President Obama Signs Federal Trade Secrets Law

May 11, 2016

On May 11, 2016, in a rare display of bi-partisan unity, President Obama signed the Defend Trade Secrets Act of 2016 ("DTSA"), after the House of Representatives approved the bill by a vote of 410-2 and the Senate approved it unanimously.  The DTSA provides trade secret owners for the first time with a uniform, federal civil remedy for the theft of trade secrets.  

The DTSA amends the Economic Espionage Act ("EEA") of 1996, 18 U.S.C. § 1832, by allowing the owners of trade secrets to bring a civil action in federal court for trade secret misappropriation.  This is a major development in trade secrets law.  Indeed, for the last 20 years, the EEA has been solely a criminal statute.  Thus, while companies could report theft of their trade secrets, only prosecutors had authority to pursue remedies for such theft in federal court.  Although there have been numerous federal prosecutions under the EEA for theft of trade secrets from private companies,[1] companies seeking to protect their trade secrets generally had no private right of action in federal court.[2]  The DTSA, which had broad support from the business community, changes that.  It provides U.S. district courts with original jurisdiction over civil actions for trade secret theft and places the protection of trade secrets on par with that afforded to patents, copyrights and trademarks.[3]    

Up to this point, companies had to rely primarily on state law to remedy trade secret misappropriation.  Although the law in most states is patterned on the Uniform Trade Secret Act, important differences exist across jurisdictions, which could potentially lead to differences in outcomes depending upon where a dispute was litigated.  Moreover, as explained in a letter submitted to the bill’s sponsors by a group of leading trade secrets practitioners, including Gibson Dunn Partner Alexander H. Southwell, state law was ineffective in many respects in dealing with modern trade secret theft.  For example, in today’s digital environment, trade secrets can be copied and transferred electronically across borders in a matter of seconds.  Given the increasingly cross-border nature of trade secret theft, and the value of trade secrets and their importance to the country’s ability to innovate, supporters of the new federal law argued that remedies for trade secret theft should not be based solely on state laws.  Many believe that federal courts are better-suited to handle these interstate and international cases, and the complex technological issues that often arise.

With regard to remedies, the DTSA authorizes monetary damages and injunctive relief to prevent "actual or threatened misappropriation," and allows courts to issue ex parte civil seizure orders to seize the allegedly misappropriated trade secret and prevent its dissemination–a notable remedy that is not typically available under state law.  Upon a proper showing, the court may, "in extraordinary circumstances," issue an order for the seizure of the materials at issue–for example, a flash drive or a CD–in order to prevent the trade secret’s dissemination.  The seizure order is served by a federal law enforcement officer, and the materials are taken into custody of the court, where they are secured from physical or electronic access pending further court determination.

The availability of civil seizure orders was one of the more controversial provisions of the bill, with detractors raising concerns over abuse of such an aggressive remedy.  As noted in Bloomberg BNA’s "2015 Trade Secrets Litigation Roundup" authored by Gibson Dunn Partner Jason C. Schwartz and Gibson Dunn Associates Greta B. Williams, Benjamin J. Cassady and Mia Donnelly, these concerns led to modifications narrowing the scope of the civil seizure provision.  Under the law as enacted, the civil seizure order must provide for the "narrowest" seizure necessary to achieve the purposes of the order.  In addition, the party seeking a civil seizure order must demonstrate the following:

1. a temporary restraining order or other form of injunctive relief is inadequate;
2. an "immediate and irreparable injury" will occur if the seizure is not ordered;
3. the harm to the applicant outweighs the harm to the person against whom the seizure would be ordered;
4. the applicant is likely to succeed in showing that (a) the information at issue is a trade secret, and (b) the person against whom seizure would be ordered misappropriated the trade secret or conspired to misappropriate it;
5. the person against whom seizure would be ordered has "actual possession" of the trade secret;
6. the application describes with "particularity" the "matter to be seized";
7. the person against whom the seizure would be ordered would destroy or hide the matter if the applicant notified the person; and
8. the applicant has not publicized the requested seizure. 

If the order is issued, a hearing must be held within seven days of the issuance of the order.  In addition, the DTSA allows the subject of such an order to seek damages if it believes the provision has been abused.  Accordingly, while the civil seizure provision may increase the likelihood of preventing the dissemination of stolen trade secrets, it remains to be seen how often and under what circumstances the provision will be employed.

Also, given that trade secret disputes often arise in the employment context, for example, when a departing employee steals his employer’s trade secrets before joining a competitor, a few employment-related provisions are worth noting.  Under the DTSA, an injunction to prevent trade secret theft may not "prevent a person from entering into an employment relationship" and "shall be based on evidence of threatened misappropriation and not merely on the information the person knows."  This provision explicitly rejects the "inevitable disclosure" doctrine, a common law doctrine that has been used in some states to enjoin a former employee from joining a rival firm, even in the absence of a non-compete agreement, if the new position would inevitably require the employee to use or disclose trade secrets. 

Further, the DTSA contains a provision providing immunity to individuals who make confidential disclosures of a trade secret to the government or to an attorney for purposes of reporting or investigating suspected trade secret theft, or in a court filing made under seal.  Notably, the law also requires employers to include notice of this whistleblower protection provision "in any contract or agreement with an employee that governs the use of a trade secret or other confidential information."[4]  An employer will be considered in compliance with this section if the employer "provides a cross-reference to a policy document that sets forth the employer’s reporting policy for a suspected violation of law."  This notification provision applies to contracts and agreements that are entered into or updated after the date of enactment.  Thus, employers should consult counsel regarding any necessary updates to employment contracts and nondisclosure agreements and policies to comply with this new requirement.  

Because the DTSA is premised on Congress’s power under the Commerce Clause, it exists in parallel with state trade secret laws and does not preempt or displace those laws.  Indeed, the DTSA applies only to misappropriation of trade secrets related to products used in interstate or foreign commerce, meaning cases involving only intrastate trade secret theft will remain the province of state law.  Where the DTSA applies, however, a trade secret owner may pursue relief under federal or state law, or both; the DTSA does not prevent companies from pursuing federal DTSA claims alongside claims based on favorable state trade secrets law.  As a result, owners of trade secrets should continue to evaluate whether there are remedies available under state law that may be useful in a case of misappropriation.  For example, it may be useful to allege a state law cause of action in addition to or instead of a cause of action under the new federal statute in states that continue to recognize the "inevitable disclosure" doctrine if the owner is concerned that a former employees will share sensitive information with a competitor.  Nevertheless, a central aim of the DTSA is to establish a uniform national standard for trade secret theft.  Supporters say a federal trade secrets law will promote greater certainty for parties on both sides of a trade secrets lawsuit and send a strong message to the international community that the U.S. is serious about protecting trade secrets at the national level.  Further, because the DTSA allows trade secrets cases to be brought in federal court, the federal discovery rules will apply, which will make it easier for litigants to obtain broader, interstate discovery.  

The DTSA became effective when President Obama signed it on May 11, 2016, and will apply to any act of misappropriation after that date.  The passage of the DTSA is an important development in U.S. trade secrets law, and one that arms companies with a powerful option to protect their valuable trade secrets in federal court.

   [1]   See, e.g., United States v. Liew, No. 11 Cr. 573 (N.D. Cal. Mar. 5, 2014) (defendants convicted following jury trial for theft of DuPont’s trade secrets under the EEA); United States v. Huang, No. 12 Cr. 00296 (W.D. Mo. Jan. 28, 2013) (defendants pleaded guilty to stealing trade secrets from Pittsburgh Corning Corporation in violation of the EEA).

   [2]   Civil cases relating to trade secrets theft are sometimes brought in federal court under the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, and other related statutes, but those approaches may have limited effectiveness.

   [3]   The DTSA does not contain any specific venue provision, meaning that a trade secrets case may be brought in any U.S. district court that has venue under the general civil venue statute, 18 U.S.C. § 1391.

   [4]   This is consistent with the SEC’s position that confidentiality agreements may not be used to prevent employees from providing information to the government.  See 17 C.F.R. § 240.21F-17; In re KBR, Inc., Exchange Act Release No. 74619 (Apr. 1, 2015) (settling SEC enforcement action regarding employee confidentiality agreement that was alleged to impede whistleblowers).