Friday, June 24, 2016

Business Owners & the New Federal Claim for Trade Secret Misappropriation

On May 11, 2016, Pres. Obama signed into law the Defend Trade Secrets Act of 2016, S. 1890, 114th Congr. (2d Sess. 2016) (“DTSA”), which provides for the first time a federal private right of action to litigants for trade secrets violations.  Most states – except for Massachusetts and New York – have enacted versions of the Uniform Trade Secrets Act (“UTSA”) but the DTSA provides additional remedies without preempting state laws or eliminating any of the protections offered by them.  Business owners will need to take some actions in the short term in order to take advantage of some of the more powerful remedies created by the DTSA.

A Summary of the New Law: 

The DTSA is a substantial revision to the Economic Espionage Act (18 U.S.C. §§ 1831-1839 and 18 U.S.C. § 1961), which previously only provided criminal penalties and was only enforceable by federal prosecutors.  An individual trade secret owner’s right to sue for trade secret misappropriation related to a product or service used (or intended for use) in interstate commerce in federal court is, therefore, new.  So are many of the remedies available to trade secret owners.  Below is a summary of key provisions:

1.       Who Can Sue? 
Owners of trade secrets may file an action against those who “misappropriate” their trade secrets, provided that the trade secrets relate to products or services that are used in (or are intended for use in) interstate or foreign commerce.  This means that trade secrets associated with products or services that only travel within a single state could not be enforced under this Act.    

2.       What is “Misappropriation”? 
“Misappropriation” includes either  (1) acquisition of a trade secret by someone who knew or should have known that the secret was obtained by “improper means” or (2) disclosure of such a secret by one who did not have express or implied consent to do so and knew or should have known that it was a secret or acquired by “improper means”.

3.       What Counts as “Improper Means”?
“Improper means” includes theft, bribery, misappropriation, breach or inducement of breach of a duty to maintain secrecy or espionage through electronic or other means.  More importantly, however, “improper means” expressly does not include reverse engineering, independent derivation or any other lawful means of acquisition.

4.       Available Remedies. 
Potential remedies include: (A) injunctions to prevent the actual or threatened misappropriation, (B) monetary damages for actual loss and for unjust enrichment, and, (C) if all other remedies are insufficient to make the trade secret owner whole, then the owner can recover a reasonable royalty.    A reasonable royalty is not the preferred remedy, but instead should be a remedy of last resort.  (See Senate Rep. 114-220 (Mar. 7, 2016) and House Rep. 114-529 (Apr. 26, 2016)).

5.       Enhanced Damages for Willful Misconduct. 
If a trade secret owner can prove that the trade secret thief misappropriated the trade secret “willfully and maliciously”, then the court may award exemplary damages (not more than two times the monetary damages awarded); and award attorney fees to the prevailing party.  Such an award is within the sound discretion of the district court.

6.       Narrow Ex Parte Seizure Order. 
A trade secret owner’s ability to obtain an ex parte seizure order (which allows law enforcement officers to seize allegedly misappropriated trade secrets from a specific target without providing advanced notice to the target or permitting the target to be heard in opposition to an order prior to its issuance) is new under this law.
                Seizure is an extremely powerful tool, but has several potent limitations: (a) it is only available if the trade secret owner can demonstrate that a regular Rule 65 injunction would not be effective against this target because the target “would evade, avoid or otherwise not comply” with an injunction order, or “would destroy, move, hide or otherwise make such a matter inaccessible to the court”; (b) a seizure order will not be issued if the trade secret owner has publicized in any way that it is pursuing seizure; (c) the trade secret owner may not participate in the seizure (instead, this is handled by appropriate law enforcement personnel); (d) the trade secret owner does not receive the alleged trade secrets once they are seized from the target (instead, these are held in the custody of the court); (e) the trade secret owner must provide security (i.e., post a bond with the court) against the possibility of unlawful seizure; and (f) any seizure MUST minimize any interruption in the lawful business operations of the target.

7.       Sanctions for Bad Faith Claims or Wrongful Seizure. 
If the target proves by circumstantial evidence that the claim of misappropriation was made in bad faith, the court may award attorney’s fees to the target as a prevailing party.
                Further, if a trade secret owner wrongfully seizes materials that are later determined not to have been misappropriated, or if the owner sought an excessive seizure, the target may be entitled to the following:  (1) “relief as may be appropriate” (which includes damages for lost profits, cost of materials, loss of good will and punitive damages); (2) reasonable attorney’s fee unless the court finds extenuating circumstances; and (3) prejudgment interest on any recovery (beginning on the date the trade secret owner applied for the seizure owner).  In this case, the bond posted by the trade secret owner shall not constitute a cap on the available recovery.

8.       Federal Jurisdiction
Trade secret owners are permitted to bring DTSA claims in federal district court, but they are not required to.  Federal courts have original, but not exclusive, jurisdiction over these claims.

9.       Statute of Limitations
Trade secret owners have three (3) years after the misappropriation was discovered (or through exercise of reasonable diligence should have been discovered) to commence a civil action asserting a claim of misappropriation under the DTSA.
                However, continuing misappropriation is considered a single act – not individual acts of misappropriation that could re-start the clock for purposes of the statute of limitations.

10.   Limitations on Claims against Employees (a.k.a. Employee Immunities)
Employers can only obtain enhanced damages and attorneys’ fees from any employee who discloses its trade secrets IF the employer notified the employee in advance (either through an agreement or in certain employment policies if appropriately cross-referenced) of his/her immunity for liability under certain whistleblowing circumstances.  “Employees” for these purposes include contractors and consultants.

11.   Effective Date
This Act applies immediately to any misappropriation for which any action happens on or after the date of enactment (May 11, 2016). 

What Should Business Owners Do Now?

First and foremost – employers should revise their form agreements to be used with any employee, contractor or consultant who will have access to the employer’s confidential information to provide the requisite notice of whistleblower rights.  Without this notice, an employer cannot seek exemplary damages (up to twice the amount of actual damages awarded) or attorney’s fees if it proves the misappropriation was willful or malicious. 

Second, trade secret owners need to take stock and identify clearly what their trade secrets are.  In particular, if a trade secret owner pursues an ex parte seizure order against a competitor or an ex-employee’s new employer, the trade secret owner will have to articulate with some clarity what the trade secrets are that are alleged to have be misappropriated.  This identification is intended to aid the law enforcement officers charged with executing the seizure order to know what to take, but also allows a trade secret owner to position itself better to avoid an allegation of wrongful seizure or a bad faith claim of misappropriation as the litigation develops.  This identification will also aid businesses overall by necessitating the creation of tighter controls over those assets that are truly trade secrets to keep them from being unlawfully disseminated.

Finally, if a business becomes the target of an ex parte seizure order, know that a hearing must occur no later than seven (7) days after the seizure order was issued. Be prepared to argue that other injunction options may have been reasonably available to support the argument that a wrongful seizure occurred, entitling the target to damages. Even if the business only receives a threat of an ex parte seizure, consider whether the exceptional circumstances justifying an ex parte seizure were actually present in your case. Take any such threats seriously, and contact your attorney immediately if you receive a demand letter making this claim or if a seizure order is executed against you -- because your time to respond in either case will be very short.

Copyright © 2016, Christina D. Frangiosa.  All rights reserved.