U.S. Congress Creates Federal Cause of Action for Trade Secret Misappropriation

by Knobbe Martens
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For the first time in this nation’s history, the U.S. will have a federal trade secrets law that allows private citizens to enforce their trade secrets and sue for damages.  On Wednesday, April 27, 2016, the U.S. House of Representatives passed the Hatch-Coons Defend Trade Secrets Act of 2016 (“DTSA”).  The Senate approved the DTSA in a unanimous 87-0 vote earlier in the month.  The bill, which modifies the Economic Espionage Act by creating a private civil right of action for trade secret misappropriation, now goes to the White House for signature.  The President has expressed strong support for the legislation and is expected to sign the bill into law in the coming weeks.  

The DTSA will open up the federal courts to trade secrets owners and help harmonize trade secrets law across the nation.  No longer will trade secrets litigants have to rely on state trade secrets laws for protection.  Federal district courts will have original jurisdiction to hear DTSA cases, but the law will not preempt any other state or federal laws.  With the expansion of trade secrets protection, businesses need to evaluate whether this type of intellectual property protection is well suited for their innovations and business information.  Certain innovations and business information may not be readily ascertainable by competitors and, now that there will be a federal trade secret misappropriation law, businesses may find trade secrets law a more attractive option for enforcing their intellectual property rights in such innovations and information. Here are some highlights of the new law:

Civil Seizure Provision

The DTSA sets up a procedure whereby a court can, upon request from the plaintiff and in extraordinary circumstances, seize a defendant’s property without notice.  This extraordinary measure is available to prevent key evidence from being destroyed, moved, or hidden from the court.  Federal law enforcement officers will carry out the seizure order and the court will maintain possession of the seized materials until a hearing can be held.  The DTSA seizure scheme includes protections for defendants, including restricting access to the seized materials, requiring a hearing within 7 days of the seizure order, and allowing recovery of damages for a wrongful or excessive seizure.  The seizure provision of the DTSA is a controversial and powerful tool that is not available under the Uniform Trade Secrets Act, which has been adopted in many states.

Remedies 

Upon finding liability, a court may issue an injunction, on reasonable terms, to prevent any actual or threatened trade secret misappropriation.  However, the injunction cannot prevent a person from taking new employment and cannot otherwise conflict with applicable state laws prohibiting restraints on trade.  The court may award damages for the actual loss caused by trade secret misappropriation and any unjust enrichment that is not already addressed by the actual loss.  Damages can also be measured by a reasonable royalty in lieu of actual loss. In the case of a willful or malicious trade secret misappropriation, the court may also award exemplary damages in an amount not more than two times the amount of compensatory damages.  

Conclusion

Trade secrets take many forms and can include financial, business, economic, scientific, or engineering information, such as customer lists, business plans, compilations, formulas, designs, source code, prototypes, methods, processes, and procedures.  As storage devices have become smaller and the transmission of information faster and more robust, companies are more vulnerable than ever to trade secret theft from employees, third party collaborators, and external espionage activity.  The new federal trade secrets law will give businesses additional avenues to protect their innovations and valuable secret information.

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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