The Defend Trade Secrets Act of 2016: What Trade Secret Owners Need to Know
On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (“DTSA”), one of the most important trade secret laws in decades. The DTSA creates a federal civil claim for trade secret misappropriation and gives trade secret owners the ability to request law enforcement’s seizure of stolen trade secrets without advance notice to the wrongdoer — an extraordinary remedy unparalleled in any other current federal law. State trade secret protections remain available, and will parallel the additional federal rights created by the DTSA, which include enhanced damage provisions for willful and malicious misappropriation. Passage of the DTSA demonstrates the critical importance of protecting trade secrets and is likely to result in far more federal court litigation involving high stakes and “bet the company” disputes at a time when misappropriation and theft of trade secrets are on the rise.
DTSA overview & key provisions
Trade secrets have historically received protection under state laws, most notably the Uniform Trade Secrets Act (“UTSA”), a model law that has been adopted by forty-eight states, including Wisconsin. The Economic Espionage Act of 1996 (“EEA”) made trade secret theft a federal crime, although a private party could not bring a civil lawsuit based on the EEA, and only a select number of EEA cases are prosecuted each year. The DTSA amends the EEA to allow private party claims and includes definitions for the terms “misappropriation” and “improper means,” which are very similar to the definitions provided in the UTSA. The DTSA includes the following key provisions, which will undoubtedly have a significant impact on the future of trade secret litigation:
1. Federal civil actions for trade secret misappropriation
The DTSA allows private parties to bring a federal claim for trade secret misappropriation if “the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” 18 U.S.C. § 1836(b). Because of the extremely broad statutory scope, trade secret owners, in essence, now have the right to file suit in federal court based on a new federal cause of action. Before the DTSA, a plaintiff could only litigate in federal court if diversity or supplemental jurisdiction requirements were met because no independent civil claim existed under federal law.
2. Ex parte seizures
The DTSA allows a trade secret owner to request seizure of misappropriated property by law enforcement, without any advance notice to the alleged thief. Without question, this provision is the most controversial aspect of the DTSA given its potential for abuse. As a result, the DTSA has a number of safeguards meant to prevent the misapplication of this particular provision. For instance, before a seizure order is issued, the plaintiff must establish that an ordinary injunction would not remedy the perceived damage because of the likelihood that the accused will destroy or hide the property. An ex parte seizure applicant will be required to post bond to cover any damages if the seizure is determined to be wrongful. The issuing court will also be required to schedule an adversarial hearing to assess the merits of the seizure at the earliest possible time. Moreover, the court, and not the applicant, will take custody of any seized property. The DTSA requires the Federal Judicial Center to develop best practices over the coming years related to the ex parte seizure provision.
3. Increased damages available
The DTSA is more generous than the UTSA when it comes to monetary damages. Whereas the owner of a misappropriated trade secret under the UTSA may recover up to double damages for willful and malicious misappropriation, that same trade secret owner’s monetary remedy increases to treble damages in federal court under the DTSA.
4. No preemption of state law
Notably, the DTSA does not replace or preempt state law trade secret misappropriation rights and remedies, such as those afforded under the UTSA. See 18 U.S.C. § 1838. As such, trade secret owners now have an additional source of protection and the ability to forum shop for the most attractive venue to bring a claim.
5. Bad faith provisions
While the DTSA provides plaintiffs more options when pursuing trade secret misappropriation claims, counsel should be mindful of the DTSA’s provision allowing for the recovery of attorneys’ fees for actions brought in bad faith.
6. Whistleblower protection and affirmative duties to employers
The DTSA also provides a whistleblower immunity provision that makes clear employees will not be found liable for trade secret misappropriation if reporting legal violations to the government. Importantly, the DTSA requires employers to notify their employees about the immunity provision, “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” Accordingly, the DTSA places an affirmative duty on employers to provide employees notice of the DTSA’s immunity provision when negotiating employee-related agreements. If an employer fails to comply with the DTSA’s immunity provision, it may be prevented from recovering exemplary damages or attorneys’ fees in an action brought under the law against an employee to whom no notice was provided.
Implications of the DTSA
The DTSA is a major step toward elevating trade secrets to the same level of protection enjoyed by other forms of intellectual property such as patents, copyrights, and trademarks. It is clear that the DTSA will result in more federal court trade secret misappropriation litigation and undoubtedly impact employment and intellectual property law. Implications include the following:
The option of a federal forum adds complexity to the decision of where to file a trade secret misappropriation suit. Consideration needs to be given to a case’s complexity; the likelihood that a state versus a federal judge in the particular jurisdiction may be more inclined to issue an injunction; the likelihood of a state versus federal judge awarding DTSA bad faith damages to a defendant; scope of discovery available to federal court plaintiffs under the Federal Rules of Civil Procedure, including nationwide subpoena power, versus state law discovery rules.
Employers must provide employees notice of whistleblower protections in any contract governing trade secrets or confidential information. Failure to do so may deprive the employer of DTSA punitive damages and attorneys’ fees.
In the long term, the current state-by-state differences in the definition of trade secrets (for example, some state definitions include customer lists, computer programs and actual or potential customers, while some do not) may give way to a uniform federal standard created as DTSA precedent develops.