Trade secrets are a BIG deal, especially here in Silicon Valley, and it’s no “secret” that the vast majority of misappropriation of information occurs internally. Owners of any kind of business with proprietary information – be it a specialized restaurant or a software development company – should understand that their company’s highest risk with respect to information misappropriation stems from within their very own organization: those who create and work with proprietary and sensitive information on a day-to-day basis – employees, contractors and consultants. Whether your business is a start-up or a well-established company, it’s important to be aware of recent developments in trade secret protection, and to update your confidentiality agreements, licensing agreements and various employment agreements accordingly.

Recently, President Barack Obama signed into law the Defend Trade Secrets ACT (DTSA), which enables businesses (and individuals) to protect trade secrets more efficiently and on the federal level. The DTSA will significantly impact and facilitate how companies address and litigate trade secret disputes. The DTSA creates a federal private right of action for trade secret misappropriation under the federal Economic Espionage Act of 1996 (EEA), which provides for the federal criminal prosecution of trade secret theft. Under the Act, a trade secret owner can now obtain a variety of remedies in federal courts if the trade secret is related to a product or service used in, or intended for use in, interstate commerce or foreign commerce – a fairly easy requirement to meet in this day and age.

Until the passage of the DTSA, state laws have governed the resolution of trade secret misappropriation claims in the civil context, primarily under the Uniform Trade Secrets Act (UTSA), which was first published in 1979 and enacted by all but 2 states (New York and Massachusetts). [The text of the California version of the UTSA can be found in Sections 3426-3426.11 of the California Civil Code http://www.leginfo.ca.gov/cgi-bin/displaycode?file=3426-3426.11&group=03001-04000&section=civ.] However, because the versions enacted by the various states contain a number of differences that are not easy to reconcile when plaintiffs have to bring trade secret litigation in different states to ensure full protection, it can be very tricky for companies to adequately fight trade secret misappropriation. Procedural requirements and legal standards, just to name a few obstacles, vary across states, as a result of which the practical application of the UTSA has been far from uniform for businesses battling trade secret misappropriation. With the passage of the DTSA, claimants now benefit from a federal civil right of action for trade secret claims, which enables them to sue in federal court for damages related to theft of trade secrets. The DTSA should greatly improve a company’s ability to quickly and efficiently protect its much-valued trade secrets.

Below are some key points of the DTSA.

The Definition of a “Trade Secret” Under the DTSA is Generally Broader than Under the UTSA

The DTSA ‘s definition of a trade secret (derived from the EEA) includes “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 if—(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the another person who can obtain economic value from the disclosure or use of the information.”

In sum, almost every kind of information can qualify as a trade secret provided (1) the information is actually kept secret; (2) the owner of the information has taken reasonable measures to maintain its secrecy; and (3) independent economic value is derived from that secrecy. By comparison the UTSA identifies eight specific types information, including “formula, pattern compilation, program device, method, technique or process.” While the types identified by the UTSA are considered examples, the plain language of the DTSA appears broader.

Similar to what is contained in the UTSA’s definition of “improper means,” the DTSA expressly excludes reverse engineering and independent derivation. From a practical standpoint, acquiring information by disassembling a competitive product that was legally obtained is not, in and of itself, an improper means.

The DTSA provides a 3-year statute of limitations.

The DTSA May Restrict a Former Employee From Joining a Competitor

One important feature of the DTSA is a company’s ability to restrict a former employee from joining a competitor under certain circumstances. This remedy is intended to prevent former employees from taking company secrets to competitors. However, the DTSA provides that an injunction against a former employee must not conflict with an applicable state law that “prohibit[s] restraints on the practice of a lawful profession, trade, or business.” This caveat is especially relevant in California, which, as a matter of public interest, favors employee mobility and deems non-compete agreements as automatically void as a matter of law in California, except under certain limited circumstances.

The DTSA Contains an Ex Parte Seizure Mechanism Under Extraordinary Circumstances

Another important (and controversial) difference between the DTSA and state trade secret laws is a mechanism for civil seizure early in the action, a measure designed to quickly prevent the dissemination of trade secrets early on in the case. Currently, in most states, claimants may seek an injunction, which will not be granted until both sides have argued their case, which can result in lengthy delays to prevent the actual dissemination of the trade secrets at issue. Under the DTSA, courts can impose an ex parte civil seizure of property so that plaintiffs can quickly reclaim the allegedly stolen trade secrets and prevent them from being further circulated. This feature of the DTSA is controversial because under an ex parte order, the defendant receives no advance notice of the seizure. As such, the DTSA makes it clear that such relief is available only in “extraordinary circumstances” and addresses in detail the requirements for issuing the civil seizure order.

In addition to ex parte seizure under extraordinary circumstances, the remedies provided under the DTSA include injunctions to prevent a misappropriation, damages for actual loss or unjust enrichment, or reasonable royalty; and if the trade secret is “willfully and maliciously misappropriated,” the court may decide to increase damages by not more than two times and/or awarding reasonable attorney’s fees.

The DTSA Provides Immunity to Whistle Blowers

Finally, the DTSA protects employee and independent contractor whistleblowers, and provides that employees, contractors and consultants have immunity from liability for trade secret disclosure under the following circumstances: (A) disclosure in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney solely, for the purpose of reporting or investigating a suspected violation of law; or (B) disclosure in a complaint or other document filed in a lawsuit or other proceeding, provided the filing is made under seal.

Importantly, under the DTSA, companies have an affirmative duty to provide their employees notice of the new immunity provision in “any contract or agreement with employee that governs the use of a trade secret or other confidential information.” Note that the definition of “employee” under the DTSA includes contractors and consultants. Significantly, if a company does not provide notice of the immunity, it will not be entitled to recover exemplary damages or attorney fees in a suit against such individual. The practical ramification is that, moving forward, any agreement protecting trade secrets must contain the notice of immunity.

Conclusion

The DTSA provides a new mechanism for effectively addressing trade secret misappropriation at the federal civil level. Because it does not preempt existing federal or state laws, a trade secret owner may choose to pursue actions in the federal court and/or the state court, affording the plaintiff greater flexibility. It will certainly take some time for federal courts to vet the DTSA, and in the meantime trade secret owners will continue to have the option of litigating in state court under the UTSA and its well-developed jurisprudence. However, as federal courts begin to address claims brought under the DTSA, they will generate a more predictable and truly uniform trade secret case law and procedure across the various states. Additionally, companies, and in particular the many tech start-ups that do not benefit from the protection of a patent, should update their form confidentiality, non-disclosure, employment, consultant, contractor and vendor agreements, as well as employee handbooks, to provide notice of the immunity and also safeguard other key provisions contained in the DTSA.

-CG

DISCLAIMER. None of the materials contained in this Website is offered, nor should be construed, as legal advice. The material on our Website has been prepared and published for informational purposes only and may not reflect the most current legal developments. You should not act or rely upon information contained in these materials without specifically seeking professional legal advice.