Pssst, The Secret Is Knowing What You Can’t Do With The Defend Trade Secrets Act

The Defend Trade Secrets Act (“DTSA”) became law with President Obama’s signature on May 11, 2016. The DTSA is an amendment to the Economic Espionage Act of 1996 and, for the first time, affords a federal private right of action to protect trade secrets. Prior to its passage trade secret protection was the exclusive province of state law.

In 48 of the 50 states (New York and Massachusetts excluded) that protection comes in some version of the Uniform Trade Secrets Act (“UTSA”). Much of the DTSA is consistent with the UTSA but there are some significant new wrinkles which either expand, or limit, the relief which can ordinarily be obtained under state law. In some circumstances state law will remain the best option. To follow is an overview of what can, and can’t, be done with the DTSA.

Federal Private Right of Action

As with patents, copyrights, and trademarks, there is now a private right of action to protect trade secrets. This right is in addition to, not in substitution of, any other state rights which exist. Often federal and state claims are likely to be made in the same case to seek the most expansive scope of relief. This is already commonly done with trademark claims.

Federal Court Access

DTSA cases may be brought in federal or state court. Federal courts are accustomed to handling intellectual property cases because of the federal patent, copyright, and trademark laws, as well as the trade secret cases brought under diversity jurisdiction. Because of this familiarity with the subject, and their capabilities generally, many prefer having intellectual property cases presided over by federal court judges. Another advantage of federal court is the possible consolidation of claims against defendants from different states in one case rather than bringing multiple state court cases. If, however, state court is the desired forum, a DTSA claim cannot be included without risk of removal to federal court. Federal case law interpreting the DTSA will be forthcoming and provide additional insight on what can, and can’t, be done with the DTSA.

Ex Parte Seizure of Property

Under “extraordinary circumstances” the DTSA allows for an order to be issued for seizure of property without notice to the property holder to prevent “the propagation or dissemination of the trade secret that is the subject of the action.” Similar provisions are included in federal trademark and copyright law, but not in the UTSA, so this will essentially be new to trade secret protection. The prerequisites for issuance of such an order are so exacting that only in rare circumstances when clearly warranted is an order likely to be issued.

A property holder whose property was wrongfully seized can bring suit against the party who obtained the order to recover lost profits, cost of materials, loss of goodwill, punitive damages (if there is bad faith), and, absent extenuating circumstances, attorney fees. In the discretion of the court prejudgment interest may also be awarded. These potential adverse consequences should deter those who otherwise might imprudently seek a seizure order.

Remedies

Injunctive relief, actual loss damages, unjust enrichment damages, plus exemplary damages of twice the damage award when there has been willful and malicious misappropriation, are available under the DTSA. A reasonable royalty may be awarded in lieu of these damages. Attorney fees are recoverable by a trade secret owner when misappropriation was willful and malicious as well as by a party who has been sued for misappropriation when the litigation was in bad faith. All of these remedies are the same as those in the UTSA.

One deviation from the UTSA is the manner in which the DTSA handles injunctions. Under the DTSA an injunction may not “prevent a person from entering into an employment relationship” and “conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows . . . .” This constraint has been incorporated into the DTSA because when applying state law courts have, on occasion, concluded that an injunction should be entered prohibiting a former employee from working for a new competitor employer because the former employee inevitably would use or disclose trade secrets of their former employer when working for the new employer. However, this “inevitable disclosure” doctrine should remain viable, to the extent it is now, under state law.

Whistleblower Protection

Employees have immunity under the DTSA for disclosing trade secrets when reporting or investigating a suspected violation of law, including court filings. Employees must be given notice of these rights “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” This can be done by referring to a policy, such as contained in an employee handbook. If this notice is not given the employer cannot recover exemplary damages and attorney fees against that employee in any claim brought against them under the DTSA. If notice wasn’t given exemplary damages and attorney fees may still be available through a state court claim. This applies only to contracts or agreements entered after the DTSA became law.

The DTSA offers many advantages for the protection of trade secrets. However, particularly if the trade secret owner wishes to preclude a former employee from going to work for a competitor, they will may need to look to state law rather than the DTSA for relief.