A New Day for Businesses Seeking to Protect the “Secret Sauce” – Federal Trade Secret Protection

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Businesses are now able to protect their trade secrets in federal court with a federal civil cause of action as a result of the Defend Trade Secrets Act (DTSA). President Obama signed the DTSA into law May 11, 2016. Th e DTSA is a rare example of bipartisan agreement and passed by overwhelming margins in both the House of Representatives and the Senate.

For American innovators, this new federal remedy could not come soon enough. Unlike patents, trademarks and copyrights which find value in registration and publication, trade secrets are valuable because they are cloaked in secrecy. Businesses try to protect that secrecy by limiting who has access to information about trade secrets, where such information is kept and how it is communicated. In an increasingly digital and mobile workplace, however, employees routinely transfer work documents to personal computers or other devices which their employers do not necessarily control. Even if employees never intend to keep that information, it would not be unusual for them to fail to delete it when their employment ends. Still, others intend to and do retain and use their former employer’s trade secrets for improper means.

Prior to the DTSA, businesses that sought to protect trade secret information were required to do so under various state laws. Th ough state trade secret laws overlap significantly, there are still some differences. Th e DTSA is an eff ort to streamline the requirements for protection and to provide much needed consistency. Th at said, although the DTSA provides additional options for businesses, it does not preempt state law. Th e key benefit of the DTSA is that employers can now go straight to federal court based on this new federal law.

Here are some key provisions in the DTSA that all businesses should be aware of.

Notice of Whistleblower Immunity

The DTSA has a safe harbor for an employee who discloses trade secrets to the government for the purpose of reporting or investigating a suspected violation of law or if the employee discloses trade secrets under seal in litigation. It goes even further, however, requiring each business with employees to provide notice of that immunity. Importantly, the definition of “employee” under the DTSA specifically includes consultants and contractors.

The DTSA allows employers to comply with the notice requirement through “policy documents.” A failure to provide the requisite notice could preclude the employer from an award of exemplary damages or attorney’s fees if the employer sues the employee for trade secret misappropriation under the DTSA. It remains to be seen whether the failure to provide the notice has ramifications in other contexts as well. Meanwhile, the most sensible course may be to revise company policies to include the DTSA notice.

Inevitable Disclosure

Under many state trade secret laws, the “inevitable disclosure doctrine” permits employers to bring a trade secrets action against an employee by claiming that trade secrets would be inevitably disclosed in the employee’s new employment. The DTSA expressly rejects the “inevitable disclosure” doctrine for injunctions, allowing a business to seek an injunction based on evidence of threatened misappropriation, but “not merely on the information the person knows.” It is worth noting that this limitation on the use of the inevitable disclosure doctrine appears to apply solely to injunctions. It may still be a basis for a claim for monetary damages under the DTSA.

Civil Seizure Order

Businesses can now obtain an exparte civil seizure order of “property necessary to prevent the propagation or dissemination of the trade secret.” Obtaining such an order requires that the applicant present specific facts to support the extreme remedy of civil seizure of property. Th ere are numerous requirements for a civil seizure order – many of which are similar for obtaining an exparte temporary restraining order and others that are not. For example, an applicant must present facts that:

• An order under Rule 65 of the Federal Rules of Civil Procedure or other equitable relief would not be sufficient because the individual subject to the order would “evade, avoid, or otherwise not comply with such order;”

• The person against whom the seizure is being ordered has actual possession of the trade secret and any property to be seized;

• The application describes with reasonable particularity the thing to be seized and if possible, the location of the property to be seized;

• The person who would be subject to the order would “destroy, move, hide or otherwise make such matter inaccessible to the court, if the applicant would proceed with notice to such person;” and

• The applicant has not publicized the requested seizure.

If the district court makes the required findings under the DTSA, it will issue a detailed order, which, in part, sets a “security determined adequate by the court for the payment of the damages that any person may be entitled to recover as a result of wrongful or excessive seizure or wrongful or excessive attempted seizure under this paragraph.” Th e district court would then schedule a hearing, and take possession of the property to be seized. Th e district court is instructed to protect the person subject to any seizure order from publicity.

At the seizure hearing, the party who obtained the seizure order has the burden to prove the findings of fact and conclusions of law set forth in that order. A person, including a third party, who suffers damage as a result of a wrongful or excessive seizure order will have a cause of action against any applicant who obtained a seizure order. Th is potential liability is intended to deter employers from being too aggressive in seeking a seizure order under the DTSA.

In addition to exparte seizure orders, the DTSA expanded the remedies available to businesses to include injunctions, exemplary damages, attorneys’ fees and reasonable royalties in certain circumstances.

While the DTSA has been heralded as a win for American innovation, it remains to be seen how litigants and courts will employ its provisions. It is too soon to tell how the DTSA will interplay with state laws. It is likewise too soon to tell which circumstances will fit the criteria required for judges to grant the sweeping exparte relief in the civil seizure provision. For now, one thing is certain. Th e opportunities for businesses seeking to protect trade secrets through litigation have increased and many businesses welcome the change.

Brooke Anthony

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