Incorporating Trade Secrets into an IP Portfolio Under the New Defend Trade Secrets Act

On Wednesday, May 11, 2016, the President signed into law the Defend Trade Secrets Act (DTSA) of 2016, in an effort to strengthen trade secret protection by providing companies with the option of filing federal civil lawsuits for trade secrets theft.  Until now, trade secrets were exclusively defended under state trade secret laws or by federal prosecutors (rather than competitors) filing cases under the Economic Espionage Act of 1996.  The DTSA sheds new light on the importance of considering how trade secrets can be part of a company’s overall strategy of protecting and enforcing intellectual property.

As a general matter, a trade secret is secret information used in a company’s business that gives the company an opportunity to obtain an advantage over competitors who do not use the information.  Trade secret laws recognize that competitors should not be permitted to use fundamentally improper methods to obtain confidential information of a business.  In contrast to patents, which must be registered by the federal government to grant a period of exclusivity, trade secrets are not registered and can potentially last indefinitely, provided that secrecy is diligently maintained.

WHAT IS A TRADE SECRET UNDER THE DTSA?

The DTSA slightly expands the definition of what is considered a trade secret under existing state and federal laws.  As a result, the DTSA broadly defines a trade secret to include 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.  Importantly, the definition of trade secret encompasses information that is tangible or intangible, and whether it is stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.

Ultimately, however, to qualify as a trade secret under the DTSA, two basic criteria must be met: (1) the owner of the trade secret has taken reasonable measures to keep such information secret; and (2) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.

WHEN DOES DTSA APPLY?

Causes of action under the DTSA for trade secret misappropriation will only apply against an act that occurs on or after May 11, 2016.  Also, the statute of limitations for a DTSA action is 3 years from the date the misappropriation is discovered or should have been discovered.

By bringing trade secret enforcement to federal courts, the DTSA intends to bring more consistency to the varying trade secret laws of different states.  However, the DTSA does not preempt state law, so state causes of action for trade secret theft will still be available.  To bring trade secret cases under federal jurisdiction, the DTSA broadly specifies that “the owner of the trade secret that is misappropriated may bring an action under the DTSA, if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.”  Use in interstate commerce has been broadly interpreted for other laws in the past.  Simply intending that the associated product or services will be sold or used outside a state’s borders would be enough to enforce trade secrets in federal court.

WHAT CONSTITUTES A VIOLATION OF TRADE SECRET RIGHTS?

A violation of trade secrets under the DTSA occurs when another discloses the secret information without proper consent or acquires the trade secret using improper means, such as theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.  Thus, breaking into a competitor’s plant, emailing confidential information to competitors, or bribing employees would be obvious violations.  Likewise, breaching a confidentiality agreement or inducing a former employee to breach a confidentiality agreement could be violations.  However, independently developing trade secret information or reverse engineering a product that was purchased commercially are not trade secret violations.  Furthermore, the DTSA offers some protection to whistleblowers or individuals to be able to legally disclose trade secret information to the government or in a court filing.

WHAT REMEDIES ARE AVAILABLE UNDER THE DTSA?

In addition to injunctive relief and monetary damages provided by the DTSA, a significant new remedy provided by the DTSA is the procedure for obtaining a seizure order to prevent dissemination of a trade secret before its value has been lost.  Under the DTSA, a showing of “extraordinary circumstances,” will allow the court to issue an order for ex parte property seizure “necessary to prevent the propagation or dissemination of the trade secret.”  This type of seizure order is somewhat controversial, as it allows a plaintiff to seek the seizure without providing advance notice to the defendant.  In an attempt to avoid abuse, the DTSA specifies that other remedies should be used before a seizure and, if a seizure is found necessary, that the orders for law enforcement need to be clear as to what times the seizure can take place (i.e. outside of business hours), whether locked areas can be accessed (which could contain other confidential information), and that no copies of seized materials are to be made.

With respect to monetary damages, the DTSA also allows for greater penalties to be awarded than previously provided.  The law now specifies that an organization that commits any offense under the DTSA shall be fined not more than the greater of $5,000,000 or 3 times the value of the stolen trade secret to the organization, including expenses for research and design and other costs of reproducing the trade secret that the organization has thereby avoided.

To receive enhanced damages or attorney fees, the DTSA also specifies that employers must provide notice to an employee who is later sued for trade secret infringement of the whistleblower immunities and other permissible trade secrete uses.  This notice must be given to employees and contractors regarding the whistleblower immunities in any contract or agreement with the employee (entered into after May 11, 2016) that governs the use of a trade secret or other confidential information.

CONCLUSION

Again, in order to receive any remedy for misappropriation of trade secrets under the DTSA or in state law actions, a company is still generally required to undertake steps to protect the secrecy status of that information.  The trade secret status of information should not be determined in hindsight.  For example, company sign-in rules, restricted building areas and signs, visitor name badges, visitor sign-in sheets, and confidentiality agreements are some of the efforts a company can undertake to establish evidence of the secrecy status for the information it considers to be a trade secret.

Accordingly, the above-noted factors of the DTSA should be taken into consideration when determining whether to preserve information as a trade secret, and evaluating how trade secrets can be part of a company’s overall intellectual property protection strategy.

BY:  Peter A. Cummings

Gardner, Linn, Burkhart & Flory, LLP specializes in the protection, enforcement, and defense of intellectual property including patents, trademarks, copyrights, and trade secrets, as well as unfair competition and related agreementsOur attorneys are highly skilled at complex litigation, which also enhances our ability to provide customized and effective intellectual property protection strategies. 

If you have any related questions, please contact our intellectual property attorneys at (616) 975-5500.