Federal Defend Trade Secrets Act About to be Signed into Law
On April 27, 2016, the U.S. House of Representatives, by a vote of 410-2, passed the "Defend Trade Secrets Act" (DTSA). The bill was previously passed by the Senate, and the President is expected to soon sign the legislation.
Currently, remedies for trade secret misappropriation are available only in state court and are based on the laws of each of the states. The DTSA creates a new federal remedy, and after the law is signed by the President, businesses will be able to file a civil suit in federal court. To qualify, the product or service related to the trade secret must be used in, or intended for use in, interstate or foreign commerce.
Through an ex parte Seizure Hearing, the DTSA permits, under extraordinary circumstances, the seizure of property that contains the trade secret. The property must be narrowly defined, and the trade secret owner must prove misappropriation, immediate and irreparable injury without the seizure, knowledge of the location of the property and that the party who misappropriated the trade secret would avoid a public order or destroy the evidence.
Both injunctions and damages are available under the DTSA. The DTSA provides that a Court may grant an injunction if a trade secret is misappropriated. There are two exceptions: (1) if an injunction prevents a person from entering into an employment relationship; and (2) the injunction conflicts with an applicable state law. Conditions on employment for an ex-employee based on evidence of threatened misappropriation beyond mere knowledge of the ex-employee may be put in place, and other affirmative actions in defense of the trade secret may be required by a court. In the absence of an injunction, an ongoing reasonable royalty may be imposed.
Damages for actual loss and any unjust enrichment exceeding that loss may be imposed. Alternatively, damages may be assessed for a reasonable royalty for past conduct. If a trade secret was willfully misappropriated, damages may be doubled. Attorney’s fees are available if bad faith is proven by either party.
The DTSA requires that a civil action must be filed within three years of the misappropriation or when, by reasonable diligence, the misappropriation would have been discovered. Any litigation may occur under a protective order to protect the trade secret from further disclosure. Further, if it is relevant to an anti-retaliation lawsuit, the trade secret may be disclosed to the court under seal.
The DTSA does not include a territorial limit, and while a U.S. territorial limit may be implied, at least one prominent commentator has speculated that the DTSA may reach trade secrets held and stolen in a foreign country from a U.S. company. Of note, Section 4 of the DTSA asks the Attorney General to biannually report on foreign theft of trade secrets of U.S. companies occurring outside the U.S. and changes in how trade secrets are treated in foreign jurisdictions. Notably, in item (b)(4) of Section 4, the reports will include the abilities and limitations of trade secret owners to prevent misappropriation of trade secrets, the ability to enforce judgments against foreign entities and the ability to prevent imports based on that misappropriation.
Section 5 states that it is a "Sense of Congress" that trade secret theft occurs around the world and that the statute amended by the DTSA "applies broadly to protect trade secrets from threat." Based on this language, Congress intends for the DTSA to reach activity in foreign countries. U.S. courts will likely impose some limits, but seemingly any interaction with U.S. territory or markets may be enough for inclusion under the DTSA.
The DTSA defines a "trade secret" as:
[A]ll 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 thereof 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, the another person who can obtain economic value from the disclosure or use of the information.The act also defines "misappropriation" as:
"(A) 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;"
"(B) disclosure or use of a trade secret of another without express or implied consent by a person who—"Used improper means to acquire it;
Knew that someone else used improper means to acquire it; or
Knew that the information was derived from someone with a duty to keep it secret.
"Improper means," while defined to include theft, espionage and violations of a duty to maintain secrecy in various forms, excluded "reverse engineering, independent derivation or any other lawful means of acquisition."
To summarize, the DTSA creates a new federal remedy for trade secret misappropriation. The DTSA may have a much longer reach than existing state statutes and thefts in other countries might be applicable. The DTSA is favorable to owners of trade secrets and in the event of misappropriation, it may be a superior avenue to some of the state statutes. For particularly egregious parties that misappropriate trade secrets, Civil Seizure offers an avenue to seize property necessary to propagate the trade secret without the prior knowledge of the stealing party.