February 9, 2017

Federal Trade Secrets Act

At long last, there is a federal civil cause of action for trade secret misappropriation under the Defend Trade Secrets Act (DTSA) enacted in 2016.  The DTSA complements state law remedies, which are not preempted, potentially enhancing the value of trade secret protection for technologies.  The cause of action under DTSA is largely similar to the Uniform Trade Secret Act, some form of which is in force in all the states but New York and Massachusetts, but the DTSA provides new federal remedies, like new powerful ex parte recovery mechanisms for seizing and recovering property to prevent the dissemination of a trade secret.  Provisions in the DTSA protecting whistleblowers. however, may require revision of employment, consulting and other agreements.

The bipartisan Defend Trade Secrets Act of 2016 amends the Economic Espionage Act of 1996 (EEA) in what may be the most significant development in trade secret law in decades.  The DTSA provides a federal private right of action; exemplary damages and attorney fees; early ex parte seizure of the trade secret by the court; and protections consistent with the digital age.  The DTSA applies to alleged trade secret misappropriation that occurred on or after the enactment date, May 11, 2016.  The DTSA encourages communication between prospective whistleblowers and the regulatory agencies.

FEDERAL PRIVATE RIGHT OF ACTION: The DTSA federalizes trade secret misappropriation actions and provides access to the federal courts for those seeking to protect their trade secret “if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” (Note, the scope of trade secrets protectable under DTSA is narrower than under the laws of many states.)  Until now, trade secrets have been the only intellectual property form lacking a private federal cause of action.  Previous attempts to protect trade secrets in state courts had natural limitations resulting in part from the limited scope of the state courts’ power and the differing regulations among the states.  A federal cause of action often provides a desirable alternative to the traditional limitations of state courts.  For example, federal courts are better situated to act swiftly to prevent further dispersion of the trade secret.  Importantly, the DTSA does not preempt state law, preserving the ability of trade secret owners to bring claims in state court as well as in federal court.

DAMAGES: Under the DTSA, a court may grant an injunction “to prevent any actual or threatened misappropriation.”  To protect employee mobility, the courts, contrary to the traditional inevitable discovery doctrine, are precluded from granting injunctions that prevent or place conditions on employment, except in limited instances when conditions are “based on evidence of threatened misappropriation.”  Courts are also precluded from granting injunctions that would “conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.”

Courts may award damages for actual loss and damages for unjust enrichment.  In lieu thereof, courts may, in certain instances, award reasonable royalties.  If the trade secret is “willfully and maliciously misappropriated,” courts may award exemplary damages up to two times the amount of calculated damages.  Lastly, courts may award attorney fees to the prevailing party, if a claim is brought in bad faith or if the trade secret was “willfully and maliciously misappropriated.”

EX PARTE SEIZURE OF THE TRADE SECRET: Providing a potentially powerful new tool for trade secret owners, the DTSA includes a civil seizure provision that allows a court, upon a demonstration of “extraordinary circumstances,” to issue an order bring the trade secret within the court’s custody to prevent further dissemination.  The court must hold a full hearing on the order no later than seven days after the order has issued.

DIGITAL ISSUES: The DTSA considers issues specific to the present technological age.  For example, the DTSA provides that the courts will secure “seized material from physical and electronic access” and will “prohibit the medium from being connected to a network or the Internet without the consent of both parties.”

WHISTLEBLOWER PROVISIONS & NOTIFICATION REQUIREMENTS: The DTSA immunizes those who disclose trade secrets “in confidence to a Federal, State, or local government official … or to an attorney … for the purpose of reporting or investigating a suspected violation of law.” Similarly, the DTSA will immunize those who disclose trade secrets in a document filed under seal in a lawsuit.  To encourage disclosure, the DTSA requires employers to provide notice of the immunity “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.”  Failure to include the language is a forfeiture by the employer of exemplary damages and attorney fees in subsequent suits.

Practice Tips: 

  1. Trade secret owners must now consider the new DTSA remedies and potential advantages of action in federal courts in developing a strategy to confront a trade secret theft.  As always, action may need to be taken quite quickly after learning of the theft to preserve rights and remedies.
  2. It may be appropriate to revisit and, if necessary, revise company’s trade secret procedures and agreements — the DTSA includes a three year statute of limitations, starting from the date of discovery, or alternatively, the date by which, after exercise of reasonable diligence, misappropriation should have been discovered.
  3. It may be appropriate to revise employment, consulting, confidentiality and similar agreements to include the whistleblower immunity provisions.


Citation: Defend Trade Secrets Act of 2016 (“DTSA”); Public Law No. 114-153, May 11, 2016