House of Representatives Passes the “Defend Trade Secrets Act”

May 3, 2016

On April 27, 2016, the U.S. House of Representatives overwhelmingly passed the Defend Trade Secrets Act (DTSA), sending it to the White House for President Obama’s promised signature.

  • When it is signed into law, the DTSA, which has been described as the “most significant expansion of federal law in intellectual property since the Lanham Act in 1946,” will allow, for the first time, trade secret owners to file civil lawsuits for trade secrets misappropriation under federal law in federal court.
  • Although the DTSA largely tracks the Uniform Trade Secrets Act, which nearly every state has adopted in some form, the federal statute also includes a novel ex parte seizure provision. Under this provision, courts may order ex parte “seizure of property necessary to prevent the propagation or dissemination of the trade secret” at issue in the litigation. In other words, unlike state trade secrets laws, the DTSA permits property to be seized without formal notice to the party against whom the seizure is ordered.

One of the main goals of the DTSA is uniformity. According to the DTSA’s proponents, the statute will permit easier access to federal courts, which will develop more predictable, nationwide trade secrets case law. Whether the statute actually will achieve this goal remains to be seen, especially given that it does not preempt any state laws. What is certain, however, is that trade secret owners now have an important new tool to protect themselves from trade secret misappropriation.

The DTSA and State Trade Secrets Laws

Traditionally, state law has governed trade secret misappropriation in civil cases. Although nearly every state has adopted some version of the Uniform Trade Secrets Act, proponents of the DTSA have argued that the existence of significant state-to-state differences in the protection of trade secrets necessitates the “federalization” of trade secrets law. Thus, one of the primary goals of the DTSA is to harmonize the protection of trade secrets and to allow federal courts to develop more predictable, nationwide trade secrets case law.

At the same time, however, the DTSA does not preempt state trade secrets laws and does not prohibit trade secret owners from bringing parallel claims in federal court under both federal and state law. In that regard, trade secret owners still may be able to rely on state trade secrets laws, which, in some cases, are more favorable than the DTSA.

For example, the DTSA explicitly rejects the “inevitable disclosure” doctrine and precludes the court from enjoining a person from working for a competitor absent actual “evidence of threatened misappropriation.” Some states, however, permit trade secret owners to seek injunctive relief based solely on the asserted inevitability that a former employee would disclose trade secret information in his/her position with a new employer.

Something New – Ex Parte Seizure Provision

The DTSA’s most significant departure from state trade secrets laws is a provision authorizing courts to order ex parte “seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” Under this provision, a court can order the seizure of property without any notice to the party against whom the seizure is ordered.

In order to prevent competitive abuse, the DTSA (a) provides that a court should issue an ex parte seizure order “only in extraordinary circumstances,” and (b) creates a cause of action for “wrongful or excessive seizure.” The statute does not define what constitutes a “wrongful or excessive seizure” and does not set out the level of abuse required to impose liability on an overzealous trade secret owner. As such, trade secret owners seeking to employ aggressively the ex parte seizure provision should tread carefully until federal courts more fully develop the contours and legal limits of the provision. Nevertheless, the seizure provision may become a powerful new tool for trade secret owners to prevent the disclosure of their trade secret information.

Remedies for Misappropriation

In addition to seizure of trade secret materials, the DTSA’s remedies for misappropriation include injunctive relief, actual damages, damages for unjust enrichment, and a reasonable royalty in lieu of other damages. Further, courts may award exemplary damages where a trade secret has been “willfully and maliciously misappropriated” and reasonable attorneys’ fees for “bad faith” misappropriation, “bad faith” making or opposing a motion to terminate an injunction, or “willful and malicious” misappropriation.

Protecting Employee Mobility and Whistleblowers

The DTSA also includes several provisions protecting employee mobility and whistleblowers. Notably, any injunctive relief granted under the DTSA may not “prevent a person from entering into an employment relationship.” Moreover, the DTSA provides that any conditions restricting a former employee’s employment “cannot be based merely on information he or she knows by virtue of the former employment” and “must comply with applicable state laws prohibiting restraints on the lawful practice of one’s profession, trade, or business.”

Finally, the DTSA immunizes from liability an individual who discloses a trade secret to a federal, state or local government official for the purpose of reporting or investigating a suspected violation of law. The DTSA expressly provides that notice of this immunity must be set forth in any “contract or agreement with an employee that governs the use of a trade secret or other confidential information” for the employer to recover exemplary damages or attorney’s fees in a lawsuit against an employee. Thus employers must take this affirmative step before seeking to recover such damages.

Trade Secret Best Practices

The DTSA provides a powerful federal tool for trade secret owners but it does not absolve such owners from following best practices in protecting their trade secrets. Trade secret owners still must identify their trade secrets, establish protocols to protect secrecy, and take action to prevent inappropriate use or disclosure.

Influx of Federal Cases Likely

The most immediate impact of the new law is likely to be an influx of federal cases alleging trade secret misappropriation. Previously, plaintiffs had to establish federal jurisdiction either via diversity and a minimum amount in controversy, or as supplemental to a claim under a different federal statute, such as the Computer Fraud and Abuse Act. The DTSA all but eliminates the need for jurisdictional gymnastics and affords litigants a clear path to federal courts, which is almost always the preferred venue for trade secret plaintiffs.

For further information or questions about the Defend Trade Secrets Act, or for any questions you may have regarding the protection of trade secrets, please contact the authors, your McGuireWoods contact, or a member of the firm’s labor and employment or intellectual property groups.