Defend Trade Secret Act to bring consistency to trade secret litigation

On April 28 2016 the US House of Representatives approved the Defend Trade Secret Act by a margin of 410 to two. As the act had already passed the Senate with an 87-0 vote, the bill has now gone to President Obama to be signed into law. The Obama administration has voiced strong support for the act and the passage of the bill appears imminent.

Under US law, trade secrets are legally protectable information, and include formulae, patterns, compilations, programmes, devices, methods, techniques or processes that derive independent economic value from not being generally known. To be a trade secret, the owner must take reasonable measures to protect the information. Other examples of trade secrets include business plans, designs, computer software, customer lists, and cost and pricing information.

The monetary benefits or investment returns from trade secrets come in various forms, including sales of the products or services that use the trade secret, premium price points for the product that uses the trade secret or increased market share. In addition, trade secret misappropriation lawsuits provide another avenue of potential investment returns through the recovery of damages; however, the results of such litigation have not always been consistent. 

One reason for this inconsistency is that trade secrets have long been governed at the state level, not through federal law. While most state trade secret laws are substantively similar, subtle variations in the laws can make enforcement in different states challenging and lead to unpredictable outcomes. The Defend Trade Secret Act creates a federal private cause of action for trade secret misappropriation. And, although the Defend Trade Secret Act is similar to the Uniform Trade Secrets Act employed by the states, there are certain additions to the Defend Trade Secret Act not found in the state laws that all businesses must be aware of.

The most controversial aspect of the Defend Trade Secret Act is a new remedy available under the law that is not found in the Uniform Trade Secrets Act. While the standard remedies of monetary damages and injunctive relief are available, the Defend Trade Secret Act also allows, in "extraordinary circumstances", courts to issue ex parte orders to seize misappropriated trade secrets to prevent further dissemination or destruction of property. The concern of many public and private companies has been whether this could lead to the seizure of a party's manufacturing plant or R&D lab as a means to leverage settlement in a dispute. To assuage those concerns, lawmakers added certain provisions specifically requiring that a court finds it "clearly appear[ant]" that:

  • no other adequate relief is available;
  • immediate and irreparable injury will occur if such seizure is not ordered;
  • the harm to the trade secret owner outweighs the harm to the party whose property is being seized;
  • the harm to the trade secret owner "substantially outweighs" the harm to any third parties (eg, a customer awaiting product from a manufacturing plant);
  • the trade secret owner is likely to succeed in proving the existence of a trade secret and misappropriation;
  • the trade secret owner has described with "reasonable particularity" the matter to be seized and its location;
  • the accused party would destroy, move or hide the matter if the case were to proceed normally; and
  • the trade secret owner has not publicised the requested seizure.

Trade secrets owners seeking ex parte seizure will need to seriously consider whether such an extreme remedy is merited, as there is risk for a trade secrets owner that abuses the provision. Specifically, a party whose property is seized may seek damages in the event of a "wrongful or excessive seizure". The Defend Trade Secret Act also requires the trade secrets owner to post a bond in an amount to be determined by the court in order to cover such damages if the seizure is found to have been unjustified or unwarranted. 

Another variation between the Uniform Trade Secrets Act and the Defend Trade Secret Act is that the Defend Trade Secret Act provides immunity from a trade secret misappropriation claim for whistleblowers that disclose a company's trade secrets when reporting a suspected violation of law. The new act requires that companies provide notice of such immunity in an employee contract, non-disclosure agreement or confidentiality agreement. The failure of a company to provide such notice in an employee's contract prevents the company from recovering exemplary damages or attorney's fees under the Defend Trade Secret Act in action against that employee. Employment agreements will be deemed in compliance with the Defend Trade Secret Act notice provisions if they cross-reference a policy document provided to the employee that sets out the employer's reporting policy for a suspected violation of law. Notably, the notice provisions of the Defend Trade Secret Act affect only agreements entered into or amended after the passage of the bill.   

The Defend Trade Secret Act provides companies with a clear and consistent path to protecting company trade secrets via a federal law that should be applied uniformly by the federal courts. As misappropriation claims under the Defend Trade Secret Act are litigated over the next few years, the results of such lawsuits will provide companies with a sampling with which to approximate a return on their trade secret investments through misappropriation lawsuits. Nonetheless, businesses should take the necessary steps presently available in updating their employment agreements to ensure that all the benefits of the Defend Trade Secret Act are accessible.     

This is an Insight article, written by a selected partner as part of IAM's co-published content. Read more on Insight

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