President Obama Signs Defend Trade Secrets Act into Law

by Ballard Spahr LLP

President Obama today signed into law the Defend Trade Secrets Act (DTSA), which provides for the first time a federal civil private right of action for trade secret misappropriation, placing trade secrets on par with patents, copyrights, and trademarks, which are already protected under federal law.

The new law, passed by both the Senate and the House nearly unanimously, is significant in many respects, and will impact both companies and employees from all economic sectors. While it does not replace the various trade secret laws passed by states, the aim of the DTSA is to provide a uniform set of rules for trade secret protection throughout the United States. These uniform rules allow plaintiffs to more easily enforce and protect their rights across state lines, because the definition of a trade secret, the acts and proof necessary to show misappropriation, and the available remedies are all consistent under this new federal law. The DTSA also provides plaintiffs with a new mechanism for protecting their misappropriated trade secrets. Now, where an injunction is insufficient and "extraordinary circumstances" are otherwise present, a plaintiff may seek a civil seizure of property.

Although it remains to be seen how the courts will interpret and implement this new law, the DTSA provides new benefits to plaintiffs and accused misappropriators going forward:

Uniformity and Federal Jurisdiction. The primary benefit of the DTSA is the uniformity it will eventually provide. Before the DTSA, trade secret plaintiffs were left to enforce their rights under state law. Although most states adopted what was touted as the Uniform Trade Secrets Act (UTSA), the UTSA was not actually "uniform." Rather, states adopted varying versions of the UTSA and/or developed their own jurisprudence under their respective versions of the law. Thus, the definition of a trade secret, the requirements for protecting a trade secret, and the conduct considered to be trade secret misappropriation varied widely among states. Companies whose trade secrets were misappropriated in multiple states had to consider which state provided the best law or remedy to protect their interests. Companies were thus faced with the possibility of inconsistent protections, inconsistent outcomes, and, even where successful, inconsistent remedies.

The DTSA aims to remove that inconsistency, by allowing an injured plaintiff to file a single suit in a federal court in which the defendants are subject to personal jurisdiction. The DTSA definition of a trade secret is broad, and covers almost any kind of information used by a business, so long as the products or services are used or intended for use in "interstate or foreign commerce," the owner has taken "reasonable measures" to keep the information secret and the information derives actual or potential independent economic value from not being known or reasonably ascertainable by the public. Trade secrets can include subject matter that may be deemed unpatentable discoveries of the laws of nature or methods considered too "abstract" to be protected by current U.S. patent law, provided it meets all other trade secret requirements.

It is important to note, though, that the DTSA does not replace the individual state laws—rather, it supplements them and acts as an added layer of protection. Trade secret plaintiffs can still file suit under traditional state trade secret laws, either in state court alone, or in federal court in conjunction with other federal laws, including the DTSA. Trade secret plaintiffs may of course also avail themselves of traditional state laws, including breach of contract, breach of covenants not to compete, and unfair competition, when faced with misappropriation.

Civil Seizure. The DTSA also provides a new remedy for use in "extraordinary circumstances"—ex parte civil seizure of property. Similar to the seizure provisions of the Lanham and Copyright Acts, the DTSA provides this remedy where a trade secret plaintiff can establish, among other things, that it has no other available and adequate remedy, the target has actual possession of the misappropriated trade secret, and the trade secret is in danger of being destroyed or removed if notice is given to the target of the seizure order. Because law enforcement will serve the seizure order, the plaintiff must also describe with reasonable particularity the matter to be seized and the location of the matter to be seized. The DTSA requires that the court both maintain custody of the seized property and protect its confidentiality after the property is seized.

To reduce the likelihood of abuse and/or improper gain, the plaintiff must also establish that it has not publicized the requested seizure before the court will issue an order. The DTSA also provides the target of the seizure order with a hearing within seven days of the seizure and a civil remedy for damages in the case of a wrongful or excessive seizure.

Recovery of Damages. The DTSA's provisions relating to damages are similar to the UTSA's by allowing a prevailing party to recovery its loss due to the misappropriation, plus the unjust enrichment of the defendant from misappropriating the trade secrets. If it is difficult to calculate these losses, the courts can calculate damages by determining what reasonable royalty the defendant would have needed to pay for access to the trade secret.

As under traditional UTSA provisions, the DTSA allows courts to award enhanced double damages and the plaintiff's reasonable attorneys' fees where the misappropriation is willful.

Whistleblower Protection and Notice to Employees. The DTSA provides immunity for whistleblowers who disclose trade secrets to law enforcement officials for the purpose of reporting a suspected violation of law. The DTSA similarly protects a party who discloses a trade secret in a complaint in a lawsuit, so long as the filing is made under seal. The DTSA requires employers to start to provide notice of this immunity in writing in their contracts governing the use of the employer's trade secrets or confidential information. An employer may not collect enhanced damages and attorneys' fees from an employee who did not receive this required notice.

The Inevitable Disclosure Doctrine and Employee Mobility. The DTSA, like its predecessor state laws, authorizes courts to grant both temporary and permanent injunctive relief. The DTSA is clear that an injunction shall not issue, however, simply where "inevitable disclosure" of the trade secret is likely. Under the so-called inevitable disclosure doctrine, trade secret plaintiffs have traditionally been able to enjoin departing employees by showing that the employee's new job will inevitably lead to reliance on the plaintiff's trade secrets, either consciously or unconsciously. Under traditional state laws, courts could issue injunctions prohibiting employees from taking new jobs based solely upon the information the employee knew, regardless of whether trade secrets were actually misappropriated at the time the injunction issued.

The DTSA rejects this approach by expressly requiring evidence of threatened misappropriation before an injunction can issue. Mere knowledge of the former employer's trade secret and the opportunity to use it is not enough. And, to ensure that the federal courts do not extend the protections beyond those provided under state law, the DTSA requires that any court issuing an injunction ensure that the proposed injunction not conflict with applicable state laws prohibiting restraints on an individual's ability to be employed.

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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