House and Senate Pass New Defend Trade Secrets Act; President Obama Set to Sign Into Law

Thursday, April 28, 2016

It is not often that Congress works together, let alone with an overwhelming consensus. But Congress did just that in passing the Defend Trade Secrets Act of 2016 (the “DTSA”) in both houses. The Senate passed Senate Bill 1890 by a vote of 87-0. Yesterday, the House of Representative passed the DTSA by an overwhelming vote of 410-2. President Obama has already indicated that he will sign the bill into law when it reaches his desk, which could take place in days. Although nearly every state has already enacted versions of the Uniform Trade Secrets Act, what was before purely a matter of state law is now a federal issue. The DTSA will apply only to those acts of misappropriation that occur on or after the date that the law is enacted.

What is New?

First, and most significantly, the new Act will give parties a federal cause of action for misappropriation of trade secrets, so long as the trade secret is related to a product or service used in interstate or foreign commerce. That is, Plaintiffs can now bring a trade secrets case in federal court. This will not only give parties access to federal courts, but it will also permit parties to more easily subpoena witnesses across state lines, subpoena documents from out-of-state parties, and to enforce injunctions and court orders throughout the United States.

The DTSA also provides a significant new weapon where trade secrets are threatened, if stringent elements are met, for a party to obtain ex parte seizure orders. This means that if someone steals a company’s trade secrets, the company can seek a court order to seize the trade secrets, the electronic devices or computers they are found in, or other means or devices of misappropriation without first providing notice to the defendant. This means that a person or company accused of misappropriating trade secrets could have federal marshals arriving at its doors to confiscate computers or servers without even having a chance to be heard. This type of seizure is intended only in “exceptional circumstances” where an injunction would not suffice and it can be shown that the person who misappropriated the trade secret would destroy, move, hide, or otherwise make the matter inaccessible to the court if that person were given notice of the claims against it. It is anticipated that such orders will be rarely granted, but this is left to be seen as the courts begin to implement the law.

The DTSA also specifies that if an injunction would “prevent (or place conditions on) a person from entering into an employment relationship,” it must be “based on evidence of threatened misappropriation and not merely on the information the person knows.” Depending on how courts interpret this, this is likely to curtail use of the “inevitable disclosure” theory. Similarly, the DTSA provides that an injunction preventing or limiting employment cannot “otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade or business.” Thus, in states such as California where non-competes and other restrictive agreements are essentially unenforceable, parties cannot use the DTSA to circumvent state policy.

Lastly, the DTSA also has a whistle blower protection provision. This offers immunity from liability for the confidential disclosure of a trade secret to the government or in a court filing made under seal. This provision includes a notification requirement that employers should immediately implement.

What is the Same?

The definition of a “trade secret” is not much different than most state’s current definition. After providing an illustrative list of types of information that may be deemed a trade secret, the DTSA states that information will be protected as a trade secret if: “(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives 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.” This is very similar to the current definition found in the Uniform Trade Secrets Act. Likewise, the definition of what constitutes “misappropriation” is very similar.

The DTSA also expressly states that “reverse engineering, independent derivation, or any other lawful means of acquisition” are not misappropriation and not unlawful under the DTSA. This is similar to case law in most states. The DTSA simply codifies that theory into law.

Remedies for parties under the DTSA are similar to those found under most state’s trade secrets laws. A trade secret plaintiff is entitled to compensatory damages for “actual loss of the trade secret” along with “any unjust enrichment” that the misappropriating party benefited from. In “exceptional circumstances” where injunctive relief is “inequitable,” the court may order that a reasonable royalty be paid to the plaintiff for the continued use of the trade secret. The DTSA also allows for treble damages (exemplary damages) if the misappropriation is deemed to have been willful and malicious, which some states currently permit.

Importantly, the DTSA does not eliminate or preempt the various state trade secret laws or their adoption of the Uniform Trade Secrets Act, nor does it supersede or undo any state common law or caselaw on point. Thus, parties can still chose not to assert the federal act as a cause of action and can still bring claims in state court if they so choose.

What Should You Do?

The passing of the DTSA only underscores what every company and every employer should be doing. If you have trade secrets, you should take reasonable steps to keep such information secret. This means, as a minimum starting point, drafting non-compete/non-solicit/confidentiality agreements for those employees that come into contact with your trade secrets. If you already have such agreements, they should be reviewed to make sure that they comply with the new law, including the new employee notice provisions. It also means enforcing those agreements when they are breached. The Butzel Long Trade Secrets team can help with this as they have counseled clients and/or litigated these matters in all 50 states.

Once there is a misappropriation or a threatened misappropriation, you must contact and engage your expert attorneys immediately and move swiftly. Butzel Long will work with you to identify the best and most cost-efficient strategy going forward, including an analysis on whether to file in state or federal court and what extraordinary remedies may be pursued. As always, Butzel Long will remain on the forefront of this DTSA, its implementation, interpretation and enforcement.

Paul Mersino
Detroit, MI

Joseph Cosby
Washington, D.C.

Carey DeWitt
Bloomfield Hills, MI

Bernard Fuhs
Detroit, MI

Phillip Korovesis
Detroit, MI

Thomas Patton
Washington, D.C.

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