2016 Defend Trade Secrets Act creates federal cause of action for theft of trade secrets

(and don’t forget to update your handbooks or employment agreements)

Publication April 2016

Congress passes Defend Trade Secrets Act of 2016

Yesterday, Congress broke new ground in federal law, passing the Defend Trade Secrets Act of 2016. Once it receives the expected signature from the President, the DTSA will create a federal private cause of action for misappropriation of trade secrets. Previously, federal protection of trade secrets was confined to seldom-used criminal provisions, and civil injunctive relief if requested by the Attorney General. See 18 U.S.C. §§ 1832, 1836.

2016 Defend Trade Secrets Act’s new seizure provision

Although the new law has much in common with the well-known Uniform Trade Secrets Act and similar state laws, there are some important differences, the most significant being the availability of ex parte seizure orders. In other words, federal marshals can be sent to seize trade secrets from the alleged misappropriator, with no prior notice to the defendant.

The legal standard is similar to that required for injunctive relief, but also requires showing that ordinary injunctive relief would be ineffective, and that, if given notice, the defendant would destroy, move, hide, or otherwise make the trade secret materials unavailable. A seizure order is also limited to “exceptional circumstances,” but has only minimal evidentiary requirements to issue: an affidavit or verified complaint will suffice.

The seizure provision should not be invoked lightly: Lanham Act damages are available if the defendant subsequently shows the seizure was “wrongful or excessive.” Moreover, if any third-parties are harmed, their damages are not limited to the bond or other security posted by the plaintiff.

Similarities to the Uniform Trade Secrets Act

Outside the seizure provisions, the basic framework of the Act is similar to the UTSA. The heart of the DTSA is a cause of action for “misappropriation” of trade secrets. The definition for “misappropriation” tracks that of UTSA, and is quite complicated, with numerous sub-clauses intended to cover the various factual scenarios by which a theft of trade secrets can occur. For example, the definition is nuanced enough to cover cases of industrial espionage or hacking, as well as the common scenario of an employee taking secrets to a competitor.

Damages and attorney’s fees

Available damages include actual loss, unjust enrichment, or alternatively a reasonable royalty. Attorney’s fees and exemplary damages (equal to double actual damages) are available on a showing the misappropriation was willful and malicious. Defendants can also recover attorney’s fees, if the misappropriation claim was made in bad faith (which can be shown by circumstantial evidence). Attorney’s fees are also available for moving to terminate an injunction under the act, or opposing such termination, in bad faith.

Injunctive relief

Again in common with UTSA (and many state laws), the DTSA provides for injunctive relief. However, the DTSA has special protections for employees, which are not present in many state trade-secret laws.
Specifically, injunctive relief cannot “prevent a person from entering into an employment relationship,” and “conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows.” DTSA § 2(a). Because of this, plaintiffs in many jurisdictions may still opt to pursue state-law injunctive relief, which often allows complete or partial restrictions on employment.

The DTSA also broadly provides for reasonable royalties in lieu of an injunction, when an injunction would be “inequitable.” DTSA § 2(a). This is something of a departure from UTSA, which only allows such royalties in “exceptional circumstances.” UTSA § 2(b). As such, we can expect that litigants on both sides will argue for reasonable royalties in lieu of an injunction more often than has been the case under state law.

Statute of limitations

Although the original draft of the Act provided for a five-year statute of limitations, the final version has a three-year limitations period, identical to that of UTSA and many states.

Relation to state law

Significantly, Congress took pains in drafting the Act to clearly state that the DTSA does not preempt existing state law. See DTSA § 2(f); see also18 U.S.C. § 1838. This means litigants will often be able to proceed with both federal and state law claims.

Imagine a typical fact-pattern, in which a key employee has absconded to a competitor with a thumbdrive of trade secrets. The trade secret owner could seek an ex parte seizure order of the thumb drive under the DTSA. This could be followed with a state-law request for injunctive relief barring the employee from working for the competitor, with an alternative pleading for DTSA reasonable royalties should the court find that an injunction would be “inequitable.”
Also, because the Act confers on federal courts “original” (but not “exclusive”) jurisdiction over DTSA claims, there will be concurrent jurisdiction in competent state courts.

Whistleblower implications

Lastly, in addition to the limitations on injunctive relief against employees, the DTSA has additional implications in the employment arena. Whistleblowers are protected from DTSA claims when they disclose trade secrets to the government or an attorney to report wrongdoing, or include them in sealed filings in anti-retaliation lawsuits. DTSA § 7.

Employers will need to update any policies, handbooks, or employment agreements that govern employees’ access to or use of trade secrets or “other confidential information.” DTSA § 7. Specifically, any such documents entered into or updated after the Act goes into effect must provide notice of the immunities for whistleblowing and anti-retaliation suits. Failure to do so precludes any recovery of exemplary damages or attorney’s fees from employees.

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