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The Defend Trade Secrets Act of 2016: Making a Federal Case Out of Trade Secret Misappropriation

June 13, 2016

          The Defend Trade Secrets Act of 2016 (“DTSA”) was signed into law by President Obama on May 11, 2016, giving federal courts original jurisdiction to hear civil suits alleging trade secret misappropriation.  Formerly, such civil trade secret causes of action were entirely within the purview of the State, leading to an assortment of common law doctrines,

 

often varying significantly State to State.  The new law provides a uniform, federal cause of action for trade secret misappropriation.  However, the DTSA does not preempt State law claims arising from the same set of facts, thus allowing for the possibility of parallel causes of action.  The result is an overlay to the current assortment of State common law doctrines, providing plaintiffs’ counsel with more regulations and forums to strategically consider when bringing an action for the misappropriation of trade secrets. 

 

What Is the Defend Trade Secrets Act?:

 

                The new DTSA law largely mirrors the Uniform Trade Secrets Act (“UTSA”), which has been implemented in some form or another by 48 states, with the following few major distinctions.  The DTSA:

  1. mandates that the trade secret must have been used in interstate or foreign commerce;

  2. mandates that plaintiffs must be current owners of a trade secret at the time the suit is brought in order to have standing;

  3. provides for the possibility of exemplary damages and attorneys’ fees for prevailing plaintiffs in cases of willful infringement;

  4. precludes preliminary injunction orders based on the inevitable disclosure doctrine’s reasoning;

  5. provides for a preliminary, ex parte seizure order on a showing of exigent circumstances; and

  6. provides for whistleblower immunity to employees that disclose trade secret misappropriation to authorities.

          The elements required to bring a trade secret misappropriation claim under the DTSA, relevant definitions, and available remedies are similar to those of the UTSA.  The DTSA’s revised Title 18 of the U.S. Code Chapter 90 defines misappropriation as:

  • Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or

  • Disclosure or use of a trade secret of another without express or implied consent by a person who used improper means to acquire knowledge of the trade secret, and at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was—

  • derived through improper means;

  • acquired under circumstances giving rise to a duty to maintain the secrecy or limit the use of the trade secret; or

  • derived from a person who owed a duty to protect the secrecy or limit the use of the trade secret.

 

In addition, like the UTSA, the DTSA’s statute of limitations is just three years, and only a single cause of action may be brought for continual misappropriation.Under the DTSA, the statute of limitations period begins to run once the plaintiff knew or should have known that the misappropriation had taken place.

 

Available Remedies under the DTSA:

 

                In federal actions brought under the DTSA, successful plaintiffs may recover as damages:

  1. Actual loss attributed to the misappropriation;

  2. Unjust enrichment from the defendant’s use of the trade secret; or

  3. A reasonable royalty calculation for the defendant’s use of the trade secret.

Plaintiffs are not entitled to double recovery and must choose the most appropriate remedy based on the circumstances.

                In cases of willful infringement, prevailing plaintiffs are entitled to recover up to 2x the standard damages award and their reasonable attorneys’ fees spent on litigation.  However, if a plaintiff’s complaint is ultimately determined to be frivolous or brought in bad faith, the prevailing defendant is then entitled to an award for its reasonable attorneys’ fees under the Act.

 

Essential for Employment Agreements – Whistleblower Immunity Notice:

 

                It’s not just litigators, however, who need to pay attention to the new law.  All employers who utilize trade secrets or confidential information are also affected.  Employers must now inform their employees of the Act’s whistleblower immunity provisions in order to avail themselves of the potential for exemplary damages and attorneys’ fees.

                The DTSA provides for civil and criminal immunity to whistleblowers who divulge trade secrets to government officials or attorneys, “solely for the purpose of reporting or investigating a suspected violation of the law.”  18 U.S.C. §1833(b)(1)(A).  The Act states that employers 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.”  18 U.S.C. §1833(b)(3)(A) (emphasis added).  If notice is not provided, the employer will not be able to recover exemplary damages or attorneys’ fees awards in any DTSA action brought against such an employee.  Consequently, any employment contract entered into after May 11, 2016, which governs the use of confidential information or trade secrets, must have notice language tantamount to the following:

 

Pursuant to 18 U.S.C. §1833(b)(1): “An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that (A) is made (i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and (ii) 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.”

 

This requirement is not retroactive, and employers need not worry about revising employment agreements currently in place.  However, as standard damages awards in trade secrets cases often top tens of thousands, if not hundreds or even millions of dollars, with years spent in litigation, the notice requirement of the whistleblower provision is significant. 

 

Ex Parte Seizure Orders:

 

                In “extraordinary” cases, to prevent the propagation or dissemination of a trade secret, the DTSA provides for the unique possibility of an ex parte seizure order of all of defendant’s products that utilize the trade secret.  This pre-trial seizure order is unobtainable in State forums, and is only possible in actions arising under the DTSA.  For such a seizure order to take place, the court must find:

  • a preliminary injunction would be inadequate, due to a probability that the defendant would evade, avoid or otherwise not comply with the order, and/or make the trade secret inaccessible once given notice;

  • plaintiff is likely to succeed on the merits;

  • immediate irreparable injury would occur, but for the seizure;

  • balance of the harms in issuing the order favors plaintiff over defendant, and substantially outweighs potential harm to third parties;

  • defendant is in possession of the trade secret;

  • defendant is in actual possession of products utilizing the misappropriated trade secret;

  • plaintiff has described with reasonable particularity the products to be seized; and

  • plaintiff has not publicized the requested seizure.

Examples of “extraordinary circumstances”, where an ex parte seizure order may be appropriate, include cases where evidence shows the defendant plans to immediately disclose a trade secret to a third party or flee the country.

 

No Inevitable Disclosure:

 

                The DTSA follows California law in that it does not recognize the inevitable disclosure doctrine in preliminary injunction determinations or ex parte seizure orders.  The inevitable disclosure doctrine suggests that once an individual/entity is in unlawful possession of a trade secret, it will inevitably disclose the secret, and therefore mere possession of the trade secret alone is evidence that irreparable injury will occur.  The DTSA rejects this doctrine, and instead demands independent proof that, if the court refuses to grant an injunction or seizure, immediate irreparable injury will result.  Consequently, a plaintiff must provide specific evidence that a defendant has engaged in tangible actions, which could reasonably lead to the eventual disclosure of a trade secret, in order to show immediate irreparable injury.  DTSA plaintiffs may not rely solely on a defendant’s known possession of a trade secret to convince the court that irreparable injury will inevitably occur, no matter how sensitive the trade secret may be. 

                Due to these high standards of proof necessary to sustain ex parte seizure orders, plaintiffs should be careful when bringing such motions.  Under the Act, defendants who are harmed by a wrongful seizure may bring a cause of action against the plaintiffs for damages, including punitive damages if the seizure order was sought in bad faith. 

 

No Preemption Power:

 

                Notably, the DTSA does not preempt State law.  This allows for parallel causes of action and potentially incongruous results.  For example, some States recognize the inevitable disclosure doctrine, while the DTSA expressly rejects it.  A plaintiff could bring both DTSA and State law claims together in federal court, and potentially succeed on being granted a preliminary injunction for the State law claim, due to the State’s recognition of inevitable disclosure, while being denied the same relief with the DTSA claim.  In addition, not all States have adopted the UTSA, which the DTSA was based on, and even in States which have, the very definition of what constitutes a trade secret may not coincide with the DTSA.  Consequently, plaintiffs may be successful at defining certain information as a trade secret in one context but not the other.  Such fact patterns may lead to variant federal case law, even within the same district, dependent upon which choice of law principles the court applies in each case.

                In other situations, as with California’s trade secret statutes, it may behoove plaintiffs to forgo bringing both State and federal misappropriation claims.  California does not allow for multiple causes of action attributable to an alleged misappropriation.  Consequently, if a plaintiff brings a California trade secret claim, it will be precluded from bringing corresponding claims of business interference, conversion, negligence, unfair competition, etc., based on the same set of facts as the misappropriation.  However, if a California plaintiff brings a federal DTSA claim, and does not allege California trade secret misappropriation, the plaintiff would presumably be allowed to bring the additional State claims of business interference, conversion, etc., under the court’s supplemental jurisdiction powers, in effect circumventing California law and enabling multiple recoveries for the same harm.

 

Conclusion:

 

                The DTSA was designed, largely in part, to create a uniform body of federal law by which to try trade secret disputes.  However, due to its lack of preemption power, and contrasting provisions with State common law, uniformity remains to be seen.   Unfortunately, litigators still must research the intricacies of State law when considering whether and where to bring a DTSA claim, inevitably leading to increases in forum shopping.  Nevertheless, under the DTSA, plaintiffs across the nation now have a federal, civil remedy for the unlawful disclosure/misuse of their highly valuable trade secrets, no matter where in the United States the misappropriation occurs. 

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