Time to Review Your Confidentiality Agreements New Federal Trade Secrets Act Creates

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The Defend Trade Secrets Act of 2015 (DTSA), which establishes a new federal private right of action for trade secret misappropriation, is now the law. Trade secrets, the fourth leg of the intellectual property chair, have long been governed primarily by state law. The three other legs – patent, copyright and trademark – each have had federal statutes providing for private civil rights of action for many years (since 1790 for patents and copyrights, and since 1890 for trademarks). Before the DTSA, a litigant seeking a private civil right of action for misappropriation of trade secrets could only turn to the common law and state statutes. Litigants may now bring such claims in federal courts across the country. However, the DTSA does more than simply overlay federal rights on top of counterpart state rights. It also provides additional remedies not available under state law and affects employment law through its whistleblower provisions.

The DTSA and Pre-Existing State Law

The DTSA amends the federal Economic Espionage Act of 1996 (EEA), 18 U.S.C. § 1831 et seq., which created criminal and civil causes of actions for acts of economic espionage and trade secret thefts, but only allowed the United States Attorney General to file a civil suit. In practice, this meant that the EEA was rarely used to pursue civil actions, leaving private litigants to pursue state law civil remedies under various promulgations of the Uniform Trade Secrets Act (UTSA) that are in effect in most states.

Accordingly, under the pre-DTSA trade secret protection regime governed largely by the UTSA, trade secret misappropriation actions were usually brought in state, not federal, courts unless diversity of citizenship of the parties provided an independent basis for federal jurisdiction. A key practical implication of the DTSA is that trade secret misappropriation claims may now be brought in federal court, regardless of the citizenship of the parties or even the amount in controversy. In a given case, this may simplify the decision as to where to file suit, since a uniform body of law may now be applied to trade secret misappropriation claims. That said, the DTSA does not preempt state law claims, as discussed further below.

The DTSA’s definitions of trade secrets and misappropriation are very similar to those in the UTSA. The definition of “trade secret” is very broad. It “means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if – (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.” “Misappropriation” is defined as acquisition of a trade secret by improper means or disclosure or use of a trade secret without consent.

DTSA Remedies

The remedies provided for trade secrets misappropriation under the DTSA are similar to those under the UTSA. They include injunctive relief to prevent actual or threatened misappropriation, damages for actual loss and unjust enrichment, exemplary damages up to two times actual damages in cases of willful and malicious misappropriation, conditioning the future use of the trade secret on the imposition of a reasonable royalty where exceptional circumstances would render it inequitable to enjoin use of the trade secret, and awarding attorneys’ fees in cases of willful and malicious misappropriation or where a claim of misappropriation is made in bad faith. The DTSA includes a three-year statute of limitations accruing from “the date on which the misappropriation with respect to which the action would relate is discovered or by the exercise of reasonable diligence should have been discovered.”

In addition to providing a federal forum for civil trade secret claims, the DTSA has four other significant features: it grants trade secrets owners procedural protections, including the right to explain why their trade secrets should be kept confidential by the court; it provides for the issuance of ex parte seizure orders by federal courts; it provides for broad whistleblower protections; and it specifies that it does not preempt trade secrets causes of action existing under state law.

Procedural Protections for Trade Secrets

Section 1835 provides that “the court shall enter such orders and take such other action as may be necessary and appropriate to preserve the confidentiality of trade secrets” and that “[t]he court may not authorize or direct the disclosure of any information the owner asserts to be a trade secret unless the court allows the owner the opportunity to file a submission under seal that describes the interest of the owner in keeping the information confidential.” The latter provision is unique to the DTSA and does not have a counterpart in the UTSA.

Seizure Orders

The ex parte seizure provision in Section 1836 provides for preliminary seizure of “property necessary to prevent the propagation or dissemination of the trade secret.” The UTSA does not provide for ex parte seizures. Section 1836 allows a party to apply to the court via affidavit or verified complaint to have the alleged trade secret confiscated in order to prevent its dissemination. The fact-specific nature of trade secrets and the process to obtain, and dissolve, a seizure order under the DTSA have created a new class of litigation. To obtain an ex parte seizure under the DTSA, eight criteria must be satisfied. First, seizure under Federal Rule of Civil Procedure 65 or pursuant to another form of equitable relief must be ineffective. Second, the facts must show that an immediate and irreparable injury will occur if the seizure is not ordered. Third, the harm of denying the applicant’s order must outweigh the legitimate interest of the party against whom the seizure would be executed and substantially outweigh the harm to third parties that might suffer from seizure of the alleged secret. Fourth, the facts should show that the applicant is likely to succeed in showing that alleged secret is in fact a trade secret, and that the person against whom seizure would be ordered either misappropriated the trade secret by improper means or conspired to do so. Fifth, the party against whom the seizure would be ordered must have actual possession of the trade secret and the property to be seized. Sixth, the application must describe with particularity the matter to be seized and its location. Seventh, the facts must show that the person against whom seizure would be ordered would destroy or hide the matter to be seized if the applicant gave notice to the party. Finally, the applicant must not have publicized the requested seizure. The DTSA also provides for a hearing after the order is granted to determine whether it was rightfully granted. The applicant for an order who does not meet their burden at this hearing may face costs in the form of the fees incurred by the party against whom the order was executed.

Whistleblower Immunity Provisions

The DTSA protects whistleblowers from criminal or civil liability for disclosing a trade secret if the disclosure is made in confidence to a government official, directly or indirectly, or to an attorney, and it is made for the purpose of reporting a violation of law. These whistleblower immunity provisions provide that individuals (employees, contractors, or consultants) may disclose trade secret information to the government or in a court filing without creating DTSA liability.

An individual seeking immunity from disclosure must have either: (1) made the disclosure in confidence to a government official or an attorney and solely for the purpose of reporting a suspected violation of law, or (2) made the disclosure in a complaint or other document filed under seal in a lawsuit or similar proceeding. The DTSA also allows an individual to use trade secret information in an anti-retaliation lawsuit brought against the individual that reported a suspected trade secret violation if the individual files under seal the document containing the trade secret and does not disclose the secret to anyone other than to the individual’s attorney.

Employers have an affirmative duty to provide employees and contractors notice of the new immunity provision in “any contract or agreement with employee that governs the use of a trade secret or other confidential information.” To give the provision some teeth, the consequence of failure to comply is that the employer may not recover exemplary damages or attorney fees in a DTSA action for theft of trade secrets against an employee to whom no notice was provided –even if there isn’t a whistleblower situation involved, it appears. To be in compliance, an employer can provide a “cross-reference” to a “policy document” given to the relevant employees that describes the reporting policy for suspected violations of law.

New Best Practice: Include Cross-Reference to Policy Document in Employee Agreements

In light of this new law, employers should add a provision to their employment, nondisclosure, noncompetition or other agreements with employees. The agreement should provide: “Employee hereby acknowledges that Company has informed her, in accordance with 18 U.S.C. § 1833(b), that she may not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret where the disclosure (a) is made (1) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (2) solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.”

No Preemption of State Law

The DTSA provides that except for its whistleblower immunity section, it shall not be construed to preempt or displace any other remedies, civil or criminal, for misappropriation of trade secrets under federal or state law, so the trade secret laws of each state continue to coexist with the DTSA. Indeed, it is likely that plaintiffs will allege both violations of the DTSA and of applicable state law and the UTSA. This is a key difference from the UTSA, which preempts or displaces conflicting tort, restitutionary, and other law providing civil remedies for misappropriation of a trade secret. A related difference of the DTSA from the UTSA is that the UTSA provides that it does not affect contractual remedies, whether or not based upon misappropriation of a trade secret, whereas the DTSA omits this provision. However, since the UTSA is not preempted, employers may continue to rely upon the UTSA’s deference to contractual remedies, including reliance upon contractual agreements with their employees, contractors, and consultants.

Effective Now

The DTSA is effective immediately and applies to actions premised on acts occurring on or after the date of enactment, May 11, 2016.

Practical Implications

The DTSA adds another arrow to the quiver of businesses aggrieved by employees who misappropriate their trade secrets and the employers who hire them. Although the DTSA may appear at first blush to simplify the law in this area, the continuing viability of state law/UTSA remedies, together with the disincentives to elect federal or state law remedies at the pleading stage, is likely to complicate the strategic calculus for both plaintiffs and defendants in trade secret misappropriation cases. This may well result in increased expense for parties and increased burdens on the federal courts. Human resources professionals should give careful attention to the DTSA’s whistleblower provisions so that employers do not inadvertently lose rights they would otherwise have under the DTSA against employees who misappropriate trade secrets.

The DTSA has significant implications for employers, employees, competitors, employment practices, and litigation strategies. Bradley’s intellectual property and employment law attorneys, joined by our new team of IP litigators in Charlotte, are prepared to assist clients in these matters.