Understanding the Defend Trade Secrets Act

May 2017  |  COVER STORY  |  INTELLECTUAL PROPERTY

Financier Worldwide Magazine

Trade secrets, like all intellectual property (IP) drive profitability and generate jobs, and should be afforded the same respect and protection as any other asset, be it real estate or a key member of senior management.

Trade secrets differentiate a product from the competition. They include confidential sales methods, manufacturing processes, client lists, distribution methods and much more. While it is difficult to assign an actual value to trade secrets, their importance cannot be underestimated.

It is unsurprising, then, that trade secrets are the source of many commercial disputes, typically arising from misappropriation. Historically these disputes have been costly and time consuming for parties; however, with the introduction of new legislative measures, and by enacting the right internal protections, pragmatic companies can reduce the impact of trade secret disputes.

First and foremost, organisations must take the right steps to safeguard their IP against accidental or malicious loss. Though judicial protection serves a purpose, the first line of defence lies with companies. Organisations cannot rely on their governments to protect their trade secrets for them. “The primary responsibility for the identification, classification, protection and valuation of trade secret assets rests upon the trade secret holder, not the judicial system,” says R. Mark Halligan, a partner at FisherBroyles. “Unlike patents, copyrights and trademarks, there is no government registration system for trade secret assets. Therefore, it is incumbent on the organisation to build an internal trade secret asset management system and to develop trade secret misappropriation incident response plans.”

Though internal defences must be established, lawmakers have helped by strengthening trade secret protections. One of the most important legislative developments in the US was the introduction of the long awaited Defend Trade Secrets Act (DTSA) in 2016. The DTSA is an amendment of the Economic Espionage Act (EEA) which has created a private civil cause of action for trade secret misappropriation.

After years of political stalling, on 11 May 2016, president Obama signed the much needed DTSA into law. Previously, trade secrets were the exception to America’s network of IP laws. Unlike trademarks, patents and copyrights, they were not governed by federal law; instead they were regulated at state level. However, the DTSA has introduced a number of measures, including the option of filing trade secret misappropriation actions in federal court, providing for equitable relief, and allowing companies to recover compensatory damages, punitive damages, and lawyer’s fees and costs.

The DTSA imposes a uniform approach to trade secret enforcement in the US, reflecting the Uniform Trade Secrets Act (UTSA), adopted by 48 states. Furthermore, the DTSA defines trade secrets, has a three-year statute of limitations, and authorises remedies similar to those found in the California Trade Secrets Act and other pieces of state legislation. Yet, there are differences between the DTSA, the UTSA and other forms of state legislation. Namely, the DTSA does not pre-empt related tort claims arising from the same nucleus of facts. Further, it limits actions available to owners of misappropriated trade secrets related to products or services used in, or intended for use in, interstate or foreign commerce. Consistent application and predictability will be a boon for organisations.

The DTSA also creates an ex parte seizure procedure for use in extraordinary circumstances where the party against whom the seizure is ordered “would destroy, move, hide, or otherwise make such matter inaccessible to the court, if the applicant were to proceed on notice to such person”.

Damages are also addressed. This includes damages for actual loss caused by the misappropriation of a trade secret, as well as damages for unjust enrichment caused by the misappropriation of a trade secret that is not addressed in computing damages for actual loss.

If the court finds that the trade secret has been wilfully and maliciously misappropriated, it may award exemplary damages of an amount no more than double the amount of the damages, plus attorney fees.

The DTSA is applicable outside the US if, first, the offender is a natural person who is a citizen or permanent resident alien of the US, or an organisation recognised under the laws of the US or any of its states; or if an act in furtherance of the offence was committed in the US.

The DTSA is a turning point in US trade secrets protection. But companies need to actively maximise its impact. It is crucial to revise confidentiality agreements and policies to include asset protection. Companies must audit and identify the information that they wish to be protected as a trade secret and take adequate steps to keep that information secret, to satisfy the courts that precautions have been taken. Simply saying that something is a trade secret is not sufficient. Further, they must ensure that all employee and third-party, privacy-related agreements are reviewed and amended as needed, along with internal policies.

Companies must also ensure that measures such as non disclosure agreements are signed when parties are disclosing information. They must also take steps to control physical and electronic access to data. Further, they must create supply chain procedures, and conduct employee and vendor training. These processes must be up to date and regularly revised and improved.

Crucially, the Act is not intended to replace or pre-empt existing state legislation. As such, it should be treated as an additional means of rectifying a trade secret misappropriation. How the DTSA will be viewed in court in the future is uncertain; for the time being, however, it will be considered alongside any trade secret misappropriation claims brought under state law.

That the DTSA is an amendment to the EEA is an important detail for extraterritorial cases. The EEA includes provisions addressing its “applicability to conduct outside the United States”, and those appear to apply to private causes of action created by the DTSA. Under the Act, a US organisation, individual citizen or permanent resident can be held liable even when acts of misappropriation occur outside the US. Further, a non-US organisation or citizen can also be found liable provided that “an act in furtherance of the offense was committed in the United States”.

The DTSA also reforms criminal penalties applicable under the EEA, increasing fines from $5m to either $5m or three times the value to the organisation of any stolen trade secrets, including the cost of reproducing them.

Reasons for reform

The DTSA was a long time coming. But it is not the first time that similar legislation has been proposed in the US. There have been numerous failed attempts to revamp trade secret protection and bring federal courts into consideration. However, recent technological changes have finally brought about change. “The DTSA was introduced in response to, among other things, the reportedly growing rise in trade secret theft from foreign hackers, nation states and rogue employees interested in obtaining US businesses’ trade secrets,” says Robert Milligan, a partner at Seyfarth Shaw LLP. “The introduction of the DTSA received increased support from many business, professional, political and academic leaders who called for the creation of a federal civil cause of action for trade secret misappropriation.”

According to a report from the Senate Judiciary Committee, the DTSA was implemented to protect and encourage future innovation, economic growth and job creation in the US. IT also protects the rights of third parties and minimises disruption to normal business operations. Its effectiveness remains to be seen, however, against the backdrop of evolving methods of cyber crime and corporate espionage. Yet, for many, the Act will be a measuring stick against which other jurisdictions will compare their trade secret protection. “The DTSA will serve as a model statute for other countries around the world addressing the need for the identification and protection of trade secret assets and assessing remedies for the actual or threatened misappropriation of trade secret assets including injunctive relief and damages,” says Mr Halligan.

By introducing the DTSA, the US is the latest country to offer greater protection to trade secrets. But other jurisdictions are signing new legislation. The European Union (EU), via its Trade Secrets Directive, passed in May 2016, has revolutionised trade secret protection throughout the region. Each of the EU’s 28 Member States will have a period of 24 months to enact national laws which provide at least the minimum levels of protections afforded to trade secrets by the directive. Much the like the DTSA, this will harmonise the EU’s approach. However, unlike in the US, it will place a greater obligation on trade secrets owners to demonstrate they have taken adequate steps to protect IP.

Whistleblower protection

Whistleblowing has become a focus for regulators in recent years. As such, employees who disclose trade secrets with good reason are protected under the DTSA. “The DTSA provides immunity to whistleblowers against criminal or civil liability for disclosing a trade secret if the disclosure is made in confidence to a government official, directly or indirectly, or to an attorney, and it is also made for the purpose of reporting a violation of law,” says Mr Milligan.

The DTSA also provides provisions that balance the public interest in protecting and encouraging whistleblowers, while also ensuring that the alleged trade secrets involved are protected against disclosure to the public thereby destroying the status of the information as a trade secret.

Further, the DTSA requires companies to comply with new ‘notice’ provisions in confidentiality agreements with employees and contractors, in order to be eligible for an award of exemplary damages or attorney’s fees in a DTSA lawsuit.

However, there are some concerns regarding the immunity provisions offered to employees. Some critics fear that employees may use the provision as a defence after they have misappropriated trade secrets. “An employee accused of trade secret misappropriation may later attempt to disclose the trade secret information to an attorney or government official solely to invoke the DTSA’s whistleblower protections and not for true whistleblowing,” points out Mr Milligan. “At least one federal district court has recently characterised whistleblower immunity as an affirmative defence and reflects that defendants will need to provide actual evidence substantiating any whistleblower immunity defence.”

While the DTSA provides companies with greater recourse, privacy advocates suggest its whisteblowing provisions may also grant the US government access to the trade secrets of private parties during investigations into potential violations of the law.

Companies should counsel and train employees on handling and protecting confidential information and trade secrets. They should develop and implement response plans for suspected or actual trade secret misappropriation. Such measures can reduce the risk of ex-employees stealing or misusing trade secrets when leaving the company.

The DTSA also states that notice of whistleblower immunity under the DTSA must be set forth in any contract that governs the use of trade secrets. Organisations that fail to provide the required notice will forfeit rights to exemplary damages or attorneys’ fees under state or federal law, regardless of the forum in which they sue, even if they eventually prove a trade secret violation.

Trade secrets and the future

Trade secret protection is entering an unprecedented period, with new legislation in the EU, and the DTSA finding its feet in the US. There is much that is still unknown or ambiguous about the DTSA, including defendant counterclaims for wrongful seizure, its impact on state law, inevitable disclosure claims, the limitations placed on its application to international trade secret theft, and whether it will be applied uniformly across the US. Further problems may arise from differences in the way the DTSA defines a trade secret compared to the UTSA.

For Mr Halligan, however, trade secret legislation in the US is still developing. “The next big development in US trade secrets law will be civil causes of action filed for violations of the Racketeering Influenced and Corrupt Organizations Act (RICO) based upon the underlying offences of Section 1831 on Economic Espionage and Section 1832 on Theft of Trade Secrets that have been added as ‘predicate’ offences under RICO. There is extraterritorial jurisdiction under the DTSA. A RICO cause of action will expand third-party liability well beyond the current limitations in the DTSA,” he says.

The DTSA is an important piece of legislation, but we are still in its formative years. Recent rulings, such as a decision regarding the status of a whistleblower, the case of Raben Tire Co., LLC v. McFarland, and the suing of former employees by driverless car manufacturer UCAR Technology under the DTSA, all of which occurred in March, have only just begun show the application and interpretations of the Act. Further, its use in connection with extraterritorial conduct has yet to be tested. The DTSA is the future of trade secret protection; however, additional cases and decisions are needed to bring clarity to its applications.

© Financier Worldwide

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Richard Summerfield