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Defend Trade Secrets Act Creates Federal Question Jurisdiction for Victims of Trade Secret Theft

Last week, President Barack Obama signed the Defend Trade Secrets Act of 2016 (DTSA) into law.  The bill received overwhelming bipartisan support in Congress, passing in the House of Representatives by a vote of 410-2 and in the Senate by a vote of 87-0.  In a nutshell, The DTSA creates a federal private right of action for trade secret misappropriation under the federal Economic Espionage Act of 1996 (EEA), which provides for the federal criminal prosecution of trade secret theft.

Key aspects of the DTSA are as follows:

• The DTSA does not preempt existing state trade secret law and trade secret theft victims can still sue under state trade secret laws.  It does, however, create federal subject matter jurisdiction in such cases and, in so doing, will allow non-diverse plaintiffs access to federal courts.  In so doing, it will foster the creation of more predictable, nationwide trade secret case law.

• The DTSA coverage is broad:  the EEA defines a trade secret as “all forms and types of financial, business, scientific, technical, economic, or engineering information” if (1) the owner has taken reasonable measures to keep such information secret, and (2) the information derives independent economic value from not being generally known or readily ascertainable through proper means.  We anticipate that all of the decisional case law since the criminal EEA was enacted in 1996 can and will be cited by litigants as precedent for the DTSA’s civil provisions.  Applying criminal case law in civil cases can lead to messy results (as we know from cases brought under the civil provisions of the Computer Fraud and Abuse Act) and it remains to be seen how courts interpreting civil EEA/DTSA cases will apply earlier criminal EEA jurisprudence.

• While we await definitive guidance from the courts on this point, the DTSA seems to have a lower intent element that the criminal provisions of the EEA.  Specifically, intent to benefit the wrongdoer or cause harm to the trade secret owner does not appear to be not required for a violation (as it is in EEA prosecutions).  Rather, it is enough that the defendant intends to misappropriate (i.e., wrongfully taken) the trade secret.  This distinction can be especially helpful in circumstances where a trade secret theft victim discovers the theft early on, before the motive or intent of the wrongdoer becomes apparent.

• The DTSA authorizes ex parte civil seizures in “extraordinary circumstances” (a requirement that applications and developing case law will undoubtedly flesh out).  In particular, upon ex parte application, a court is empowered to “issue an order providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.”  At the same time, however, DTSA also provides an aggrieved defendant with a cause of action against the ex parte applicant if the order leads to a wrongful or excessive seizure causing damages to the defendant.

• Another provision of the DTSA, however, places limitations on injunctions that might unfairly limit employee mobility between companies.  Specifically, an injunctive order cannot be used to prohibit a person from entering into an employment relationship.  Furthermore, any conditions placed on such employment under the injunctive order must be based on actual evidence of threatened misappropriation, not merely on the information the person knows.  Accordingly, if an employee quits and goes to work for a competitor, the plaintiff cannot obtain an injunction placing conditions on the departing employee’s new job based solely on the fact that the former employee “knows too much” about the plaintiff’s “secret sauce.”

• Finally, the DTSA provides statutory authorization for limited disclosures of trade secrets to the government by whistleblowers; to counsel; and to the courts (in sealed filings).  Interestingly, where employers and contractors are proactively notified of this right – but only in such circumstances — the DTSA allows aggrieved plaintiffs to recover punitive damages and attorney’s fees from faithless employees and contractors.  It remains to be seen how this provision will play out, and cautious trade secret owners to whom these additional remedies are important should carefully evaluate this provision of the law.

Overall, DTSA provides intellectual property owners with both additional substantive and forum-related tools to address the ever-growing problem of trade secret theft in a digital age.

© 2016 DeVore & DeMarco LLP – a member of the EACCNY