President Obama Signs Into Law the Defend Trade Secrets Act
On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (DTSA), creating the first federal civil remedy for trade secret misappropriation. The new law is designed to better protect businesses against the economic losses suffered from trade secret theft.
Before being sent to the Oval Office, the Senate unanimously passed the bill, S. 1890, and the House of Representatives voted to pass the bill by an overwhelming majority of 410-2.
Last February, we wrote about the preexisting landscape for trade secret protection in Hawaii. Prior to the enactment of the DTSA, civil trade secret claims were governed exclusively by state law. For decades, this state-based system has separated trade secret protection from other intellectual property rights, such as patents, copyrights and trademarks, which are all federally regulated. The DTSA now establishes federal jurisdiction for claims brought under the Act, providing plaintiffs the option to sue in federal court and the a more unified body of federal law.
Employers Should Amend Employment Agreements to Provide Notice of Statutory Whistleblower Protections
One provision of the DTSA requires immediate attention from employers. The Act includes a whistleblower clause that provides immunity for disclosure of trade secrets to government officials for the sole purpose of reporting violations of the law. Employers must provide notice to employees of that immunity “in any contract or agreement with an employee that governs the use of trade secret or other confidential information.” (18 U.S.C. § 1833(b)(3)(A)). Employers who fail to provide the notice cannot recover punitive damages or attorneys’ fees that may otherwise be available under the DTSA.
To ensure compliance with the DTSA, employers should consider addressing this notice requirement in its current policies regarding trade secret information (or establishing such policies if they do not already exist). Employers should also review existing employment agreements, non-disclosure agreements, assignments and other agreements that govern the use of a trade secret or other confidential information. For example, employers may want to insert a cross-reference to a policy, or insert the following language into existing agreements:
18 U.S.C. § 1833(b) states:
“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.”
Accordingly, the Parties to this Agreement have the right to disclose in confidence trade secrets to Federal, State, or local government officials, or to an attorney, for the sole purpose of reporting or investigating a suspected violation of law. The Parties also have the right to disclose trade secrets in a document filed in a lawsuit or other proceeding, but only if the filing is made under seal and protected from public disclosure. Nothing in this Agreement is intended to conflict with 18 U.S.C. § 1833(b) or create liability for disclosures of trade secrets that are expressly allowed by 18 U.S.C. § 1833(b).
Ex Parte Seizure Orders
One of the more controversial provisions of the DTSA is a clause authorizing ex parte civil seizures “of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” (18 U.S.C. § 1836(b)(2)(A)(i)). An ex party seizure order may only issue upon “extra ordinary circumstances”, where a court finds it “clearly appears” from “specific facts” that:
- An order issued pursuant to Rule 65(b) of the Federal Rules of Civil Procedure, or another form of equitable relief, would be inadequate;
- An immediate and irreparable injury will occur if such a seizure is not ordered;
- The harm to the applicant outweighs the harm to the legitimate interests of the subject of the order and substantially outweighs the harm to any third party who might be affected;
- The likelihood of success in showing that (i) the information is a trade secret; and (ii) the subject of the order misappropriated, or conspired to misappropriate, the trade secret by improper means;
- The subject against whom the seizure would be ordered has actual possession of the trade secret and any property to be seized;
- The application describes with reasonable particularity the matter to be seized and, to the extent reasonable under the circumstances; identifies the location where the property is to be seized;
- The subject of the order (or those in concert with the subject) would destroy, move, hide, or otherwise make such matter inaccessible to the court, if the applicant were to proceed on notice to such person; and
- The applicant has not published the requested seizure.
18 U.S.C. § 1836(b)(2)(A)(ii).
Any ex parte seizure order must also generally include: (i) findings of fact and conclusion of law, (ii) provide for the narrowest seizure of property necessary; (iii) be accompanied by an order protecting the seized property from disclosure; (iv) guidance to law enforcement executing the seizure delineating the scope of the official’s authority; and (v) require the person obtaining the order to provide security for the payment of damages that any person may be entitled to recover as a result of a wrongful or excessive seizure or wrongful or excessive attempted seizure. 18 U.S.C. § 1836(b)(2)(B).
Injunctive Relief and Damages
The DTSA allows for both injunctive relief and an award of damages available to plaintiffs for the misappropriate of trade secrets. Injunctions may issue to prevent actual or threatened misappropriation on such terms as the court deems reasonable, provided that the order does not (i) prevent a person from entering into an employment relationship; or (ii) otherwise conflict with the applicable state law prohibiting restraints on the practice of a lawful profession, trade or business.
This provision is included to protect employee mobility. The language of the provision negates the potential for the “inevitable disclosure doctrine” to be used to prevent an employee from taking a new job. Under the inevitable disclosure doctrine, “a plaintiff may prove a claim of trade secret misappropriation by demonstrating that [a] defendant’s new employment will inevitably lead [the defendant] to rely on the plaintiff’s trade secrets.” See PepsiCo, Inc. v. Redmond, 54 F. 3d 1262, 1269 (7th Cir. 1995).
The exclusion from the DTSA of an inevitable disclosure claim is consistent with the White House’s recent report on Non-Compete Agreements, which “address[es] the potentially high costs of unnecessary non-competes to workers and the economy”. Click here for the Report. It is also consistent with House Bill 1090, that passed last year in Hawaii, that amended Section 480-4, Hawaii Revised Statutes, to ban non-compete agreements and non-recruitment agreements within “technology businesses”.
The above protection in the DTSA on employment relationships requires that any condition on employment must be supported by evidence of threatened misappropriation, not merely information that the person knows.
The DTSA is a welcomed change to trade secret law, bringing trade secrets in line with its federal intellectual property cousins. The Act appears to preserve many of the important elements of state law, while providing plaintiffs a new federal forum of choice. It remains to be seen how federal jurisprudence with develop; whether district courts will continue to follow their state’s laws, or whether a new uniform body of law will develop. In any event, the DTSA requires employers to consider the impacts of the Act now and to develop procedures to protect their trade secrets.