Explaining the Provisions of the Defend Trade Secrets Act
The Defend Trade Secrets Act (DTSA) is now one signature away from becoming law. On April 4, 2016, the Senate unanimously passed the DTSA and, last week, on April 27, the House of Representatives followed suit, passing the DTSA by a vote of 410-2. The DTSA thus has wide bipartisan support and President Obama, who expressed his own strong support for the bill, is expected to sign the bill into law in the near future.
Once enacted, the DTSA will create a federal private civil cause of action for trade secret misappropriation. Under the DTSA, “[a]n owner of a trade secret that is misappropriated may bring a civil action . . . if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” Defend Trade Secrets Act of 2016, S. 1890, Sec. 2. Civil remedies for trade secret misappropriation have previously been a matter of state law, but, with the passage of the DTSA, an additional avenue of redress will be made available for a party seeking to remedy improper acquisition of its trade secrets. The DTSA gives United States district courts original jurisdiction over actions under the statute. The statute will not preempt existing state trade secret laws, but will exist in parallel, adding an enhanced toolbox of options for American companies’ enforcement of their intellectual property rights.
Below is an explanation of some of the salient provisions of the DTSA that American companies should be aware of as the DTSA moves onto the President’s desk. We will be monitoring DTSA jurisprudence following its enactment and will provide continuing commentary on the new law – check back for regular updates.
“Trade secret” is defined broadly in the DTSA as:
all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—
(A) the owner thereof has taken reasonable measures to keep such information secret; and
(B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.
“Misappropriation” is defined in detail as follows:
(A) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
(B) disclosure or use of a trade secret of another without express or implied consent by a person who—
(i) used improper means to acquire knowledge of the trade secret;
(ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was—
(I) derived from or through a person who had used improper means to acquire the trade secret;
(II) acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or
(III) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or
(iii) before a material change of the position of the person, knew or had reason to know that—
(I) the trade secret was a trade secret; and
(II) knowledge of the trade secret had been acquired by accident or mistake.
Civil Seizure and Remedies
The DTSA provides for a civil seizure mechanism which is issued based on an ex parte application to the court. The civil seizure is a preventative tool employed prior to a finding of misappropriation by which a court may “issue an order providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” Using this tool, an American company aware of a potential misappropriation of its trade secrets may be able to quickly prevent further dissemination of that information during the pendency of a formal DTSA case. Following issuance of a seizure order, the court is required to hold a seizure hearing where the party who obtained the seizure order has the burden to prove the facts underlying the order. Civil seizure may be ordered only in “extraordinary circumstances” and requires a showing that:
an order pursuant to Fed. R. Civ. P 65 or other equitable relief would be inadequate;
an immediate and irreparable injury will occur if seizure is not ordered;
harm to the applicant from denial of a seizure order (1) outweighs the harm to the person against whom seizure is ordered, and (2) substantially outweighs the harm to any third parties by such seizure;
applicant is likely to succeed in showing that the person against whom the order is issued misappropriated or conspired to misappropriate a trade secret through improper means;
the person against whom the order will be issued has possession of the trade secret and any property to be seized;
the application describes with reasonable particularity the matter to be seized and, to the extent reasonable under the circumstances, the matter’s location;
the person against whom seizure is ordered would destroy, move, hide, or otherwise make such matter inaccessible to the court if on notice; and
the applicant has not publicized the requested seizure.
Upon a finding of misappropriation of a trade secret, the statute provides for additional remedies. A court may grant an injunction to prevent any actual or threatened misappropriation, provided that the injunction does not “prevent a person from entering into an employment relationship,” and that any conditions placed on employment are based on “evidence of threatened misappropriation and not merely on the information the person knows.” Where appropriate, an injunction may require affirmative actions to protect the trade secret. Further, in “exceptional circumstances that render an injunction inequitable,” the court may condition future use of the trade secret on the payment of a reasonable royalty. Following a finding of misappropriation, a court may also award damages. Where the trade secret is “willfully and maliciously misappropriated” a court may award exemplary damages double the damage amount already awarded. A court may also award attorney’s fees where the misappropriation or claim of misappropriation was in bad faith, or where a motion to terminate is made or opposed in bad faith.
Other Notable Provisions
The DTSA additionally mandates that within one year of enactment, and every six months thereafter, the Attorney General submit a publicly available report on, inter alia, (1) the scope and breadth of theft of trade secrets of American companies occurring outside of the United States, (2) the extent to which theft outside the United States is sponsored by foreign governments or instrumentalities, (3) the ability of trade secret owners to prevent misappropriation of trade secrets outside of the United States, and (4) recommendations for actions that may be undertaken to reduce the threat of misappropriation of trade secrets of American companies occurring outside of the United States.
The DTSA also includes a safe harbor for “whistleblower” employees which provides for immunity from any criminal or civil liability under any federal or state trade secret law for disclosure of a trade secret that is made in confidence to an attorney or federal, state, or local governmental official “solely for the purpose of reporting or investigating a suspected violation of law,” or in a filing in a lawsuit made under seal.
Additionally, while the DTSA expressly indicates that “[n]othing in the amendments made by this section shall be construed . . . to preempt any other provision of law,” and thus it will not preempt existing state trade secret laws, one remaining open question is what the result will be where the definition of “trade secret” within the DTSA conflicts with a state’s common law definition or there is a different conflict between the DTSA and a state’s common law requirements concerning keeping confidential protected trade secrets.
Once enacted, the DTSA’s enablement of a federal cause of action for trade secret misappropriation will provide another important tool to protect American companies’ intellectual property. This additional avenue of protection follows the increasing trend of American companies providing enhanced value to their shareholders through the ardent protection of their intellectual property with a combination of patent infringement and trade secret misappropriation actions. We will be monitoring the jurisprudence for this new law as it develops and will provide regular updates.