Defend Trade Secrets Act Passes House, Moves to President for Signature

McDonnell Boehnen Hulbert & Berghoff LLP

One week after the House Judiciary Committee unanimously reported the Defend Trade Secrets Act of 2016 to the House floor, the full House approved the bill, 410-2.  The two no votes were from tea party Republicans, Rep. Justin Amash (R-MI) and Rep. Thomas Massey (R-KY).  Oddly, Rep. Massey is himself an inventor and former technology business owner who holds numerous patents and has two engineering degrees.  Regardless, the bill now moves to the President for his signature, which the White House has already indicated the President will provide.  As a result, there will soon be -- for the first time -- a Federal private right of action for trade secret misappropriation.

The provisions of the Defend Trade Secrets Act were written against the backdrop of the Uniform Trade Secrets Act, which governs trade secret law in most of the states.  Despite its name, the Uniform Trade Secrets Act has been enacted in various forms in the states, with different definitions of trade secrets and burdens of proof on showing whether information has been misappropriated.  In addition, state law has been found onerous to enforce when the misappropriating party is out of the state or out of the country, especially when the misappropriating party is likely to flee or destroy evidence.

The Defend Trade Secrets Act adds three critical new elements.  First, a private right of action for trade secret misappropriation that can be brought in the Federal courts.  Second, an ex parte seizure provision that allows a trade secret owner to ensure trade secrets are not further disseminated and evidence is not destroyed.  Third, whistleblower protection provisions that prevent retribution against whistleblowers who reveal trade secrets to the government or in litigation claims, as long as the revelation is done under seal.  All three elements are intended to address concerns with the Uniform Trade Secrets Act.

First, the new Federal claim for trade secret misappropriation brings with it a single definition of trade secrets, a definition of "improper means" of obtaining trade secrets, and the certainty and ease of the Federal Rules of Civil Procedure.  The definition of trade secrets amends what has previously been used in Federal criminal cases, applying to information (1) for which an owner has taken reasonable measures to maintain secrecy and (2) which derives independent economic value from not being known and not being readily ascertainable through proper means by another person who can obtain economic value from the disclosure or use of the information.  The definition of "improper means" expressly excludes reverse engineering and independent derivation, which are not expressly excluded from the definition in all states.  And the Federal Rules of Civil Procedure provide a clear, simple path for obtaining evidence from other states.

Second, an unprecedented provision allows for the ex parte seizure of trade secrets from an accused misappropriator in extraordinary circumstances.  "Extraordinary circumstances" is not intended to be an independent hurdle, but establish that there must be some exigency (such as a fleeing person or threat of destruction of evidence) to invoke the ex parte seizure provision rather than traditional equitable procedures.  The bill has extensive rules, both procedural and substantive, for when the ex parte seizure provision can be invoked and how it should be applied.

Third, the bill frees a whistleblower from any potential criminal or civil liability under any trade secret law, Federal or state, for disclosing a trade secret confidentially.  The protections extend to both disclosure to government officials for the purpose of investigating a potential violation of the law and filing of a complaint under seal.  Furthermore, the bill requires employers to inform all new employees and contractors of the whistleblower protections.

In summary, we will soon see access to the Federal courts for claims of trade secret misappropriation on a par with other forms of intellectual property.  Thanks to Congress's bipartisan support of the Defend Trade Secrets Act, companies will have an additional weapon at their disposal to protect their trade secrets, and a much stronger way to prevent dissemination after they are first misappropriated.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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