Good news for U.S. companies looking to protect their valuable trade secrets: a new law creates for the first time a federal civil remedy for trade secret misappropriation.
Now in effect is the Defend Trade Secrets Act (DTSA), which allows trade secret owners to file a private right of action in federal district court for trade secret misappropriation that occurred on or after May 11, the day of the law’s enactment. Such claims must relate to a product or service used in, or intended for use in, interstate or foreign commerce.
First, a word of explanation: The term “misappropriation” means the acquisition, disclosure, or use of another’s trade secret acquired by “improper means,” including through “theft, bribery, misrepresentation, breach, or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.”
Until now, the only other federal law under which trade secret owners could assert a trade secret misappropriation claim was the Economic Espionage Act, which allowed for criminal claims of trade secret theft. To get federal relief, “companies had to lobby federal prosecutors to take on the case and bring criminal charges,” says Peter Riebling, a partner with law firm Katten Muchin Rosenman.
To expect the Department of Justice to bring charges in every trade secret case, however, is unrealistic. “Federal prosecutors really only want to get involved in cases where the trade secret owner can prove that the misappropriation involves espionage by a foreign entity,” Riebling adds.
Most cases involving trade secret misappropriation have been filed in state court under the Uniform Trade Secrets Act (UTSA). Although most states—with the exception of Massachusetts and New York—have adopted some version of UTSA, each interprets the law in its own way, creating a patchwork of different statutes of limitations, remedies, and definitions of what constitutes a “trade secret.”
As a uniform, nationwide set of standards governing trade secret law, the DTSA brings harmonization to civil trade secret litigation and, thus, greater predictability to trade secret owners. “Instead of having a patchwork of state statutes that define what a trade secret is, you now have a uniform federal Act that defines what a trade secret is, providing some certainty and reliability for companies to identify and protect their trade secrets,” says James McNairy, a partner at law firm Seyfarth Shaw.
The DTSA, however, does not preempt state trade secret law, giving in-house counsel the option to file a claim in federal or state court, under federal or state law, or both. “That decision is going to be highly fact specific,” says McNairy. Over time, federal courts across the country are likely to develop a relatively uniform body of law applying the DTSA, which will be useful in guiding in-house counsel as to which option will best suit the facts of their case, he says.
“Instead of having a patchwork of state statutes that define what a trade secret is, you now have a uniform federal Act that defines what a trade secret is, providing some certainty and reliability for companies to identify and protect their trade secrets.”
James McNairy, Partner, Seyfarth Shaw
One controversial provision under the federal statute, for example, allows for an ex parte seizure order, which means a trade secret owner can request—without the involvement of, or even notification to, the other party—that federal law enforcement officials seize any property “necessary to prevent the propagation or dissemination” of the trade secret at issue.
Such an option is not normally available in state court, where you typically have to give notice to the other side. “Trade secret owners can get an early advantage in litigation if you can seize the trade secret at issue before notifying the other side,” Riebling says.
A court may order such a seizure only in “extraordinary circumstances,” including where:
The trade secret owner can establish that immediate and irreparable harm would result absent the seizure;
The harm to the trade secret owner outweighs the legitimate interests of the seizure’s target and substantially outweighs any potential harm to third parties;
The target of the seizure has “actual possession” of the trade secret and the property to be seized;
The target “would destroy, move, hide, or otherwise make such matter inaccessible to the court” if notified of the lawsuit; and
The trade secret owner can establish that it’s likely to succeed in showing that the trade secret was misappropriated.
Furthermore, the application for the seizure must describe with “reasonable certainty” the material to be seized and its location, and the requested seizure must not have been publicized.
Individuals who suffer harm as a result of wrongful or excessive seizures may file claims for damages, including lost profits, cost of materials, loss of goodwill, punitive damages in instances where the seizure was sought in bad faith, and reasonable attorneys’ fees. Thus, companies should take care to seek seizure orders judiciously.
Compliance officers and in-house counsel should also keep in mind, too, that the DHTSA establishes a broader definition of “trade secret” than the UTSA to mean “all forms and types of financial, business, scientific, technical, economic, or engineering information.” Such information includes “patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes—whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.”
The caveat, however, is that the trade secret owners must take “reasonable measures” to keep such information secret. “You can have trade secret information that is extraordinarily valuable and has nearly unlimited economic potential, but if that information is made public due to shoddy or inadequate practices, then that information will not qualify as a trade secret, and it’s a huge opportunity lost,” McNairy says.
TRADE SECRET IMMUNITY
Below is an explanation of immunity and use of trade secret information in anti-retaliation lawsuits afforded under the Defend Trade Secrets Act.
Immunity. An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that (A) is made in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.
Use of trade secret information in anti-retaliation lawsuits. An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual (A) files any document containing the trade secret under seal; and (B) does not disclose the trade secret, except pursuant to court order.
Source: Defend Trade Secrets Act
The DTSA also has increased criminal penalties, previously capped at $5 million, to the greater of $5 million or three times the value of the stolen trade secrets. Additionally, the DTSA amends the Racketeer Influenced and Corrupt Organizations Act by adding “economic espionage” and “theft of trade secrets” to the list of RICO’s “racketeering activities.”
The statute of limitations is another factor to consider when deciding where to file a claim. The DTSA, for example, requires that a civil action be brought within three years of the date that the misappropriation is discovered, whereas the statute of limitations in some states is five years.
Whistleblower protections & notice requirements
In addition to protecting trade secret owners, the DTSA provides whistleblower protections by giving employees who turn over protected trade secrets to government officials for the purpose of reporting suspected violations of the law immunity from any criminal or civil liability. Additionally, employees alleging they were terminated for reporting suspected law violations may similarly disclose protected trade secrets to an attorney and in a court filing, provided the filing is made under seal.
“The central purpose of the DTSA is to protect trade secrets; yet, ironically, the statute contains a whistleblower provision that jeopardizes the confidentiality of trade secrets by giving whistleblowers immunity for handing trade secrets over to the government,” says Steven Pearlman, a partner with law firm Proskauer.
This whistleblower provision could lead to the disclosure of trade secrets through Freedom of Information Act requests, Pearlman adds. Even though FOIA exempts trade secrets, “courts have held that that protection is not absolute, and FOIA officers may disagree with companies as to whether any particular piece of information constitutes a trade secret,” he says. “Employers, thus, need to heighten restrictions on access to trade secrets.”
The DTSA establishes new compliance obligations by requiring that companies provide notice of these whistleblower provisions in any contract or agreement with an employee—broadly defined to include contractors and consultants—that governs the use of trade secret or other confidential information. “All non-disclosure agreements with employees, contractors, and consultants that are entered into or updated following enactment of the DTSA should contain disclosures of the DTSA’s whistleblower provisions,” McNairy says.
The DTSA states that companies are also considered to be in compliance with the notice requirement if they provide “a cross-reference to a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law.”
If an employer fails to provide notice of the immunity provision in its contracts or agreements, it will not be awarded “exemplary damages” (up to double damages) and attorney fees in a trade secret misappropriation action against an employee.
Although the punishment may not seem severe, be warned: Federal regulators could view the lack of a notice as a company’s attempt to effectively chill employee reporting.
Complying with the notice obligations further protects the company against a “disgruntled employee who might look for ways to bring an action that’s not warranted,” says Eric Hagen, a partner with law firm McDermott Will & Emery. “That’s all the more reason to include the notice in an employment agreement or in a company policy document,” he says.
Companies should consider immediately reviewing and revising, if necessary, all relevant documents to include notice of the whistleblower protections. These include contracts, consulting agreements, employment agreements, non-disclosure agreements, non-compete agreements, offer letters, severance agreements, and confidentiality agreements referencing the use of trade secrets.
More guidance is on the way. The DTSA requires the attorney general within the next year and biannually thereafter to submit to Congress a report that includes recommendations to assist U.S. companies “to reduce the risk of loss of their trade secrets when taken outside of the United States” and to provide a mechanism for U.S. companies “to confidentially or anonymously report the theft of trade secrets occurring outside of the United States.”