The New Federal Trade Secret Act and What It Means to Your Business

By: Amir Amini; Sanchez & Amador, LLP; Los Angeles, California

Submitted by Emerging Leaders

Congress recently passed the first federal trade secret law, the “Defend Trade Secrets Act of 2016,” or “DTSA.” Passed with overwhelmingly bipartisan support, the President is expected to sign it before this article is published. The DTSA covers all trade secret misappropriation occurring after its enactment. The most significant impact of the DTSA is that it creates a federal private right of action for trade-secret misappropriation, provides an ex parte seizure remedy, and contains a safe harbor for whistleblowers and employees. Each of these is addressed below, along with other notable provisions.

Congress’s goal in passing the DTSA is to promote consistency in trade secret law, which to date has been developed exclusively through state laws. Traditionally, trade secrets have been protected by state law under a particular state’s adoption of the Uniform Trade Secrets Act (“UTSA”), with the exception of New York and Massachusetts which protect trade secrets under the common law. While most states follow the UTSA, there are still significant differences among the states’ laws and application of those laws. The federal law is expected to lead to more uniform decisions and generate more predictable results, although, as discussed below, it expressly does not pre-empt state law.

In many respects the DTSA is quite similar to the UTSA. One similarity is the DTSA’s definitions for “trade secret,” “misappropriation,” and “improper means,” all of which are consistent with the UTSA. The DTSA also provides similar remedies (except as noted below), including injunctive relief, compensatory damages, and exemplary damages and the recovery of attorneys’ fees in the event of willful or malicious misappropriation.

As outlined below, however, the DTSA contains some notable new provisions.

Notable Provisions in the DTSA

(1) New Ex Parte Seizure Order. Although most UTSA states have procedures for obtaining temporary restraining orders to stop misappropriation, the DTSA provides a detailed procedure for not only stopping misappropriation but also for recovering the alleged trade secret even prior to giving notice of the lawsuit to the defendant. In “extraordinary circumstances,” a trade secret owner may file an ex parte application for Court intervention to issue an order “providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret.”

Though the DTSA does not define “extraordinary circumstances,” it expressly provides that an ex parte order may only issue if the party seeking it meets certain strict conditions that are intended to curtail the potential abuse of such seizures. In addition to satisfying the usual requirements for an injunction, the trade secret owner must: (i) demonstrate that an order issued pursuant to FRCP 65 (i.e. injunctions, restraining orders, or other equitable relief) would be inadequate; (ii) demonstrate the need for the ex parte order substantially outweighs the harm to any third parties that may be affected by its issuance; (iii) establish the person subject to the order has actual possession of the property to be seized and would likely “destroy, move, hide, or otherwise make inaccessible” the property if the Court gave advance notice; (iv) describe with reasonable particularity the items to be seized and their location; and (v) demonstrate that the requested seizure has not been publicized.

If all elements are met, the Court may issue a narrowly tailored seizure order so as to not impede the rights of those subject to the order. Once issued, the order may only be carried out by federal law enforcement or other authorities, and must be reviewed at a hearing within seven days after the order has issued. The order must provide specific instructions for law enforcement officers performing the seizure, such as when the seizure can take place and whether force may be used to access locked areas.

This new remedy, however, also comes with significant risks. The DTSA includes an express cause of action for a person damaged by a wrongful or excessive seizure and allows for the collection of actual and punitive damages.

(2) Safe Harbor for Whistleblowers and Employees. The DTSA provides immunity from civil and criminal liability to individuals who disclose trade secrets in confidence to the government in the course of reporting wrongdoing. Individuals who disclose trade secrets in an anti-retaliation lawsuit are also granted immunity provided that the disclosure is made under seal and pursuant to court order. With respect to employees, the DTSA requires that injunctions relating to future employment be narrow and based on “evidence of threatened misappropriation and not merely on the information a person knows.” In addition, the injunction preventing or limiting employment cannot “otherwise conflict with an applicable state law prohibiting restraints on the practice of a lawful profession, trade, or business.” This limitation, however, doesn’t appear to apply to causes of action against former employees. As such, this provision has the potential of creating a conflict between state employment laws favoring employee rights and the DTSA.

(3) Changes to “Employee” Confidentiality Agreements. The DTSA creates an affirmative duty on employers to provide “employees,” which is defined broadly to include contractors and consultants, notice of the new immunity provision in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” If notice is not provided, the employer may not recover exemplary damages or attorney fees in an action brought under the DTSA.

Companies should have counsel review policies and relevant agreements to ensure that they contain language required under the DTSA. Companies should also ensure that non-disclosure agreements contain clear definitions of trade secrets and confidential information and are not overly broad.

(4) State Laws Not Preempted. The DTSA does not preempt state trade secret laws. Trade secret owners can assert state law claims along with DTSA claims. This may have the unintended consequence of forum shopping. Where complete diversity is lacking, plaintiffs could choose to rely on state law claims in order to take advantage of a friendly forum without fear of removal. Conversely, those facing an imminent lawsuit may choose to strike preemptively under the DTSA and the declaratory judgment act to guarantee a federal forum.

(5) Statute of Limitations. A civil action must be commenced within three years of discovery of the misappropriation or by the exercise of reasonable diligence should have been discovered.

Although the DTSA is a step in the right direction, like many new laws, it leaves several unanswered questions and its application may result in unintended consequences. For example, the DTSA does not include express territory based limitations, leaving open questions regarding the extraterritorial reach of the new law. Congress smartly included in the DTSA procedures to reassess and make necessary changes and in all likelihood, there will be ongoing legislation to address ambiguities.

For now, one thing is certain. Companies that want to have all the DTSA’s available remedies should modify all confidentiality and non-disclosure provisions and agreements to include the required notice language as discussed above. It is advisable that companies ensure that all confidentiality and non-disclosure provisions and/or agreements contain clear definitions of the company’s trade secrets and confidential information and are not overly broad. Finally, companies should revisit their internal protocols to ensure that all reasonable measures are being taken to maintain the secrecy of the company’s proprietary information.

Amir A. Amini is Senior Counsel with Sanchez & Amador, LLP, with offices in Los Angeles and Oakland California. Amir leads the firm’s business and real estate litigation team. His practice focuses on complex business litigation, including commercial contracts, fraud, defamation, unfair competition, and intellectual property disputes. Amir is Co-Chair of NAMWOLF’s Emerging Leaders Group.