Defend Trade Secrets Act (DTSA) Signed into Law, May 11, 2016

Date: June 8, 2016

On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act (DTSA) creating a cause of action under federal law for trade secret misappropriation which previously had been governed by state common law and each state's adoption of the Uniform Trade Secrets Act.   The law took effect immediately upon signing.

Executive Summary

To greatly summarize, the DTSA was enacted in order to address the rise of trade secret misappropriation generally, facilitate trade secret protection in a technologically connected global economy, and promote uniformity in trade secret law and enforcement.  While the DTSA does not expressly preempt state trade secret laws – instead, claiming to provide a “supplement” to state law – it does include a number of significant provisions which may make claims under it particularly appealing. The DTSA has five main areas of reform; each is highlighted below.

First, the DTSA provides for a variety of remedies which may be awarded to an aggrieved party, including ex parte seizures. The ex parte seizure provision allows a court to order the seizure of any property necessary to prevent the dissemination of a misappropriated trade secret. Importantly, an ex parte seizure application can be brought by a plaintiff without any notice to the adverse party. To prevent potential abuse, however, an ex parte seizure is only available in “extraordinary circumstances” and a plaintiff's application must be based on an affidavit or verified complaint. An ex parte seizure order requires a showing of immediate and irreparable injury and likely success in showing (1) that the information is a trade secret, and (2) that the defendant misappropriated the information or conspired to do so “by improper means.” Improper means is defined to include “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy or espionage through electronic or other means.”  The DTSA mandates that a hearing is to take place no later than 7 days after the order has been issued.  At the hearing, the party who obtained the seizure order bears the burden of proving facts supporting the order.  Notably, a person who ultimately suffers damage as a result of a wrongful or excessive seizure order is permitted to bring a cause of action against the applicant.

Second, a court may grant an injunction under the DTSA to prevent any actual or threatened misappropriation provided that the injunction does not “prevent a person from entering into an employment relationship.” Where appropriate, the court may require “affirmative actions” be taken to protect a particular trade secret.

The DTSA also permits a plaintiff to seek its actual losses as well as the defendant's profits arising from the misappropriation of the plaintiff's trade secrets. Interestingly, under circumstances where actual losses are difficult to determine, the DTSA permits the plaintiff to seek a reasonable royalty, much like the Patent Act. Furthermore, where the trade secret is “willfully and maliciously misappropriated,” a court may award exemplary damages in an amount not more than two times the amount of damages awarded. Attorneys' fees may also be awarded where the misappropriation was in bad faith.

Third, the DTSA provides immunity to “whistle blowers” who disclose a trade secret if such disclosure is made to a governmental agency in the course of an investigation or in a court filing made under seal. Importantly, employers must provide notice of this immunity to employees, consultants and independent contractors “in any contract or agreement … that governs the use of a trade secret or other confidential information.”  While employers need not amend or revise confidentiality agreements entered into prior to enactment of the DTSA, any updates or other amendments to those agreements must also include a notice of this immunity. Notably, the DTSA permits the required notice to be given by providing a “cross-reference to a policy document … that sets forth the employer's reporting policy for a suspected violation of law.”  Failure to provide the required notice in these agreements will result in the employer being prohibited from being awarded exemplary (punitive) damages or attorneys' fees that may otherwise be available under the Act.

Fourth, the DTSA includes no pre-discovery disclosure requirement. In other words, a plaintiff need not disclose the trade secrets it alleges have been misappropriated in its initial complaint or in other public filings until an appropriate protective order has been entered.  This stands in stark contrast to the requirements in certain states where plaintiffs are required to identify in a written disclosure each trade secret at issue before conducting any discovery regarding the alleged misappropriation. 

Finally, the DTSA seeks to investigate the nature and extent of foreign trade secret misappropriation by requiring the Attorney General to author future reports on trade secret theft “occurring outside of the United States” with recommendations on reducing the impact of such theft. 

Companies should expect to see rapid development in this area of the law as courts implement and interpret the DTSA.

What to do now?

The DTSA ushers in a new era in trade secret law by providing a long-awaited federal forum and remedy for trade secret disputes.  It will have far-reaching consequences, and companies should evaluate their IP, employment and other policies and litigation options in light of its provisions.

Obviously, and at a bare minimum, employers should include the required whistle blower immunity notice in all nondisclosure agreements entered into with employees, independent contractors and consultants on and after May 12, 2016.  Additionally, going forward, employers should consider taking advantage of opportunities to update existing employment and contractor agreements to include this notice language.  This will require coordination with a company's HR and legal teams. 

More fundamentally, companies should act now to take advantage of both existing state law trade secret protections, as well as those now available under the DTSA. Systematically identifying and protecting confidential and other information that is available for trade secret protection is a critical -- and too often overlooked -- step in maintaining a truly protectable intellectual property portfolio.

This Alert has been prepared for general informational purposes in a summary manner only and is not intended as specific legal advice.  For more information or to discuss the implications and opportunities of the Defend Trade Secrets Act for your organization, please contact any of the attorneys listed on this alert.

© 2016 Whiteford, Taylor & Preston L.L.P.