On May 11, 2016, President Barack Obama signed the Defend Trade Secrets Act of 2016 (“DTSA”), which creates a new federal private cause of action for trade secret misappropriation. The DTSA amends Chapter 90 of Title 18 of the US Code regarding the protection of trade secrets, which had previously only provided for criminal penalties.
Under the DTSA, the owner of a trade secret may bring a civil action for acts of misappropriation occurring on or after the date of enactment of the DTSA if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce. The remedies available include damages and injunctive relief, as well as seizure of “property necessary to prevent the propagation or dissemination of the trade secret” based on an ex parte application by the trade secret owner to a court. The DTSA also provides for security and protection of the subject trade secrets while in the custody of the court.
Misappropriation and Remedies Under the DTSA
The acts for which a person may be civilly liable for trade secret misappropriation under the DTSA are similar to those specified in the Uniform Trade Secrets Act (“UTSA”), as the DTSA’s added definition of “misappropriation” is virtually identical to that in the UTSA. Generally, acts of misappropriation include acquisition or disclosure of a trade secret that was acquired by improper means, or where there was a duty to maintain the secrecy of the trade secret, or where the trade secret was acquired by accident or mistake.
The remedies available under the DTSA include injunctions and various forms of damages. An injunction may prevent actual or threatened misappropriation, but may not prevent a person from entering into an employment relationship, and any conditions placed on employment may be based only on evidence of threatened misappropriation (and may not be based merely on the information the person knows—a deviation from the so-called “inevitable disclosure doctrine”). The injunction may also require affirmative actions to protect the trade secret or (in exceptional circumstances that render an injunction inequitable) condition future use of the trade secret upon payment of a reasonable royalty for a certain period of time.
The damages vary, and exemplary damages and recovery of attorney fees are available in certain circumstances.
The DTSA permits a court, based on an ex parte application in “extraordinary circumstances,” to issue an order seizing property “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” The applicant must provide an affidavit or verified complaint, and the requirements for issuing such an order are strict—including, among other things, that specific facts in the ex parte application demonstrate that “the party to which the order would be issued would evade, avoid, or otherwise not comply with such an order” and that the party named in the order misappropriated the trade secret or conspired to do so. In other words, ex parte orders may only be directed against wrongdoers, not against innocent third parties.
Any seizure order issued by a court also must comply with certain requirements, largely directed to ensuring that the seizure is narrow and minimally disruptive to legitimate business operations and protecting from disclosure the seized property until the parties have an opportunity to be heard in court. The order also must require the applicant who obtains the seizure order to provide security to cover damages for wrongful or excessive seizure or attempted seizure.
Security and Protection of Materials in the Custody of the Court
According to the DTSA, any materials seized pursuant to a court order must be taken into the custody of the court, and the court is required to secure the material from physical and electronic access. For example, if the materials are (or are stored on) a “storage medium,” the court is required to prohibit the medium from being connected to a network or the Internet, unless the parties otherwise consent. Further, a party who has an interest in the material seized may make a motion to encrypt the material. Such a motion may be heard ex parte.
In addition to creating the first federal private cause of action for trade secret misappropriation, the DTSA amends several aspects of the existing statutes related to criminal liability and addresses other issues. For example, it increases the fines available for criminal theft of trade secrets from not more than $5,000,000 to “not more than the greater of $5,000,000 or 3 times the value of the stolen trade secret to the [violating] organization, including expenses for research and design and other costs of reproducing the trade secret that the organization has thereby avoided.”
The DTSA also provides for immunity for certain confidential disclosure of a trade secrets, and employers are required to provide notice of such immunity in any contract or agreement (either new or updated after enactment of the DTSA) that governs the use by an employee (including contractors or consultants) of trade secrets or other confidential information. The penalty for an employer failing to provide the required notice is the unavailability of exemplary damages or attorney fees for certain actions against the employee to whom notice was not provided.
The DTSA will provide an important new tool for pursuing those who misappropriate trade secrets and may provide added incentive to use trade secret protection, where appropriate. Private causes of action for trade secret misappropriation currently vary state by state, and this new federal cause of action should enhance the ability of owners to enforce their trade secrets. The availability of a civil seizure, in addition to flexible injunctive relief and a variety of damages models, makes the DTSA a potentially powerful weapon. As with any new law, however, much will depend on its application in the courts. Moreover, considering the ongoing existence of state-based trade secret laws, trade secret owners will want to carefully consider the legal mechanism best suited to their needs in any particular case. Separately, employers should be aware of the new required notice that, under the DTSA, will need to accompany contracts and agreements with employees (and contractors and consultants) governing the use of trade secrets and other confidential Information.