Until May 12, 2016, trade secret law was the only area of intellectual property law left largely to state courts and state law. No longer. On May 12, President Obama signed the Defend Trade Secrets Act of 2016. (Pub. L. No. 114-153). It establishes a new federal civil remedy for the misappropriation of trade secrets, including an innovative ex parte civil seizure provision, provides non-exclusive federal question jurisdiction for claims arising under the Act, and creates new duties – effective immediately – for employers, contractors and consultants.
Many issues must still be sorted out by the courts, but several consequences of the new Act are clear and warrant immediate attention. Below we’ve outlined some of the most important features of the Act and how they may impact your business.
1) Update Your Confidentiality Agreements Now to Include Notice of Whistleblower Protections.
Section 7 of the Act provides whistleblower protection to employees, contractors and consultants who disclose trade secrets in certain situations. Employers must provide notice of this protection in any contract governing the use of trade secrets. Failure to comply bars employers from receiving exemplary damages or attorneys’ fees in any law suit brought against an employee under the new provisions of the Act.
The new notice must explain that an employee will not be held criminally or civilly liable under any federal or state trade secret law for disclosures of a trade secret made (1) in confidence to a federal, state or local government official, either directly or indirectly, or to an attorney where the disclosure is made solely for the purpose of reporting or investigating a suspected violation of law, or (2) in a complaint or other document filed in a lawsuit or other proceeding, if filed under seal. While the requisites of notice are set forth in the statute, the optimal clause will vary depending on specific state law and the particulars of the contract you’re seeking to enforce.
The new notice requirement takes effect immediately. It applies to any agreement governing the use of a trade secret or other confidential information signed or modified on or after May 12, 2016.
2) Now You Can File Your Trade Secret Claim in Either Federal or State Court.
The creation of a new federal cause of action means that trade secret actions can now routinely be litigated in federal court. The Act does not preempt state law, however, and instead expressly supplements state law and state remedies. The prospect of dual enforcement schemes covering the same field brings new opportunities to protect and enforce trade secrets, but also new complexity and uncertainty when you do so.
The Act is modeled on and shares a number of similarities with the Uniform Trade Secrets Act, which has been adopted in one form or another by 48 states and the District of Columbia. The new Act also differs from the not-entirely-Uniform Act in ways that are not always immediately apparent and will require some thoughtful consideration before implementing in your company. For example:
3) Understand the Inconsistent Definitions of “Trade Secret” Across State and Federal Laws and How They May Impact Your Use and Management of These Valuable Assets.
Unlike the Uniform Trade Secrets Act used by the state, the federal Act’s definition of “trade secret” excludes information that is “readily ascertainable through proper means by another person who can obtain economic value from the disclosure or use of the information.”
In contrast, California’s variant of the Uniform Act omits the phrase “readily ascertainable” and adds in its place the phrase “not being generally known to the public or to other persons who can obtain economic value from [the trade secret’s] disclosure or use.” Thus California protects “secrets” that are not “generally known” even if they are “readily ascertainable” by someone who looks.
Now consider the two states that have not enacted the Uniform Act in any form: New York and Massachusetts. New York has its own multi-factor test for a trade secret that departs from the Act and the Uniform Act. For example, while information must be in “continuous use” in the operation of the business to qualify as a trade secret under New York common law, the definition of “trade secret” under the new federal statute contains no such “use it or lose it” component.
4) The Law Allows But Sets a Very High Standard Before You Can Use the Inevitable Disclosure Doctrine to Prevent Employees from Joining Competing Companies.
Many states’ trade secret statutes bar a departing employee from taking a job with a competitor if the departing employee knows trade secrets and takes a position with a company where those secrets may be used, reasoning that the employee will inevitably disclose the secrets to his or her new employer. California does not. Taking a cue from California law, the new federal Act bars injunctions preventing a person from entering into an employment relationship based “merely on the information the person knows” rather than actual “evidence of threatened misappropriation.”
These are just a few of the differences between existing law and the new Act. There are many others. Creating parallel bodies of trade secret law, which are available to everyone, creates some new complexity in this area of the law. It will take the courts many years to sort all of the questions raised by the new Act. For now, if you are contemplating trade secrets litigation, whether as a plaintiff or defendant, you will want to take a hard look at the new legal options created by the Defend Trade Secrets Act and compare them to the existing state law where you conduct business. To some extent we now have a trade secrets smorgasbord, from which litigants can pick and choose.
5) Plaintiffs May Be Able to Seize Property to Prevent the Distribution of Trade Secrets Without Notifying the Defendant.
On top of the typical remedies of damages and injunctive relief, section 2 of the Act provides an innovative civil seizure remedy that in appropriate cases can be invoked ex parte or without notice to the defendant. This opens the door for a plaintiff to seek a court order seizing property “necessary to prevent the propagation or dissemination of the trade secret.” To avoid the potential abuse of this extraordinary remedy, the Act establishes a very high eight-part test that a plaintiff must satisfy (by a verified complaint or an affidavit) before a court may order property to be seized.
The Act also provides remedies in cases of wrongful or excessive seizure, and detailed provisions govern custody of the secrets and publicity about the seizure. Seizure orders will not be lightly granted but in an appropriate case may provide a powerful new weapon against the theft of trade secrets. That may prove to be especially true if the secret is about to leave the country. Theft of secrets by foreigners is a particular concern of Congress, as reflected in section 4 of the Act, which directs the Department of Commerce to study the extent to which misappropriation of trade secrets by foreign companies and nationals adversely affects American companies, and recommend ways to prevent it.