Federal Trade Secret Protection Has Now Become Reality

Confidential text on the brown envelope

Today, President Obama signed the Defend Trade Secrets Act of 2016 (“DTSA”) into law, bringing trade secrets alongside trademarks, copyrights and patents as intellectual property rights protected under federal law.

Every employer and owner of trade secrets seeking to protect their rights needs to become versed in this new enforcement scheme. While the DTSA does not displace state trade secrets laws, the DTSA permits an employer to bring claims asserting trade secret misappropriation in federal court where the alleged trade secret is used in or intended for use in interstate or international commerce.

Designed to create greater uniformity in the application and enforcement of trade secret protection from state to state and internationally, the DTSA cherry-picks from the most recent version of the Uniform Trade Secrets Act (UTSA) while adding new tools to an employer’s arsenal to remedy trade secret theft. It also adds several defensive mechanisms to protect those wrongly accused of misappropriation or subjected to seizure far beyond what is necessary to recover stolen trade secrets. Below, we outline several of the key changes to trade secret litigation practice brought on by the enactment of the DTSA.

Ex Parte Civil Seizures And Added Protections For Parties Against Whom Seizure is Sought

Among the unique (and certainly most controversial) additions was the creation of a mechanism for the immediate seizure of allegedly stolen trade secrets – without notice – when a plaintiff-applicant can make a significant showing that (a) the information is in imminent danger of being disseminated and (b) that providing notice as one would in a typical emergency injunctive proceeding would be inadequate because the party to whom the order would be issued would evade, avoid or otherwise not comply with that order. The civil seizure provision sets forth exacting requirements that an applicant must satisfy in order for a seizure order to issue – from filing the verified complaint under seal, to spelling out precisely what was taken and where it is located.

Once a seizure order is entered, it is not the applicant or the party to be enjoined that is responsible for carrying out the order after notice is given (as is the case in a typical emergency injunction action). Instead, once the seizure order is entered, the court directs “federal law enforcement” (presumably, the U.S. Marshals) to (a) serve notice of the seizure order on the party it is issued against, and (b) at the same time, seize all trade secret information and/or servers/storage media containing allegedly stolen trade secret information as described in the seizure order. The DTSA specifically prohibits the applicant or any agent of the applicant to perform the seizure or be involved in the seizure in any way. The seized equipment is then placed in the custody of the court until a noticed hearing takes place within 7 days on the propriety of the seizure.

While certainly a powerful tool for employers seeking to quickly prevent the dissemination and/or widespread competitive use of their trade secret information, the civil seizure provision does offer balance and protection to those who are subject to seizure orders. In addition to providing for the recovery of attorneys’ fees for claims filed in bad faith, the DTSA creates an express right of action for any person harmed by wrongful or excessive seizure and for any party improperly deprived of their property. Such claims allow for the recovery of lost profits, material costs, loss of goodwill, punitive damages and pre-judgment interest against the party that made the successful application for the seizure. The provisions appear designed to encourage would be applicants to narrowly draw the scope of their seizure demands. Courts are also given the power to appoint “special masters” (for example, a computer forensic expert) to locate and isolate any misappropriated trade secret data on seized equipment and facilitate the return of unrelated property and data to the person it was seized from.

In addition, the DTSA prohibits applicants seeking to recover alleged trade secrets from seeking to publicize the requested seizure and specifically requires that a court granting a seizure order take “appropriate action to protect the person against whom the order is obtained from publicity” about the order or any seizure made under such order that is initiated “by or at the behest of the person obtaining the order.” At least in theory, this “gag order” type restriction makes perfect sense as the purpose of the procedure assumes that notice of any kind defeats the purpose of the relief it affords.

Whistleblower Immunity And Notice Requirements For Employers

Another notable addition to the DTSA is an express grant of immunity for would-be whistleblowers from liability for trade secret misappropriation and disclosure – provided that such disclosure is only made (a) confidentially to a government agency or (b) in court filings provided they are made under seal and do not otherwise disclose alleged trade secret information absent a court order. The DTSA also specifically expands the definition of “employees” protected under the whistleblower immunity provision to contractors and consultants for an employer.

While limited immunity for would-be whistleblowers might not seem like a surprising addition to trade secret protection law, Congress went further by making express disclosure of such immunity to employees mandatory in order for an employer-applicant to be able to recover punitive damages or attorneys’ fees in an action for misappropriation under the DTSA. That disclosure must be expressly included in any contract that governs the use of a trade secret or other confidential information entered into after the enactment of the DTSA.

To the extent that employers want to preserve their rights to seek exemplary damages and attorneys’ fees in cases of willful misappropriation under the DTSA, they must incorporate whistleblower protection disclosures into their non-disclosure and confidentiality agreements entered into after the DTSA is signed into law. Such changes can be made either by express inclusion of the disclosure language in the agreement itself, or by cross-reference to an employment policy document that the employee receives that sets forth the employer’s policy for reporting suspected violations of the law.

The DTSA Rejects The Doctrine Of Inevitable Disclosure

Another notable departure at the outset of the new federal trade secrets protection law is its rejection of what has come to be known as the doctrine of “inevitable disclosure” as a means to obtain injunctive relief in the absence of evidence of actual or threatened misappropriation.  The doctrine, created by the Seventh Circuit in Pepsico v. Redmond, 54 F.3d 1262 (7th Cir.1995) and adopted by a minority of jurisdictions (including Illinois), holds that an individual possessing knowledge of highly secret and competitively valuable information may be enjoined from directly competing on the grounds that it is inevitable that he/she will disclose and take unfair advantage of his/her knowledge of this super-secret information.  The DTSA effectively disavows that theory by stating that only actual or threatened misappropriation can be enjoined, provided that the order does not: “prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information a person knows.”

Other Notable Additions To Improve Trade Secret Litigation 

Another attribute of the DTSA that appears geared towards the needs of practitioners is inclusion of several concrete mechanisms designed to address issues regularly encountered in the course of litigating trade secrets claims. Simple provisions such as expressly authorizing motions for encryption by any party – or by any person claiming an interest in the subject matter seized, or providing for the filing of submissions that may reveal any alleged trade secrets  under seal as needed to protect the confidentiality of any secret information without disclosing the very information that you are trying to protect –avoids a common problem of leaving pleadings vague and ambiguous out of fear that to do otherwise would disclose a client’s super-secret information.

Looking forward, the DTSA also advances the cause of developing “best practices” for the seizure, recovery and securing of trade secret information (particularly digital data maintained on any number of digital storage devices). It does so by tasking the Federal Judicial Center to develop – with its existing resources – “best practices” for the seizure of information and storage media and securing the information once seized.

Conclusion

Without question, this shift to federal protection of trade secrets is a game changer. Employers and interested parties of all shapes and sizes will want to do their due diligence now to see what will be in store for trade secret protection actions for the foreseeable future.

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Contributing Editors: Ernest Irons, Daniel V. Kinsella

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