This blog post is the second in a two-part series covering a new trade secret law, the Defend Trade Secrets Act of 2016 (DTSA). This post focuses on the differences between this new federal trade secret law, state laws, and the Economic Espionage Act of 1996 (EEA) (which provides criminal liability for trade secret misappropriation activities). It also details the practical impact this new protection regime may have on companies attempting to enforce their trade secret rights in U.S. courts.
From Patchwork State Trade Secret Laws to Federal Uniformity
The DTSA applies to trade secret misappropriation activities that occur after May 11, 2016. It creates a new federal protection umbrella for trade secrets. And while trade secret theft has been considered a federal crime since the EEA’s enactment in 1996, state laws have generally governed civil claims for trade secret misappropriation. As of now, 48 states (including Virginia and the District of Columbia) provide trade secret protection that is based largely on the Uniform Trade Secrets Act (UTSA).
With enactment of the DTSA, trade secrets join other intellectual property rights—namely, copyrights, patents, and trademarks—protected by U.S. federal law reaching across all states. And, as with these other federally-protected IP rights, cases alleging trade secret violations under the DTSA will be brought in federal courts. Before the DTSA, companies generally had no choice but to litigate trade secret claims in state court. Although federal courts had (and will continue to have) the ability to hear state trade secret claims if brought together with other federal claims such as the Computer Fraud and Abuse Act (CFAA), such cases have been infrequent compared to state trade secret actions.
The DTSA will not replace state laws, and companies can still decide to press their misappropriation claims using state law, in state courts. With this new law, however, Congress has provided the opportunity for development of a body of law that provides greater predictability in an area that has to-date developed based on a patchwork of state laws.
Is There Broader Protection Under Federal Trade Secret Law?
The differences between the DTSA and state trade secret laws may drive a company to choose one over the other when protecting trade secrets through court proceedings.
For example, different state law policies reflect varying levels of protection for employees’ mobility. Many states recognize an “inevitable disclosure” doctrine, which allows a court to block an employee’s effort to take a similar job at a competitor company if the similarity of the duties and competitive relationship between the two companies make it “inevitable” that they would use trade secrets gained from the former employer. Other states have rejected this doctrine as an unlawful restraint on employee mobility. The DTSA also rejects the doctrine. Federal courts may not use the DTSA to enjoin a person from entering into an employment relationship.
The DTSA does not authorize injunctions against subsequent employment or other employment-related restrictions, unless there is some evidence of threatened misappropriation beyond an employee’s mere knowledge of information. The DTSA does, however, allow courts to impose certain restrictions on employment, and the “conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows.” Theoretically, however, the DTSA provides jurisdiction for federal courts to issue “inevitable disclosure” injunctions if a federal action involves a claim under a state law that allows for use of the “inevitable disclosure” doctrine, even though such injunctions cannot be issued directly under the DTSA directly.
The DTSA, unlike some state statutes, allows only an owner of a trade secret to bring a civil suit under the new law. So if a company does not have current ownership rights (think of an authorized product manufacturer who holds a license in the trade secret for purposes of manufacturing products for the owner), it should consider state law options in those states that do not have such a stringent standing requirement.
Importantly, the new federal law seemingly expands the definition of trade secrets in comparison to the various states’ trade secret laws. Nearly any type of information might arguably qualify as a trade secret under the DTSA, provided it is kept secret and the owner has taken reasonable steps to maintain its secrecy (18 U.S.C. §1839):
[A]ll forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing 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, the another person who can obtain economic value from the disclosure or use of the information.
In contrast, the UTSA definition—the model for many states’ laws—describes eight specific categories or types of information that can qualify as a trade secret.
Additionally, the DTSA does not require that a trade secret owner describe its trade secrets with particularity, which several states currently require if a company files a complaint alleging trade secret misappropriation. This means that a company that lacks detailed evidence regarding a suspected misappropriation may fare better in federal court against an early motion to dismiss the claim, particularly when the company needs to continue to develop its misappropriation claim through the discovery process—including document production, depositions, and use of the subpoena process to gather evidence to better understand the relevant facts and support its claim. Additionally, companies preferring not to divulge their trade secrets with the increased particularity of certain states’ laws may fare better under the federal law.
Another difference is that the updated EEA’s and the DTSA’s definition of trade secrets broadly encompasses information in any form, “whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.” No doubt, some enterprising company will argue that information “stored” in a person’s memory can be the subject of a federal civil claim for theft of trade secrets. Such theories are unlikely to survive for very long under most state trade secret laws.
Under the DTSA, misappropriation does not include “reverse engineering, independent derivation, or any other lawful means of acquisition.” These potential defenses are consistent with state laws and the EEA. The DTSA definition of “misappropriation” is almost identical to the definition of “misappropriation” under the UTSA. Finally, like the UTSA, the new federal law states that an ongoing misappropriation is a single act/claim of misappropriation. Thus each new act in furtherance of a misappropriation does not constitute a new injury that restarts the statute of limitations clock.
New “Secret” Trade Secret Seizure Orders
Also, the federal statute includes new and powerful remedies for violation of another party’s trade secret rights that are unavailable under any state’s trade secret laws. Under the DTSA, a company that has experienced trade secret theft can file a request with a court for seizure of the trade secret, without notifying the party accused of taking or using the trade secrets.
This ex parte seizure procedure is to be used only in extraordinary circumstances, where the offending trade secret snatcher “would destroy, move, hide, or otherwise make such matter inaccessible to the court” if the company were to provide notice to the snatcher. When a civil seizure is ordered, a seizure hearing must be held within seven days of the order and at that hearing the trade secret owner must prove the facts necessary to support the order. Accordingly, companies seeking to use the seizure process will need to undertake detailed factual investigations and have evidence that satisfies the strict requirements for these seizures before filing a seizure request. The seizure process is not a court-based tool for early discovery or investigation of potential trade secret misappropriation.
This seizure process is controversial provision of the DTSA, but it provides a powerful remedy for trade secret owners, and is intended to stop the dissemination of a trade secret (especially to overseas entities) before its competitive value has been lost as a result of public disclosure. Yet Congress recognized the potential for abuse of the seizure provision. So the DTSA prohibits copies to be made of seized property, and requires that any ex parte orders provide specific instructions for law enforcement, such as when the seizure can take place and whether force may used to access locked areas. The DTSA requires exacting findings of fact to support the seizure order and detailed descriptions of the particular property to be seized. Interestingly, the DTSA also provides privacy protection to the person subject to the seizure order to preclude the trade secret owner from publicizing the seizure. In addition, a party seeking an ex parte seizure must first establish with the court that other less drastic remedies, like a preliminary injunction, are inadequate.
The DTSA gives companies victimized by trade secret theft a new and powerful tool to obtain relief in federal court. And the new law will likely open the doors to federal courts for state law claims that have been historically litigated exclusively in state courts, which experience larger case loads and tend to move slower towards resolution of these types of claims.
The differences in existing state laws, the DTSA, and the EEA raise interesting issues that will surface and develop over the coming years as courts start to enforce the DTSA alongside the EEA and state trade secret laws. Companies will have to carefully consider whether they should use federal or state laws to enforce trade secrets, evaluating the differences in the relevant laws’ substantive provisions, statutes of limitations, attorneys’ fees award options, and the damages allowed under both federal regimes and the relevant state laws.
Photo by Jeff Trexler. Flickr photo used under Creative Commons license.