trade secret misappropriation related to products or services used or intended for use in interstate or foreign commerce. The new statute also broadens the EEA's definitions of "misappropriation" and "improper means" and provides for remedies in the form of damages for actual loss, unjust enrichment, and reasonable royalties. In addition, the DTSA establishes exemplary damages of twice other monetary damages and authorizes the award of attorney fees and costs, under certain circumstances.

The DTSA also expressly authorizes ­injunctions to prevent actual or threatened trade secret misappropriation, but appears to rule out injunctions that "prevent a person from entering into an employment relationship" where the conditions placed on employment are not "based on evidence of threatened misappropriation" but "merely on information the person knows." In doing so, Congress seems to have signaled that a federal "inevitable disclosure" doctrine will not serve as a basis for injunctions in the employment context, which may be ­available under state law.

In what is likely to be one of the DTSA's most talked about and most litigated provisions, the DTSA authorizes ex parte seizure with the intended goal of preventing the dissemination of trade secret information in "extraordinary circumstances" and where the court specifically finds that eight ­factors are present, including that immediate and irreparable injury will occur without seizure. In those cases, the DTSA requires that the court take custody of the materials in question and hold a seizure hearing within seven days, at which time the applicant bears the burden to prove the elements needed to support the original seizure order. Although ex parte seizure may yet prove to be a powerful tool for victims of trade ­secret theft, the burden is heavy. The courts' willingness to oversee custody of seized material containing trade secret ­information is untested, and penalties that aim to minimize abuse of the procedure confirm that making such an application is not without risk. In particular, parties harmed by a wrongful or excessive seizure order may recover damages from the applicant in the event of a wrongful seizure.

Unlike other federal protections for ­intellectual property, the DTSA does not pre-empt existing state law on trade secrets, so litigation will likely involve both federal- and state-law claims related to misappropriation of trade secrets.

Of particular interest to employers, in order to take advantage of some of the enhanced remedies available, the DTSA requires employers to include in their confidentiality and nondisclosure agreements (or related policies and procedures) notice that whistleblowers and retaliation claimants may disclose trade secret information to their counsel and use the trade secret ­information in court proceedings, provided the individual files any document with the information under seal and does not ­disclose the trade secret information except pursuant to court order.

Finally, and also of note for foreign and domestic businesses, the EEA (18 U.S.C. Section 1837) (and, therefore, the DTSA) applies extraterritorially and encompasses acts of misappropriation outside the United States committed by a U.S. citizen, by a permanent resident alien, or by a U.S. entity or organization as well as acts of misappropriation outside of the United States for which an "act in furtherance of" the misappropriation "was committed in the United States." While that provision provides some clarity as to the DTSA's reach, a potential gap remains in cases where "an act in furtherance of" the misappropriation was not committed in the United States or by a U.S. actor—namely, ­misappropriation occurring entirely abroad by foreign actors but causing injury to domestic businesses. Given the general presumption against ­extraterritorial application of statutes, the DTSA's silence on that point, and the DTSA's failure to fill the gap, the DTSA may limit civil suits where the only connection to the United States is an injury suffered by a U.S. entity.

For years, business and government ­leaders have voiced concern about the ­rising threat of economic espionage and trade secret misappropriation as well as the ­immense costs ­inflicted on business by disaffected insiders and employees, or by unscrupulous competitors. Placing trade secrets on a level with patents, trademarks and ­copyrights, the DTSA provides private ­litigants with potent legal tools that should enhance efforts to protect vital business information. The way in which businesses take advantage of the new statute should prove to be a measure of whether—and to what extent—U.S. ­companies view trade secrets on a par with other forms of IP protection.

“Federal Legislation Changes the Trade Secrets Landscape,” by Michael P. Broadhurst, Kevin M. Passerini, and Leigh Ann Buziak was published in The Legal Intelligencer on May 18, 2016. Please click here to read the article online.

Reprinted with permission from the May 18, 2016, edition of The Legal Intelligencer © 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.