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Feds Provide Major Boost to Protection of Business Trade Secrets

President Obama is poised to sign the Defend Trade Secrets Act 2016 (“DTSA” or the “Act”), legislation that would fundamentally overhaul the decades-long tradition of state control of trade secrets lawsuits. DTSA, which amends the Economic Espionage Act, passed Senate review late last month, and would create a new federal cause of action for an entity engaged in interstate commerce (in other words, every business) that suffers the improper loss of a trade secret. Until now, trade secret litigation had been a creature of state law and state courts, but industry groups and IP attorneys lobbied hard for DTSA in an effort to make uniform the Nation’s approach to all intellectual property disputes.

Trade secrets are the most common, but also the least understood, form of IP. While trademarks, copyrights, and patents all come with a certification from the federal government, a trade secret requires no such formal designation. Instead, a trade secret is a “formula, practice, process, design, instrument, pattern, commercial method, or compilation of information which is not generally known or reasonably ascertainable by others, and by which a business can obtain an economic advantage over competitors or customers.” The archetypical example of a trade secret is the formula for Coca-Cola - legendarily obscure and known only by a handful of Coke executives at one time. KFC’s “eleven herbs and spices” or Dr. Pepper’s 33 ingredients are other examples. But these are only the most famous examples of trade secrets. Client lists, algorithms, customer preferences, or even sales pitch scripts are all trade secrets, and all protected by law.

Enforcement of trade secrets, however, has traditionally been left primarily to state courts, where uncertainty and unfamiliarity have been consistent complaints of the plaintiffs’ bar. The Act represents industry’s effort to create a uniform approach to trade secrets, and to provide federal remedies to aggrieved parties. Importantly, the Act also demonstrates the extent to which theft of trade secrets by domestic and, increasingly, international competitors has become a source of consternation to American business.

The Act confers jurisdiction on federal courts to hear any case brought by the “owner of a trade secret that is misappropriated [] if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” The creation of a federal cause of action is the most significant expansion of the federal law of intellectual property since the Lanham Act in 1946. Notably, the Act dramatically increases the potential penalty for trade secret theft, now permitting aggrieved parties to recover the greater of $5 million or three times the value of the stolen property to the defendant, including costs saved. Trade secret theft remains a RICO predicate act, a powerful tool against entities engaged in serial trade theft. Indeed, the Act specifically discusses the baleful consequences of trade secrets pilfered by foreign actors and governments, and requires that the Director of the U.S. Patent and Trademark Office make biennial reports on the ongoing threat of trade secret theft.

Perhaps the most consequential aspect of the Act, though, is the right to seizure of stolen items. DTSA authorizes federal judges, “upon affidavit or verified complaint” to issue ex parte orders “providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” These super-injunctions are limited to circumstances where “an order issued pursuant to Rule 65 of the Federal Rules of Civil Procedure or another form of equitable relief would be inadequate,” or, put more simply, where “the party to which the order would be issued would evade, avoid, or otherwise not comply with such an order.” Bypassing the standard TRO, these orders are more akin to warrant applications, requiring only that the applicant is likely to succeed in showing that:

  • the information [sought] is a trade secret; and

  • the person against whom seizure would be ordered—

    • misappropriated the trade secret of the applicant by improper means; or

    • conspired to use improper means to misappropriate the trade secret of the applicant;

  • the person against whom seizure would be ordered has actual possession of—

    • the trade secret; and

    • any property to be seized

If, under the circumstances, “the application describes with reasonable particularity the matter to be seized and, to the extent reasonable under the circumstances, identifies the location where the matter is to be seized” and states that the offending party “would destroy, move, hide, or otherwise make such matter inaccessible to the court, if the applicant were to proceed on notice to such person,” the order may issue.

Such orders are extremely powerful tools to protect intellectual property. Not only do they amount to a preliminary finding of theft and liability under the Act, they permit federal marshals or local law enforcement to enter premises (even forcefully) and seize stolen property.

Once stolen materials are obtained, the legal remedies available are no less robust. A plaintiff may obtain injunctive relief in any form the Court deems reasonable, as long as the relief does not impermissibly prohibit a person from obtaining employment. Aggrieved parties may also recover actual damages and unjust enrichment; willful and malicious trade secret theft entitles the plaintiff to double damages.

The Act is a dramatic move in favor of protecting trade secrets, regardless of form or content. When enacted, DTSA will provide businesses with a deterrent against trade theft far more potent than has ever existed in federal law. Potential defendants should be forewarned: other than granting attorneys’ fees in cases of bad faith applications for seizure orders, the Act is overwhelmingly pro-plaintiff, and should be understood in the context of the federal government’s renewed interest in protecting American IP.

© 2020 Bilzin Sumberg Baena Price & Axelrod LLP


About this Author

Philip R. Stein, Complex Commercial Litigation Attorney Bilzin Sumberg, Law Firm

Philip R. Stein, a Partner in Bilzin Sumberg's Litigation Group, focuses his practice on complex commercial litigation. He regularly acts as lead counsel to mortgage companies, financial services companies, and large national homebuilders on a broad range of issues of importance to companies in those industries. Phil is currently devoting a substantial part of his practice to representing originators and sellers of mortgage loans throughout the country as they defend against loan repurchase claims made by banks and other investors. He also regularly assists companies...