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.