Trade Secrets: What Businesses Should Know August 26, 2016

By Kristen M. Hoover and Jack E. Moran

What is a Trade Secret? Kristen explains in “The Secret of Trade Secrets.”

On May 11, 2016, President Obama signed the Defend Trade Secrets Act of 2016 (DTSA) into law. Previously, trade secret law was almost exclusively a state law matter. The Economic Espionage Act of 1996 (EEA) did criminalize industrial espionage or theft of trade secrets, but discretion was up to prosecutor to bring case in criminal court. The new DTSA makes significant changes to the world of trade secret law and the protections afforded.

DTSA Allows for Civil Action in Federal Court

Prior to the DTSA, trade secrets cases were primarily brought in state courts or occasionally in criminal cases under the EEA. The DTSA extends the EEA to civil court. Trade secrets owners are now able to bring suit in federal court directly under the DTSA without relying on another basis for jurisdiction or hoping a prosecutor will take the case up under the EEA. This means federal courts now have jurisdiction over misappropriation of trade secrets and federal law now recognizes four types of intellectual property (patent, trademarks, copyrights, and trade secrets).

DTSA Broadens the Definition of “Trade Secret”

The DTSA also adopts the EEA’s definition of “trade secrets” which is more expansive than under state law. The act defines trade secrets as “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the another person who can obtain economic value from the disclosure or use of the information.”  This definition encompasses a vast amount of information as long as the previously mentioned three general conditions from the TRIPS agreement are met.

Further, information is protected in any form “whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.” Therefore, even if the information is only held in the memory of an individual, it can be protected by the DTSA.

DTSA Protects Whistle Blowers

Employers must carefully note that there is a crucial exception to the DTSA protections for “whistleblowers.”  The DTSA protects, from both criminal and civil liability, whistleblowers who disclose trade secrets confidentially to government officials or attorneys, when the disclosure is “solely for the purpose of reporting or investigating a suspected violation of law.” It also protects disclosures made in litigation provided that such disclosure (in a filing or testimony) is made under seal.

Further, the DTSA also mandates that employers provide notice to employees of their right to disclose trade secrets in these limited circumstances. This notice should be set forth “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.”  There is no exact description of what this notice should entail, but a failure to satisfy the requirement prevents the employer from recovering exemplary damages or attorneys’ fees in a subsequent DTSA lawsuit.  Thankfully, this requirement only applies to “contracts and agreements” entered into after the DTSA’s enactment, so it is not necessary (though it may be advisable) to revisit prior agreements, policies, and handbooks.

DTSA Rejects “Inevitable Disclosure” Doctrine

The DTSA takes a noticeable swipe at a long-standing and troublesome legal doctrine: inevitable disclosure.  The inevitable disclosure doctrine arises from the theory that certain employees possess knowledge that, if they worked for a competitor, they would “inevitably” use to their former employer’s detriment.  Thus, the doctrine permits a party to seek injunctive relief, usually against a former employee, to prevent that employee from associating with a competitor under the assumption that the employee would disclose trade secrets.  The DTSA does not abolish this doctrine, but it does limit injunctive relief to only certain circumstances – namely, only when the order would not “prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows.” Thus, while former employers can still claim the “inevitable disclosure” doctrine under state law, this new federal law doesn’t allow a former employer to seek injunctive relief on the mere assumption that an employee will make an unauthorized disclosure.

DTSA Provides for Ex Parte Seizures

The DTSA does, however, provide new protections to holders of trade secrets, including the ability to obtain an ex parte seizure order.  This allows a claimant to make an ex parte request to a federal court to issue an order halting an adversary from distributing protected information.  This can be used in “extraordinary circumstances,” like when an appropriator is planning to flee the country or immediately disseminate the information.  If a claimant can demonstrate such extraordinary circumstances justifying this relief, then it can obtain an ex parte temporary court order seizing an adversary’s assets or information.  Since the law is so new, it isn’t clear whether it will provide meaningful protection over and above already-existing relief (like temporary restraining orders).  Also, some critics of the law feel that abuse of the ex parte seizure procedure could lead to dangerous anticompetitive results.

The enactment of the DTSA shows that Congress recognizes the growing importance of trade secrets in business today, particularly given the limitations other forms of intellectual property may have. Further, it attempts to more effectively protect trade secrets.

Given how valuable trade secrets are and the danger of trade secret theft, we encourage our clients to reassess and audit their practices regarding trade secrets as well as revise any employee, contractor, or consultant agreements as required by the DTSA. Please contact us with any questions regarding intellectual property or employment law.

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