Federal Defend Trade Secrets Act: potential clashes with existing state law pre-emption

Congress introduced the Defend Trade Secrets Act in part to promote a uniform body of federal trade secret law. However, in practice, the act could result in unexpected confusion, given the existing and well-developed bodies of state trade secret law. State trade secret law has generally been some form of the Uniform Trade Secrets Act, which usually explicitly pre-empts other forms of state law (eg, common law tort claims). In contrast, the Defend Trade Secrets Act explicitly does not pre-empt state law causes of action, thereby possibly placing these common law claims back on the table.

Until recently, private claims for trade secret misappropriation in the United States were governed exclusively by state law. However, on April 27 2016 Congress passed the Defend Trade Secrets Act, which was signed into law by President Obama on May 11 2016. Although the Defend Trade Secrets Act is not technically a new statute, but rather an amendment to the existing Economic Espionage Act, it marks a profound change in trade secrets law by creating a federal private cause of action for trade secret misappropriation. 

Before the Defend Trade Secrets Act's enactment, the majority of states had enacted their own versions of the Uniform Trade Secrets Act to protect trade secrets. The only two states that have not enacted the Uniform Trade Secrets Act – Massachusetts and New York – rely on state and common law sources distinct from the Uniform Trade Secrets Act to govern trade secret claims. Although there are commonalities among each state's trade secret laws, implementing such laws at the state level has resulted in state-by-state variations, even among Uniform Trade Secrets Act states. Thus, a trade secret owner previously faced potentially inconsistent legal standards depending on the venue, including:

• what information constitutes a 'trade secret';
• what conduct constitutes 'misappropriation'; and
• what remedies he or she ultimately may recover in that state.

Congress introduced the Defend Trade Secrets Act in part to promote uniformity at a federal level. However, in practice, some confusion is likely, given the existing and well-developed bodies of state trade secret law. This is significant because the Defend Trade Secrets Act does not pre-empt state law causes of action. Instead, the Defend Trade Secrets Act is designed to supplement, and coexist with, existing state trade secret laws, including any state's version of the Uniform Trade Secrets Act. As such, a trade secret owner now may bring claims for trade secret misappropriation under the Defend Trade Secrets Act, the existing state law, or both. Given the newness of the Defend Trade Secrets Act's passage, the potential impact of this concurrent jurisdiction over trade secret claims remains an open question.

The pre-emptive effect of state trade secret law, coupled with the lack thereof under the Defend Trade Secrets Act, is just one source of potential conflict as courts begin to apply the Defend Trade Secrets Act. The Defend Trade Secrets Act does not "preempt or displace any other remedies, whether civil or criminal… for the misappropriation of a trade secret" under federal or state law (18 USC § 1838). Conversely, the Uniform Trade Secrets Act "displaces conflicting tort, restitutionary and other law of this State providing civil remedies for misappropriation of a trade secret" (Section 7(a) of the Uniform Trade Secrets Act). Although there is a divide among Uniform Trade Secrets Act states regarding the extent to which the Uniform Trade Secrets Act pre-empts state and common law claims, the broader view is that the Uniform Trade Secrets Act displaces (or bars) all state and common law theories for the recovery of information theft, regardless of whether that information rises to the level of a trade secret. Examples of commonly preempted claims include common law claims for conversion, unfair competition, tortious interference with business relations and breach of duty of loyalty or fiduciary duty, if based on the misappropriation of confidential information. 

Yet under this new statutory scheme, those previously pre-empted common law claims may be back on the table. Imagine a scenario where a trade secret owner brings suit in a federal court sitting in a Uniform Trade Secrets Act state, asserting claims against a former employee for the theft of confidential or proprietary information. In theory, the trade secret owner has the option of suing under the Defend Trade Secrets Act, under the state's version of the Uniform Trade Secrets Act (presuming that other independent grounds for federal jurisdiction exist) or both.

If the trade secret owner chooses to sue only under the Defend Trade Secrets Act, theoretically he or she could assert both a Defend Trade Secrets Act claim and any non-Uniform Trade Secrets Act common law theories that may overlap with a claim for trade secret misappropriation (or would cover claims relating to information that does not qualify as a trade secret). This would be a marked departure from previous Uniform Trade Secrets Act precedent barring duplicative claims and may increase litigation costs and increase exposure for the accused party. However, a court may find that because the plaintiff "opened the door" by asserting some state law claims in federal court, those claims still are pre-empted by the state's Uniform Trade Secrets Act, even if the plaintiff intentionally omits any cause of action under the statute.

To further complicate matters, trade secret owners likely will assert both Defend Trade Secrets Act and Uniform Trade Secrets Act claims, provoking a host of other legal questions. In those cases, courts must decide whether the Defend Trade Secrets Act and Uniform Trade Secrets Act claims should be pled in the alternative to each other, or analysed together as analogous claims under the same metrics. If the court decides that the claims are pled in the alternative, it must then determine whether common law claims can similarly be pled in the alternative to Uniform Trade Secrets Act claims, which is generally prohibited by the Uniform Trade Secrets Act's pre-emption provision. If the court decides that the claims are pled together, it must reconcile the non-pre-emptive language of the Defend Trade Secrets Act with the pre-emptive effect of the Uniform Trade Secrets Act. 

How courts manage these seemingly circular inquiries will factor largely into any trade secret owner's decision of whether to file in federal or state court. It is likely that, if a trade secret owner asserts both a Defend Trade Secrets Act claim and any common law claim based on the misappropriation of information, the pre-emptive effect of the state's Uniform Trade Secrets Act will bar the common law claims even without expressly asserting a cause of action under the Uniform Trade Secrets Act.

Concurrent federal and state jurisdiction is not unprecedented in IP law. While the protection of copyrights and patents is within the exclusive province of federal courts, trademark law has long been governed by both federal and state law. Many courts have harmonised the relationship between the Lanham Act (the federal trademark statute) and state trademark and unfair competition laws by employing the same analyses to trademark violations under state law as used under the Lanham Act. This approach may be analogous to how courts will approach the Defend Trade Secrets Act and the Uniform Trade Secrets Act. However, unlike the Uniform Trade Secrets Act, neither the Lanham Act nor state trademark statutes pre-empt overlapping common law claims.

Because there is no existing body of federal trade secret law, federal courts applying the Defend Trade Secrets Act may look to state court decisions for guidance. However, given the distinctions from state to state, such course of action may not lead to the desired uniformity promoted by the Defend Trade Secrets Act, at least initially. While the Defend Trade Secrets Act may ultimately create a more consistent body of law and address the realities of dealing with information theft in an increasingly digital and global market, the relationship between the Defend Trade Secrets Act and existing state laws remains to be seen. As Defend Trade Secrets Act case law develops, companies should be aware of the potential clashes between federal and state law in the practical application of the Defend Trade Secrets Act when formulating any trade secret protection strategy.