trade secrets

By Jessica C. Engler

On May 11, 2016, President Barack Obama signed into law the Defend Trade Secrets Act of 2016 (“DTSA”). Through the DTSA, claims for trade secret misappropriation will now have a basis in Federal law and Federal Courts will have jurisdiction over such claims. In addition to the new federal cause of action, the DTSA adds in several tools that trade secret holders can use to protect their trade secrets, making this Act one of the most broad-sweeping changes to American intellectual property law since the Leahy-Smith America Invents Act in 2011. Given these changes and the Supreme Court’s recent decisions on the patentability of software and business methods, it is important that trade secret holders understand the new tools available for protecting their intellectual property rights and their new responsibilities.

Generally, a trade secret is information, including patterns, plans, compilations, formulas, design, processes, procedures, and more, where the holder has taken reasonable measures to keep the information secret, the information is not readily ascertainable or reverse-engineered, and the information gives that owner some kind of economic value or competitive edge.[1] Famous examples of trade secrets include the recipe for Coca-Cola, Google’s proprietary search algorithm, and the formula for WD-40.[2] However, trade secrets do not extend to just these highly-valuable examples. A majority of businesses have at least some trade secrets including, but not limited to, customer lists, marketing strategies and analyses, manufacturing techniques, pricing and purchasing information, business methods, business forecasts, and product information.

A trade secret is valuable for as long as the information remains a secret. Trade secrets can be lawfully learned through reverse engineering. What becomes more concerning for trade secret holders is unlawful use through commercial or industrial espionage, breach of contract, or employee poaching while non-compete agreements are in place. The unauthorized use or misappropriation of a trade secret by a person other than the holder is considered unfair competition and an unfair trade practice.

Before the DTSA, trade secrets were the only major form of intellectual property that that is not backed by U.S. federal civil remedies. Trade secret holders whose secrets were publicized typically only had state-level remedies available. The DTSA extends the current Economic Espionage Act of 1996, which criminalized certain trade secret misappropriations, to now permit civil lawsuits for trade secret appropriation. This new law will have significant impacts on holders of trade secrets.

First, this new law provides a federal remedy for trade secret misappropriation, but does not eliminate the remedies previously available in state court. Accordingly, litigation costs may increase since claimants may bring their claims in federal court alone or in both state and federal court. However, the federal claim will provide federal jurisdiction, which may reduce jurisdiction battles that were are common in trade secret litigation where the trade secret had crossed state lines. International companies will now also be able to bring suit in federal court where their United States office is located, which may help improve foreign companies’ ability to enforce judgments.[3] Further, having a federal remedy will create a nationwide body of trade secret law, which will provide a greater degree of predictability to trade secret litigation.

Second, in addition to allowing damages for wrongful takings of trade secrets, the DTSA includes a seizure provision, wherein a trade secret owner can obtain, on an ex parte basis, an order to seize “property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” This provision is intended to apply in cases where a trade secret thief who receives notice of the court action would leave the country or disseminate the secret before a court could stop them. For a seizure order to issue, the claimant must establish the standards necessary for a state civil injunction and show specific evidence demonstrating that the injunction would be insufficient because the thief would violate the order or would make the secret inaccessible to the court for seizure.

Third, the DSTA also has provisions that impact employee mobility. Employers can seek an injunction to prevent actual or threatened misappropriation of a trade secret by an employee, provided it does not prevent that person from entering into an employment relationship. For this injunction to be granted, there must be evidence of threatened misappropriation of the trade secret. An employer will not be awarded an injunction “merely on the information that the person knows.” Also important for Louisiana—a state that strongly disfavors non-compete agreements—the injunction cannot be used to circumvent state laws regarding restraints on employment and non-compete agreements.

Last, the DTSA provides immunity for whistleblowers. Under this provision, an individual cannot be held criminally or civilly liable under any federal or state trade secrets laws for revealing the disclosure of a trade secret in confidence to a federal, state, or local government official or an attorney for the purpose of reporting or investigating a suspected violation of the law. Employees may also disclose the trade secrets of their employer in court documents filed under seal as part of a lawsuit for retaliation by his employer.

In order to take full advantage of the DTSA, the Act requires employers make some changes to employee contracts, confidentiality agreements, and nondisclosure agreements. As part of the immunity provision, employers are now required to “provide notice of the immunity” created by the DTSA “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” Failure to include this notice will strip the employer of certain remedies available in an action against an employee. The DTSA allows for exemplary damages when the trade secret has been willfully and maliciously misappropriated. Attorney fees can be awarded when the misappropriation is made in bad faith or when the trade secret was willfully and maliciously misappropriated. Attorney fees and exemplary damages are not recoverable unless the employer has provided the defendant employee, consultant, or contractor with notice of the immunity from criminal and civil prosecution granted by the DTSA to whistleblowing persons. Therefore, if an employer is to recover exemplary damages or attorney fees against an employee who unlawfully disclosed its trade secrets, the employee must have been notified of the immunity provisions. Therefore, if a company has employees, or employs consultants or contractors who have access to the company’s trade secrets, the company should consider consulting an attorney to ensure that their employment agreements include the proper DTSA immunity notifications.

While the DTSA presents new opportunities for a trade secret holder to enforce its rights, it is important to note that the DTSA did not alter the holder’s need to make efforts to keep the secret confidential. Trade secret holders must still make efforts to maintain the secrecy of their trade secrets and confidential information. An attorney can assist with ensuring that the proper steps are taken to maintain this confidentiality.

[1] 18 U.S.C. § 1839.

[2] Melanie Radzicki McManus, 10 Trade Secrets We Wish We Knew, HowStuffWorks.com (last accessed May 4, 2016) (available at http://money.howstuffworks.com/10-trade-secrets.htm)

[3] Monika Gonzalez Mesa, Latin American Companies Back New US Trade Secrets Law, Daily Business Review (May 3, 2016) (available at http://www.dailybusinessreview.com/id=1202756520297/Latin-American-Companies-Back-New-US-Trade-Secrets-Law?slreturn=20160404115326).