The Impact Of The Federal Trade Secrets Act

At first glance, the DTSA might not be considered that big of a deal; however, the intent of the law, and its long term effects, should have a significant impact on the arsenal of U.S.-based companies to combat trade secret theft.

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On May 11, President Obama signed into law the Defend Trade Secrets Act (DTSA). At first glance, the DTSA might not be considered that big of a deal; however, the intent of the law, and its long term effects, should have a significant impact on the arsenal of U.S.-based companies to combat trade secret theft.

In the 2012 November/December issue of Industrial Distribution , I detailed why and how distributors can protect their trade secrets. In the 2014 September/October issue, I further detailed the issues distributors should consider if seeking to protect true trade secrets. Each article was based on the Uniform Trade Secrets Act (UTSA), a uniform statutory framework for trade secrets claims first published in 1979 and amended in 1985, adopted by almost every state, and until the DTSA, governed how trade secret misappropriation was handled in each state — even if variances existed in the form of the UTSA adopted by any particular state or case law rejected or accepted different aspects of trade secret misappropriation, such as the inevitable disclosure doctrine (IID). The IID is a common law doctrine, upheld by some states, to enjoin a former employee from joining a competitor if in a new position they would inevitably be required to disclose trade secrets.

The DTSA is not a stand-alone law; rather, it is an amendment to and thus builds upon the Economic Espionage Act (EEA), a preexisting 20-year statute governing criminal trade secret theft. While the EEA has teeth, creating a federal civil remedy has been viewed as an important step in the effective prevention of trade secret misappropriation — as trade secrets are a big deal. The congressional statistics and reported information supporting enactment of the DTSA suggests that U.S. businesses lose a half-billion dollars each year to trade secret theft, and it is certainly no surprise that foreign and/or domestic threats exist everywhere as to the security of computer stored information, including trade secrets. This was one reason to author my prior two articles on the how’s and why’s of trade secret protection.

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The primary benefit of the DTSA is, of course, that it provides access to federal courts — a forum viewed by many as better equipped to handle cross-border (whether state-to-state and/or international) disputes, as well as complex issues associated with trade secret misappropriation. Prior to the DTSA, advancing trade secret misappropriation in federal court was not so easy. The DTSA creates a federal cause of action for any business engaged in interstate commerce (a relatively easy burden to meet under the Commerce Clause of the Constitution) and who owns a trade secret that has been misappropriated. In theory, much like patents, copyrights and trademarks, as well as trade dress and/or service marks, the federal judiciary is expected to develop a uniform body of law that will override existing state law interpretations of the UTSA.

One might ask why even bother with a federal trade secrets law? The DTSA does not supplant state law trade secrets claims — but adds a significant arrow in the quiver of companies injured by trade secret misappropriation. A particularly unusual aspect of the DTSA is the ability of a party to seek an ex-parte (one side only) court order seeking the seizure of misappropriated trade secrets and the mechanism by which they have been purportedly misappropriated. The seizure aspect of the DTSA is complicated, but under the right circumstances could be uniquely helpful to a business that can show its trade secrets have been compromised, particularly if headed overseas and/or before the value is lost through public disclosure. While Congress intended the seizure remedy “to proactively contain a theft before it progresses and the trade secret is lost,” and to only be available “under extraordinary circumstances,” anyone with an interest in the seized materials may seek relief from the court, including to encrypt seized materials.

In many respects, the DTSA is similar to the UTSA, as it provides for compensatory damages, a 3-year limitations period and awards of double (i.e., exemplary) damages and attorney’s fees for willful or malicious misappropriation. The DTSA, however, broadens the definition of a trade secret, arguably to the point of not only of what might be stored in human memory but also to the extent that it relates to product or service in the development stage as long as the trade secret is related to a product used in or intended for use in interstate commerce.

By its amendments to the EEA, the DTSA definition of trade secret misappropriation is also as broad, if not broader, than under the UTSA. Misappropriation includes theft, bribery, breach or inducement of breach of a duty of secrecy, espionage and misrepresentation, although it still exempts reverse engineering, independent derivation or other lawful means of acquisition of a trade secret. Further, the DTSA also provides for injunctive relief to prevent “threatened misappropriation,” which is akin to inevitable disclosure, but the law makes clear that an injunction may not “prevent a person from entering into an employment relationship” and shall be based on threatened misappropriation, not just on the information a person knows.

Finally, the DTSA provides immunity from civil and criminal prosecution for employees, as well as contractors and consultants, who blow the whistle in ways relating to or file a suit under seal that relates to a trade secret. Employers must give specific notice as to the immunity sections of the DTSA “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” A failure to do so precludes recovery of exemplary damages and/or attorney’s fees under at least the DTSA. To comply with the notice provisions of the DTSA, employers may either incorporate the immunity sections in the contract or agreement itself or include a cross-reference to any policy the employer maintains containing the DTSA immunity provisions.

Fred Mendelsohn, Fred Mendelsohn, Partner at Burke, Warren, MacKay & Serritella P.C. in ChicagoFred Mendelsohn, Fred Mendelsohn, Partner at Burke, Warren, MacKay & Serritella P.C. in Chicago

Ultimately, the DTSA should prove to be a valuable weapon to combat trade secret misappropriation. While co-existent with state law (and in particular the UTSA), the DTSA provides the powerful ex-parte seizure order remedy, which is not available under state law, expands the ability of trade secret owners to pursue the inevitable disclosure of trade secrets and expands the definition of a trade secret. Employers should, however, ensure that their employment policies and agreements and contracts as to confidential information and trade secret information (including NDAs) are up to date, and state-of-the-art, to best protect themselves should they have to bring a trade secrets claim.

 

For those interested in further discussing the DTSA and trade secret protection, feel free to contact me at fmendelsohn@burkelaw.com and/or at 312-840-7004. 

This article originally appeared in Industrial Distribution's July/August print edition. Click here to view the full digital edition.

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