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May 17, 2016

The New Defend Trade Secrets Act – Takeaways and Action Items

The Defend Trade Secrets Act of 2016, enacted May 11, 2016 (the "Act"), amends 18 U.S.C. Ch.90, the Economic Espionage Act of 1996 (the "EEA"). The Act authorizes a federal private right of action by owners of trade secrets that are misappropriated. It replaces a section of the EEA that authorized the US Attorney General to bring a civil action for injunctive relief to enjoin violations of the EEA.

In many ways, the Defend Trade Secrets Act is similar to the Uniform Trade Secrets Act (UTSA), which has been adopted by most states (with notable exceptions of New York and Massachusetts). While initial versions of the Act provided for a longer statute of limitations and allowed for greater exemplary damages than the UTSA, what was ultimately enacted provides a 3-year statute of limitations and allows for exemplary damages up to double of the actual damages in the case of willful and malicious misappropriation – the same as the UTSA.

In creating this new cause of action, the Act opens-up the federal courts for trade secret owners, and in the long run, hopefully harmonizes this cause of action. Notably, the Act does not preempt state causes of action, and thus lawsuits can still be brought through state courts, and companies should still track how the UTSA or its state variants are being construed and applied to assess which forum may be best to enforce their rights. Because there is no state preemption, the Act creates the possibility of bringing a claim in federal court under the EEA and appending a state claim under the state's UTSA.

Under the Act, the definition of "trade secret" is similar to that of the UTSA. For information to satisfy the trade secret definition, there are two requirements – (i) the owner must have taken reasonable measures to keep the information secret; and (ii) the information must derive independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.

The "owner" of a trade secret is defined to include a licensee. The Act defines "misappropriation" of a trade secret as acquiring the trade secret by "improper means" or disclosure of a trade secret without the consent of the owner by a person who acquired it by improper means or who owed a duty to maintain its secrecy. "Improper means" includes theft, bribery, espionage through hacking, and breach of a duty to maintain secrecy. The Act, however, expressly excludes reverse engineering and independent derivation from the definition of improper means, similar to what was allowed under the UTSA. Though the Act does not define reverse engineering, this exclusion could mean that acquiring information by disassembling a competitive product that was legally obtained is not, in and of itself, an improper means.

Under the Act, a trade secret owner can now obtain a variety of remedies in federal courts if the trade secret is related to a product or service used in, or intended for use in, interstate commerce or foreign commerce. The remedies include an injunction, damages, and a seizure order. In regards to injunctions, the Act explicitly rejects the inevitable disclosure doctrine, adopted by some states in their application of the UTSA, that possessing knowledge of a trade secret is a basis for an injunction. As stated in the Act "evidence of threatened misappropriation and not merely on the information the person knows" is required for injunctive relief. This means an employer cannot use the Act to obtain an injunction prohibiting an employee from working for a competitor based simply on the employee's knowledge.

Also, unlike the UTSA, the Act authorizes federal courts in extraordinary circumstances to issue an order for the seizure of property based on the trade secret owner's ex parte application. Notably, this new remedy allows such seizure before notifying the other side and can be particularly powerful if there is danger that the accused party could destroy information if given notice. In this way, the seizure can preemptively stop disclosure of a trade secret. Companies vulnerable to cyberattacks may find this tool particularly valuable. Those on the wrong side of a seizure order will have the seized property under the custody of the court and will have a chance to be heard at a hearing not later than seven days after the issuance of the seizure order.

Moreover, the Act provides immunity from criminal and civil liability for the disclosure of trade secrets by individuals under specific circumstances. To qualify for the immunity, the disclosure must be made in confidence to government officials or to an attorney for the purpose of reporting a violation of law or in a lawsuit, if the trade secret is contained in a filing under seal. The type of lawsuit includes one in which an employee or contractor sues the employer on the basis that the employer has retaliated against him/her for reporting a violation of law.

The Act requires employers to provide notice of this immunity provision in all agreements with their employees and contractors governing the use of trade secrets or confidential information. The employer may satisfy this requirement by including a cross reference to an employee manual or other policy document providing notice of the immunity provision. If an employer fails to provide this notice required for an employee or contractor, the employer forfeits its right to exemplary damages and attorneys' fees in an action against the employee or contractor.

In view of the Act, companies should consider updating their form confidentiality, non-disclosure, employment, contractor and vendor agreements in the following respects: 

  1. The agreements should express that the confidential information is related to a product or service used in or intended for use in interstate or foreign commerce.
  2. The scope of the company's "Confidential Information" definition should at least encompass the Act's definition of "trade secret."
  3. The "remedies" provisions should go beyond the usual "irreparable injury" language to strengthen the owner's position for obtaining an injunction or seizure order, for example, by requiring the recipient to acknowledge that: (i) an immediate and irreparable injury would occur without a seizure order; (ii) seizure of the confidential information would not interrupt the legitimate business operations of the recipient; and (iii) an injunction would not prevent the recipient from entering into an employment relationship.
  4. Since the Act permits the owner to recover exemplary damages and attorneys' fees in certain circumstances, the agreements should recite the required elements and include the required immunity notice.
  5. Since reverse engineering is not considered an "improper means," the agreements should specifically prohibit the recipient from reverse engineering the embodiments of the "Confidential Information."

The enactment of the Defend Trade Secrets Act provides new benefits for trade secret owners but also creates new duties binding upon employers. Companies should therefore review and update their in-house procedures, agreement templates and policies related to confidential information. We provide counseling, contract drafting and enforcement with respect to trade secrets, leveraging our in-depth experience in the areas of Intellectual Property, Corporate, Cyber Security, Labor & Employment, Commercial Litigation, and White Collar Defense.

If you would like further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the member of the Corporate or Intellectual Property Litigation Practice Areas.


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