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

On 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

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

Trade 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

The Federal Defend Trade Secrets Act: Impact on Employers

Trade Secrets Confidential Chain.jpg On 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.

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

Trade Secrets, Banker Bonuses, Worker Misclassification – Employment Law This Week – Episode 25 [VIDEO]

We invite you to view Employment Law This Week – a weekly rundown of the latest news in the field. We look at the latest trends, important court decisions, and new developments that could impact your work.

This week’s episode includes:

Former Workers Violated Ex-Employer’s Trade Secret Rights
Financial Regulators Propose Banker Bonus Restrictions
D.C. Circuit: Musicians Are Employees
NLRB Alleges Misclassification Violates NLRA
In-House Tip of the Week

Article By George Carroll Whipple, III of Epstein Becker & Green, P.C.

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

Trade Secrets Bill with Controversial Civil Seizure Provision Passes Senate

Recently, Congress and the courts in the United States have been active in reining in what many have seen as patent system that has run amuck. In the process, they have placed a number of limits on patent holders’ ability to effectively and successfully enforce patents. But as opportunities to enforce intellectual property through patent suits have been narrowed, another IP door appears to be opening.

For several years, Congress has been working on legislation that would, in effect, federalize what until now has been a state-by-state system of trade secret law. The current version, the Defend Trade Secrets Act of 2016 (S. 1890) (“DTSA”), was approved by the Senate on April 4, 2016 with bipartisan support.

The DTSA would operate to expand the existing Economic Espionage Act by, among other things, adopting much of the framework of the Uniform Trade Secrets Act (“UTSA”) and permitting private parties to bring civil trade secret misappropriation actions. UTSA-derived provisions are already in effect in 48 of the 50 states. Thus, while there are some differences between the DTSA and the UTSA, it is unclear whether the DTSA would represent a meaningful departure from existing trade secrets law, at least substantively. There are differing views.

The DTSA’s Civil Seizure Provision

What would almost certainly represent a significant new development is the DTSA’s civil seizure procedure, which is not contemplated under the UTSA. Under the proposed law, upon application by a party asserting theft of trade secrets, a federal court would have the authority to order law enforcement officials to enter land and seize property “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” Most strikingly, the bill envisions an ex parteprocess under which seizures would be authorized and executed without any notice to the relevant property owner(s), including third parties—a process that naturally raises due process and Fourth Amendment concerns.

Supporters of the bill point to analogous ex parte seizure provisions contained in the Lanham Act¹ (authorizing ex parteseizures of counterfeit goods) and the Copyright Act² (authorizing ex parte impoundments of documents and things related to copyright infringement)—provisions that have survived constitutional scrutiny.

Moreover, Rule 64 of the Federal Rules of Civil Procedure authorizes prejudgment seizures of property under applicable state law (e.g., writs of replevin or sequestration remedies), and ex parte seizures under such state law provisions have likewise been upheld under many circumstances. Courts have also justified ex parte seizures under the All Writs Act.³ Thus, there is precedent for these types of procedures.

It is also worth noting that ex parte seizure procedures are used in intellectual property cases in numerous jurisdictions outside of the United States. For example, in the United Kingdom, so-called “Anton Piller” orders have been utilized for many years to secure documents and things on an ex parte basis, in exceptional circumstances.

Significant Controversy

Nevertheless, the prospect of ex parte seizures in the trade secrets context has generated significant controversy in the United States. One major source of concern is the fact-intensive nature and overall complexity of trade secrets disputes. What exactly is the information at issue and does it qualify as a trade secret? How, if at all, has it been maintained in secrecy? Does the target of the seizure really have the information in his or her possession, and if so, how was the information obtained? Was reverse engineering involved? And so on.

Even on a preliminary basis, the complex factual issues involved in trade secret disputes may not lend themselves to fair resolution through expedited and non-adversarial ex parte procedures. Indeed, it does not take much imagination to conceive how, in the wrong hands, one-sided ex parte seizure proceedings might be used for improper purposes.

For example, in one Lanham Act counterfeit goods case, the plaintiff’s attorney “ran roughshod over the applicable statutes and rules,” submitting an inaccurate and misleading affidavit and convincing the lower court to authorize a private investigator to conduct the seizure and hand the seized property to the attorney.⁴ In another, the district court described a scheme in which the plaintiffs obtained seizure orders in a succession of counterfeiting cases, only to dismiss each case approximately one year after seizing the goods, without having ever established that the goods were, in fact, counterfeit.⁵

Rigorous Procedural Safeguards

In an effort to eliminate potential mischief, and to ensure that the new DTSA scheme passes constitutional muster, the bill’s sponsors have included a number of key procedural safeguards:

Ex parte seizures would be reserved for “extraordinary circumstances” only;
A seizure order would only issue upon the plaintiff’s filing of an affidavit or verified complaint that sets forth “specific facts” establishing, among other things: (1) immediate and irreparable injury if seizure is not ordered; (2) a likelihood of success on the merits of the trade secret claim; (3) the balance of harms favors the applicant; (4) the identity and location of the material to be seized, with reasonable particularity; and (5) more ordinary procedures (such as a TRO motion under Rule 65) would be ineffective because the seizure target would evade the order or destroy the evidence;
The applicant would be required to post a bond sufficient to cover damages should the seizure turn out to be wrongful or excessive;
Any seizure order would “provide for the narrowest seizure of property necessary” and would be executed by law enforcement officials;
The court would be required to provide specific guidance to the officials executing the seizure that “clearly delineates” the scope of their authority and details how the seizure must be conducted;
The court would also be required to schedule an adversarial hearing for the earliest possible time after the seizure was executed, at which hearing the applicant would bear the burden of proof of establishing that the seizure order was proper; and
The bill provides for a civil action for damages based on a wrongful or excessive seizure.

Taken together, these safeguards are significant and may reduce the likelihood of erroneous seizure orders and/or abuse of the system. In fact, it is possible that the obstacles to securing a seizure order would be so significant that, as a practical matter, they would eliminate the seizure remedy as an alternative in all but the most egregious scenarios. That appears to be an intended result.

In any event, having navigated the Senate, the DTSA will now pass to the House of Representatives for further consideration. A companion bill to S. 1890, H.R. 3326, was introduced in July 2015 and has enjoyed broad bipartisan support. In an era of partisan rancor, the DTSA may yet be one instance—the ex parte seizure provision notwithstanding—in which legislators find ways to work together across the aisle to achieve results.

_{¹See 15 U.S.C. § 1116(d).

²See 17 U.S.C. § 503(a).

³28 U.S.C. § 1651.

⁴Warner Brothers v. Dae Rim Trading, Inc., 877 F.2d 1120 (2d Cir. 1989).

⁵NASCAR v. Doe, 584 F. Supp. 2d 824 (W.D.N.C. 2008).}

Four New Year’s Resolutions to Avoid the Damaging Loss of Trade Secrets

On December 21, 2015, an Illinois jury awarded Miller UK Ltd. $73.6 million against Caterpillar Inc. Miller supplied couplers for Caterpillar’s equipment, and the jury concluded that Caterpillar used its leverage as Miller’s largest customer to demand access to information that Caterpillar then used to manufacturer its own version of the coupler. As a result of the alleged theft, Miller claimed it had to terminate roughly seventy-five percent of its workforce, close an office, and scale back a new business venture. This lawsuit was not between an employer and an employee, but it holds important lessons for employers that operate in industries and environments with valuable trade secrets.

1. Audit Non-Disclosure Agreements

Trade secrets laws across the country provide a layer of protection for misappropriated trade secrets. Non-disclosure and confidentiality agreements can often provide additional protection, by catching disclosures that would not be covered by trade secrets laws.

In the New Year, audit company records to confirm that any company or person who has access to the company’s trade secrets and proprietary information has signed a non-disclosure or confidentiality agreement. If any of these parties did not sign an agreement during the contracting process, get an agreement in place immediately.

2. Review Materials

In the New Year, review the company’s handbooks, policies, offer letters, and employment agreements to ensure that they prohibit theft and misappropriation of trade secrets and proprietary information from third parties (and not just the company).

Not only will this hopefully prevent employees from engaging in misconduct for which the company could be held liable (i.e. engaging in misappropriation), it could help the company avoid being held liable for any misconduct that does occur.

3. Audit Restrictive Covenants

To the extent that your company has trade secrets and proprietary information that can be protected through restrictive covenants under applicable law, in the New Year, audit the company’s agreements with employees to ensure that all employees who have access to that information have signed the required restrictive covenants. If an employee has not signed an agreement, identify what legal consideration will be required to obtain enforceable restrictive covenants. For those employees who have signed restrictive covenants, confirm that the company has signed (if required) and that the company records consist of both the employee’s signature and the body of the agreement that the employee signed. Finally, review the company’s form restrictive covenants to ensure that they have kept up with the growth and development of the company (i.e. that they protect all of the company’s trade secrets and proprietary information) and with the latest developments in the law.

4. Resolve

In the New Year, resolve to follow the three steps above at least once per year. As the verdict demonstrates, an ounce of prevention is worth a pound of cure. Following a regular maintenance schedule is the best way for a company to minimize the risks associated with trade secrets and proprietary information.

Article By Gillian McKean Bidgood of Polsinelli PC

Arizona Supreme Court Holds That The Uniform Trade Secrets Act Only Preempts Claims for Misappropriation of Trade Secrets, Not Other Confidential Information

In Orca Communications Unlimited, LLC v. Noder (Ariz. Nov. 19, 2014), the Arizona Supreme Court ruled that Arizona’s version of the Uniform Trade Secrets Act (the “AUTSA”) “does not displace common-law claims based on alleged misappropriation of confidential information that is not a trade secret.” Orca, a public relations firm, filed suit against Ann Noder, its former president, for unfair competition after Noder left Orca to start a rival company. Orca alleged that Noder had learned confidential and trade secrets information about “Orca’s business model, operation procedures, techniques, and strengths and weaknesses,” and that Noder intended to “steal” and “exploit” that information and Orca’s customers for her company’s own competitive advantage. The trial court dismissed Orca’s complaint at the pleadings stage, concluding that the AUTSA preempts Orca’s “common law tort claims arising from the alleged misuse of confidential information,” even if such information is “not asserted to rise to the level of a trade secret.” The court of appeals reversed in part, holding that the AUTSA preemption exists only to the extent that the unfair competition claim is based on misappropriation of a trade secret.

The Arizona Supreme Court considered the text of the 1990 AUTSA’s displacement provision, concluding that nothing in the language of the statute “suggests that the Legislature intended to displace any cause of action other than one for misappropriation of a trade secret.” “If such broad displacement was intended, the legislature was required to express that intent clearly.” The court assumed, but did not decide, that Arizona’s common law recognizes a claim for unfair competition. Nor did it decide what aspects, if any, of the alleged confidential information in plaintiff’s unfair competition claim might fall within the AUTSA’s broad definition of a trade secret and therefore be displaced. “That determination will not hinge on the claim’s label, but rather will depend on discovery and further litigation that has not yet occurred.

While the court acknowledged the split of authority among various states as to the preemptive effects of the Uniform Trade Secrets Act, it found that the “quest for uniformity is a fruitless endeavor and Arizona’s ruling one way or the other neither fosters nor hinders national uniformity.” With its ruling, the Arizona Supreme Court joins courts in states such as Pennsylvania, Virginia and Wisconsin that have the narrowed the preemptive effects of the Uniform Trade Secrets Act. Conversely, courts in other states including California, Indiana, Hawaii, New Hampshire, and Utah have held that Uniform Trade Secrets Act statutes should be read to broadly preempt all claims related to the misappropriation of information, regardless of whether the information falls within the definition of a trade secret.

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Protecting Trade Secrets in the Cloud

The business community’s growing use of cloud-based computing services provides great benefits due to cost-savings and mobile information access. However, business leaders should understand the risks of storing valuable trade secrets in the cloud. This article provides the business community tips on how to safeguard valuable trade secrets stored in the cloud from being freely disclosed to the public, thus putting the business at risk of losing protections that courts grant trade secrets.

As businesses’ profit margins have continued to shrink since the Great Recession, more companies have looked to reduce costs by reducing growing expenses related to their information technology departments.^[1]The first line item to draw attention in the IT budget is frequently the rising costs associated with maintaining and upgrading system hardware. Businesses often find that housing and operating multiple servers stretches IT budgets thin by increasing maintenance, labor, and operational costs. The solution so many businesses have turned to is to move their valuable data to virtual servers, or the “cloud.”^[2] A recent survey of IT executives provides that companies will triple their IT spending on cloud-based services in 2014 over 2011.^[3] Cloud service providers have also seen demand increase as they increase their cloud capabilities.^[4]

Although cloud-based servers provide businesses with substantial financial and operational benefits, businesses must recognize that there are perils to shifting data to the cloud. One of the key concerns businesses should consider before moving data to the cloud is the risk that its valuable trade secrets will lose protection as a result of insufficient safeguards to protect against disclosure. This article addresses that concern and provides businesses keys for seeking to protect valuable secrets in the cloud.

What is a Protectable Trade Secret

The initial step for a business to determine how to protect its trade secrets is to understand how the law characterizes a trade secret. Information qualifies as a trade secret only if it derives independent economic value as a result of not being generally known or readily ascertainable, and be subject to reasonable efforts to maintain its secrecy. Trade secrets are broadly defined as information, including technical or non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, strategies, pricing information, and lists of customers, prospective customers, and suppliers.

Businesses Need to Take Reasonable Efforts to Protect Trade Secrets in the Cloud

Trade secrets are only protectable when the owner takes reasonable efforts to prevent them from being freely disclosed to the public so that the information does not become generally known.

Information does not have to be cloaked in absolute secrecy to be a trade secret, as long as a business’s efforts to maintain secrecy or confidentiality are reasonable. It is easy for one to imagine how a business may protect confidential documents that are stored locally. Computer files may be password-protected with several layers of encryption software, with access limited to specified personnel. Similarly, paper files may be stored in locked cabinets, in secured rooms, where only specified personnel are granted access.

However, those seemingly straight-forward security protocols become murky when information is stored in the cloud. Unlike storing data on local servers, storing data in the cloud requires the owner to disclose confidential information to a third-party vendor. In most situations, disclosing data to a third-party eliminates trade secret protections. Therefore, businesses must take additional steps to ensure that its data remains secure.

Three Keys to Protecting Trade Secrets Stored in the Cloud

There are no fail-safe measures to protect data stored in the cloud. The best way for a business to protect its trade secrets is to locally store and protect its most valuable data with the proper data security protocols. A business, however, should not fear the cloud as long as it takes certain steps to ensure that it exercises reasonable efforts to protect its cloud-based data.

First, business leaders must conduct appropriate due diligence before selecting a cloud-provider. The business should conduct necessary research to select a reputable, well-established company that has the physical and technological capabilities to store and protect data.

Conducting due diligence on a provider includes ensuring that the provider has taken necessary steps to establish appropriate physical and virtual security protocols to protect the confidentiality of your information. Inquire how the provider establishes physical security measures, and monitoring capabilities to prevent unauthorized access to its data centers and infrastructure. Also, learn how the provider limits its employees’ access to customer data and determine the internal controls that the provider has in place to prevent unauthorized viewing, copying, or emailing of customer information.

A business should also inquire about the provider’s virtual security protocols. A business must generally understand how its cloud-provider’s encryption software and security management systems work to protect data. If your business is not capable of independently evaluating whether the provider has proper security protocols, a good indicator is to ask the provider for its client list. If the provider has clients that are typically security-conscious companies, such as financial institutions or healthcare facilities, that is a good indication that the provider has been vetted and it has proper security measures in place. Finally, the provider should maintain sufficient data-protection insurance coverage to protect against potential data breaches or system failures.

Second, a business must have contractual safeguards in place with its cloud-provider to adequately protect its intellectual property and trade secrets. The contract should establish that the business owns the data, that it will be segregated from other data groups, and that the business may enjoy unfettered access to the data. The contract should specify that the business can demand that the data be deleted or returned request, and detail how the provider will purge the data to ensure that it is properly deleted upon termination of the relationship. The contract should require regular data backup and recovery tests, while restricting the provider from accessing, using or copying data for its own purpose. Finally, the contract should establish the provider’s obligations to notify the business of a data breach or system failure.

Third, a business should also consider adding multiple layers of authentication and encryption to data containing trade secrets before transmitting it to the cloud-provider. However, a business should consider if the additional encryption efforts could adversely affect the business’s ability to access, utilize, and port data for its normal business use.

Conclusion

There are several financial and operational benefits for a business to store data in the cloud. However, businesses must understand that there are also risks to storing its valuable trade secrets on virtual servers. Businesses need to take reasonable efforts to protect the confidentiality and secrecy of its most valuable data and information.

_{[1] Dave Rosenberg. Reducing IT Infrastructure Costs via Outsourcing. May 7, 2009. news.cnet.com/8301-13846_3-10235742-62.html}

_{[2] Thor Olavsrud. How Cloud Computing Helps Cut Costs, Boost Profits. March 12, 2013. www.cio.com/article/730036/How_Cloud_Computing_Helps_Cut_Costs_Boost_Profits}

_{[3] Andrew Horne. Transformational Change in IT Will Drive 2014 Spending. November 5, 2013. http://blogs.wsj.com/cio/2013/11/05/transformational-change-in-it-will-drive-2014-spending/}

_{[4] IBM Commits $1.2bn to Cloud Data Centre Expansion. January 17, 2014. www.bbc.co.uk/news/business-25773266}

Tag: Trade Secrets

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