President Obama Signs Defense of Trade Secrets Act; What You Should Do Now

President Obama recently signed into law the Defense of Trade Secrets Act (the “DTSA”), an act with bipartisan support intended to improve business protection from the theft of trade secrets. The DTSA creates a federal cause of action for trade secret misappropriation, meaning that such a claim may now be brought in federal district court regardless of the amount in controversy. This client alert outlines the main provisions of the DTSA and provides recommendations on what you and your business should do now to take advantage to prepare for this new regime.

Significant Provisions of the DTSA.

Federal Cause of Action: The DTSA provides a civil cause of action for misappropriation of a trade secret, provided that the trade secret is “related to a product or service used in, or intended for use in, interstate or foreign commerce.” The DTSA adopts the definition of misappropriation from the Uniform Trade Secrets Act (UTSA). A DTSA cause of action must be brought within three years after the misappropriation was discovered or should have been discovered in the exercise of reasonable diligence. The DTSA expressly does not preempt state law claims for trade secret misappropriation. If a party is successful in proving liability, damages may include exemplary damages in an amount of two times proven damages, as well as attorneys’ fees for cases brought in bad faith or if the trade secret was willfully and maliciously misappropriated.

Ex-parte Seizure Order: The DTSA includes a new fast-acting remedy that a party may seek to curtail the dissemination of goods that may use a misappropriated trade secret. The new remedy is an ex parte seizure order—obtained without notice to a defendant. To seize the goods of another by the seizure procedure, a plaintiff would need to show that a preliminary injunction or other injunctive relief would be inadequate because the other party would “evade, avoid, or otherwise not comply with” an injunction. An issued order must be tailored to the narrowest seizure of property necessary to mitigate the misappropriation while minimizing the interruption of business of the party from whom property is seized. The order must also provide guidance to law enforcement regarding when the seizure may be executed and whether force may be used in execution. The court is required to take action to protect the party from whom seizure is made against publicity stemming from the seizure. Lastly, the court must hold a “seizure hearing” no later than seven days after the seizure order in order to allow the party from whom property was seized to be heard on the basis for the order. A party damaged by a wrongful seizure also has a cause of action for damages against the party that petitioned seeking the seizure.

Increase in penalty for criminal trade secret misappropriation: The DTSA increases the penalty for criminal trade secret theft under 18 U.S.C. § 1832(b) from a fine of $5,000,000 to the greater of $5,000,000 or 3 times the value of the stolen trade secret.    

Immunity for whistleblowers: The DTSA includes a provision immunizing a person from a misappropriation claim for disclosing a trade secret in confidence to a federal state, or local government official or to an attorney, if the disclosure was made in confidence and solely for the purpose of reporting or investigating a suspected violation of law. The immunity also applies to individuals who file a lawsuit for retaliation by an employer for reporting a suspected violation of law, provided that the person files the information under seal and does not otherwise disclose the trade secret information except under court order. This provision requires employers to notify employees of the immunity, either in an agreement or by reference to a company policy. An employer who fails to provide the required notice of immunity is barred from obtaining attorneys’ fees or exemplary damages against a suit against an employee.

What trade secret owners should do now in view of the DTSA.

1)  Audit and identify trade secrets to allow for their specific enforcement.

Companies should use the DTSA as the impetus to obtain better clarity on their trade secret assets to allow for easier protection of these assets if a misappropriation event occurs. Trade secrets may take many forms, including proprietary details about products and processing methods, business plans, customer lists, and financial information. Under the DTSA, trade secrets are protected if a company takes reasonable efforts to maintain their secrecy. A trade secrets protection audit may show where there may be holes in the protection plan and suggest ways to improve protection, which may then later counter claims of inadequate protection in litigation that could result in the loss of the asserted trade secret. Further, intellectual property cases in federal court in many instances require a more precise disclosure of claims. An audit provides a factual accounting that the company may later rely on to precisely identify the trade secret that may be later subject to litigation.

2)  Update nondisclosure agreement to address trade secret scope and scope creep.

Companies should update their employee and company-to-company confidentiality or nondisclosure agreements to ensure protected trade secrets are appropriately defined. As noted above, the DTSA requires companies to take reasonable precautions to protect the confidentiality of trade secret information. Generally, reasonable precautions are proportional to the sophistication of the company seeking to protect its trade secrets. Sophisticated companies with an expectation of protecting their trade secrets should employ nondisclosure agreements to control the dissemination of information that could constitute a company’s trade secrets. With the passage of the DTSA, companies should take the opportunity to update corporate nondisclosure agreements to ensure coverage scope.

3)  Update employee agreements and employee orientation materials to comply with DTSA whistle-blower immunity provisions.

Trade secret claims often arise in cases involving a past or departing employee. Under the DTSA, employees are afforded immunity protection for disclosing trade secret information to an attorney if it relates to a suspected violation of the DTSA. The DTSA imposes a duty on employers to notify employees of the DTSA immunity provisions, and makes exemplary damages and attorneys’ fees unavailable to companies that fail to provide such notice. Companies should update their employee agreements to comply with this notification requirement. In addition to employee confidentiality or nondisclosure agreements, or other employment agreements with such provisions, companies should update any materials used for employee orientations to also provide notice of the DTSA notice provisions. In addition, companies should review any venue provisions in confidentiality agreements, and consider amending agreements to include a venue provision referencing a particular federal court.

Need help with navigating the new requirements of the law, establishing a trade secrets audit practice or protection plan, or need to prosecute or defend a claim for trade secrets misappropriation? We at Robins Kaplan are here to help.

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