Trade Secret Misappropriation Law Now Federalized

Trade secret misappropriation has traditionally been a matter of state law.  Previously, the federal statute permitted only criminal or civil causes of action initiated by the U.S. Attorney General.

However, on May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (the “Act”), federalizing trade secrets law.   The Act does not preempt state laws.  Rather, it amends federal law by creating a federal civil remedy for the actual or threatened misappropriation of trade secrets.

Pursuant to the Act, “[a]n owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.”

The Act defines “trade secret” to mean “information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

Key points:

There is no amount in controversy threshold and the Act provides for a three year limitations period following the discovery of the facts giving rise to the trade secret claim.

The Act’s key feature is an early-litigation remedy reserved for “extraordinary circumstances.”

Specifically, federal courts are now empowered to issue ex parte seizure orders to prevent the dissemination of trade secrets.  In other words, an aggrieved party may go into court alone, without having to provide notice to the other party, in order to obtain a court order requiring the trade secret information to be held by a court pending resolution of the dispute.  The applicant bears the burden of establishing that, if advance notice is provided, the accused is likely to circumvent a traditional injunction by hiding or destroying the subject property.

The ex parte seizure provision contains various procedural safeguards to deter litigation abuse.  For example, an applicant must set forth with reasonable particularity the items to be seized, where they are located, that an irreparable injury will occur if the seizure is not ordered, and that a temporary injunction would be inadequate because the accused would destroy, hide or disseminate the subject property, or otherwise not comply with the injunction.

If the court enters a seizure order and following actual seizure, the property remains safeguarded by the court pending an expedited hearing on the propriety of the seizure.  The hearing provides an applicant an opportunity to set forth supporting facts and law.  It also enables the accused to dispute the allegations and to have the seizure order dissolved.

An applicant is not permitted to play any role in or have access to the seized property until the hearing is concluded.  Also, an applicant must post a bond that is sufficient to cover the payment of damages in the event of a wrongful seizure.

Damages can be significant under the Act and there are a number of potential remedies for an aggrieved party, including compensatory damages for either the actual loss caused by the misappropriation of the trade secret and any unjust enrichment (or a reasonable royalty for use of the trade secret), injunctive relief and punitive damages for the prevailing party if it is established that the trade secret was willfully and maliciously misappropriated.  Attorneys’ fees may also be available in cases involving bad faith.

Important protections for those accused of wrongfully misappropriating trade secrets are built-into the Act, including a process for challenging the improper seizure of property, expedited discovery and recovery of attorneys’ fees for actions that have been initiated in bad faith. Significantly, bad faith can be established via circumstantial evidence.

Lastly, the Act provides various employment protections.

An injunction to prevent actual or threatened misappropriation may not prevent a person from entering into an employment relationship. Moreover, any conditions that an injunction may place on an individual’s employment must be based upon actual evidence that trade secrets will be misappropriated.  An injunction under the Act cannot conflict with applicable state laws prohibiting restraints on the practice of a lawful trade, profession, or business.

The Act also provides whistleblower protection for employees, independent contractors and consultants that might report misappropriation of trade secrets in confidence to government authorities, or to attorneys.  It is critical that employers understand obligations imposed pursuant to this portion of the Act.

In short, employers must include notice of such immunity in any agreement with an employee, contractor or consultant that governs the use or disclosure of trade secret or confidential information.  The failure of an employer to provide required notice will result in the employer not being able to recover exemplary damages or attorneys’ fees from the employee in any action brought under the Act for theft of trade secrets against an employee to whom such notice was not given.

Employers with existing confidentiality agreements governing the secrecy of trade secrets are well-advised to revise or update those agreements promptly in order to provide the required notice.

If you are interested in learning more about the Defend Trade Secrets Act, require assistance with revisions to your written employment policies and confidentiality agreements, or if you are contemplating which claims to pursue and where to file, please contact a trademark, copyright and trade secret law attorney by emailing the author at rnewman@hinchnewman.com.

Information conveyed in this article is provided for informational purposes only and does not constitute, nor should it be relied upon, as legal advice. No person should act or rely on any information in this article without seeking the advice of an attorney.

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