Tag: Defend Trade Secrets Act

The New Federalization of Trade Secret Law – What You Should Know About the DTSA

trade secretsOn May 11, 2016, the Defend Trade Secrets Act of 2016 (DTSA) officially became law, creating for the first time a federal private civil cause of action for misappropriation of trade secrets. The DTSA is actually an amendment to the Economic Espionage Act, which was passed 20 years ago and provides for criminal prosecution of trade secret theft.

Prior to the DTSA, civil actions for trade secret misappropriation were governed solely by state law. Over the years, 48 out of 50 states have adopted some form of the Uniform Trade Secrets Act (UTSA).  The two exceptions are Massachusetts, which adopted its own trade secret statute distinct from the UTSA, and New York, which has relied on common law alone.

Many viewed this state-by-state approach as inadequate. The application of state-specific nuances in the law led to unpredictability, and the lack of federal law governing conduct that increasingly involved interstate or foreign activities caused jurisdictional and choice-of-law issues, including concerns that US companies had insufficient recourse against trade secret thieves operating overseas. In such cases, access to federal courts was not automatic. Such access required either diversity of citizenship or supplemental jurisdiction based on another asserted claim arising under federal law.

In view of these concerns, Congress has proposed various federal trade secrets bills over the past several years. Finally, with broad bipartisan support, the DTSA passed in spring 2016.

Importantly, the DTSA does not preempt state trade secret misappropriation laws. Parties may still pursue claims based on state law. But in cases with a nexus to interstate commerce, plaintiffs also will have access to the new federal statutory regime. Some parties have argued that having access to both state and federal causes of action may actually create complexity rather than engendering a more harmonized body of law, but that remains to be seen. Based on the substantial overlap in the DTSA’s and the UTSA’s definitions of “trade secret” and “misappropriation,” one might expect that DTSA and UTSA claims in the same case will not differ much from a substantive perspective. Likewise, DTSA remedies are similar to UTSA remedies: injunctive relief, compensatory damages (in the form of actual damages, unjust enrichment or reasonable royalties), enhanced damages for willful and malicious misappropriation (capped at two times compensatory damages) and attorneys’ fees (in cases involving bad faith or willful and malicious conduct). Nonetheless, there are differences between the DTSA and the UTSA, and having a new federal cause of action available should compel plaintiffs to weigh carefully which claim or claims to pursue, and where to file such claim.

A key feature of the DTSA that has received significant attention is the ex parte seizure provision, 18 USC § 1836(b)(2), which is a new remedy not available under state versions of the UTSA, although UTSA plaintiffs may have had similar vehicles of relief, such as a temporary restraining order. Under the DTSA, per a plaintiff’s expedited, unilateral request, courts may order law enforcement to seize property “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” This procedure is intended only for emergency situations to prevent or mitigate immediate and irreparable injury when less severe procedures would be ineffective. Indeed, this provision requires “extraordinary circumstances” and, if abused, can result in damages against the seizing party. To that end, the movant must post a bond sufficient to cover such damages if the seizure was unwarranted.

In addition, satisfying the threshold requirements for an ex parte seizure is not easy. A plaintiff must prove that the defendant actually possesses the misappropriated information and must identify “with reasonable particularity” the property to be seized and its location. Once seized, that property remains safeguarded by the court pending an expedited hearing on the propriety of the seizure.

Another key aspect of the DTSA remedies provision is the inclusion of employee mobility protections similar to protections in states that reject the “inevitable disclosure” doctrine. Section 1836(b)(3)(A)(i) restricts injunctive relief that would “prevent a person from entering into an employment relationship,” requiring that such relief be “based on evidence of threatened misappropriation and not merely on the information the person knows.” Notably, the law explicitly seeks to avoid conflicts with existing state employment laws—an area where disputes are expected to arise given that the DTSA is likely to be asserted against former employees.

Yet another employee protection of the DTSA is the immunity provided to whistleblowers who might disclose confidential information when reporting unlawful activities to government officials or as part of an anti-retaliation lawsuit. Under § 1833(b), employers are required to provide notice to employees of this immunity protection in any agreement governing the use of trade secret or other confidential information. As a result, it is important for companies to review and, if necessary, modify their standard employment and non-disclosure agreements to bring them into compliance with the DTSA.

The DTSA is silent on whether the plaintiff must first identify its asserted trade secrets with reasonable particularity before conducting any discovery. This is a fundamental statutory protection for defendants in certain states, such as California. Federal courts have grappled with whether this provision (Cal. Civ. P. Code § 2019.210) is applicable in federal cases under the Eriedoctrine.

The DTSA recognizes the great economic harm inflicted on US businesses by theft of trade secrets, particularly by overseas entities. The law requires the US Attorney General and other agencies to report to Congress (within the next year and biannually thereafter) on the breadth and extent of this threat, as well as on any hurdles preventing trade secret owners from avoiding misappropriation by foreign actors and recommendations for further reducing the threat. At a time when many innovators are carefully evaluating whether to guard their intellectual property as trade secrets or patents (particularly in view of legal developments that have invalidated many patents), this new law signals that trade secret protection in the United States is becoming more muscular.

ARTICLE BY Eric W. Hagen of McDermott Will & Emery
© 2016 McDermott Will & Emery

Defend Trade Secrets Act: Got Trade Secrets? Protect Them With Federally-Issued Gun

Trade SecretsTrade secrets are protected, right? They cannot be stolen or misappropriated, right? You are probably shaking your head at this. Right, right. But if they are, what can you really do about it? Have the grubby thief thrown in jail? Sure, but that’s not going to restore your loss—get you back the money you are now not making because your blueprints, your formulas, your client lists, etc. have been misappropriated. You could sue, you might be thinking. You could. But previously you could only do so in state court, through an often unstructured and painfully slow process. With the recent passage of the Defend Trade Secrets Act of 2016, that has changed. That state court trade secret action now looks like a slingshot compared to the weapon the Feds are delivering. Consider it a gun. A very big and federally-issued gun.

In July 2015, the Defend Trade Secrets Act was proposed to allow a private cause of action in federal court for the misappropriation of trade secrets. The intent was to offer those in need of protecting their trade secrets the same effective, uniform efficiency of litigation in federal court that holders of other types of intellectual property (patents, trademark, copyright) have enjoyed for quite some time. Previously, a cause of action for trade secret theft was only a state court claim, with each “trade secret act” often varying from state to state. This also proved an ineffective weapon to try and recover trade secrets that crossed state lines. A federal cause of action that allows injunctive and monetary relief with uniform nationwide discovery is, for trade secret owners, a very big gun. But wait, there’s more!

Subject to various limitations, the Act also provides ex parte property seizures where a plaintiff can enlist the federal government to seize misappropriated trade secrets without providing notice to the alleged wrongdoer.Wait, what? The government will find your disgruntled employee, sneak up on him, and get your blueprints back. That’s a pretty powerful arsenal. If the federal cause of action is the gun, consider the property seizure a big net. Catch the perpetrator with your trade secrets, recover your valuable information, and you still get to shoot the guy – in the wallet, where it counts.

In all, the new Defend Trade Secrets Act is expected to open many doors for companies struggling to protect valuable intellectual property. We anticipate many trade secret misappropriation suits will be filed in federal court now that the Act has passed. If you’re currently exploring recovery options for trade secret theft, give this one some thought. One of the primary types of trade secrets many companies fail to properly protect are customer lists. Think of the information you maintain about your customers that is not publicly available: their buying habits, shipping preferences, birthdays, anniversaries, family member names, unlisted numbers, staff member names, and contact info, etc. Looking at it this way, you can easily see the value in it.

Such details about your clients and customers—those that are not generally known or easily attainable—are what make your list a trade secret, as well as your investment in and efforts to compile these types of details and keep the list a secret. If it’s digital, keep it password-protected, and on a separate hard-drive locked in a safe. Implement policies among your staff to maintain its secrecy. These safeguards can enable you to establish the list as a trade secret and defend it in federal court.

ARTICLE BY Annie Dike of IMS ExpertServices

© Copyright 2002-2016 IMS ExpertServices, All Rights Reserved.

The Federal Defend Trade Secrets Act: Impact on Employers

Trade Secrets Confidential Chain.jpgOn May 11 2016, President Obama signed The Defend Trade Secrets Act (“DTSA” or the “Act”). Effective immediately, the DTSA creates a federal civil cause of action that allows companies to file civil lawsuits for trade secret theft under the federal Economic Espionage Act. Before the passage and signing of the DTSA, the statute only provided for criminal cases brought by prosecutors. Civil trade secret cases had to be brought under state law. While the DTSA provides an added layer of protection for companies’ trade secrets, its impact on employers is more uncertain.

Federal Cause of Action

Prior to the DTSA, victims of trade secret theft could only bring civil causes of action understate trade secret laws. These laws vary widely despite the fact that many states have passed some formulation of the Uniform Trade Secrets Act. The DTSA provides a federal civil cause of action covering any trade secret “related to a product or service used in, or intended for use in, interstate or foreign commerce.” There is a three year statute of limitations which is triggered on the date on which the trade secret misappropriation was discovered or “by the exercise of reasonable due diligence should have been discovered.” The availability of a federal trade secret cause of action could make interstate trade secret disputes more efficient by reducing choice of law disputes that happen when it is uncertain which state’s trade secret law should apply and also provides access to federal courts which are accustomed to addressing sometimes complex issues of formulations and technical information that is often necessary in these cases. However, the DTSA does not preempt state trade secret actions, so forum shopping and choice of law disputes will remain prevalent.

Seizure Clause

Along with providing a federal cause of action, the DTSA affords victims of trade secret theft an ex parte seizure proceeding to prevent the propagation of misappropriated trade secrets. Such an order can be obtained only under “extraordinary circumstances.” For a seizure order to issue, the trade secret owner must show, inter alia, that the accused party has actual possession of the trade secret and that an immediate and irreparable injury will occur without the seizure.

Companies should exercise caution when invoking the DTSA’s seizure provision because the Act also provides that parties who have been accused of trade secret theft will have a claim for damages as a result of any wrongful seizure and demand the return of any material that was wrongfully seized along with the trade secret information.

Restrictions on Employee Mobility

The DTSA contains provisions related to employee mobility. The Act restricts the availability of injunctive relief to “prevent a person from entering an employment relationship” and provides that if an injunction were to place conditions on a person’s employment, such restrictions must “be based on evidence of threatened misappropriation and not merely on the information the person knows.” This provision effectively rejects the inevitable disclosure doctrine applicable in certain jurisdictions, whereby an employer can enjoin a former employee from working in a new job that would inevitably result in the use of the employer’s trade secrets. Under the inevitable disclosure doctrine, an employer does not have to provide evidence of actual or threatened misappropriation of trade secrets, just the former employee’s knowledge of such trade secrets. This claim will not be available under the DTSA. Lastly, the DTSA prohibits the issuance of an injunction which would “conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade or business,” so employers in states that are more restrictive vis a vis non competes, will still be governed by those state laws.

Whistleblower Immunity

The Act’s most employee friendly clause, provides immunity to employees who disclose trade secrets either to the government for the purpose of reporting or assisting in an investigation of a suspected violation of law, or in a complaint filed in a lawsuit or related proceeding if such a filing is made under seal. Also, an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may reveal the trade secret to his or her attorney and utilize the trade secret information in the proceeding if the person files any document containing the trade secret under seal and does not disclose the trade secret except under court order.

The whistleblower provision contains a notice requirement that applies to any employer that utilizes employment contracts that concern the use of trade secrets. The Act requires employers to “provide notice of the [whistleblower] immunity . . . in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” The employer may instead, provide in the contract 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. Employers who neglect to comply with the Act’s notice requirements lose the ability to recover exemplary damages and attorneys’ fees under the DTSA in actions brought against employees or independent contractors who were not given the notice. This requirement applies to any new agreements or revisions to agreements made as of May 11, 2016, the date of enactment of the Act.

Employer Tips

The DTSA offers a mixed bag for employers. While the Act provides a federal trade secret cause of action (and the concomitant promise of more uniformity), it does not preempt state trade secret law, so forum shopping and choice of law issues will remain. The Act provides for a robust ex parte seizure proceeding to prevent the dissemination of trade secrets, but also a wrongful seizure cause of action for the accused party which could lead to costly satellite litigation. The Act limits an employer’s ability to restrict a former employee’s subsequent employment by requiring the employer to provide evidence of threatened misappropriation, rather than merely evidence of what the employee knows. Finally, the Act provides immunity for individuals who disclose trade secrets in whistleblowing situations and in retaliation lawsuits, simultaneously requiring employers to notify all employees or independent contractors subject to employment contracts that touch on trade secrets about the whistleblowing immunity. The whistleblowing notice requirements add costly administrative and legal burdens to employers who utilize such contracts.

Article By David I. Rosen, Galit Kierkut & Charles H. Kaplan of Sills Cummis & Gross P.C.

© Copyright 2016 Sills Cummis & Gross P.C.

Defend Trade Secrets Act. It’s Coming: What You Need to Know

The Defend Trade Secrets Act (DTSA) is headed to President Barack Obama for his signature, and there is little doubt that President Obama will sign it into law. Below is a summary of what you need to know about this soon-to-be law, including what you should be talking to your employment law counsel about in terms of modifying employment contracts and agreements.

What is the DTSA?

The DTSA will effectively “federalize” trade secrets law and allow companies or individuals with trade secrets to file private civil lawsuits under the Federal Economic Espionage Act (the Espionage Act).

What does “federalizing” trade secrets law mean?

The federalization of trade secrets law is a game changer. Pre-DTSA, trade secrets law was a state law issue. While most states dealt with trade secrets by adopting some versions of the Uniform Trade Secrets Act, the laws (and court’s interpretation of them) varied significantly from state to state. The variations led to many hotly contested procedural issues for example forum, venue and choice-of-law.

What is the purpose of the DTSA?

The DTSA’s specified purpose is to create a nationwide law that tightens trade secrets protections to align them with those given to patents, copyrights, and trademarks. It makes the issue a federal one so that federal law and courts can control the subject area, which will provide more certainty for litigants in trade secrets cases.

What will the DTSA protect?

Federal law regarding intellectual property has been fought on three fronts: copyrights, patents, and trademarks. Now, trade secrets will enter the federal protection arena.

The DTSA will allow “[a]n owner of a trade secret that is misappropriated [to] bring a civil action…if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” Oddly enough, however, the DTSA itself does not define “trade secret.” The Espionage Act, however, does.

How will the DTSA protect trade secrets? (Hint: Seizure provision)

As set forth above, the DTSA will allow trade secret owners whose trade secrets have been misappropriated to file civil actions in federal court. It also provides for theft protections abroad, but much of this part of the law is yet to be determined.

In addition to allowing victims to be awarded damages for wrongful takings, the DTSA contains a seizure provision that allows for the seizure of stolen trade secrets in “extraordinary circumstances” upon an “ex parte application,” and “affidavit or verified complaint.” This seizure provision is something completely new in the trade secrets context, as no state law has ever provided a plaintiff with this remedy.

Although it is unclear what situations courts will eventually qualify as “extraordinary circumstances,” the threshold appears to be slightly higher than that required to obtain a temporary restraining order under the Federal Rules of Civil Procedure. In fact, the first requirement for a court issuing a seizure order is the determination that “an order issued pursuant to Rule 65 of the Federal Rules of Civil Procedure or other form of equitable relief…[would] be inadequate…because the party to which the order would be issued would evade, avoid, or otherwise not comply with such an order.” These additional requirements must also be met before the court will grant a seizure:

  • an immediate and irreparable injury;

  • the harm to the applicant outweighs the harm to the legitimate interest;

  • a showing that the person misappropriated the trade secrets by improper means or conspired to misappropriate through improper means;

  • a description (with reasonable particularity) of the matter to be seized and the location of the matter to be seized (if reasonable under the circumstance); and

  • the person(s) against whom seizure would be ordered would destroy, move, hide or make the trade secrets inaccessible if they were provided notice of the application.

A seizure order is enforceable by federal law enforcement officials and the materials seized are to be deposited to the custody of the court.

While such seizures may be difficult when dealing with small bits of data or data that can be easily copied or disseminated, the DTSA provides something else no other trade secrets law offers: it allows the moving party to request that the seized information is encrypted in the custody of the court.

Is there anything else interesting about the DTSA? (Hint: Whistleblower protection)

Yes. It has an immunity protection for whistleblowers. That provision essentially provides that an individual, who reveals the disclosure of a trade secret in confidence to a federal, state, or local government official, or to an attorney, may not be held criminally or civilly liable under any federal or state trade secrets law.

Also, an individual who files a lawsuit for retaliation by an employee for reporting a suspected violation of law may disclose the trade secret to his or her attorney and use the trade secret information in the court proceeding.

What are the pros?

The advantage of the DTSA is that, for companies that operate across state and national borders and that have their trade secrets threatened by competitors across the world, state laws were previously insufficient to properly protect those companies. The DTSA will help shore up the protection of trade secrets, likely reduce jurisdictional court battles that are typical at the outset of trade secret litigation in state court, and provide litigants with federal jurisdiction.

What are the cons?

The DTSA does not preempt state trade secret laws. As such, while a litigant may bring a federal trade secrets lawsuit, that same litigant may also be able to bring a claim under state law as well. While it adds uniformity of trade secrets law at the federal level, it does nothing for the myriad of trade secrets laws at the state level. In reality, this means that a litigant is more likely to face a federal trade secrets misappropriations claim and similar state law claims. While this provides uniformity at the federal level, it does not to clarify the patchwork of state laws, and makes trade secret litigation more complex by providing more litigation options to trade secret holders. While some may see this as a good thing, because it provides multiple avenues for recovery, others prefer uniformity.

While it is not necessarily true that companies should expect to see more litigation, they should be prepared to litigate these cases on the federal stage, as well as remain up-to-date on all relevant state laws.

What should my company’s next steps be to ensure compliance and corporate readiness?

Internal Controls

Companies should check their internal controls to ensure they are properly protecting their trade secrets. Some beginning action items should include the following:

  • Audit and Identify: Perform an audit of corporate assets to identify and designate trade secrets and determine where trade secrets are maintained and who has access to them.

  • Protect: Take steps to properly and adequately protect trade secrets. For electronically available or accessible information, ensure trade secrets are username and password protected and only made available or accessible to those who need access. Encrypting electronic information will also reduce the chance that it can be taken, opened, read, and disseminated outside the company’s information systems. For tangible trade secrets, ensure trade secrets are physically locked or that physical access to them is password, keycard or otherwise protected and that only those who need access have it.

  • Revise Agreements: Many companies allow third-parties access to the property, premises, data, networks, etc. Companies should review their vendor agreements, non-disclosure agreements, and other confidentiality and other non-disclosure-type agreements to ensure they are sufficient to identify and protect corporate trade secrets.

  • Revise Policies: Companies should review their privacy policies, including corporate security and electronic use policies to ensure they are sufficient to identify and protect their corporate trade secrets. This includes reviewing non-compete, non-disclosure, and other privacy-related agreements and policies the company may have with its employees.

Dealing with Employees

The DTSA requires that employers provide notice of the DTSA’s immunity “in any contract or agreement with an employee that governs the use of trade secret or other confidential information.” Companies can comply with this requirement by cross-referencing a policy document provided to the employee that sets forth the employer’s internal mechanism for reporting a suspected violation of law. If the employer fails to do this, the employer cannot be awarded exemplary damages or attorneys’ fees in an action against an employee to whom notice was not provided. This is required for all contracts and agreements that are entered into or updated after the DTSA’s enactment date.

The takeaway for this requirement is that companies with employees should sharpen their pencils because they have contracts and agreements to modify.

Dealing with Competitors

Companies can now act swiftly against a competitor attempting to misappropriate trade secrets. Under the appropriate “extraordinary circumstances,” the ability to file an ex parte motion in federal court for the seizure of any misappropriated property provides companies with a way to actually keep these trade secrets, well, secret. In addition, the automatic access to federal courts provides companies with a forum that is often better suited to handle complex interstate and international litigation, not to mention complicated technical issues, and decreases initial costs related to procedural battles.

Article By Sara H. Jodka & Emma R. Wolfe
© Copyright 2016 Dickinson Wright PLLC

New Federal Law Will Provide First-Ever Civil Claim for Theft of Trade Secrets

On April 27, 2016, the U.S. House of Representatives approved the Defend Trade Secrets Act, S. 1890, by a vote of 410-2.  The Senate approved an identical bill 87-0 on April 4, 2016.  President Obama is expected to sign the DTSA into law in short order.  Once effective, the DTSA will create a federal, civil cause of action for trade secret misappropriation for any act that “occurs on or after the date of the enactment” of the law.  In addition to providing plaintiffs an opportunity to obtain injunctive relief and monetary damages, the DTSA will further allow for ex parteseizures of misappropriated trade secrets.

The DTSA borrows from the Uniform Trade Secret Act (the “UTSA”).  For example, the DTSA’s misappropriation, improper means, and three-year limitations provisions are all copied from the UTSA.  At the same time, the DTSA does not preempt state trade secret law or other sections of the U.S. code pertaining to trade secret misappropriation.  Finally, the DTSA directs government officials to report on exterritorial trade secret misappropriation.

The DTSA’s seizure provision is a notable addition vis-à-vis the UTSA.  It allows courts to issue an ex parte order to seize property as “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.”  To obtain such an order, a party must meet eight distinct prerequisites—including showing that a temporary restraining order is inadequate, that immediate and irreparable injury will occur if the seizure is not approved, and that the harm to the applicant outweighs the legitimate interests of any party from whom material is seized.  The party seeking an ex parte seizure order must post security and is subject to a claim for any damage caused by a wrongful seizure.  The raft of requirements intentionally set a high bar to issuance of an ex parte seizure order.  It is a powerful tool, but also susceptible to abuse absent strict controls.  The DTSA’s ex parte seizure requirements strike the right balance between need and caution.

The DTSA provides district courts with “original jurisdiction of civil actions brought under” the DTSA.  The DTSA does not contain any specific venue provisions and therefore an aggrieved party must look to the general venue statute for civil actions in deciding choice of venue in a federal district court.  In addition, plaintiffs may be able to bring a claim alleging a violation of Section 337 of the Tariff Act of 1930 in the U.S. International Trade Commission, depending on the circumstances.  Plaintiffs deciding upon a venue in which to bring a DTSA claim should analyze differences between the DTSA and any potential state law or other federal claim.

The DTSA explicitly applies to “interstate or foreign commerce.”  While the DTSA does not expand upon “foreign commerce” in any meaningful way, Section 4 of the DTSA requires various governmental officials to report on trade secret misappropriation experienced by U.S. companies that occurs abroad.  In particular, one year after the DTSA is enacted, and every two years thereafter, the Attorney General, the Intellectual Property Enforcement Coordinator, and the Director of the USPTO must submit a report to the House and Senate Judiciary Committees pertaining to trade secret theft occurring abroad.

The DTSA is an important development in U.S. law, as it provides the first-ever federal law providing a private civil claim for trade secret misappropriation.  The rationale for the DTSA is the belief by Congress, the Obama Administration, and stakeholders that the current patchwork of state laws is inadequate to address trade secret misappropriation and the concomitant damage it causes to trade secrets rights holders and to the U.S. economy.  Time will tell whether the law achieves its intended purposes.

Article By John J. Thuermer, Steven M. Auvil & David Elkins

© Copyright 2016 Squire Patton Boggs (US) LLP