THE DEFEND TRADE SECRETS ACT OF 2016

A New Option for Trade Secret Owners

On May 11, 2016 President Obama signed the Defend Trade Secrets Act of 2016 (“DTSA”). For the first time, this new law provides businesses the right to file civil claims in federal courts. It does this by amending the existing Economic Espionage Act (EEA), without displacing any state laws. But some provisions – for ex parte seizure and limiting injunctions against former employees –deserve special attention. In addition, the DTSA creates a new immunity for employee whistleblowers whodisclose confidential company data to law enforcement.

There are two action items for companies to consider now. First, employee confidentiality agreements and policies need to be adjusted to provide notice of the new whistleblower immunity. Second, companies should revisit their strategies and options for qualifying trade secret matters, to take into account any effects of the DTSA.

Background

Here is some relevant background. Trade secrets in the U.S. have traditionally been governed by state common law. Efforts to harmonize standards through the Uniform Trade Secrets Act (UTSA) have had mixed success. Although the UTSA has been adopted in 47 states, those statutes are varied, as state legislatures have chosen to modify the suggested language. The net result is that state trade secret law is far from uniform.

 

Federal involvement in trade secrets began only in 1996 with the enactment of the EEA. While violations can result in serious criminal penalties, particularly for foreign state-sponsored espionage, the law has been invoked on average in only eight cases per year. With the increasing incidence of trade secret theft involving interstate or international actors, industry years ago began to demand that the EEA be amended to provide a civil cause of action as well.

 

After a somewhat fractured effort in the 113th Congress, identical bills were introduced in the House and Senate in July 2015, with strong support from businesses and organizations. I testified at a hearing of the Senate Judiciary Committee in December (see here) and after that consulted with staff on some substantial amendments (see here). Ultimately, the bill passed the Senate unanimously, and the House on a vote of 410 to 2. The bill as passed can be found here. Other articles I have published on the DTSA can be found on the Articles page.

How the DTSA Fits With Other Laws

The DTSA is well harmonized with the UTSA in its original form, with common definitions, basic remedies and limitations period (three years from discovery). As planned, its primary effect is to create original jurisdiction in federal courts for claims of misappropriation of trade secrets that affect goods or services in interstate commerce. This means that unless the matter is entirely local (a chef takes recipes down the street to a competing restaurant), businesses will have the option of filing in federal court, and the question becomes whether to exercise that option.

Interstate and International Cases

For cases that involve interstate or international activity, where witnesses and documents are located in other states, the advantages of the federal forum are obvious. The availability of nationwide service of process and the universal applicability of the Federal Rules of Civil Procedure tend to make these cases easier to manage and more predictable, especially where they involve sophisticated issues of personal jurisdiction over foreign actors or a need for coordination with cases in other courts.

Seizure Remedy

In the extraordinary circumstance where a company discovers that someone is about to disclose or destroy a trade secret, or leave the jurisdiction with it, the DTSA provides the possibility of an ex parte order for seizure of the material by federal law enforcement. However, the requirements for this remedy are very strict, and penalties for a false alarm severe, so proceed carefully.

Injunctions

Another special provision of the DTSA restricts injunctionsaimed at departing employees. Claims of “threatened misappropriation” must be based on bad behavior, and not merely on what kind of information the employee knows.

 

The DTSA generally does not preempt other laws, and so state claims may continue to be pursued, including under supplemental or diversity jurisdiction in federal court. Because the viability of related state claims can vary, choice of venue may continue to be important in some federal cases.

Whistleblower Immunity Requires Notice In Confidentiality Agreements

The DTSA provides immunity under state and federal trade secret laws for any employee (including contractors and consultants) whistleblower who reveals company information while reporting possible criminal activity in confidence to the authorities, or filing an appropriate court action under seal. Any relevant confidentiality agreements entered into or updated after May 11, 2016 must contain a notice of this right.

Trade secret cases are increasing in number and in the size of awards. They also increasingly involve international activity. The DTSA provides some new tools for businesses to pursue these claims, and also serves as a reminder of the need to prevent them or to be prepared to defend them.



(Last updated May 12, 2016)

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