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The Defend Trade Secrets Act and Its Impact on Trade Secret Litigation

Businesses develop mechanisms and procedures to cut costs, increase efficiency and otherwise set themselves apart from their competition. Methods and inventions developed to achieve these goals are often considered to be trade secrets of the business, and many businesses remain vigilant to guard their assets against a possible threat—for example, a departing employee who takes the business’s trade secrets and other confidential information and uses it to compete against the former employer.

To this end, businesses have lobbied for uniform federal legislation both to support businesses’ rights to protect their trade secrets and to ensure that their proprietary information will be adequately protected, regardless of the jurisdiction in which the matter arose. In 1979, the Uniform Trade Secrets Act (UTSA) was proposed by the Uniform Law Commission in an effort to provide uniformity of trade secret law across the nation and streamline trade secret litigation. Because states were free to adopt the entire act, adopt some of it, or reject it outright, many states adopted only portions of the UTSA, while customizing other sections of the act. The disjointed acceptance of the UTSA and, consequently, a divergence in courts’ interpretation of the UTSA essentially negated the “uniformity” that the UTSA sought to achieve in the first place. When facing a novel issue under the UTSA, for instance, many courts would look to their states’ “precedents” before the adoption on the UTSA rather than looking at sister courts’ treatment of the issue under their versions of the UTSA.

In a renewed effort to harmonize trade secret law, Congress passed the Defend Trade Secrets Act of 2016 (DTSA), which was enacted on May 11. Generally, the DTSA: creates a federal cause of action for misappropriation of trade secrets, thereby permitting plaintiffs to assert their claims in either state or federal courts; grants the right to seek an ex parte seizure of an alleged misappropriator’s property in an effort to contain the misappropriated trade secrets; and requires that employers provide notice of the whistleblower immunity contained within the DTSA where trade secrets or other confidential information is available to employees, consultants, and independent contractors.

What are the key provisions of the DTSA?

DTSA creates federal cause of action.

With the creation of a federal cause of action, the DTSA ensures that a plaintiff has all of the benefits that come with bringing an action in federal court, including procedural efficiency, initial disclosure of the defendant, a highly structured discovery format, and a bench that is generally afforded more time to consider the pleadings and moving papers than their state court counterparts. The DTSA provides the much-needed uniformity in the scope of discovery in trade secret litigation. The DTSA, however, does not pre-empt state laws; thus, the DTSA coexists alongside existing state trade secret law.

The DTSA contains a three-year statute of limitation period; that is, a plaintiff must bring a claim under the DTSA either: within three years of the employer’s actual discovery of the alleged misappropriation; or within three years of the date that the misappropriation should have been discovered through the exercise of reasonable diligence.

The DTSA provides for the ex parte seizure of property.

To prevent the “propagation or dissemination” of trade secrets, a plaintiff can seek an ex parte civil seizure of an alleged misappropriator’s property under the DTSA. Courts and litigants are cautioned about allowing or pursuing an ex parte civil seizure, however. A plaintiff making an application for an ex parte seizure must: make an application by either affidavit or verified complaint; provide security adequate for the payment of damages that any person may be entitled to recover as a result of “wrongful or excessive seizure or wrongful or excessive attempted seizure”; prove that other less drastic measures, such as a temporary restraining order would be inadequate; prove that immediate and irreparable injury will occur if such a seizure is not ordered; prove that the balance of harm favors plaintiff’s request for a seizure; prove that plaintiff is likely to succeed on the underlying misappropriation claim; (vii) prove that the plaintiff has not sought publicity regarding the requested seizure; allege that the person whom the order is sought against has actual possession of the trade secret and any property to be seized; describe with reasonable particularity the matter to be seized, as well as the location of the matter; and prove that the person whom the order is sought against would destroy, move, hide, or otherwise make the trade secrets inaccessible to the court if the person had knowledge of the plaintiff’s application.

In the case that an ex parte seizure is ordered, the court takes steps to ensure that the seizure is not publicized and the property, seized with the assistance of the federal or state/local law enforcement, then remains in the court’s possession until the parties appear for a hearing. The DTSA specifies, however, that courts should only order an ex parte seizure in “extraordinary circumstances.” Moreover, if a claim of misappropriation is found to have been made in bad faith, which may be established by circumstantial evidence, a court may issue an award of damages to the defendant for lost profits, cost of materials, loss of good will, prejudgment interest, punitive damages, and reasonable attorney’s fees.

The DTSA provides immunities and protections for whistleblowers.

What happens to a whistleblower who reports a company’s misconduct to the authority, in light of the DTSA? The DTSA immunizes individuals from civil and criminal liability under both state and federal trade secret law where whistleblowers disclosed trade secrets “in confidence” to a government official or an attorney “either directly or indirectly” for the “purpose of reporting or investigating a suspected violation of law.” Moreover, under the DTSA, whistleblowers can disclose trade secrets in a lawsuit or other legal proceeding so long as the disclosure of the trade secret was made under seal and not otherwise disclosed (except pursuant to court order).

Critically, the DTSA places an affirmative duty on employers to notify employees (as well as consultants and independent contractors) of the DTSA’s whistleblower protections within “any contract or agreement” that governs the use of a trade secret or other confidential information. Furthermore, because the statute does not articulate an exception for small businesses, it appears that every employer must provide its employees with notice of DTSA’s whistleblower protections.

While the statute does not explicitly state how notice should be provided, it is recommended that employers attach a copy of the DTSA’s whistleblower protection language to any contract, agreement or policy entered into with employees (as well as consultants and independent contractors) on or after May 12 and also cross-reference notice of the DTSA’s whistleblower protections within the employer’s existing whistleblower policies.

Where an employer fails to provide the requisite whistleblower notice under the DTSA, that employer cannot collect exemplary damages and attorney fees when suing an employee (or a consultant or independent contractor) for trade secret misappropriation under the DTSA. Furthermore, employers should be aware that failing to provide notice of the DTSA may, in certain circumstances, be construed as evidence that the documents and information at issue were not trade secrets to begin with. Thus, it is in employers’ interest to integrate the DTSA into their policies, contracts, and agreements now, before the need to file a DTSA claim arises.

Practical Considerations for Businesses

Because the DTSA took effect immediately, employers will need to modify their existing contract templates and prepare to recalibrate their approach to future trade secret litigation. In consideration of the DTSA, employers should:

• Update all consulting agreements, employment agreements, and restrictive covenants that contain confidentiality provisions to include notice of the DTSA’s whistleblowing provision (preferably by attaching a copy of the provision to the back of the agreement, as opposed to incorporating the notice as a separate paragraph within the agreement).

• Update all confidentiality and nondisclosure agreements to reference the notice required under the DTSA.

• Update all contracts with vendors and other entities whose workers have access to a business’s trade secrets and confidential information to ensure that the notice required under the DTSA is given to those workers (and perhaps negotiate an indemnification clause into those agreements in case the entity fails to provide this notice).

• Update all existing whistleblower policies to reference the notice required under the DTSA.

Finally, although the DTSA provides a powerful means for trade secret litigation, employers should focus more on protecting their trade secrets before they are misappropriated than on using the act to recover the stolen trade secrets. That means employers should use commercially reasonable means to protect their trade secrets (e.g., password, encryption, monitoring), which makes taking trade secrets without authorization difficult. In addition, rather than designating every business information as a trade secret, businesses should consider designating only truly important information as a trade secret and sharing it with just a handful of key employees. •


By Edward T. Kang

Reprinted with permission from the June 24 edition of The Legal Intelligencer”© 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com

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