How To Capitalize on the Defend Trade Secrets Act

September 20, 2016Articles The Legal Intelligencer

Benjamin H. McCoy authored The Legal Intelligencer article, "How to Capitalize on the Defend Trade Secrets Act."

Historically, the success (or lack thereof) of a business often can be traced to the quality and quantity of its trade secrets, which are the legal embodiment of a "competitive business advantage." Recent developments in the intellectual property landscape have only served to enhance the value of trade secrets. For example, the U.S. Supreme Court's recent decision in Alice v. CLS Bank International, 134 S. Ct. 2347, 189 L. Ed. 2d 296 (2014), has led to an increasingly hostile patent marketplace. Faced with trying to obtain a patent for a business method that may implicate Alice, many businesses are ­choosing to extract value through trade secret ­protections instead.

Given the well-known value of trade secrets, it should come as no surprise that corporate espionage is now among the top threats faced by businesses. Many ­corporations have responded by ­instituting new executive-level positions to specifically combat this ever-growing risk. Of course, even if a company does implement internal protections, it faces the threat of ­disclosure by its own employees—both current and former. Simply put, the path to ­effective trade secret protection is littered with obstacles.

Recognizing the ever-growing need to protect trade secrets, President Obama signed the Defend Trade Secrets Act of 2016 (DTSA) into law on May 11. Facially, the DTSA is notable for granting federal question jurisdiction over an issue that has historically been a creature of state law, e.g., Kewanee Oil v. Bicron, 416 U.S. 470, 94 S. Ct. 1879, 40 L. Ed. 2d 315 (1974) (discussing the special role of the states in protecting and enforcing trade secrets). The DTSA does not, however, constitute an overhaul of pre-existing trade secret laws. The DTSA is based on the Uniform Trade Secrets Act (UTSA), which was ­adopted by every state aside from New York and Massachusetts. Nevertheless, there are certain nuances of the DTSA that in-house counsel can harness to more effectively protect their trade secrets.

Immunity to Whistleblowers

The DTSA provides immunity for ­whistleblowers from claims of trade secret misappropriation where the disclosure is made: "in confidence to a federal, state or local government official, either directly or indirectly or to an attorney" and "solely for the purpose of reporting or investigating a suspected violation of law" or "in a complaint or other document filed in a lawsuit or other proceeding, if such a filing is made under seal." Notably, this provision is the only section of the DTSA that pre-empts contrary state laws.

To thwart overzealous whistleblowers, the DTSA includes countervailing ­protections for employers. Any trade secret disclosed in a judicial proceeding must be filed under seal. More importantly, an entity that ­contends information is trade-secreted must be given a chance to seek a ­protective order before a court can make such information publicly ‚Ä®available.

Notice to Employees and Independent Contractors

The DTSA provides for exemplary ­"double damages" and an award of attorney fees and costs. To take advantage of these provisions, employers must provide notice of the ­aforesaid immunity provisions "in any contract or agreement with an employee that governs the use of a trade secret or other confidential information." While the ­failure to provide notice will not bar an employer from ­collecting other damages under the DTSA, the benefit far outweighs any conceivable risk. In-house counsel should ensure that any future agreements contain the requisite notice. This includes employment agreements, ­independent contractor ­agreements, consulting agreements, noncompete agreements and nondisclosure agreements. Similarly, employment handbooks and ­reporting ­policies should also be amended to give notice.

The notice provision is not retroactive and only applies to claims arising after May 11. But best practices dictate that notice should be given to all existing ­employees and contractors.

Interplay With State Law

Outside of immunity for whistleblowers, the DTSA does not pre-empt state law. Therefore, employers can continue to capitalize on the advantageous provisions of state trade secret laws. For example, the "inevitable disclosure" doctrine has been adopted by several states, as in Bimbo Bakeries USA v. Botticella, 613 F.3d 102, 111 (3d Cir. 2010) (discussing the application of the inevitable disclosure doctrine under Pennsylvania law). Under this theory, a former employee can be enjoined from working for a competitor where it would be impossible for the employee to perform his new job functions without drawing on the trade secrets learned at his old one. To encourage employee mobility, the DTSA expressly bars the inevitable disclosure doctrine. But since the DTSA does not pre-empt state law, claims for inevitable disclosure can continue to be made under state law.

Similarly, many state trade-secret laws bar litigants from bringing other claims based on the conduct underlying a ­misappropriation claim (i.e., conversion, unfair competition, etc.). The DTSA's nonpre-emption language may open up a pathway for such claims to be brought in parallel with trade secret claims. In short, in-house counsel should remain cognizant of state trade secret laws.

International Trade Secret Misappropriation and RICO

For American businesses with an international presence, the DTSA may provide a mechanism to reach foreign misappropriations (see 18 U.S.C. Section 1837 of the Economic Espionage Act). For acts of misappropriation that take place outside the United States, the DTSA applies if such acts are committed by: a U.S. citizen, a permanent resident alien, or a U.S. entity or organization. Additionally, the DTSA is implicated if "an act in furtherance of misappropriation" was committed in the United States. This latter provision may provide a hook to reach unscrupulous foreign competitors. However, the threshold for an act to be considered "in furtherance of ­misappropriation" remains unclear. For guidance, in-house counsel can look to developing jurisprudence on the extraterritorial reach of the Racketeer Influenced and Corrupt Organizations Act statute, where the standard for bringing foreign entities within the scope of American laws is set to be addressed by the Supreme Court, as in European Community v. RJR Nabisco, No. 15-138 (Oral Arg. Mar. 21, 2016).

Ex Parte Seizures

In one of the largest deviations from the UTSA, the DTSA provides ­misappropriation victims with the ability to obtain an order for the seizure of property "as necessary to prevent the propagation or dissemination of stolen trade secrets." Critically, seizures can be authorized upon an ex parte application. It is easy to envision this provision being used—in conjunction with a forensic analysis—to seize a thumb drive that an ex-employee used to siphon away ­trade-secreted material.

Although rare, similar seizure provisions can be found in other areas of the law. For example, both the Lanham Act and the Copyright Act authorize ex parte seizures to recover counterfeited and/or pirated ­material. The seizure provisions of those statutes are not utilized often, and many commentators have drawn parallels to suggest that the DTSA's seizure ­provision will have little practical effect. But ­in-house counsel should not underestimate the ­potential value of the seizure provision.

Unlike copyrights and trademarks—which are publicly available—trade secrets lose their value upon public disclosure. In the civil context, there are few areas of the law, if any, that are as susceptible to the passage of time as trade secret cases. Every ­moment that trade-secreted property is outside the corporation's control only increases the risk of public disclosure. And while a ­corporation can seek damages through a lawsuit, the competitive value of the trade secret will be forever lost. The DTSA's seizure provision provides a tool to cut off the risk of irreversible damage outside of the time-consuming process of normal litigation.

In this regard, the seizure provision speaks to a broader need for in-house ­counsel to think ahead. With the availability of federal jurisdiction, in-house counsel are now assured of uniform evidentiary and procedural rules. As a result, the ability to create and implement a rapid response mechanism to address future ­misappropriations is ­considerably easier. Additional components of such a mechanism may include knowledge of the steps and standards for obtaining an ex parte seizure; identification of the means and actors for instituting those steps (i.e., forensic analysts); and preparation of a database containing local court rules for emergency motions.

Recognizing the potential for abuse, the DTSA provides a remedy for those who are victims of wrongful seizures. In-house counsel must exercise discretion in seeking seizures, and ensure that they have adequate proof that the seized item will contain trade-secreted material.

Conclusion

The DTSA does not represent a ­substantial departure from existing trade secret laws. Nevertheless, the DTSA is a necessary step toward obtaining greater uniformity in trade secret protection. In-house counsel can take advantage of the DTSA by: amending agreements and procedures to include notice; remaining apprised of developments state laws and extraterritoriality ­jurisprudence; and implementing the new seizure provisions into rapid response protocols.

Reprinted with permission from the July 12 issue of The Legal Intelligencer. (c) 2016 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.