Blog

May 4, 2016 -

New Federal Trade Secrets Law Could Be Powerful IP Weapon

Get ready for a major expansion of the federal laws protecting intellectual property.  In April 2016 Congress overwhelmingly approved the Defend Trade Secrets Act of 2016 (DTSA) and sent it to President Obama for his signature.  The President has signaled his strong support for the new legislation, and it is expected to take effect imminently.

DTSA amends the existing Economic Espionage Act (specifically 18 U.S.C. §1836) to grant companies a federally recognized right to sue for misappropriation of trade secrets “related to a product or service used in, or intended for use in, interstate or foreign commerce.”  It substantially tilts in playing field in favor of trade secret owners in a number of ways.  First, they will now be able to sue in federal court if they prefer, whereas trade secret misappropriation has been previously been a state cause of action.  At the same time, DTSA does not preempt state trade secret laws like the Uniform Trade Secrets Act.  Thus, companies can bring claims under both DTSA and state trade secret laws, which gives them multiple bites at the apple, increasing the costs of litigation for the defendant and the chances that a trade secret owner can prevail on at least one of its claims.

The conceptual reach of DTSA is enormous.  Borrowing from the Economic Espionage Act, it defines trade secrets as “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 … 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.”  Thus, a trade secret can be virtually anything that, as a matter of corporate practice, is kept confidential and from which a company can potentially derive competitive value, including customer lists, sales and marketing methodologies, business strategies, software code, formulas, designs, algorithms and unpublished patent applications.    Since non-disclosure agreements, consulting agreements, license agreements, reseller agreements and strategic alliance agreements (among other types of contracts) typically contain clauses defining certain information of the discloser as confidential and proprietary, we can soon expect DTSA claims to accompany breach of contract claims in litigation over the unauthorized use and disclosure of this information.   When drafting agreements with confidentiality and proprietary information clauses, companies should specifically call out sensitive information as trade secrets in order to strengthen any potential claims under DTSA.

DTSA provides a trade secret owner with a number of possible remedies for misappropriation, including (1) injunctive relief; (2) damages for actual loss and additional damages for unjust enrichment (if this is not addressed by the computation of the damages for actual loss) or, alternatively, a reasonable royalty; (3) if the trade secret has been “willfully and maliciously” misappropriated, additional “exemplary” damages of up to two times (2x) the damage award in (2); and (4) attorneys’ fees in the event of willful and malicious misappropriation.

However, the most novel remedy provided to trade secret owners may also be the most troubling one from the standpoint of a company on the receiving end of a DTSA suit.  In “extraordinary circumstances,” a trade secret owner may, without prior notice to (or a hearing involving) the defendant, request a federal court to issue an order seizing alleged trade secret material if the order is “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.”  A full hearing would then follow within seven days.  If the seized material includes or is stored on a storage medium, connection of the storage medium to a network or the Internet would not be permitted until the hearing, unless both parties consent.  DTSA sets a high legal bar for obtaining such an emergency order; for example, it must “clearly appear[] from specific facts” that the plaintiff is likely to succeed in proving trade secret misappropriation, that the defendant would move, hide or destroy the trade secret material if given notice prior to the seizure proceeding, and that the harm to the plaintiff of denying its request outweighs the harm to the defendant’s legitimate interests or to third parties.  The seizure must also be conducted in a manner so as to minimize disruption of the legitimate business operations of the defendant or the operations of third parties.  All that being said, in a case where a large deep-pocketed company is seeking to stop the use of critical material by a smaller, less well-funded competitor, the availability of a DTSA seizure order may provide the plaintiff with a devastating weapon which it could then leverage in settlement negotiations.

DTSA broadly defines misappropriation to include not only the illicit direct acquisition of trade secret material from the owner and its use by the original appropriator.  Also prohibited is acquisition by a person who knows or has reason to know the trade secret was acquired by improper means, as well as disclosure or use of the trade secret by other downstream parties acquiring it or deriving knowledge of it from or through the original appropriator (or other wrongful actors), provided that a certain required level of knowledge/culpability on the part of the downstream parties can be shown.  In summary, one is not free to use a trade secret that seems to have fallen or been taken off the back of a proverbial truck.  However, the DTSA preserves traditional state law exclusions from liability for reverse-engineering and independent derivation of trade secret material.

Finally, DTSA contains whistleblower provisions that have ramifications for the confidentiality clauses in employee and contractor agreements.  An individual may not be held criminally or civilly liable under DTSA or any other federal or state trade secret law for disclosing a trade secret (1) in confidence to any type of governmental official or to an attorney, solely for the purpose of reporting or investigating a suspected legal violation, or (2) in a complaint or other document filed in a lawsuit or other proceeding, if the filing is made under confidential seal.  An employer must “provide notice” of this immunity “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.”    (It is sufficient for the employer to provide a cross-reference to a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected legal violation.)  Companies should be aware, however, that DTSA’s whistleblower provisions apply not just to traditional W2 employees, but also to “any individual performing work as a contractor or consultant for an employer.”  Thus, the contractual notice requirement also applies to individuals being paid on a 1099 basis.  The penalty to an employer for failing to provide the required contractual notice is inability to recover exemplary (i.e., multiplied) damages and attorneys’ fees in a suit against the employee for willful and malicious trade secret misappropriation under DTSA.

For any questions on how the passage of DTSA may impact your business, or for assistance in updating your contracts, please contact Andrew Baer (andrew@baercrossey.com).