SUMMARY OF THE DEFEND TRADE SECRETS ACT OF 2016
by Robert Bader and Adrianna Rubino
On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (“DTSA” or the “Act”). The DTSA amends the existing Economic Espionage Act (“EEA”) and applies to any trade secret misappropriation that occurs on or after May 11, 2016. The DTSA does not preempt other state laws that protect trade secrets.
- Defines “misappropriation” and “improper means,” while leaving the definition of “trade secret” largely untouched from the EEA.
- “Trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information, including 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 if: (1) the owner has taken reasonable measures to keep such information secret; and (2) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.
- “Misappropriation” means the acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or the disclosure or use of a trade secret of another without express or implied consent by a person who: (1) used improper means to acquire knowledge of the trade secret; or (2) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was (i) derived from or through a person who had used improper means to acquire the trade secret, (ii) acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret, or (iii) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or (3) before a material change of the position of the person, knew or had reason to know that the trade secret was a trade secret and knowledge of the trade secret had been acquired by accident or mistake.
- “Improper means” includes theft, bribery, misrepresentation, breach/inducement of a breach of duty to maintain secrecy, or espionage, but does not include reverse engineering, independent derivation, or other lawful means of acquisition.
- Creates the first federal civil remedy for trade secret misappropriation.
- Provides a mechanism for the ex parte seizure of property from the party accused of misappropriation, but only in extraordinary circumstances.
- Provides for injunctive relief, compensatory damages, exemplary damages, and, where applicable, reasonable attorneys’ fees to the prevailing party.
- Provides certain protections for whistleblowers.
- Imposes an affirmative requirement on employers to notify their employees, which the DTSA defines as including contractors and consultants, of the Act’s whistleblower immunity provision.
Federal Civil Remedy
The DTSA creates a federal civil remedy action in federal court for trade secret misappropriation. Accordingly, a party who is the owner of a trade secret may now file a misappropriation claim in federal court. The statute of limitations for claims brought under the DTSA is three years from the date the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. A continuing misappropriation constitutes a single claim of misappropriation. The claim may be brought if the trade secret that is misappropriated relates to a product or service used in, or intended for use in, interstate or foreign commerce.
The DTSA establishes an ex parte procedure that can be used to seize property from an accused party to prevent the propagation or dissemination of a trade secret. The requesting party must submit an affidavit or verified complaint demonstrating that it clearly appears from specific facts that:
- A preliminary injunction, temporary restraining order, or other form of equitable relief would be inadequate because the accused party would evade, avoid, or not comply;
- An immediate and irreparable injury will occur if seizure is not ordered;
- The harm to the requesting party in denying the seizure outweighs the harm to the legitimate interests of the accused party of granting the application and substantially outweighs the harm to any third parties who may be harmed by the seizure;
- The requesting party is likely to succeed in showing that the information is a trade secret and the accused party misappropriated the trade secret by improper means or conspired to use improper means to misappropriate the trade secret;
- The accused party has actual possession of the trade secret and any property to be seized;
- The requesting party’s application describes with reasonable particularity the property to be seized and, to the extent reasonable under the circumstances, identifies the location where the property is to be seized;
- The accused party, or others acting in concert, would destroy, move, hide, or make such property inaccessible to the court if the requesting party proceeded on notice to the accused party; and
- The requesting party has not publicized the requested seizure.
The ex parte seizure procedure can only be used in extraordinary circumstances, such as when an accused party is seeking to flee the country or planning to immediately disclose a trade secret to a third party. While the procedure may not be used against a third party who unknowingly acquires a stolen trade secret, it can be used to seize a trade secret stolen by an accused party and handed off to an accomplice.
If an accused party is subject to a wrongful or excessive seizure, they may bring a cause of action against the requesting party for damages, including punitive damages, and reasonable attorneys’ fees.
Various remedies are available for trade secret misappropriation under the DTSA:
- Injunctive relief for actual and threatened misappropriation, with two limitations: (1) the injunctive relief may not prevent a person from entering into an employment relationship; and (2) the injunctive relief may not conflict with any applicable state law prohibiting restraints on the practice of lawful profession, trade, or business. In addition, the evidence of misappropriation supporting injunctive relief cannot merely be based on information the accused party knows. Where an injunction would be inequitable, in exceptional circumstances, a reasonable royalty may be imposed for future use of the trade secret that may not last longer than the period of time for which use of the trade secret would have been prohibited under an injunction.
- Compensatory damages based on actual loss and unjust enrichment caused by the misappropriation or a reasonable royalty for the trade secret’s use or disclosure.
- Exemplary damages of up to two times the damages award for willful and malicious misappropriation.
- Attorneys’ fees to the prevailing party if there is a willful and malicious misappropriation; if a misappropriation claim is made in bad faith; or if a motion to dissolve an injunction is made or opposed in bad faith.
Whistleblower/Retaliation Claim Protections and Related Notice
The DTSA immunizes a person disclosing a trade secret from criminal or civil liability under any federal or state trade secret law in two circumstances. First, if the disclosure is made in confidence, solely for the purpose of reporting or investigating a suspected violation of law, to a federal, state, or local government official (either directly or indirectly), or an attorney. Second, if the disclosure is made in a complaint or other document filed under seal in a lawsuit or other proceeding. In addition, the Act provides that a person who files a lawsuit for retaliation against an employer for reporting a suspected violation of law may disclose a trade secret to their attorney and may use trade secret information in their court proceeding if that person files any document containing the trade secret under seal and if they only disclose the trade secret pursuant to a court order.
Correspondingly, the DTSA imposes an affirmative duty on employers to notify their employees, contractors, and consultants of the Act’s whistleblower immunity provision in any contract or agreement with an employee that governs the use of a trade secret or other confidential information. This immunity notice requirement applies to any such contracts entered into or updated after May 11, 2016. An employer may comply with the immunity notice requirement by adding the notice language directly into any covered contracts or by providing a cross-reference in any covered contracts to a policy stating the employer’s reporting policy for suspected violations of law that is provided to the employee. The DTSA expressly provides that an employer who fails to comply with the Act’s immunity notice requirement may not recover exemplary damages or attorneys’ fees in a later action against the employee for trade secret misappropriation under the Act.
III. KEY TAKEAWAYS
An owner of a trade secret misappropriated on or after May 11, 2016, may now file a misappropriation claim in federal court. Because the DTSA does not preempt other state laws that protect trade secrets, a party deciding to bring a claim under the DTSA may still simultaneously assert related state law misappropriation causes of action against a defendant.
The potential mechanisms and remedies provided under the DTSA to curb and prevent trade secret misappropriation are various and include civil seizure, injunction or other equitable relief, royalties, and compensatory and exemplary damages.
To take full advantage of the DTSA’s remedies, however, employers must act immediately to ensure that they are in compliance with the Act’s immunity notice requirement.
IV. ACTION ITEMS FOR EMPLOYERS
- Add the required immunity notice to any contracts or agreements with employees, contractors, and consultants governing the use of a trade secret or other confidential information entered into or updated after May 11, 2016.
- Review any forum selection clauses or arbitration agreements that may be included in the employer’s standard contracts and policies to assess whether any of these currently preclude the employer’s ability to bring an action under the DTSA in federal court and, if so, whether any of these should be revised to afford the employer the ability to do so.
- Review the types of information that an employer seeks to be protected as trade secrets and the measures the employer has in place to keep that information secret. (To garner protection as a “trade secret” under the DTSA, an owner must have taken reasonable measures to keep the information sought to be protected secret.)