Got Trade Secrets? Protecting Your Business Under the Landmark Defend Trade Secrets Act of 2016

It’s no secret that businesses want to set themselves apart from the pack. They invent, research, test and develop a host of ideas, processes, products and information with the intent of keeping these developments and information confidential and out of the hands of the general public. And, of course, businesses want to protect these trade secrets and sometimes must resort to litigation to do so.

Prior to May 11, 2016, claims for misappropriation of trade secrets were confined to state courts absent some independent ground for federal jurisdiction (e.g., diversity or ancillary jurisdiction). In this regard, such claims differed from other intellectual property claims, such as claims for patent or copyright infringement, which can be brought only in federal court, and claims for trademark infringement, which can be brought in federal court pursuant to the Lanham Act, so long as the trademark in question was used in interstate commerce.

On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (the Act). As a result, trade secret litigants now have a statutory basis for pursuing claims for misappropriation of trade secrets in federal court. Now, any claim for misappropriation of trade secrets that arose on or after May 11, 2016 can be filed in federal court, provided that the trade secret is related to a product or service that is used or intended for use in interstate or foreign commerce.

Most of the Act resembles the trade secrets laws of most states. Therefore, enactment of the Act should not significantly alter the analysis as to whether certain information qualifies as a trade secret or whether specific misconduct constitutes a misappropriation. As with most state trade secrets laws, the Act provides for the award of enhanced damages and attorney’s fees under certain circumstances.

However, the Act also contains important provisions that are not found in most trade secrets statutes.

Seizure of Property

For example, the Act expressly authorizes a court to enter an ex parte civil order providing for the seizure of property necessary to prevent the dissemination of the trade secrets. To obtain an ex parte seizure order, the trade secret owner must file a verified complaint or affidavit supporting the application. Under the Act, a court may enter a civil seizure order if it finds that:

1. A preliminary injunction or other equitable relief is insufficient because the adverse party would evade, avoid or otherwise not comply with such an order;
2. An immediate and irreparable injury would occur if a seizure is not ordered;
3. The harm suffered by the applicant in denying the application outweighs the harm to the legitimate interests of the person against whom seizure would be ordered and substantially outweighs the harm to any third parties;
4. The applicant is likely to succeed in showing that: (a) the information is a trade secret; and (b) the person against whom seizure would be ordered either misappropriated the trade secret by improper means or conspired to use improper means to misappropriate the trade secret;
5. The person against whom seizure would be ordered has actual possession of the trade secret and any property to be seized;
6. The application describes with reasonable particularity the matter to be seized and, if reasonable under the circumstances, identifies the location where the matter is to be seized;
7. The person against whom seizure would be ordered, or persons acting in concert with such person, would destroy, move, hide or otherwise make such matter inaccessible to the court, if notified of the application; and
8. The applicant has not publicized the requested seizure.

Once a seizure order is executed and items are seized pursuant to the order, the court maintains custody of the seized items, at least until a hearing can be held. The Act requires that the hearing be held within seven days from the date of the entry of the order to determine if the order should remain in effect or be dissolved. The applicant must post a bond to cover damages suffered by virtue of a wrongful or excessive seizure or attempted seizure.

Impact on Employers/Employees

The Act also contains some novel protections that are designed not to protect the owners of trade secret information, but to protect employees, contractors and consultants that seek to utilize trade secret information against an employer. Specifically, the Act provides that an employee, contractor or consultant cannot be held criminally or civilly liable for the disclosure of trade secret information that is disclosed: (i) in confidence to a federal, state or local government official, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law; or (ii) in a complaint or other document filed under seal in a lawsuit or other proceeding.

Further, the Act also allows an individual who files a lawsuit for retaliation committed by an employer for the individual’s reporting of a suspected violation of law to disclose the trade secret to the individual’s attorney and use the trade secret information in the court proceeding, provided that the individual files the trade secret information under seal and does not disclose the information, absent a court order.

To the extent that employers have their employees, contractors and consultants sign any agreements governing the use of trade secrets or other confidential information, the Act requires that an employer must provide notice of the protections contained in the Act, either in the agreement itself or in a policy document cross-referenced within the agreement. If the employer does not comply with the notice requirement, then the employer may not be awarded exemplary damages or attorney’s fees under the Act. In light of these protections, employers may need to modify their agreements to preserve their ability to pursue full legal relief under the Act.

Looking Ahead

The Act has codified what once was in the exclusive territory of the states. And in light of its passage, now is an optimal time for businesses to evaluate their own portfolios, identifying trade secrets (and other intellectual property, for good measure) and developing measures for protecting them under the provisions of the Act.

Further, as a new statutory regime, there will inevitably be gaps that federal courts will need to fill in. As those decisions are rendered, their outcomes will continue to shape this new scheme of enforcement.