Expanded protections against trade secret theft

Congress recently enacted the Defend Trade Secrets Act (DTSA), which creates a new federal civil cause of action for misappropriation of trade secrets. The DTSA provides for additional remedies, but also imposes certain compliance obligations upon companies seeking to recover exemplary damages or attorneys' fees in federal trade secret litigation.

Federal definition of misappropriation of trade secrets

The term "trade secrets" covers all forms of confidential business or financial or engineering information, regardless of how that information is stored (physically, electronically, graphically, photographically, or in writing). Similar to the Uniform Trade Secrets Act (UTSA), which has been adopted in some form by most states, the owner of the trade secret must have taken reasonable measures to keep the information secret. Also, the information must derive independent economic value, actual or potential, from not being generally known and not being readily ascertainable through proper means.

The liability extends not only to persons misappropriating a trade secret but also to others who continue to use or disclose the secret information. The statute defines "improper means" to include theft, bribery, breach, or inducement of breach of a duty to maintain secrecy, or espionage through electronic or other means. However, "improper means" does not include reverse engineering, independent derivation or other lawful means of acquisition.

Remedies under federal statute

In addition to seeking damages and injunctive relief in the form of a temporary restraining order (TRO) or preliminary injunction, the new law also allows a company to seek an order requiring ex parte seizures of property so as to prevent the destruction of the value of the secret or destruction of evidence or the removal of the information from the country. However, before the court will issue an ex parte seizure, the owner of the trade secret applying for seizure must show "extraordinary circumstances," including establishing that a TRO or other injunctive relief would be inadequate, that immediate and irreparable injury will occur if seizure is not ordered, and a showing that the person against whom seizure would be ordered or persons acting in concert with that person would destroy, move, hide or otherwise make inaccessible to the court the trade secrets at issue.

Entities seeking seizure must describe with reasonable particularity the matter to be seized and must provide a security amount to be determined by the court for the payment of damages for wrongful seizure. The moving party cannot participate in the seizure and the court must hold a hearing no later than the seventh day after issuance of the order. Abuse of the seizure procedures could result in the party who has been the subject of a wrongful or excessive seizure seeking to recover damages in the form of lost profits, lost good will, and potentially exemplary damages and attorney's fees.

Whether to sue in federal or state court

Although federal courts have exclusive jurisdiction over actions brought under the DTSA, employers still have the option of filing in state court alleging a violation of the state UTSA. Thus, a company pursuing a claim for misappropriation of trade secrets should consider all options, including the likelihood of whether the state or federal court will move expeditiously, whether there are advantages to being in a state or federal court with regard to the court's expertise, the rules governing discovery and procedures, and how burdened the court is by a heavy backlog of cases.

Protection of whistleblowers

Under the DTSA an individual shall not be held criminally or civilly liable for disclosure of a trade secret that is made in confidence to a federal, state or local governmental agency or official. The new statute also has an anti-retaliation provision under which an individual who files a lawsuit for retaliation stemming from the employer's suspected law violation may disclose the trade secret to his attorney and use the trade secret information in the court proceeding, provided that the document containing the trade secret is filed under seal.

Notice of immunity provision

The new statute also provides that employers must give notice of the immunity provisions in any contract or agreement governing the use of trade secrets. Failure to give this notice may preclude the employer from being awarded exemplary damages or attorney's fees. The DTSA applies to not only employees but also contractors or consultants. Thus, companies should take immediate steps to include notice of whistleblower immunity in any confidentiality agreements with employees, contractors or consultants.

Effective date/statute of limitations

A civil action under the statute must be commenced no later than three years after the date the misappropriation is discovered. However, the DTSA does not apply retroactively and is limited to theft of trade secrets occurring on or after May 11, 2016.

No pre-emption

The DTSA does not pre-empt trade secret protection laws provided at federal, state or local levels. Examples of matters not pre-empted would include unauthorized access to a computer system in violation of the Federal Computer Fraud and Abuse Act and claims for violation of state UTSAs.

Criminal sanctions

The new law also provides for heightened criminal sanctions, including elevated criminal penalties for up to three times the value of the trade secret or $5 million, whichever is greater. The DTSA also adds economic espionage and theft of trade secrets to the Racketeer Influenced and Corrupt Organizations Act (RICO) list of racketeering activities.

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Richard Hunt is a partner at Barran Liebman LLP. He represents employers in employment law matters, including trade secrets, noncompetition agreements and departing employee disputes. Contact him at (503) 276-2149 or rhunt@barran. com.

Published: Mon, Jun 06, 2016

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