Contributors

Christian Scali

Founder and Managing Shareholder

What happened?

On May 11, 2016, President Obama signed the Defend Trade Secrets Act of 2016 (“DTSA”) which creates a federal civil cause of action for trade secret theft. The law provides trade secret owners alternatives to navigating varied state trade secret laws or seeking assistance from the Department of Justice.

Why is it important to you?

Companies are increasingly turning to trade secret law as a means of protecting valuable intellectual property beyond the twenty year cap afforded under patent law. Advances in cyber technologies have greatly enabled the theft of trade secrets, which is now estimated to cost the U.S. economy $300 billion dollars annually. Trade secret theft effects a wide range of industries including: automobiles, automobile tires, aviation, chemicals, consumer electronics, defense systems, electronic trading, industrial software, and pharmaceuticals.

Moreover, the new law provides for whistleblower protections that require a change to your confidentiality agreements.

How does this new law differ from existing protections?

Trade secret rights have been enforced exclusively through state laws. The DTSA would change that, but would not displace the existing state law trade secret regimes. Rather, the new federal rights would exist in parallel.

For the most common types of trade secrets misappropriation, substantive rights under the DTSA are arguably no broader than those under California law. For example, like California law, the DTSA requires actual or threatened misappropriation of trade secrets and does not allow for remedies based only on their “inevitable disclosure” – the theory that simply because an employee went to a competitor to work in the same position he or she had with his or her former employer with all of the competitive knowledge gained from that former employment the former employer’s trade secrets will inevitably be disclosed to the new employer.

But the broad discovery tools available in federal court are available in any action in which a federal trade secret claim is brought. For example, the federal subpoena power extends across state lines, unlike the subpoena authority of state courts.

And the DTSA provides for ex parte seizure orders. Upon a successful application, a court can order federal marshals to seize “property necessary to prevent the propagation or dissemination” of the stolen trade secret. This order to seize property is without notice to the accused thief, but is limited to those instances where the applicant can establish “extraordinary circumstances,” and requires the posting of a bond sufficient to cover damages for wrongful or excessive seizure. The DTSA also provides for a “seizure hearing,” at which the party that obtained the order bears the burden to show that the order was necessary. Further, victims of wrongful seizure may be entitled the same relief as available for an improper seizure under trademark law: a damages award, punitive damages for bad faith, and attorneys’ fees.

The DTSA also amends and expands the protections available under the Economic Espionage Act (EEA). The EEA currently applies only to conduct occurring outside the United States under certain circumstances. The DTSA would apply to conduct outside of the US; it contemplates the theft of trade secrets “used in, or intended for use in, interstate or foreign commerce.” And although the EEA made the theft of trade secrets a federal crime, it did not provide for private civil remedies. But the DTSA provides for such remedies.

Do I have to do anything in light of this new law?

Yes. The DTSA also provides protection for certain “whistleblower” employees, and obligates employers to notify their workers of these protections. For example, an employee who discloses a trade secret “solely for the purpose of reporting or investigating a suspected violation of law” would be protected from liability. The DTSA would require employers to inform their employees of the various immunities available under the new law. Failure to do so could deprive the employer of any right to punitive damages or attorneys’ fees in an action against that employee. “Employee” is defined broadly under the act, and sweeps in contractors and consultants. This notice requirement will require companies to review and standardize their confidentiality, hiring and consulting agreements with an eye toward spelling out responsibilities regarding trade secret information. Work with a knowledgeable trade secret and employment attorney to craft the required confidentiality notices.

What else should I do in light of this new development?

Companies can avail themselves of the trade secret protection framework under existing state laws and the DTSA. Systematically identifying confidential information that merits protection as a trade secret is a prudent, and often overlooked, step in maintaining a protectable trade secret portfolio. To qualify as a trade secret, the information must:

(A)  Derive its value from being generally unknown to the public; and

(B) Be the subject of reasonable measures to maintain its secrecy.

These measures can include physical locks, security guards, access control, electronic password access control, confidentiality agreements and document labeling. Many companies must comply with safeguards rules for customer information under the Gramm Leach Bliley Act. Trade secret protection protocols can be easily incorporated into existing safeguards programs. The law requires only reasonable – not fail-safe – security measures. Establishing an organized and well-documented trade secret inventory and standard protective measures will help prepare a company to enforce its rights when necessary. It is important to note, however, that an effective trade secret protection plan goes well beyond having a confidentiality and trade secret policy.