United States Congress Passed DTSA, Defend Trade Secrets Act
On April 27, 2016, the United States House of Representatives voted 410-2 in favor of passing the legislation known as the Defend Trade Secrets Act (DTSA) after it was unanimously passed by the Senate earlier this month. President Obama is expected to sign the bill. This impending new law has been described by some as the “most significant expansion of federal law in intellectual property since the Lanham Act in 1946,” as it creates a federal private cause of action for trade secrets misappropriation. The new law has been passed as an amendment to the Economic Espionage Act (EEA), the law relating to protection of trade secrets but that previously included only criminal penalties.
Prior to the adoption of the DTSA, civil actions for trade secrets misappropriation had been largely a matter of state law, and U.S. companies usually initiated claims for trade secrets misappropriation by bringing them in state courts under the Uniform Trade Secrets Act (UTSA), the uniform law adopted in various versions by 48 states (all but New York and Massachusetts). Proponents of the new law cited the need for the uniform law to ensure consistent application of the UTSA, avoidance of different interpretations and implementations of trade secret law in different states, access to federal court and ease of obtaining out-of-state discovery in trade secret litigation.
The DTSA explicitly states that it does not preempt state law, and therefore the DTSA does not replace state trade secret law. Thus, companies are not precluded from filing their claims in state court, but rather, the DTSA provides them with an additional litigation option by allowing them to bring lawsuits automatically in federal court if they choose to do so.
One potential benefit of the new law for companies is that the definition of a “trade secret” under DTSA/EEA is arguably broader than the one contained in the UTSA. Both the DTSA/EEA and the UTSA require that a trade secret derive value “from not being generally known.” However, unlike the UTSA, which focuses on whether the trade secret would be known to “other persons who can obtain economic value from [the trade secret’s] disclosure or use,” the DTSA/EEA takes a slightly different view and analyzes whether the public can obtain economic value from the disclosure. Because the DTSA/EEA’s definition of a “trade secret” is arguably slightly broader, federal civil actions under these statutes may be more preferable, as they extend protection to a broader range of information. In practice, we do not see this change as significant.
The most controversial aspect of the DTSA is its ex parte civil seizure provision. The DTSA allows a court to 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” based on an ex parte application. This civil seizure procedure can be a powerful tool in protecting trade secrets and in some cases goes beyond what many courts typically order under existing state law. The relief, however, is reserved only to “extraordinary circumstances,” and the court may not grant it unless:
A temporary restraining order issued pursuant to Rule 65(b) of the Federal Rules of Civil Procedure would be inadequate;
An immediate and irreparable injury will occur if such seizure is not ordered;
The harm to the applicant outweighs the harm of the one against whom seizure would be ordered and significantly outweighs the harm to any third parties;
The applicant is likely to show that (i) the information is a trade secret, (ii) the opponent misappropriated the trade secret by improper means or conspired to use improper means to do so and (iii) the opponent possesses the trade secret;
The application describes with reasonable particularity the matter to be seized and, to the extent reasonable under the circumstances, the location of the matter to be seized;
The person or persons acting in concert would destroy, hide or otherwise make the matter inaccessible to the court if on notice; and
The applicant has not publicized the requested seizure.
Notably, state courts also have the right to order civil seizures in appropriate circumstances.
The DTSA also provides protection to whistleblowers and contains a provision offering immunity from liability, criminal and civil, for confidential disclosure of a trade secret to the government for the purposes of reporting or investigating a suspected violation of law or in a court filing if such filing is made under seal. The DTSA requires employers to provide a notice of the availability of the immunity as described above in any contract or agreement with an employee that governs the use of trade secrets. Failing to comply with this notification requirement would prevent an employer from recovering exemplary damages or attorney’s fees in action against an employee to whom notice was not provided. The notification requirement applies to all contracts and agreements entered into or updated after the date of enactment of the DTSA.
Following the adoption of the DTSA, a plaintiff now must decide what forum (federal or state) provides more benefit to it. This determination should be made on a case-by-case basis and may depend on the particular circumstances of each case. While it appears that the newly enacted federal law protects a slightly broader range of information and may provide some powerful mechanisms for protection of trade secrets (e.g. ex parte civil seizures), choosing federal court should not be an automatic choice for the plaintiff. State courts may still to be a more preferable venue for many plaintiffs, as they typically provide more lenient rules for obtaining ex parte relief and a temporary restraining order. Federal courts are often backlogged and may not hear a temporary restraining request immediately. By the time a temporary restraining order is issued, the critical information may be disclosed or forever gone. Thus, an expedited hearing in state court may outweigh the benefits of the federal court option provided by the DTSA.