On May 11, 2016, President Obama signed the Defend Trade Secrets Act (“DTSA”) into law, creating a new federal civil remedy for private parties for misappropriation of trade secrets. The new law allows an owner of a misappropriated trade secret to bring a civil action in federal court if the trade secret “is related to a product or service used in, or intended for use in, interstate or foreign commerce.” Before the DTSA, civil trade secret claims were the purview of state law, and almost every state has adopted some version of the Uniform Trade Secrets Act (“UTSA”) to govern such claims. The DTSA does not preempt these state laws; it provides a complementary federal cause of action for trade secret misappropriation having a jurisdictional nexus to interstate or foreign commerce.
How does the DTSA differ from the UTSA?
There are several key differences between the DTSA and the UTSA, including: (i) The DTSA provides for ex parte seizure of property where certain prerequisites are met; (ii) the DTSA provides individual immunity for confidential disclosure of trade secrets to the government or in court proceedings; and (iii) the DTSA imposes certain notice obligations on employers as a condition for seeking exemplary damages.
Ex Parte Seizure Remedy — The DTPA provides an ex parte civil seizure remedy that allows a federal court, ex parte, to order seizure of property from an accused misappropriator where necessary to preserve evidence or prevent a trade secret’s dissemination. Seizure is available only in “extraordinary circumstances,” and a significant number of requirements must be met before seizure can be ordered. Chief among these are that immediate and irreparable injury will occur without a seizure order, that the applicant is likely to succeed in showing that the person from whom seizure is sought order has actual possession of the applicant’s trade secret, and that such person misappropriated the trade secret by improper means. An applicant also must show that, if given notice, the person against whom seizure is sought would destroy, move, hide, or otherwise make such property inaccessible.
Immunity for Confidential Disclosure in a Court Proceeding or to Government — The DTSA provides individual criminal and civil immunity for trade secret disclosures in two circumstances: (1) in a document filed under seal in a judicial proceeding or (2) for disclosures made in confidence to a government official, or to an attorney, and “solely for the purpose of reporting or investigating a suspected violation of the law.” Further, where an individual files a lawsuit for retaliation by an employer for reporting a suspected violation of law, the DTSA permits the individual to disclose trade secrets to the individual’s attorney and to use the secrets in court proceedings (so long as disclosure is made only in sealed court filings and pursuant to a court order). The DTSA does not, however, immunize unlawful access of materials by unauthorized means or any other act otherwise prohibited by law.
Exemplary Damages Conditioned on Notice of Immunity — Under the DTSA, an employer may not recover exemplary damages from an “employee” (a term defined by the DTSA to include a person doing work as a contractor or consultant) unless the employer provided notice of the DTSA’s immunity in any contract or agreement with such party that “governs the use of a trade secret or other confidential information.” This notice requirement applies to any contract or agreement entered into or updated after May 11, 2016. The required notice may be provided in the contract or in a policy document provided to the employee, contractor or consultant.
Practical Considerations for Businesses
With the passage of the DTSA, a company facing misappropriation of its trade secrets (having an interstate or foreign nexus) now has the option to seek damages, injunctive relief, and, in extraordinary circumstances, ex parte seizure of misappropriated trade secrets in federal court. Like state trade secrets laws, the DTSA will impact a range of business activities—e.g., employment, outsourcing, technology licensing, and innovation-related cooperation and data sharing—that expose employees, subcontractors, vendors, consultants, and licensees to a company’s valuable know-how and business information. There are several steps that a company can take now to best position itself to take advantage of the protections provided by the new law.
Identify, mark, catalogue, and track access to trade secrets — In order for a court to impose conditions on a former employee’s future employment or order seizure of property necessary to prevent disclosure of trade secrets under the DTSA, a company must be able to show, among other things, evidence of threatened misappropriation—not merely evidence of what a person knows. Companies should endeavor, on an ongoing basis, to identify, mark, catalogue, and track access to documents, computer files, software programs, and other data containing trade secrets. By doing so on a regular basis, a company facing misappropriation should be able to quickly and particularly identify trade secrets in the possession of a person accused of misappropriation, and quantify the potential harm to the company that would result from such misappropriation.
Protect trade secrets in writing — In order to pursue federal trade secret protection, a company must show that it employs reasonable measures to protect the confidentiality of its trade secrets. Companies should require employees, contractors, consultants, licensees and others legitimately exposed to its trade secrets to sign a written NDA or acknowledge confidentiality obligations in writing before valuable know-how or business information is disclosed. In addition to training, written policies and guidelines should be provided to employees, and protocols (concerning, for example, destruction, return and ongoing secrecy) should be established and provided to departing employees. Written warnings also should be provided to prevent unauthorized access to company trade secrets.
Determine which contracts trigger the DTSA’s immunity notice requirement and should be updated accordingly — The DTSA requires companies to provide notice of immunity in connection with any contract or agreement with an employee (including an independent contractor or consultant) that governs the use of a trade secret or other confidential information. While the statute does not include an affirmative penalty for non-compliance, a company cannot recover exemplary damages from an employee, independent contractor, or consultant who has not received written notice of immunity. Companies should identify all such contracts and agreements entered into or updated after May 11, 2016. After identifying applicable contracts, businesses should consider the need—on a case-by-case basis—to update contractual language and/or provide appropriate policy documents to employees, contractors and consultants to whom notice is owed under the DTSA.