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Why the New Federal Law on Trade Secrets is a Big (But Not Too Big of a) Deal

Published by and on June 17, 2016

In an increasingly rare example of bipartisanship, President Obama recently signed the Defend Trade Secrets Act (“DTSA”) into law after it passed both houses of Congress. Here’s what you need to know about its impact on your business.

In an increasingly rare example of bipartisanship, President Obama recently signed the Defend Trade Secrets Act (“DTSA”) into law after it passed both houses of Congress. Much has been and will be written about this law, and deservedly so.

In many ways it is similar to the Uniform Trade Secrets Act that has been enacted in whole in or in part by the vast majority of States, but the DTSA contains several novel features.

Expanded Federal Jurisdiction. The DTSA doesn’t just create new statutes or causes of action; it has created an entirely new area of law under federal jurisdiction.

Traditionally, trade secret litigation was a matter of state law, and hence state courts were the more common forum. Now, however, a trade secret plaintiff has a federal cause of action. Moreover, a federal court can exercise supplemental jurisdiction over claims it would ordinarily lack subject matter jurisdiction over, if those claims are substantially related to the original claim.

This is especially important in the trade secret context, since trade secret litigation often implicates other claims, like fiduciary duty and breach of contract claims. Interestingly, the DTSA explicitly does not preempt state trade secret laws.

Application to Independent Contractors. The DTSA is markedly more expansive in its scope; it is not limited to traditional, full-time employees. The DTSA defines “employee” to include “any individual performing work as a contractor or consultant for an employer.”

The group of people subject to this statute is broader than that of other laws, and this is the first time to our knowledge that Congress has explicitly defined the term “employee” to include independent contractors.

Ex Parte Seizure. Unlike the Uniform Trade Secrets Act, the DTSA allows a court to enter an ex parte order to seize property if such a seizure is “necessary to prevent the propagation or dissemination of a trade secret” that is the subject of a lawsuit. To obtain a seizure order, a prospective plaintiff will have to make several showings to the court, one of which is that a temporary restraining order under Rule 65(b) would be inadequate.

This seizure may only be done by law enforcement. Furthermore, a hearing must be held no later seven (7) days after the seizure. At this hearing, the party who obtained the seizure must show that the basis for the seizure remains in effect. If the party cannot do so, the court will modify or dissolve the order. The DTSA creates a cause of action for wrongful or excessive seizure.

Whistleblower Protections. Disclosure of a trade secret to the government to investigate or report suspected illegal activity is immune from civil or criminal liability. Moreover, an individual who files a suit for retaliation for reporting a suspected violation of the law may disclose the trade secret in a court proceeding, if he or she does so under seal.

Notice Requirement. For agreements entered into after the enactment of the DTSA, the employer is required to provide a notice of their whistleblower protections under the DTSA “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.”

This requirement can also be satisfied by way of a cross-reference to a policy document provided to the employee that describes the employer’s reporting policy for suspected violations of law. An employer who fails to provide this notice may not be awarded exemplary damages or attorney fees in an action against an employee who did not receive notice.

Given that this provision (along with the rest of the DTSA) applies to independent contractors, employers may need to revise their independent contractor agreements to include these notices, as well as policies and agreements for employees.

Attorney’s Fees for Bad Faith. The DTSA provides that a defendant may recover reasonable attorney’s fees from the plaintiff if the claim of misappropriation was made in bad faith. Although existing state laws often contain similar provisions, the DTSA is unique in adding expressly that bad faith “may be established by circumstantial evidence.” This is significant given that direct evidence of bad faith—say, an admission by the plaintiff that the claim was without merit—can be exceedingly difficult to obtain.

A plaintiff’s affidavit submitted in connection with an application for ex parte seizure could be one source of evidence of bad faith. Hence, plaintiffs seeking to use the DTSA’s seizure remedy must exercise care in the materials submitted in support of any application for seizure.

Protections for Employee Mobility. The DTSA is crafted so as to avoid restricting employee mobility. A court cannot enter an order under the DTSA “to prevent a person from entering into an employment relationship.” Furthermore, relief under the Act requires “evidence of threatened misappropriation” and cannot rely “merely on the information the person knows.” Therefore, one cannot press a claim under the DTSA merely because a former employee has knowledge of a trade secret and now works for a competitor.

Welter Insight:

It’s important not to overestimate the effect this law will have on trade secret practice. The DTSA, while creating significant new remedies, deliberately includes several countervailing measures. Moreover, for trade secret matters, state laws are a familiar remedy, and state courts are a familiar forum; the DTSA has deliberately left these established avenues intact. It may therefore take time for prospective plaintiffs and their counsel to become comfortable working with this new law.

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