NEWLY ENACTED FEDERAL TRADE SECRETS LAW OFFERS STRATEGIC ADVANTAGES TO EMPLOYERS AND EMPLOYEES

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On May 11, 2016, President Obama signed into law S.1890, the Defend Trade Secrets Act of 2016, establishing a civil claim under federal law for trade secret misappropriation. The DTSA is patterned on the Uniform Trade Secrets Act, which 48 states (including California) and the District of Columbia have adopted in varying forms. The DTSA differs from California’s version of the UTSA in a few significant ways. The DTSA provides strategic benefits to employers in some respects and to employees in others. Here are 10 ways the DTSA compares to the UTSA:

  1. Interstate Commerce Threshold. The DTSA provides civil remedies to an owner of a misappropriated trade secret that is “related to a product or service used in, or intended for use in, interstate or foreign commerce.” While the California UTSA (CUTSA) does not impose this interstate/foreign commerce requirement, it is a threshold that is relatively easy to meet and so unlikely to be a deciding factor in determining whether to use the DTSA or the CUTSA.
  2. Rejection of the “Inevitable Disclosure” Doctrine. The DTSA contains limitations on relief against a former employee that conform to California public policy encouraging free movement of employees to new employment. For example, the DTSA requires that an injunction against a former employee respect “an applicable State law prohibiting restraints on the practice of a lawful profession, trade or business.” The DTSA also prohibits a court from granting an injunction that would “prevent a person from entering into an employment relationship,” and requires that any conditions in an injunction imposed upon someone being employed by a new employer “be based on evidence of threatened misappropriation and not merely on the information the person knows.” In other words, as in California and a few other states, the “inevitable disclosure” doctrine does not apply. Generally, injunctive relief, damages, grant of a royalty, punitive damages and attorneys’ fees provisions under the DTSA track the provisions in the CUTSA.
  3. Requirement to Notify Employees of Whistleblower Protections or Risk Loss of Remedies. The DTSA imposes on employers a requirement not included in the UTSA (including the CUTSA) that, in the event of non-compliance, will eliminate claims for punitive damages and attorneys’ fees against former employees. Employers must give notice in any agreement with an employee governing the use of trade secrets or other confidential information that, under the DTSA, the employee is immune from civil or criminal liability under federal or state trade secret law for disclosure of a trade secret (a) made in confidence to an attorney or federal, state or local government official solely to report or investigate a suspected violation of law, or (b) in a complaint or other document filed in a lawsuit or other proceeding, provided the filing is under seal. The employer may provide this notice by cross-reference to a policy document given to the employee setting forth the employer’s reporting policy for a suspected violation of law. Failure to comply with this notice requirement results in the loss of an employer’s right to seek punitive damages or attorneys’ fees in a trade secret misappropriation claim under the DTSA. Employers should consider updating their confidentiality/proprietary information/trade secrets agreement with employees to include this notice, to ensure the availability of these remedies under the DTSA.
  4. No DTSA Requirement to Identify the Trade Secret before Commencing Discovery. While California law requires a plaintiff in a trade secret misappropriation case to “identify the trade secret with reasonable particularity” before commencing discovery related to the trade secret, the DTSA contains no such requirement. It is possible that a federal court that considers this requirement a matter of substantive, rather than procedural, law would impose this requirement in a lawsuit in federal court. The only provision in the DTSA that is similar to this requirement is that, in seeking a court order for seizure of trade secret materials, the ex parte application for the seizure order must describe “with reasonable particularity the matter to be seized . . . .”
  5. Strategic Advantage to an Employer to Require a Former Employee to Litigate in Federal Court. In non-diversity cases, the DTSA gives an employer the opportunity to require a former employee to litigate in federal court, with its stricter procedural requirements. For an employer faced with a wrongful termination lawsuit in state court, the ability to require a former employee to defend a DTSA lawsuit in federal court, rather than as a cross-complaint in state court, could prove a strategic advantage. At least one employer has already filed a DTSA claim in a California federal court against two former employees who had sued the employer in state court and who now will have to incur the expense to fight the employer on two fronts.
  6. Strategic Advantage to a Former Employee and New Employer to Seek Declaratory Relief. The DTSA may also give an advantage to a former employee of an employer who has threatened a trade secret misappropriation claim against the former employee or his or her new employer. Such an employee may file a complaint for declaratory relief under the DTSA to seek a determination that no trade secret misappropriation has occurred. The employee could thereby (a) exert control over the choice of forum, and (b) preclude use of the inevitable disclosure doctrine or other state law theories that would not be applicable in a DTSA claim, in cases where the former employer might sue in a jurisdiction that recognizes that doctrine or those theories.
  7. Added Ex parte Provisional Remedy of Civil Seizure of Trade Secret Materials. While some commentators have touted the DTSA’s new civil seizure provisional remedy as a significant enhancement for employers, it is likely to be used only in exceptional circumstances in light of its stringent requirements, risks and costs, as well as the availability under the DTSA, as with UTSA, of injunctive relief. The DTSA authorizes the court, upon an ex parte application by an owner of a trade secret, and “only in extraordinary circumstances,” to issue an order seizing property needed to prevent “propagation or dissemination” of a trade secret.

Specific Findings and Conclusions Required in Seizure Order. In granting such relief, the court must make findings of fact and conclusions of law (a) that other available injunctive relief would be inadequate because the defendant “would evade, avoid, or otherwise not comply” with such an order, (b) that immediate and irreparable injury would occur absent the order, (c) that the harm to the plaintiff of denying the application outweighs the harm to the legitimate interests of the defendant in granting the application, and substantially outweighs the harm to third parties who might be harmed by a seizure, (d) that the plaintiff is likely to succeed on the merits in showing the information is a trade secret that the defendant misappropriated or conspired to use improper means to misappropriate, (e) that the matter to be seized has been described with reasonable particularity and the location of the matter has been identified, (f) that the defendant or persons acting in concert with the defendant would destroy, move, hide or otherwise make the matter inaccessible to the court if notice of the application were given to the defendant, and (g) that the plaintiff has not “publicized” the requested seizure.

Strict Requirements Limiting Scope of Seizure Order and Protecting Trade Secret Material. In addition to making findings and conclusions, the court’s order must (a) limit the scope of the seizure to what is necessary to achieve the purpose of this remedy and direct that the seizure be conducted in a way that minimizes interruption of the business operations of third parties or the legitimate business operations of the defendant, (b) protect the seized property from disclosure by prohibiting access by both the plaintiff and the defendant and prohibiting copies of the seized property, until the parties have had an opportunity to be heard in court, (c) provide that, if access is granted, the matter seized remains in the custody of the court, the medium on which the material is stored is not connected to a network or the internet without the consent of both parties, and the confidentiality of the materials that are unrelated to the trade secret information ordered seized is protected absent consent from the defendant to disclosure of such materials, and (d) require that the plaintiff post sufficient security to pay damages that a person may be entitled to recover as a result of wrongful or excessive seizure or attempted seizure.

Other Procedural Requirements to Protect a Defendant’s Rights. The Court also must take appropriate action to protect the defendant from publicity by the plaintiff about such an order and any seizure under the order; keep the material in the custody of the court, secure from physical and electronic access; order service of a copy of the order and the plaintiff’s application papers by a federal law enforcement officer, who (with the assistance of state or local law enforcement officials and a technical expert, as allowed by the court) will also carry out the seizure of the materials; and set a date for a hearing at which the plaintiff has the burden to prove the facts supporting the findings of fact and conclusions of law supporting the order.

A defendant or any person harmed by such an order may move the court to dissolve or modify the order. The court may modify the time limits for discovery as necessary, and a person who suffers damage as a result of wrongful or excessive seizure has a cause of action against the plaintiff. The court may appoint a special master “to locate and isolate all misappropriated trade secret information and to facilitate the return of property and data unrelated” to the trade secret information allegedly misappropriated.

  1. No Preemption by DTSA of State Laws; so UTSA Preemption of Non-Contractual and Non-Statutory Claims May Still Apply. The UTSA (including the CUTSA) preempts all non-statutory and non-contractual causes of action based upon misappropriation of a trade secret. California courts routinely dismiss claims for, among other things, interference with business and conversion, that arise from the same facts as a trade secret misappropriation claim. One federal court, in San Francisco, has held that the CUTSA preempts such claims even where a UTSA claim has not been asserted. Because the DTSA provides that it does not preempt other laws, a state law like the CUTSA would most likely apply to preempt claims in a federal court complaint that are not based on statute or contract and are grounded in the same facts as a CUTSA claim.
  2. Same Three-Year Statute of Limitations. Like the CUTSA, the statute of limitations for a claim under the DTSA is three years after discovery or after the date a person should reasonably have discovered misappropriation. Like the CUTSA, the DTSA, for purposes of the limitations period, recognizes only one claim of misappropriation even where continuing misappropriation occurs.
  3. Application of DTSA only to Acts after May 11, 2016. The DTSA applies “with respect to any misappropriation of a trade secret . . . for which any act occurs on or after the date of the enactment of this Act,” or May 11, 2016. According to the plain language of this provision, if trade secret misappropriation commenced before May 11, 2016, and continuing acts of misappropriation with regard to the same trade secret occurred after May 11, 2016, the DTSA would apply to those subsequent acts. This is consistent with the CUTSA.

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