Articles

The Connecticut Law Tribune

July 25, 2016

Last month, Congress passed the Defend Trade Secrets Act of 2016 (“DTSA” or the “Act”). This momentous new law establishes a federal cause of action for companies who have trade secrets misappropriated.  Described by legal scholars as “the most significant expansion of federal law in intellectual property since the Lanham Act in 1946,” the Act is intended to enhance the ability of companies’ ability to fight back against those who would steal their trade secrets.

BACKGROUND

Over the last few years, multiple versions of a trade secret protection law failed to pass in Congress. Finally, the 2016 DTSA passed with broad support.  The House of Representatives voted 410-2 in favor of passing the bill.  The Senate approved it 87-0.  President Obama then signed the bill into law in a public ceremony.  We have previously written about Congressional gridlock during the Obama administration – President Obama has consistently pursued his policies through alternative means such as creating new, stronger regulations or stepping up enforcement of existing ones.  Therefore, it is interesting that this law garnered such broad, bi-partisan support.  It suggests many politicians felt strongly this was a much needed change.

WHAT ARE THE KEY FEATURES OF THE NEW LAW?

As stated above, the DTSA establishes a federal cause of action for trade secret misappropriation. Owners of misappropriated trade secrets may now sue under the DTSA if “the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.”  This practically covers almost all commerce in the United States.

One of the most significant characteristics of the DTSA is a provision allowing seizure of property “necessary to prevent the propagation or dissemination of” the trade secret in question. Most notably, trade secret owners are allowed to apply to the court for this relief ex parte!  In other words, a judge can decide whether to order such a seizure without the alleged misappropriator being attendance or given an opportunity to oppose the application until after the seizure occurs.  The Act lays out eight requirements which must be satisfied before a court may grant seizure:

1. The court finds an order pursuant to Rule 65 of the Federal Rules of Civil Procedure (providing for  injunctions and restraining orders) or other forms of equitable relief are inadequate to protect the petitioner/plaintiff because the defendants would “evade, avoid, or otherwise not comply with” such an order;

2. An immediate and irreparable injury will occur if such seizure is not ordered;

3. The harm to the plaintiff of denying the seizure outweighs the legitimate interests of the defendant   and substantially outweighs the harm to any affected third parties;

4. The plaintiff is likely to succeed in showing the information in question is a trade secret and the defendant misappropriated it using improper means or conspired to use improper means to do so;

5. The person against whom the seizure would be ordered has actual possession of the trade secret and any property to be seized;

6. The plaintiff describes what is to be seized with reasonable particularity and reasonably identifies the location where it is to be seized;

7. The person against whom seizure would be ordered, or persons acting in concert with such person, would destroy, move, hide, or otherwise make such matter inaccessible to the court, if the applicant were to proceed on notice to such person; and

8. The plaintiff has not publicized the requested seizure.

Recognizing this may be a controversial measure, the drafters of the bill took steps to prevent abuse. Among other things, the judge must “provide for the narrowest seizure of property necessary,” schedule a hearing within seven days of the seizure at which the burden of proof is on the plaintiff, and take appropriate steps to protect the party against whom the seizure was directed from publicity by at or at the behest of the plaintiff. We will not know whether these protections will prove effective until the first DTSA cases seeking seizures make their way to the courts.

The law also gives judges the ability to grant a wide variety of damages to a successful plaintiff. The court may provide actual damages caused by the misappropriation, damages for unjust enrichment not addressed in the actual loss calculation, imposition of a reasonable royalty on the misappropriator (in lieu of other damages), attorney’s fees, and even punitive damages!

Another significant provision is whistleblower immunity. The Act protects individuals from criminal or civil liability under federal or state law for disclosures of trade secrets made in confidence to federal, state, or local government officials or an attorney solely for the purpose of reporting or investigating a suspected violation of law. Individuals will also not be liable if they disclose trade secrets in legal filings as long as they are made under seal. When filing an anti-retaliation lawsuit, whistleblowers are similarly allowed to disclose trade secret information to their attorney and in filings made under seal.

Notably, the DTSA requires employers to notify their “employees” (the Act uses a broad definition of “employee” which includes contractors and consultants) of these whistleblower protections. Any contract or agreement governing use of a trade secret or other confidential information must contain a notice of the immunity granted by the DTSA, or at least cross-reference the employer’s reporting policy for suspected violations of the law (which must then also be provided to the employees). Failure to do so may result in an employer not being awarded punitive damages or attorney’s fees in a future DTSA lawsuit. You should seek legal counsel for these form disclosures.

WHAT ARE THE CONSEQUENCES FOR TRADE SECRET LITIGATION?

We expect an exponential increase in the amount of trade secret litigation in federal court. Prior to the passage of the DTSA, trade secret issues were governed entirely by state law. Trade secrets could still be brought in federal court, but only if the requirements for federal diversity jurisdiction were met. For any lawsuit to satisfy diversity jurisdiction requirements, the amount in controversy must be over $75,000 and all plaintiffs must be citizens of different states than all defendants. Even if these requirements were satisfied, the federal court had to apply state law. Now, without these requirements, it will be much easier to bring trade secret lawsuits to federal court.

The DTSA does not preempt state trade secret laws, so plaintiffs will be able to choose whether to file trade secret misappropriation lawsuits in state or federal court. Whether this will produce more favorable results for trade secret plaintiffs remains to be seen.

Not everyone is convinced the DTSA will have the intended effect. In 2015, a group of legal scholars submitted a letter addressed to Senators Chuck Grassley and Patrick Leahy and Representatives Robert Goodlatte and John Conyers, Jr. detailing their concerns. They wrote, “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.” Only time will tell if these fears come true.

WHAT SHOULD COMPANIES DO NOW?

Companies should immediately update their employee and independent contractor agreements (or standalone confidentiality agreements if applicable) to include language satisfying the notice requirement of the DTSA’s whistleblower immunity provision. If a company later sues an employee to whom it did not provide this notice, it will not be able to receive punitive damages or attorney’s fees under the Act. The notice requirement applies to any “contracts and agreements that are entered into or updated” after May 11, 2016 (the DTSA’s date of enactment). Be sure your actions involving employment-related agreements cannot be construed as a change to the original form which would trigger this notice requirement.

Now is also a good time for companies to review their policies regarding incoming employees. With a new federal cause of action, it may become easier than ever for former employers to file misappropriation of trade secret lawsuits against their former employees. Do not let your company get sued because an overzealous new employee brought a former employer’s trade secrets with him. Companies should have a clear written policy stating incoming employees may not bring their old companies’ trade secrets or other confidential information with them and may not use such information in carrying out their duties at their new employers. It also should require new employees disclose any possible concerns over misappropriation of trade secrets and related information.

Robert G. Brody is the founder of Brody and Associates, LLC. Alexander Friedman is an associate at the Firm. Brody and Associates represents management in labor, employment, and benefits law matters and has offices in Westport and New York City.