"Can You Keep A Secret?" Why the Defend Trade Secrets Act of 2016 May Affect Your Business Thumbnail

"Can You Keep A Secret?" Why the Defend Trade Secrets Act of 2016 May Affect Your Business

Federal law has long protected owners of patents, copyrights and trademarks from infringement of those intellectual property rights. Trade secret owners, however, traditionally had to rely on state law to protect their trade secrets from improper use or disclosure. Congress has now given trade secret owners an additional avenue for protecting their intellectual property:  the Defend Trade Secrets Act of 2016 (the "DTSA"). The DTSA creates a civil cause of action under federal law for misappropriation of trade secrets.

Although the DTSA resembles many of the provisions of the Uniform Trade Secrets Act ("UTSA") (which has been adopted at least in part by all but two states), the DTSA does not preempt any state laws protecting trade secrets. Instead, it supplements those state laws. As of May 11, 2016, trade secret owners can now seek relief for misappropriation of trade secrets based on both federal and state law. Importantly, the DTSA enables trade secret owners to bring any misappropriation claim in federal court (previously, federal jurisdiction was only available in certain instances).

The DTSA was clearly intended to provide trade secret owners with additional weapons to protect their trade secrets from misappropriation by foreign parties. One notable provision of the DTSA is the section that permits a pre-judgment civil seizure of property. Under most state laws, a trade secret owner can seek a preliminary injunction in an attempt to prevent the misuse or improper disclosure of a misappropriated trade secret. Congress, however, recognized that a preliminary injunction might not be adequate to fully protect a trade secret. The DTSA, therefore, enables a federal district court, under appropriate circumstances and without prior notice to a defendant, to order law enforcement officials to seize and sequester trade secrets in the possession of that defendant. Prior to issuing a civil seizure order, the court must find, among other things, that an injunction would be inadequate and that the plaintiff will suffer irreparable harm if the seizure is not ordered. The court must take steps to protect the defendant from unjustified harm. Importantly, the DTSA gives the defendant a cause of action against the plaintiff for damages if the court later determines that the seizure requested by the plaintiff was wrongful or excessive. Unlike with an injunction, where the damages that can be recovered by a defendant are limited to the amount of the bond posted by the plaintiff, the damages for wrongful or excessive seizure are not capped. A court must hold a hearing within seven days following a seizure to determine whether the plaintiff can carry its burden of proof to establish that the seized trade secrets were misappropriated.

The DTSA gives a successful plaintiff the right to obtain an injunction to prevent any actual or threatened misappropriation of a trade secret, along with damages to compensate the plaintiff for any actual loss of the trade secret and any unjust enrichment not included in the amount awarded for the loss of the trade secret. Alternatively, the plaintiff may seek a reasonable royalty for the use of the trade secret. A plaintiff that establishes willful misappropriation can recover double damages. In cases involving bad faith or willful misappropriation, the prevailing party can recover its attorneys' fees.

Often, a trade secret owner will pursue a claim against a former employee for misappropriation. The DTSA contains some important provisions that concern claims against former employees. First, the DTSA expressly prevents a court from entering an injunction to prevent a former employee from working for a competitor based "merely on the information the person knows." Instead, the injunction must be "based on evidence of threatened misappropriation." Some commentators have suggested that this language was intended to repudiate the "inevitable disclosure doctrine" recognized in some states, including Ohio. Under the inevitable disclosure doctrine, a court can enjoin a former employee from working for a competitor if the nature of the duties at the new employer would result in the inevitable disclosure of the former employer's trade secrets. The court can enjoin the former employee from working for a competitor even if the employee never signed a non-competition agreement.

By prohibiting an injunction based merely on what the former employee knows, the DTSA may appear to be at odds with the inevitable disclosure doctrine. Yet, a review of the case law embracing that doctrine shows that the courts have concluded that an injunction was warranted not merely because of what the former employee knew, but because the facts and circumstances of the new employment demonstrated an actual and real threat of improper disclosure. For that reason, we do not believe that the inevitable disclosure doctrine is irrelevant to a DTSA claim. Moreover, because the DTSA does not preempt state law, a plaintiff can pursue remedies based on both the DTSA and state law.

The DTSA also protects whistleblower employees. An employer has no cause of action against any employee who discloses trade secrets to the government or an attorney for the employee if the disclosure is made for the purpose of reporting or investigating a suspected violation of the law. The DTSA requires that employers provide their employees with "notice of the immunity" under the DTSA "in any contract or agreement with an employee that governs the use of a trade secret or other confidential information." In other words, in any confidentiality agreement, non-compete agreement and various other employment related agreements, an employer should include a provision notifying the employee that he or she may disclose the employer's trade secrets to the government or an attorney for the employee if made for the purpose of reporting or investigating a suspected violation of the law. The DTSA permits an employer to comply with this requirement by cross-referencing "a policy document provided to the employee that sets forth the employer's reporting policy for a suspected violation of law." Presumably, a cross-reference to an employee handbook that contains the appropriate policy will be sufficient. Failure to provide the proper notice will not prevent an employer from pursuing a claim against a former employee, but it will prevent the employer from recovering enhanced damages and legal fees.

While passage of the DTSA will provide several new enforcement tools to address a claim of misappropriation, trade secret owners should still have in place reasonable and adequate measures to protect their trade secrets from misappropriation or improper use or disclosure. These measures should be based on the specific facts and circumstances of each situation.

Also, because of the new notice provisions, employers should review their existing confidentiality, non-compete and employee handbooks to bring them into compliance with the DTSA.

Related professionals

Related practices