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Everyone has a secret. This is true for companies, too, which means the newly enacted Defend Trade Secrets Act of 2016 (DTSA) is something that will impact just about every U.S. company. Not all legal commentators think the law will meet its standardization goals across all states, but many think it’s a good thing for companies that go after foreign entities who steal their secret sauces. One headline on Forbes.com called it the “biggest IP development in years.” Others are taking a “wait and see” approach.
Signed by President Obama on May 11, 2016, the DTSA is an extension of the Economic Espionage Act (EEA), put in place in 1996 to protect intellectual property from theft by foreign governments and those who would do their bidding. While the EEA included protection of information technology, it did not provide a private cause of action—government prosecutors had to enforce it. This is something that has been “less than fully effective,” wrote attorney Patrick J. Coyne of Finnegan, Henderson, Farabow, Garrett & Dunner. The DTSA attempts to take care of that problem by providing “substantial additional enforcement capacity by empowering those persons who are most affected by misappropriation—trade secret owners. The DTSA also preserves state law trade secret protections,” he said, “and supplies a broad definition of what it means to ‘misappropriate' a ‘trade secret.’”
The act also provides for ex parte seizure orders, which Coyne calls “perhaps the single most important provision” of the act. (See Coyne’s article – What You Should Know About the Defend Trade Secrets Act, Law360®, June 27, 2016.)
Not So Fast
Getting such an order is not a snap, however, as the law sets strict requirements.
Eric E. Bensen, attorney, author and prolific writer on intellectual property law, wrote in an article for The Lexis Practice Advisor Journal™, titled “Defending Trade Secrets Under the Economic Espionage Act,” that the ex parte orders may be issued only after a court has found:
Author of Patent Law Perspectives and co-author of Patent Licensing Transactions, Milgrim on Trade Secrets®, and other works, Bensen said a court must also take appropriate action to protect defendants from publicity about an order or any seizure, and must protect the confidentiality of the materials.
Coyne advises companies to have a plan ready in the event they are greeted with an ex parte seizure order, just as you would a disaster recovery plan. “No matter how hard a court tries not to create a business disruption, some disruption is inevitable, and companies must be prepared to keep their businesses running smoothly should they be presented with an order,” he wrote.
He went on to write that companies would be wise to ensure they are effectively managing their trade secret portfolio, just as they would with patents or trademarks. “You do not want litigation to be the first time you assert ownership of a trade secret,” he said.
To keep tabs on the effectiveness of the act, the National Association of Manufacturers® explained in its summary that the act requires the U.S. attorney general to submit a biannual report to Congress on the theft of U.S. corporate trade secrets occurring outside the country. It requires the Federal Judicial Center to develop a set of “best practices” for the seizure and storage of information, and includes a “sense of Congress” to monitor the impact of trade secret theft on the U.S. economy.
Coyne said the remedies are “robust,” including recovery of actual losses, any unjust enrichment or a royalty for unauthorized disclosure, exemplary damages, attorneys’ fees and injunctive relief.
Bensen added that, in light of disparate state laws governing employee mobility, the DTSA limits injunctive relief in the employee context. “First, an injunction that would prevent an individual from entering into an employment relationship must be based on evidence of threatened misappropriation and cannot be based merely on the information that the person possesses … Second, and more broadly, the DTSA bars injunctive relief that would otherwise conflict with state law prohibiting restraints on the practice of a lawful profession, trade or business.”
Employers: Act Now
Whistleblowers are protected under the act, which is the one provision that requires immediate action on the part of employers, according to attorneys at Morrison & Foerster.
“Employers must give notice of that immunity ‘in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.’ Employers who do not do so cannot recover punitive damages or attorneys’ fees that may otherwise be available under the Act. Employers should consider addressing this clause in current policies regarding trade secret information (or establishing such policies if they do not exist) and reviewing existing employment, non-disclosure, proprietary information and invention assignment, and other agreements that govern the use of a trade secret or other confidential information to ensure compliance with the DTSA.” (See the firm’s May 11, 2016 client alert, written by Kenneth A. Kuwayti, Bryan Wilson and Christian Andreu-von Euw, here.)
Coyne says it’s important for employers to make sure their legal and human resources departments fully understand the whistleblower protection provisions and additional notice obligations.
“It remains to be seen what the scope and effectiveness of these new provisions will be. But if experience under the Lanham Act is any indicator, and it likely is, trade secrets will enjoy a substantial scope of enforcement under the act, just as trademarks have for the past 70 years,” Coyne said.
Bensen doesn’t seem so sure. “No doubt a seizure order under the DTSA is in theory a powerful, new protection for trade secret owners. However, given the relatively strict requirements that have to be met to obtain a seizure order and the fact that a trade secret owner would have to discover the misappropriation fairly quickly for a seizure order to do any good, it may not be a frequently utilized protection.”
Equalizing Intellectual Property
Bensen also questions whether the DTSA can even meet its own goals, such as bringing the rights of trade secret owners into line with the rights of owners of other intellectual property types.
“It does not,” Bensen wrote. “Unlike the Patent Act and Copyright Act, which preempt state laws that provide similar rights with respect to inventions and works of authorship respectively, and the Lanham Act, which essentially creates a federal scheme for trademark protection that parallels protections available under state law, the DTSA neither generally preempts state law protection for trade secrets nor creates any new substantive rights in commercially sensitive information. Rather,” Bensen wrote, “the net impact of the DTSA is to create subject matter jurisdiction for trade secret claims in federal court (where the DTSA’s interstate commerce requirement is met) and to create a new—albeit carefully circumscribed—right for a trade secret owner to have the government seize trade-secret-related property from a defendant. Thus, although enacted as substantive law, the net effect of the DTSA is largely procedural.”
The DTSA was enacted in part to provide a clear and predictable national standard for trade secret misappropriation. Bensen said trade secret law was already “largely uniform,” with the differences among state laws being relatively small.
“More importantly,” Bensen wrote, “because the DTSA incorporates the Uniform Trade Secrets Act (UTSA) definitions of ‘trade secret,’ ‘misappropriation’ and ‘improper means,’ a federal district court construing the DTSA will, given the lack of other guidance, almost certainly rely on the decisional trade secret law of the state in which it sits to construe the DTSA. By doing so, those courts will likely impart whatever differences exist among state trade secret laws to the DTSA itself.
“Notwithstanding the passage of the DTSA, a significant advance in the uniformity of trade secret law is not likely on the horizon,” Bensen wrote.
Meaningful New Relief?
Eric Goldman, an internet law professor at the Santa Clara University School of Law, writing for Forbes magazine, agreed with Bensen that the DTSA will not reach its intended goals. “The DTSA does not provide any meaningful new relief for victims or deterrents to already-illegal behavior. If Congress hoped the DTSA would stick it to the Chinese government or Eastern European cyber-criminals, it will be disappointed.” He added that the law also will drive up legal costs given the need of counsel to understand and make sure client policies conform with old and new requirements.
Bensen’s recommendation to trade secret holders is that, should they sue in federal court, they may want to pursue both the DTSA claim and a parallel state law claim. “The DTSA claim would resolve any issues about subject matter jurisdiction and at least keep open the possibility of obtaining a seizure order, while the state law claim would keep open the opportunity to obtain attorney’s fees and exemplary damages in the event the owner has not satisfied DTSA’s notice requirements,” Bensen wrote.
Goldman said this dual jurisdiction approach means trade secret owners will win more cases. He said that because there are some differences among laws, plaintiffs might find that if they can’t win under one law they might fare better under the other. “This creates gaming opportunities for plaintiffs,” he said, “who might bring both state and federal actions, or strategically choose one or the other depending on their chance of success. With more options,” he said, “the more chances to win. With this also comes the potential for more litigation brought for ‘illegitimate’ or ‘anti-competitive reasons,’” he warned.
This article was edited for LexisNexis by Tom Hagy, managing director of HB Litigation Conferences and former publisher of Mealey's® Litigation Reports.