Defend Trade Secrets Act – Ushering in a New Era of Federal Trade Secret Protection

05.05.2016

During a time when Congress seemingly cannot agree on anything, last week the House of Representatives passed the Defend Trade Secrets Act ("DTSA") by an overwhelmingly bipartisan vote of 410-2, after the bill was already passed by the Senate. (S. 1890, H.R. 3326.) The new bill was lauded by multinational companies, such as Microsoft Corp., General Electric Co., and DuPont Co., and the Obama Administration has already said that it "strongly supports" the bill.

While companies’ trade secrets have enjoyed protection at the state level for decades, commensurate federal protection has been non-existent. This is because federal civil law governing intellectual property has long contained only three prongs: copyrights, patents and trademarks. The DTSA, passed by congress, promises to add a fourth one: trade secrets, and is being hailed as the most far reaching expansion of federal intellectual property law since the Lanham Act of 1946.

The Defend Trade Secrets Act

Trade secrets are confidential, proprietary, and valuable information of a business, not generally known to the public, that has actual or potential independent value, where reasonable efforts are made to keep it a secret, and which gives the company in possession of the trade secret a competitive edge. Famous examples are the Coca Cola formula and the algorithm Google uses to filter and synthesize information on the World Wide Web. California, like many other states, has adopted the Uniform Trade Secrets Act, which provides for civil recourse at the state level in the event of trade secret misappropriation.

Federal law, however, has only governed criminal enforcement and prosecution of trade secret theft under the federal Economic Espionage Act. This limitation has proven problematic for companies who operate across state and national borders and are therefore exposed to trade secret misappropriation by competitors operating across the world, not just within the borders of a single state. According to many experts, the expansion of the global economy renders the array of state laws inefficient and inadequate, which is perhaps why powerful lobbying groups such as the National Association of Manufactures and the U.S. Chamber of Commerce have championed a uniform, federal trade secret law.

The DTSA will allow companies to sue for trade secret theft and pursue damages in federal court. The DTSA would further provide a uniform protection to national and international companies whose proprietary information "is related to a product or service used in, or intended for use in, interstate or foreign commerce," and is being threatened by competitors around the globe. Thus, the hope is that the DTSA will harmonize the law through a single federal statute, and will aid in establishing case law that is more uniform and predictable, and not subject to the differences and nuances found in state-to-state trade secret laws.

Injunctive Relief Under the DTSA

In addition to the traditional damages available for misappropriation of trade secrets under current state law, the DTSA provides for injunctive relief as an additional remedy. According to a Congressional Research Service report on the bill, "[t]he DTSA would require evidence of actual or threatened misappropriation before a court may issue an injunction to prevent it." In addition, the DTSA provides that a federal court "upon ex parte application but only in extraordinary circumstances" may issue an order for the seizure of property "necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action." Since the earliest iteration of the DTSA was introduced in 2012, this provision allowing courts to issue ex parte seizure orders to prevent the dissemination of a trade secret — a harsh remedy that’s unavailable under state law – has been its most controversial provision. Undoubtedly, what constitutes "extraordinary" circumstances justifying a seizure order will be a hotly contested and litigated issue in the years following the passage of the DTSA.

Whistleblower Protection

In addition, the DTSA provides for whistleblower protections. An individual shall not be criminally or civilly liable under any federal or state law for a disclosure of trade secret information

that is made in confidence to a federal, state or local government official for the sole purpose or reporting a suspected violation of law.

What Critics Are Saying About the DTSA

Although the law has garnered wide ranging political support, there are a minority of experts who oppose the DTSA. According to these experts:

While we agree that effective legal protection for U.S. businesses’ legitimate trade secrets is important to American innovation, we believe that the DTSA [. . .] will not solve the problems identified by its sponsors. Instead of addressing cyberespionage head-on, passage of the DTSA is likely to create new problems that could adversely impact domestic innovation, increase the duration and cost of trade secret litigation, and ultimately negatively affect economic growth.

See Professors’ Letter in Opposition to the Defend Trade Secrets Act of 2015 (S. 1890, H.R. 3326)

These scholars argue that there is already wide uniformity in state trade secret laws as most states, including California, follow some iteration of the Uniform Trade Secret Act. Thus, adding a new federal law will result in yet another forum for which plaintiffs can pursue damages, will stretch adjudication costs, and will result in unnecessary consumption of judicial time and energy.

Although these scholars arguably raise valid points, their arguments have proven unpersuasive as the Obama Administration is poised to sign the DTSA into federal law.

Conclusion

If your company conducts interstate commerce, and has been, or may be, the victim of trade secret theft, it is important to stay on top of this emerging area of law. Whereas before your company may have been limited to pursuing damages in state court, with the imminent passage of the DTSA into law, new remedies may be available to pursue in federal court.

To take advantage of this law, it is important for a business to examine its contracts regarding trade secret or confidential information to protect its options provided under the DTSA. It must make sure that newly hired employees are advised and cautioned to not bring the trade secret or confidential information of a former employer to their new employer. Upon termination, a former employee should be reminded of their continuing obligations of non-disclosure of the employer’s trade secret or confidential information even if that employee is moving across the country or leaving the country. With these and other steps, a business will be in a better position to protect the trade secret and confidential information it has developed through great effort.