Client Alert - Your Trade Secrets Now Have Federal as Well as State Protection
Most states (not including New York) have enacted the Uniform Trade Secrets Act to protect trade secrets from misappropriation through civil actions in state court.
Now, the Defend Trade Secrets Act of 2016 (“DTSA”) adds an additional civil remedy in federal court to accompany the criminal penalties previously provided in the Economic Espionage Act of 1996.
General Provisions
The DTSA defines a “trade secret” as virtually any form of information (a) that the owner has taken reasonable measures to keep secret and (b) that derives economic value from not being generally known or readily ascertainable by another person who can obtain economic value from its disclosure or use.
The criminal penalties and civil remedies apply to whoever, (a) with intent to convert a trade secret (b) that is related to a product or service used in or intended for use in interstate or foreign commerce, (c) to the economic benefit of anyone other than the owner, and (d) intending or knowing that the offense will injure the owner, (e) steals, duplicates, receives, or misappropriates the information. It also applies to attempts or conspiracies to commit such offenses.
“Misappropriation” is defined in detail in the DTSA. It generally covers the acquisition or disclosure of a trade secret without authorization by a person who knows or has reason to know that the information was acquired by improper means, in breach of a secrecy obligation, or by accident or mistake. Reverse engineering and independent derivation are expressly permitted.
The criminal penalties are a fine, up to ten years imprisonment, or both. The fine on an organization that commits the offense is not more than the greater of five million dollars or three times the value of the trade secret to the acquiring organization, including the research and design costs it avoided.
The civil remedies include:
- an injunction (which must be tailored so as not to prevent employee mobility), or in exceptional circumstances that render an injunction inequitable, payment of a reasonable royalty;
- an award of damages (up to double the actual damages if willful and malicious);
- in some cases, attorneys' fees; and
- in extraordinary circumstances (with a number of safeguards including a security bond against wrongful or excessive seizure), an order to seize property to prevent the trade secret from being destroyed or hidden.
New Contract Notice Requirement
An important new requirement is that any contract or agreement with an employee (defined to include a contractor or consultant) that is entered into or updated after the date of enactment of the Act must provide notice that an individual has immunity for the disclosure of a trade secret:
- in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law, or
- in a document filed under seal in a legal proceeding, including a lawsuit for retaliation by an employer for reporting a suspected violation of law.
If an employer does not provide this notice, the employer may not be awarded double damages or attorneys' fees in an action against the employee.
Most Significant Changes
- Trade secret cases can be litigated in federal court without having to establish another basis for federal jurisdiction. Although state law is not preempted, this change could lead to a new body of federal jurisprudence.
- New notices should be added to non-disclosure agreements as to immunity for disclosure of trade secrets by whistleblowers, in anti-retaliation lawsuits against employers and in law enforcement proceedings.
- Ex parte seizures are added as an extraordinary remedy, similar to those that may be obtained in an anti-counterfeiting case (subject to possible liability for wrongful seizures).
- Enhanced damages and attorneys' fees may be awarded for willful or malicious misappropriation by defendants or bad faith claims by plaintiffs.
- A reasonable royalty may be awarded in extraordinary circumstances if an injunction would be inequitable.
Things To Do
- Review your secrecy procedures to ensure that they protect your trade secrets.
- Revise your employment and non-disclosure form agreements to include the required immunity notices.
- Make sure your form agreements provide for civil enforcement under federal as well as state law.
Please note: This is a summary of the Act, and does not purport to completely state its provisions.
For further information, please contact William M. Borchard or your CLL attorney.