The First Federal Civil Trade Secrets Law Is Now Effective

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The First Federal Civil Trade Secrets Law Is Now Effective

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Yesterday, President Obama signed the federal Defend Trade Secrets Act (the DTSA) into law. Here is what you need to know:

The first federal, civil cause of action for trade secrets misappropriation
While trade secrets misappropriation has long been recognized as a federal crime subject to criminal prosecution in federal court, victims have lacked a federal civil (non-criminal) claim, until now. The DTSA creates a federal civil claim for trade secrets misappropriation and makes an array of remedies available, e.g., compensatory damages, punitive damages, injunctive relief, and attorneys’ fees and costs, in certain circumstances.

The convenience and power of federal court
DTSA plaintiffs will benefit from the nationwide scope of the federal courts’ powers at all stages of the litigation: the beginning of the case (e.g., nationwide service of process), during discovery (e.g., nationwide service of third-party subpoenas), and at the enforcement stage (e.g., nationwide enforcement of judgments and interlocutory injunction orders).

New Remedies – including ex parte seizure orders
This new entrée to federal court brings with it more extensive and immediate remedies, such as emergency seizure orders to address exigent situations. Although expressly limited to “extraordinary circumstances,” such orders are available when normal procedures and relief are not sufficient, and when necessary to prevent dissemination of the trade secret. Seized materials are taken into court custody, with safeguards.

Clarification of “Inevitable Disclosure”
In some states, a defendant who knows trade secrets and takes a job with the competition so similar to his prior position that he will inevitably use or disclose his former employer’s trade secrets can be temporarily enjoined from taking that job. This “inevitable disclosure” doctrine, which essentially allows judicially-created non-competes, has been controversial in some jurisdictions. DTSA injunctions may not prevent an employment relationship altogether and must be based on evidence of threatened misappropriation, not merely on the information that the employee knows.

Interplay with state law regarding non-compete agreements
DTSA injunction orders may not conflict with “an applicable State law prohibiting restraints on the practice of a lawful profession, trade or business.” The applicable state-law approach to the enforcement of non-compete agreements therefore will limit the types of injunctive relief available under the DTSA.

Options for plaintiffs
A plaintiff may choose to bring a DTSA claim in either state or federal court.  Moreover, the DTSA does not replace any existing state law. So plaintiffs will have options when determining what claims to bring and where to bring them. A number of factors, which will vary from case to case, will determine the best strategy.

The Uniform Trade Secrets Act remains a guiding force
Most of the DTSA’s definitional scheme and menu of remedies is taken from the Uniform Trade Secrets Act, the statute on which most states have based their state trade secrets law. Case law interpreting the Uniform Trade Secrets Act therefore is likely to remain relevant even in DTSA cases, particularly if brought in state court.

Impact on employee non-disclosure agreements
The DTSA provides immunity for certain trade secrets disclosures, e.g., sealed lawsuit filings and whistleblower disclosures to attorneys and government officials. Any employer who fails to provide an employee with notice of these immunity provisions (e.g., in its confidentiality agreements) will be prohibited from collecting punitive damages or attorneys’ fees in any DTSA action against that employee. This requirement applies to all agreements entered into or revised after enactment.

Trade secret protection is going global
The United States’ enactment of the DTSA coincides with increased protection efforts in other countries as well. Indeed, the European Commission recently issued a directive regarding the importance and protection of trade secrets. See: European Commission on Trade Secrets. These various initiatives allow trade secrets owners greater – and geographically broader – protection than ever before.

What does this mean for your business now?
Most immediately, employers will want to take another look at their non-disclosure agreements, in order to ensure that they provide all required notices. And recipients of trade secrets information who will be incorporating that information into broader systems and databases may wish to insist that the governing non-disclosure agreement prohibit application of the DTSA’s seizure provisions.

A copy of the DTSA, which is an amendment to the Economic Espionage Act, which is found at 18 USC Sec. 1831 et seq., can be found here: Defend Trade Secrets Act.