The Defend Trade Secrets Act (the “DTSA”), the first of its kind at the federal level, has been passed in both the Senate and the House of Representatives. Now, the DTSA merely awaits President Obama’s expected signature to become law. The DTSA has the potential to transform trade secret litigation and create more uniform case law nationwide.
Trade secret misappropriation has long plagued employers, even before technological advances and cyber security issues. Traditionally, employers implement a variety of protective measures to protect their trade secrets from both employees and others. These measures may include requiring employees to sign non-disclosure or confidentiality agreements, restricting dissemination of information to only key employees, physically locking files or offices, and implementing electronic security measures and protocols. But, even the most “secure” employer may be required seek additional protection in the face trade secret misappropriation.
Employers, depending on the jurisdiction and the facts of the case, have a number of weapons in their arsenal when it comes to pursuing trade secret misappropriation claims. Forty-eight states have enacted state-level versions of the Uniform Trade Secrets Act (the “UTSA”), which allow employers to seek injunctive relief and other damages in the event of actual or threatened trade secret misappropriation, assuming they can establish the elements of a misappropriation claim. Many employers employ state trade secrets acts to seek injunctive relief (and ultimately, attorneys’ fees) against departing employees who steal trade secrets. Additionally, if an employee signed a confidentiality or non-disclosure agreement, employers may pursue a breach of contract claim to enforce that agreement and prevent use or disclosure of trade secret information. Further, depending on the jurisdiction, some employers may have the option of bringing a claim under the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, the success of which is heavily based on the facts of the case. The availability and ultimate success of these various remedies varies from state to state, and even court to court, creating a patchwork of trade secret litigation across the country.
Cue the DTSA, which will give employers a federal private right of action for misappropriation of trade secrets. At its most basic level, the DTSA allows employers to seek redress for misappropriation of trade secrets in federal court. While this may not seem noteworthy, many employers prefer federal court for trade secret litigation due to the complexity of the underlying trade secrets at issue. Further, for employers with numerous operations in varying states, the DTSA will helpfully serve to uniformly protect trade secrets nationwide, instead of the current patchwork of state trade secret laws and related law to define protectable trade secrets.
Potentially the most remarkable change coming with the DTSA is its “seizure” provision. Under this provision, courts may order “seizure of property necessary to prevent the propagation or dissemination of the trade secret” at issue in the litigation. This may even be done ex parte. State level trade secrets laws allow no such recourse. As it stands now, if an employer suspects, or even knows, an ex-employee has trade secret information on a laptop or external storage device, it must seek review of such property through an injunction or discovery, both of which may take time and allow for destruction of valuable evidence. The implications of the DTSA’s seizure provision are significant and may serve as a powerful tool in trade secret litigation. However, the seizure provision also creates a cause of action for “wrongful or excessive seizure,” the meaning of which has yet to be defined. It remains to be seen how powerful the seizure provision is in practice, but this alone may bring about the most significant change in trade secret litigation.
It is important to note the DTSA does not preempt state laws regarding trade secret misappropriation. This is especially important in those states that recognize the “inevitable disclosure doctrine,” as the DTSA will not permit an injunction restricting an employee from working for a competitor solely based on the threat of disclosure of trade secrets. Some employers use the inevitable disclosure doctrine to prevent an employee from joining a competitor and associated disclosure of trade secrets by virtue of that employment, which the DTSA will not allow. The DTSA appears to protect employee mobility more than state law in this regard. As such, in jurisdictions where the inevitable disclosure doctrine remains an option for employers, state law will continue to serve an important purpose in trade secret misappropriation actions. The DTSA requires “evidence of threatened misappropriation,” and unlike the arguably broader protections under some states’ law, employers cannot rely on an inevitable disclosure doctrine argument to place conditions on an employment relationship.
As it relates to damages or other remedies, in addition to seizure, the DTSA provides for: (i) injunctive relief, (ii) compensatory damages, including awards based on principles of unjust enrichment, (iii) exemplary damages (not to exceed twice the amount of the actual damages awarded), and (iv) attorneys’ fees. Notably, the DTSA provides for an award of attorneys’ fees upon a showing of “bad faith” by either party, arguably in an attempt to “chill” frivolous misappropriation claims by employers.
Finally, the DTSA expressly protects employee whistleblowing activity. Specifically, an employer is prohibited from recovering attorneys’ fees and exemplary damages under the DTSA unless the employer has provided the defendant employee with notice of immunity from criminal and civil prosecution for disclosure of trade secrets in the course of certain whistleblower activity. This notice must be provided in writing to the employee in an agreement that governs the use of trade secret or confidential information. Thus, employers across the country should consider including an express notice provision in non-disclosure, confidentiality, or other employment agreements for all employees, contractors, and consultants. Absent this provision, employers may not be able to recover significant financial damages even if successful in a DTSA action.
In addition to reviewing and potentially revamping non-disclosure and other employment agreements, employers should view this new legislation as an opportunity to evaluate their trade secret protection measures generally. For example, an employer should ask itself the following questions to evaluate whether it should implement additional protocols to adequately protect trade secret information:
- Does your company implement reasonable measures to protect trade secret and confidential information?
- Is dissemination of this information limited to a certain strata or level of employee?
- Is this information stored on a password protected database or other secure system?
- How is this information protected from disclosure outside the company?
- Is this information marked “CONFIDENTIAL” or otherwise?
- Are employees routinely required to enter into non-disclosure and confidentiality agreements?
- Does your company conduct training on maintaining confidentiality?
Passage of the DTSA marks a significant step in trade secret litigation. However, it is not a fail-safe measure for protection of trade secrets and, like the UTSA, the DTSA requires employers to engage in proactive efforts to protect their trade secrets.
If you have any questions about how Sheppard Mullin can help keep your confidential, proprietary information and trade secrets from falling into the hands of competitors, whether through misappropriation by employees, piracy with third parties, or otherwise, please contact the authors or your Sheppard Mullin attorney for assistance.