Trade secret owners now have a new cause of action to assert against an entity who improperly obtains or uses their trade secrets. In addition, owners of trade secrets should amend their agreements and employment policies to take advantage of certain benefits under the new law.
By way of background, a trade secret is information which: (1) the owner has taken reasonable measures to keep such information secret; and (2) derives independent economic value from not being generally known to, and not being readily ascertainable through proper means by another person. Examples of trade secrets include confidential formulas, manufacturing techniques, and customer lists.
The Commission on the Theft of American Intellectual Property estimated that annual losses to the American economy due to trade secret theft are over $300 billion and has led to the loss of 2.1 million American jobs each year.
Trade secrets can be stolen through a cyber attack by an outside party or can be stolen by an employee or inside party using email, a flash drive, an external drive, a file transfer service, or other techniques. Detection of the trade secret theft can be difficult and may not be detected for months.
The Defend Trade Secrets Act (“DTSA”) provides a new federal civil cause of action for trade secret misappropriation. The DTSA amended the Economic Espionage Act which defined the federal criminal law for trade secret misappropriation. Prior to the DTSA, a trade secret owner had to rely upon a state trade secret law and other causes of action.
Most states, including Illinois, have a trade secret law which is modeled after the Uniform Trade Secret Act (“UTSA”). The UTSA includes: definitions of trade secret, improper means, and misappropriation; and provisions for injunctive relief, damages, exemplary damages, attorney fees and statute of limitations. The DTSA is also modeled after the UTSA, but the DTSA also provides additional provisions which are very beneficial to trade secret owners.
The first benefit of the DTSA is federal jurisdiction. A trade secret owner can now avail itself of the benefits of the federal courts. Previously, a plaintiff needed diversity or a concurrent federal cause of action. Often trade secret misappropriation involves activities or parties in more than one state and federal service of process facilitates obtaining evidence. In order to bring a DTSA claim, the trade secret must be related to a product or service used in, or intended for use in, interstate or foreign commerce. Most products and services would satisfy this test. It is important to note that the DTSA does not preempt a state trade secret action and state trade secret actions are still available. In addition, based upon court filings after the passage of the DTSA, plaintiffs are asserting DTSA and state trade secret causes of action in the same complaint.
The second benefit of the DTSA is the use of ex parte seizure. The UTSA and state laws do not have such a provision. An ex parte seizure allows a trade secret owner to petition the court to have federal officers seize the trade secret from a third party. In order to grant such a request, the DTSA sets forth a long list of requirements to be satisfied including: the seizure of the property is necessary to prevent the propagation or dissemination of the trade secret; the accused party would evade, avoid, or otherwise not comply with such an order; and the accused party would destroy, move, hide, or otherwise make such matter inaccessible to the court if the plaintiff were to proceed on notice to the accused person. The seizure provision requires “actual possession” which protects third parties from seizure, such as an operator of a third party server which stores the trade secret or an online intermediary, such as an Internet service provider according to the Senate Report on the DTSA. The DTSA envisions that ex parte seizure would be used in extraordinary circumstances.
The DTSA specifically does not allow use of the inevitable disclosure doctrine. The doctrine states that a former employee may inevitably disclose trade secrets to her new employer due to the nature of her position at the new employer. The former employer can still use the doctrine in a state action if permitted under state law.
Whistle blower provisions are also included in the DTSA. Generally, the provisions allow a person to disclose a trade secret to a government official or a lawyer solely for the purpose of reporting or investigating a suspected violation of law. The provisions do not allow the whistleblower to disclose trade secrets to the public.
In order to obtain enhanced damages (up to double the actual damages) and attorneys’ fees, an employer must provide notice of the whistleblower provisions to the employee. The notice must be provided in agreements which involve trade secrets and which are entered into or amended after May 11, 2016. Notice can also be provided by “a cross-reference to a policy document provided to the employee that sets forth the employer’s reporting for a suspected violation of law.” An “employee” is defined broadly as “any individual performing work as a contractor or consultant for an employer.” Therefore, entities should amend non-disclosure agreements, proprietary and invention assignment agreements, employment agreements, consulting agreements, research and development agreements, and any other agreements which involve trade secrets, and potentially revise employment policy documents.
The DTSA provides an important tool for entities to protect their trade secrets, especially at a time of increased risk of trade secret misappropriation.