Implications of the Defend Trade Secrets Act of 2016

On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016, which among other things creates a federal civil right of action for trade secret misappropriation and provides immunity, under certain specific conditions, for whistleblowers who report an employer's violation of existing law. There are several key takeaways from the new Act:

1. The DTSA specifically reaches misappropriation that occurs in connection with "interstate or foreign commerce."  A party seeking redress for trade secret misappropriation in federal court under the DTSA that implicates actors in multiple states or foreign countries will enjoy the advantages provided by being in federal court, such as the availability of nationwide service of process and familiarity of federal judges with procedural rules for serving summonses, subpoenas and document requests in foreign countries. Misappropriation could implicate actors in multiple states for example where an employee steals a formula which he shares with competitors located in different states, or where a competitor hacks into its rival's computer system across state lines and forwards it via email to a third party in a third state.
2. The DTSA creates an ex parte seizure procedure in which a federal district court can seize a party's property, without a hearing, to prevent destruction or dissemination of the trade secret. Although the DTSA clearly reserves the seizure mechanism for "extraordinary circumstances," it remains to be seen what circumstances would qualify as "extraordinary" to invoke this drastic remedy.
3. The DTSA provides immunity to an "individual" whistleblower who, in the course of disclosing an employer's illegal actions, or in an anti-retaliation action, reveals trade secrets belonging to the employer. The DTSA requires employers to provide notice of the immunity set forth in the DTSA to "employees" (defined to include individuals "performing work as a contractor or consultant"). It is important to note that the DTSA became effective upon its signing on May 11, 2016, requiring "all contracts and agreements that are entered into or updated after the date of enactment…" to comply with the notice requirement. Such notice can be made by providing a cross-reference to the employer's policy document that sets forth the "employer's reporting policy for a suspected violation of law." As a rule of thumb, if an employer has any trade secrets at all, it should develop a reporting policy and provide the required notice. If the employer does not comply with the notice requirement, it may not be awarded exemplary damages or attorneys' fees in an action against the employee for trade secret misappropriation.

Because most state trade secret acts are modeled after the Uniform Trade Secrets Act ("UTSA"), a substantial body of law already exists at the state court level interpreting the provisions of the UTSA, which find numerous parallels in the DTSA. It is expected that federal courts interpreting the DTSA will rely on this body of law already developed at the state level. However, different states interpret key provisions of the UTSA differently, and therefore a significant possibility exists that federal district court opinions interpreting the DTSA will mirror the lack of uniformity seen in state court opinions. A case seeking redress under both a state trade secret statute and also under the DTSA may encounter conflicting interpretations of the respective statutes. This conflict may be an advantage to plaintiffs, who need win under only one statute, not both.

It is hoped that the interstate and foreign reach of the DTSA will afford efficiencies to proceeding on trade secret claims in federal court, that use of the seizure mechanism will be rare and that the immunity statute will provide protection to whistleblowers while also protecting the trade secrets of employers. It remains to be seen whether the DTSA will hasten or inhibit the creation of a uniform body of trade secret law.

The DTSA applies to any act of misappropriation within the scope of the Act occurring on or after May 11, 2016. It is codified at 18 U.S.C. §1836(b) and amends the Economic Espionage Act, 18 U.S.C §1831 et seq.