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New Federal Trade Secrets Law Almost Here

Written by: Don Benson, Esq.

The Defend Trade Secrets Act (“DTSA”),  passed by both houses of Congress, is headed to President Barack Obama for his signature and his office has stated it “strongly supports” the legislation. On April 4, the U.S. Senate passed the DTSA by a vote of 87-0. The Senate bill passed in the House on April 27, by a vote of 410-2.

New Protections Under the DTSA:

  • Damages: The DTSA provides for actual damages, restitution, injunctive relief,  exemplary relief (up to two times the award of actual damages), and attorney’s fees.
  • Ex parte Seizure: Ex parte property seizures are available by a court order  to seize misappropriated trade secrets without providing prior notice to the alleged wrongdoer. To prevent potential abuse,  the DTSA prohibits copies to be made of seized property, and requires that ex parte orders provide specific instructions for law enforcement officers, such as when the seizure can take place and whether force may be used to access locked areas.
  • Statute of Limitations: 3 years after actual discovery of the misappropriation or when by  the exercise of reasonable diligence it should have been discovered.
  • Immunity and Notice: Individuals are immune from criminal or civil liability for disclosing a trade secret if it is made in confidence to a government official, directly or indirectly, or to an attorney, and it is made for the purpose of reporting a violation of law. Employers have an affirmative duty to provide employees notice of the new immunity provision in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” The definition of “employee” includes contractors and consultants.
  • Penalties: The “Trade Secret Theft Enforcement” provision increases the penalties for a criminal violation of 18 U.S.C. § 1832 from $5,000,000 to the greater of $5,000,000 or three times the value of the stolen trade secrets to the organization, including the costs of reproducing the trade secrets.
  • RICO: The DTSA further amends the RICO statute to add a violation of the Economic Espionage Act as a predicate act.

Comparison With State Trade Secret laws: Seizure and Inevitable Disclosure.

The DTSA does not preempt state trade secrets laws.  Companies still have the option of enforcing state trade secret laws and state courts will remain an option for victims of trade secret theft. Uneven protections under state trade secret laws, problems in obtaining injunctions against local companies, and potential bias against foreign corporations in some state courts may argue in favor of using federal courts and the DTSA. Even companies operating in only one state may find themselves having to protect their trade secrets from unauthorized use in multiple states. It will also be possible to use both the DTSA and pendent state trade secret claims in the same lawsuit.

As outlined above, seizure orders may be more easy to obtain under the DTSA than an injunctive order  from a state court under a state trades secret act

Although there are similarities between the DTSA and state trade secrets acts, many state trade secret acts adopt a doctrine of “inevitable disclosure” that allows the plaintiff to argue that the employee’s new job will inevitably lead to disclosure or use of the trade secret. The DTSA expressly rejects the “inevitable disclosure” doctrine and precludes a court from enjoining a person from entering into an employment relationship.

Conclusion.

The DTSA will be a new weapon to protect trade secrets nationwide, along with pendent enforcement actions for non-competes, non-solicitation of customers and non-solicitation of employee agreements.

Employers should consider the following preparations and strategies to fully take advantage of the DTSA:

  1. Review and Modify confidentiality agreements to include proper notice of the DTSA’s immunity provision and spell out clear definitions of trade secrets and confidential information that are not overly broad.
  1. Identify and Protect the company’s trade secrets to prove that reasonable steps are being taken to limit access to the information, protect its dissemination, and obtain its return when an employee departs. No matter how important the information is to your business, it will not rise to the level of trade secret under the statutes if you cannot prove that there are  reasonable steps in place to protect it.