Federal Trade Secrets Act Now Law: What Companies Should Know

May 16, 2016

On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act (“DTSA”).[i]  The measure had previously been passed by the U.S. House of Representatives 410-2 on April 27, 2016, quickly following the U.S. Senate’s unanimous passage of the bill on April 4, 2016.[ii]  The DTSA amends the Economic Espionage Act of 1996 to create a federal private right of action for trade secret misappropriation.  Its passage represents a major overhaul of intellectual property law in the United States, as companies were previously left to seek redress for trade secret misappropriation under a patchwork of state laws, the majority of which were adoptions of the Uniform Trade Secrets Act (“UTSA”).[iii]  While the DTSA mirrors many of the provisions and remedies found in the UTSA, which New Jersey and Pennsylvania have versions of, it does not do away with those state law protections, but rather provides additional tools for companies to utilize in protecting their intellectual property. Here are some beneficial takeaways for companies: A. DTSA Definition of a Trade Secret The DTSA creates a broad, universal definition for the term “trade secret,” encompassing “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing” provided that:
  1. The company has taken reasonable measures to keep the information secret, and
  1. The information derives independent economic value to the company from not generally being known and not being readily ascertainable by others.
B. DTSA Definition of "Misappropriation" The DTSA also details when “misappropriation” has occurred—i.e., when a trade secret holder may seek redress—as follows:
  1. When a trade secret has been acquired by someone who knew or should have known that the trade secret was obtained through “improper means,” or
  1. When a trade secret has been disclosed or utilized, without consent of its owner, by someone who knew or had reason to know either that (a) it is a trade secret or (b) it was obtained through “improper means.”
The term “improper means” is defined in the DTSA to include “theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means.”  However, the DTSA leaves an exception in the term for “reverse engineering, independent deviation, or any other lawful means of acquisition.” C. Federal Cause of Action While the majority of states have enacted the UTSA, there are slight differences between several of the state laws, and New York and Massachusetts have chosen not to adopt the UTSA.  Thus, companies seeking redress for trade secret misappropriation can now bring a suit in federal court without the requirement of diversity of citizenship between the parties.  Importantly, the DTSA does not replace or preempt the states’ existing trade secrets laws.  Thus, it provides more options to trade secret holders, who can now bring an action in federal court to assert parallel federal and state rights.  Note that while federal courts are normally the preferred venue for employers in employment discrimination suits, the same calculus does not necessarily hold as to equity matters, where state courts, for example in New Jersey with its chancery courts, are often the preferred venue for seeking to enforce restrictive covenants. D. Remedies for Trade Secret Holders The DTSA provides for several different measures of damages once misappropriation has been found.  These include the actual damages caused by the misappropriation, unjust enrichment damages, reasonable royalties in lieu of other damages, exemplary damages for willful or malicious misappropriation, and attorneys’ fees if the trade secret is found to have been misappropriated willfully or maliciously.  Notably, similar to the state statutes based upon the UTSA such as the New Jersey Trade Secrets Act, N.J.S.A. 56:15-1 et seq. (“NJSTA”), and Pennsylvania Uniform Trade Secrets Act, 12 Pa.C.S. 5301 et seq. (“PUTSA”), the DTSA allows for attorneys’ fees to be awarded if the claim of misappropriation was made in bad faith.  This reverse fee-shifting often leads to hesitation by companies and their attorneys in utilizing these statutes because of the possibility that a court may award fees if it holds that the claim was made in bad faith.  The same reluctance will attach to the use of the DTSA.  E. Unique Provisions of the DTSA
  1. Early Seizure: Under extraordinary circumstances, a trade secret holder may apply ex parte to a court to seize the property that encompasses the trade secret “to prevent [its] propagation or dissemination.” This provision—certainly the DTSA’s most controversial—gives trade secret holders a remedy akin to a preliminary injunction by which they can prevent dissemination of a trade secret early in a case.  Such an application will be granted when a trade secret holder can show that immediate and irreparable harm will occur if a seizure is not ordered, that the harm to the alleged individual who misappropriated the trade secret is less than the harm to the holder, and that the holder is likely to succeed in their case on the merits.
  1. Remedies Against Former Employees: The DTSA makes clear that any injunction granted by a court with respect to trade secret misappropriation shall not be entered where it “prevent[s] a person from entering into an employment relationship,” or “otherwise conflict[s] with an applicable State law prohibiting restraints on the practice of a lawful profession, trade or business.” Moreover, the DTSA states that any “conditions placed on such [new] employment shall be based on evidence of threatened misappropriation” and not simply “information the person knows.”  These provisions address a frequent criticism often levied at restrictive covenants that prevent former employees from working for competitors in a certain geographic area for a certain time period—that they are preventing someone from earning a living.  The same rationale is the reason why non-solicitation agreements are more likely to be enforced by some courts as opposed to non-competition agreements, which restrict a former employee from working for a competitor.
  1. Whistleblower Immunity: The DTSA provides a safe harbor for employees who make a disclosure of a trade secret to the government “for the purpose of reporting or investigating a suspected violation of law,” as well as for employees who confidentially disclose a trade secret in an anti-retaliation action against their employer. Importantly, the DTSA provides that notice of this immunity must be provided by employers in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.  This may be accomplished by cross-referencing a separate policy document.  A failure to do so could result in exemplary damages and attorneys’ fees should the employee win on his or her anti-retaliation action.  Employers should immediately add this immunity language to all new or updated restrictive covenant agreements, non-solicitation agreements, and confidentiality agreements going forward from May 11, 2016, in order to ensure conformity with the DTSA.
F. How the DTSA Compares to State Equivalent Statutes in the Region As the DTSA does not do away with state equivalent statutes, it is important to note that there remain benefits to utilizing the state statutes for companies operating in the region. For example, the NJSTA is broader than many other state adoptions of the UTSA.  This is because where other states' adoption of the UTSA may have pre-empted common law claims for trade secret misappropriation, the NJTSA included an express provision stating that: The rights, remedies and prohibitions provided under this act are in addition to and cumulative of any other right, remedy or prohibition provided under the common law or statutory law of this State and nothing contained herein shall be construed to deny, abrogate or impair any common law or statutory right, remedy or prohibition . . . . In interpreting this provision, at least one court has refused to dismiss common law counts brought in addition to a count for violation of the NJTSA.[iv]  Likewise, the PUTSA contains additional avenues for redress apart from the DTSA because its provisions have been interpreted to permit the issuance of preliminary and permanent injunctions preventing a former employee from accepting employment with a competitor where it can be shown that the employment will result in the trade secret’s utilization or disclosure.[v] By contrast, as New York does not have an equivalent statute adopting the UTSA, its common law interpretation of trade secret misappropriation is very fact-intensive, as its courts have adopted the definition of a trade secret from the Restatement of Torts.  New York defines a trade secret as “any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it,” and the factors that New York courts utilize in deciding a trade secret claim include: (1) the extent to which the information is known outside of [the] business; (2) the extent to which it is known by employees and others involved in [the] business; (3) the extent of measures taken by [the business] to guard the secrecy of the information; (4) the value of the information to [the business] and [its] competitors; (5) the amount of effort or money expended by [the business] in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.[vi] As the DTSA’s definition is more straight-forward, its enactment may make it easier for New York companies to demonstrate a trade secret and misappropriation thereof than under New York’s existing common law. Finally, companies should still be aware that in other states, such as New Jersey, even if information does not rise to the level of a trade secret, it may still be protected under the individual state’s common law.[vii] For questions about the Defend Trade Secrets Act and its implications, please contact Harris S. Freier, Esq., a Partner in the firm’s Employment Law and Appellate Practice Groups, at hfreier@genovaburns.com or (973) 533-0777.   [i] https://www.whitehouse.gov/photos-and-video/video/2016/05/11/president-obama-signs-s1890-defend-trade-secrets-act [ii] https://www.congress.gov/bill/114th-congress/senate-bill/1890 [iii] http://www.uniformlaws.org/shared/docs/trade%20secrets/utsa_final_85.pdf [iv] See SCS Healthcare Mktg., LLC v. Allergan USA, Inc., 2012 N.J. Super. Unpub. LEXIS 2704, at *19 (N.J. Super. Ct. Ch. Div. Dec. 7, 2012). [v] See, e.g., Solar Innovations v. Plevyak, 2013 Pa. Super. Unpub. LEXIS 1230 (Pa. Super. Ct. 2013). [vi] See Restatement of Torts § 757 cmt. b, at 5 (1939) (quoted in Ashland Mgmt. v. Janien, 82 N.Y.2d 395, 399, 624 N.E.2d 1007, 1008, 604 N.Y.S.2d 912, 913 (N.Y. 1993)). [vii] See e.g., Ingersoll-Rand v. Ciavatta, 110 N.J. 609, 626 (N.J. 1988); Platinum Mgmt., Inc. v. Dahms, 285 N.J. Super. 274, 295 (N.J. Super. Ct. Law Div. 1995).

Tag: General