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A Better Way to Litigate Trade Secrets? – Congress Passes Defend Trade Secrets Act of 2016 and the Bill Awaits the President’s Signature

Posted in Intellectual Property

Yesterday, the United States House of Representatives passed S. 1890, the Defend Trade Secrets Act of 2016 (DTSA), with overwhelming bipartisan support in a 410-2 vote. This bill was previously passed by the Senate earlier this month by a vote of 87-0, and will now proceed to the White House where the president will surely sign it into law. The Obama administration has stated that it “strongly supports” passage of this bill, and it is expected that the president will sign the bill into law quickly. The DTSA enables trade secret owners to file civil lawsuits in federal court for trade secret misappropriation related to products or services in interstate or foreign commerce. The DTSA also provides remedies for trade secret misappropriation, such as damages, injunctions and civil seizure orders.

What is the Defense of Trade Secrets Act of 2016 (DTSA)?

The DTSA creates a cause of action for trade secret owners in federal court under the Economic Espionage Act of 1996, which will provide predictability and uniformity of trade secret laws across the United States[1]. Currently, trade secrets are protected in most states under a particular state’s adoption of the Uniform Trade Secrets Act (UTSA). Trade secrets are also protected under federal criminal laws, i.e., the Economic Espionage Act of 1996, as well as state criminal laws. The new law, however, will not preempt various state trade secret rights, but will coexist with state law and add an extra layer of protection for owners to protect their trade secrets. The DTSA will go into effect immediately when it is signed by the president, and it will apply to any act of misappropriation on or after its effective date.

The new law has garnered overwhelming bipartisan support because it was amended to address various concerns. In 2015, Congressional leaders introduced the Defend Trade Secrets Act of 2015, which featured amendments from an unsuccessful attempt the previous year to pass the bill. While the proposed 2015 legislation had many benefits, critics still had concerns. To address these concerns, several new amendments were introduced earlier this year, passing with majority support.

DTSA Key Features and Amendments

Because critics voiced concerns that such a harsh remedy could be abused against small companies and former employees, the amended DTSA states that such orders are only to be instituted in “extraordinary circumstances.” It also placed further limitations on the seizures, such as requiring the parties to show “with reasonable particularity” what property is to be seized, as well as proof that the target of the seizure order has “actual possession” of the trade secret or the property. The amendment also added a provision that stressed the importance of balancing the interests of all parties when issuing an ex parte seizure by instructing the Federal Judicial Center to develop “best practices” for executing seizures and storing seized information.

Further, victims of a seizure made in bad faith will be entitled to relief in the form of a damages award, punitive damages for bad faith and/or attorneys’ fees.

  • State laws coexist with federal cause of action. The DTSA clarifies the appropriate scope of injunctions relating to “threatened misappropriation” to ensure that federal court orders do not conflict with applicable state laws prohibiting restraints on employment. Although the original language for this section was taken from the UTSA, there was concern that federal judges could use this provision to override state laws rejecting the “inevitable disclosure doctrine,” and prohibit employees from leaving to work for a competitor. The amendment addresses this concern by requiring that an injunction that limits employment must be based on actual evidence of threatened misappropriation of a trade secret, and not simply based on information an employee knows.
  • Whistle blowers. This provision provides immunity from liability (whistle blower protection) for confidential disclosure of information to law enforcement, to the government or in a court filing (made under seal). It also requires that employment contracts provide to employees notice of this immunity. Failure to notify employees could limit an employer’s right to punitive damages or attorneys’ fees in an action against that employee.
  • Statute of limitations. The statute of limitations for the DTSA was amended from five years to three years.
  • Federal civil action for misappropriation. The DTSA creates federal court subject matter jurisdiction with appeals going to the regional federal circuit courts.

How Your Company Can Benefit

Companies can act now to protect their trade secrets by assessing confidentiality agreements and guarding confidential information to ensure trade secrets are adequately protected. When the DTSA is enacted into law, companies will have a new avenue to pursue protection in federal courts. Federal courts can provide broader discovery tools than state courts, such as nationwide subpoena power. Federal courts are also oftentimes better equipped than state courts to handle complex technical details and international disputes. Furthermore, the DTSA’s provision requiring notification of immunity to whistleblowers should be immediately implemented by employers in order to safeguard an employer’s right to certain damages in trade secret protection under the DTSA.

[1] See https://www.congress.gov/congressional-report/114th-congress/senate-report/220/1.

[2] For more information see http://www.law360.com/ip/articles/789239?nl_pk=f855e51b-562d-4d09-a6a6-d80d5ec985f4&utm_source=newsletter&utm_medium=email&utm_campaign=ip.