The Federal Defend Trade Secrets Act of 2016

Does your company rely on secret information that would be valuable in the hands of another? Has someone used or tried to use that information against your company or for their own benefit? Then you might be interested in the Defend Trade Secrets Act, which was just passed a few months ago.

On May 11, 2016, the Defend Trade Secrets Act, 18 U.S.C. § 1836, (read it here) became the law of the United States. It was passed with overwhelming support in both houses, and became effective immediately. It is the single biggest change in federal trade secret law in history.

How it was before the Defend Trade Secrets Act

Trade secrets have almost universally been a matter of state, and not federal, law. Most states have adopted the Uniform Trade Secrets Act verbatim. Only New York and Massachusetts have passed on the act, and North Carolina adopted their own rules, but are still similar to the UTSA.

The UTSA defines a trade secret as "including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." This broad definition covers more than super secretive processes that are passed down through generations in restrictive guilds. The UTSA's definition is broad enough to cover something as simple as a customer list, so long as necessary precautions have been taken.

The big stick for the UTSA is its enforcement provision: it provides both civil and criminal remedies. In civil court, a damages party could seek injunctive relief, actual damages, attorney's fees, and even punitive damages if the misappropriation was "willful and malicious." In some circumstances, these acts could also result in a felony.

On the federal end, however, trade secrets were only protected by criminal penalties, leaving civil remedies to state courts. Often, the difficulty in understanding and litigating criminal trade secrets violations discouraged many US Attorneys from prosecuting all but the most egregious violations. Because only the Attorney General had the authority to seek civil penalties, private parties had no options in federal courts for trade secrets violations.

What the Defend Trade Secrets Act Changes

The Defend Trade Secrets Act is the first full-force federal law granting civil remedies to private parties for trade secrets violations. Practically speaking, the law adopts most of the UTSA's provisions regarding the definition and enforcement of trade secrets with some minor alterations and stylistic changes. That said, there are some noticeable differences between the Defend Trade Secrets Act and the UTSA:

• Seizure - The new federal law actually allows a plaintiff to use federal marshals to actively enter a defendant's property to seize the trade secrets on an ex parte complaint. This is a major departure from existing trade secrets law on the state level. While this remedy is only granted in rare circumstances, and only after the plaintiff can swear that the trade secrets are about to be imminently disseminated or destroyed, in addition to meeting the usual requirements for injunctive relief, the sheer power of being able to use federal law enforcement mechanisms to remedy a civil liability is unique, to say the least.
• Royalties - While the concept of a royalty for the inappropriate use of a trade secret are not new, this remedy is explicitly provided in the DTSA. Basically, a court can now require a misappropriating defendant to pay to a plaintiff a royalty based upon their use of the trade secret for as long as the trade secret is useful or confidential. However, this is only granted in "exceptional circumstances."
• Whistleblower Protections - Another interesting departure is the DTSA's protection for whistleblowers. Falling in line with other federal whistleblower protections, the DTSA protects individuals who disclose otherwise confidential trade secrets to the government in a confidential manner, so long as that disclosure is for the purpose of reporting a potential crime.
• International Reporting - Currently, because trade secrets are, by definition, confidential, it can be pretty difficult to collect reliable data on how often trade secret violations occur. The DTSA now authorizes and requires other federal agencies, such as the United States Patent and Trademark Office, to prepare reports on trade secret violations that occur abroad to US companies.
• Non-Preemption - Often, when Congress enacts a law, they take over the law by default under a concept called "preemption." However, the DTSA explicitly does not preempt state law, meaning that two different, but complimentary case laws may develop even in the same state. This does provide benefit to plaintiffs that may seek to file a claim, because they now get to pick their venue: state or federal.

Bottom Line

Trade secrets are increasingly one of the most valuable pieces of property companies own, whether they know it or not. Long misunderstood, trade secrets have evolved from the outdated concepts of secret recipes passed down from generation to generation in cloistered guilds. Modern trade secrets include proprietary formulas, source codes, financial reports, and even customer lists. So long as the information "derives independent value" and is kept secret using "reasonable methods," it is potentially a valuable trade secret.

The Defend Trade Secrets Act is the first time a federal civil cause of action has been available for misappropriation of trade secrets. While state law used to be sole recourse, the DTSA gives potential plaintiffs an option to file in state or federal courts now.

The DTSA also forces some changes for businesses using trade secrets:

• Update those NDAs - Your confidentiality agreements, both internally and externally, need to be updated from time to time, anyway. Trade secret law is advancing constantly, and a routine review of your agreements always helps. However, with the DTSA, your NDAs just became woefully outdated. Probably time to brush those up.
• Perform a Confidentiality Audit - An ounce of prevention is worth a pound of cure. The best way to protect a trade secret is to make sure it stays secret. You should meet with an attorney to discuss what items need to be protected and what methods you are using to protect them. It's also very important that you mention your trade secrets specifically to your attorney. It is difficult for us to protect concepts, but if you tell us that you need to protect your customer list, there's a lot more we can do to help you.
• Reassess that Lawsuit - If you had passed on pursuing on that trade secret misappropriation before because you weren't confident about filing in state court, you now have another option. While the standards to litigate in federal court are higher, the lower case load arguably allows federal courts to spend more time on your case while expediting the end result.
• Act Fast - With the new seizure options, the DTSA speeds up an already quick litigation schedule. As soon as you know of an actual or potential misappropriation, you need to speak with an attorney, or suffer the consequences.
• Tolerate Whistleblowers - I know, I know, I know... Whistleblowers scare everyone. However, you cannot take retaliatory action against someone for calling the cops on you for your trade secret. It's best to hope that nothing will come of it and that law enforcement will take proper steps to keep that information confidential.

Trade secrets law is constantly changing, and new developments are happening all the time. If you need help protecting your trade secrets, give us a call at The Watson Firm, 205-545-7278, or complete the form on this page to find out more.