Newly Enacted Defend Trade Secrets Act of 2016

On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (DTSA), which received extensive bipartisan support in Congress.  The DTSA gives trade secret owners a new tool against the misappropriation of their trade secrets.  It is the first federal trade secrets legislation that allows private citizens, without first having to obtain patent, trademark, or copyright registration, to sue in federal court to protect their trade secret interests.  Importantly, as more fully addressed below, businesses should know that the DTSA contains certain requirements that affect their employment and similar agreements with provisions protecting against disclosure or misappropriation of the company’s trade secrets or confidential information.

Below are the “top ten” most notable provisions of the DTSA:

  • Prior to passage of the DTSA, trade secret holders could only resort to state law to protect their interests in the civil courts. While most states, including North Carolina, had already adopted the Uniform Trade Secrets Act (or a slightly modified version), which allows aggrieved trade secret owners to sue in state court, the DTSA now gives federal courts original jurisdiction to hear a trade secrets dispute.  Consequently, aggrieved parties are no longer required to rely on diversity to get into federal court.
  • The DTSA does not preempt state law; therefore, the owner of a trade secret could potentially bring both a federal claim and a state law claim at the same time.
  • To qualify under the DTSA, the trade secret must be related to a product or service that is used or intended to be used in interstate commerce or foreign commerce. The DTSA defines “trade secret” rather broadly and includes “all forms and types of financial, business, scientific, technical” and other information, whether tangible or intangible, if (a) the owner has taken reasonable measures to keep the 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.”
  • Generally speaking, misappropriation occurs when a person or entity without authorization (a) acquires a trade secret that was knowingly obtained through improper means, or (b) discloses or uses another’s trade secret knowing, or having reason to know, that it was a trade secret or was obtained by another person through improper means.  The DTSA defines “improper means” as “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage” but excludes “reverse engineering, independent derivation, or any other lawful means of acquisition”.  The DTSA’s protections apply only to misappropriations that occur after the DTSA was signed by the President – May 11, 2016.  Prior acts are protected only under applicable state law.
  • The statute of limitations under the DTSA is three years from the date the owner discovers the misappropriation or the date he should have discovered it through reasonable diligence.
  • The DTSA provides immunity from trade secret misappropriation claims to whistleblowers who disclose their employer’s trade secrets or confidential information to government officials for the purpose of reporting or investigating a violation of the law.
  • The DTSA requires all employers to notify employeesof the DTSA’s whistleblower protection provisions in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.  Otherwise, an employer will be deprived of exemplary damages and attorney’s fees under the DTSA.  This notice requirement is satisfied if the agreement cross references a separate written policy that addresses reporting suspected violations of the law.   Importantly, the DTSA broadly defines “employee” to include any individual “performing work as a contractor or consultant for an employer.”  Therefore, independent contractors and consultants, in addition to “W-2 employees,” are covered under this definition.  The notice requirement applies to agreements that are entered into or modified after May 11, 2016.
  • The DTSA contains a notable enforcement tool – a civil seizure provision – not found in state law. To “prevent the propagation or dissemination” of a stolen trade secret, a court may order on an ex parte basis (i.e. without notice to the accused party) the seizure of certain trade secret property in “extraordinary circumstances.”  “Extraordinary circumstances” are circumstances where the accused would likely destroy or hide a stolen trade secret if given prior notice of the proceedings.   To obtain such an order, in addition to showing extraordinary circumstances, the plaintiff must demonstrate certain criteria, such as: (i) the plaintiff will sustain immediate and irreparable injury without the order, (ii) the plaintiff is likely to succeed in proving the information is in fact a trade secret and the defending party misappropriated it, and (iii) an order other than an ex parte seizure order is inadequate to protect the trade secret because the defending party will evade or refuse to comply with the order.  The plaintiff also must post a bond for payment of damages in the case of a wrongful seizure.   Generally, there must be a hearing before the court within 7 days of the order’s issuance.
  • In the event a defending party is damaged due to a wrongful seizure, it may sue for and recover “relief as may be appropriate,” such as damages for lost profits, damages for loss of goodwill, reasonable attorney’s fees and punitive damages if the seizure was sought in bad faith.
  • The DTSA provides a variety of remedies. If the court finds liability, it may: (1) issue an injunction so long as the order does not prevent an individual from entering an employment relationship and does not conflict with applicable state law prohibiting restraints on lawful employment; (2) order that a party take certain affirmative action to protect the trade secret; (3) award actual damages and damages for unjust enrichment; (4) condition future use of the trade secret on payment of a reasonable royalty, and (5) in a case of willful misappropriation, award exemplary damages not more than twice the original damages amount.  In addition, if the court determines that a party willfully and maliciously misappropriated a trade secret, or if it finds that a misappropriation claim or a motion to terminate an injunction has been brought in bad faith, it may award reasonable attorney’s fees to the prevailing party.

Trade secret owners should take this opportunity to review their trade secret, confidentiality and similar policies to ensure they contain necessary safeguarding protections.  If a party fails to reasonably protect the secrecy of its trade secret information, that information loses its trade secret status.  In addition, companies who may want to invoke the DTSA’s protections should review their confidentiality, employment and similar agreements to ensure they comply with the DTSA’s mandates, in particular its notice requirement concerning the DTSA’s whistleblower protection provision.

Feel free to call Essex Richards if you have any questions or would like assistance with your trade secrets concerns, policies or agreements containing non-disclosure provisions.