Defend Trade Secrets Act signed into federal law–Why it’s a bigger deal than many may think…

May 11, 2016, President Obama signed the Defend Trade Secrets Act (DTSA) into federal law. As an extension to the current Economic Act of 1996, the DTSA provides a right of civil action for trade secret misappropriations, allowing trade secret owners to pursue new options in lawsuits under federal law. Before the DTSA was passed, state law authorized trade secret lawsuits by adopting their own version of the Uniform Trade Secrets Act. With the DTSA now in effect, trade secret action under federal law will be intended to supplement state law.

Key provisions include:

  • Federal courts have original jurisdiction over civil trade secret claims
  • Civil and criminal immunity provided to employees from liability for certain confidential disclosures to government agencies or attorneys, and
  • Employer may seek ex parte orders to seize misappropriated trade secrets from employees.

The DTSA has passed at a critical time for a variety of industries, such as software developers and pharmaceutical companies, who have recently discovered their patentable innovations are no longer patent eligible. Many federal courts have recently begun invalidating software and business-method patents, as well as pharmaceutical and medical device patents. With the rise in invalidated patents, these software and pharmaceutical companies may look to trade secret protection lawsuits as an alternative method.

Employers seeking to protect their intellectual property under the DTSA should be aware of the requirements under this act. U.S. district courts would have jurisdiction over these civil actions as long as the alleging party can show its trade secrets are related to a product or service used in, or intended for use in, interstate or foreign commerce.

Employers alleging misappropriation of their trade secrets may now seek an injunction to seize property to prevent dissemination of the trade secret. Through “ex parte” seizure of property, a federal judge can, without notice, order the seizure of property when it is shown that due to extraordinary circumstances, the seizure of such property is necessary to prevent dissemination of the trade secret. This “ex parte” provision is intended to protect employers from catastrophic misappropriation of its trade secrets, as well as potential defendants from groundless allegations. A party alleging misappropriation of its trade secrets and seeking seizure of property, must show:

  • Other forms of equitable relief would be inadequate
  • Immediate and irreparably injury would occur if not for the seizure
  • The harm done to plaintiff in denying the seizure outweighs the harm to the legitimate interests of the defendant and substantially outweighs harm to any third parties
  • Plaintiff is likely to succeed on the merits
  • Defendant is actually in possession of the trade secret
  • The request of the seizure is narrowly tailored to the specific circumstances
  • The material to be seized would be destroyed, moved, or otherwise made inaccessible if the party provided notice
  • The party has not publicized the requested seizure

The DTSA also provides for civil and criminal whistleblower immunity to employees, which will be discussed below. This immunity clause is important to employers because they must provide notice to their employees of such clause. Employers should look to update their standard employment agreements to make sure they are in compliance with this immunity clause.

The DTSA also provides protection to whistleblowers. Employees who report to government officials trade secrets that are in violation, or suspected to be in violation, of the law will be immune from any criminal or civil liability. Employers are required to provide its employees notice of this immunity clause in any contract governing the use of trade secrets. If an employer does not provide notice to the employee, the employer may be unable to recover exemplary damages or attorney fees in trade secret misappropriation lawsuits.

The DTSA has a major impact on the law of trade secrets. Employers, as well as employees, will be protected in trade secret misappropriation litigation for the foreseeable future. Employers should be aware of these changes and look to amend their employment agreements. Failure to provide notice of the whistleblower immunity may result in the employer being exempt from recovering damages or attorney fee’s in trade secret misappropriation lawsuits. Noncompliance by the employer can also result in legal costs increasing. The harsh reality- trade secret litigation is extremely expensive. Failing to comply with this provision may result in a more expensive lawsuit. Employers should comply with this new act in order to protect themselves, and to prevent increased legal costs.

If you need assistance in revising your policy in light of this new federal law or have any other questions regarding protecting your trade secrets, please call Maribeth Meluch.