New Federal Trade Secrets Law: Defend Trade Secrets Act of 2016 Signed into Law on May 11, 2016

protection of trade secrets
On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (“DTSA”) , which dramatically expands federal jurisdiction over trade secret claims.  The impetus for this law was to provide some response to the reports of Chinese and possibly Iranian hacking into U.S. corporate and government sites.  Prior bills were introduced in 2013 and 2014.  These served as models for the eventual statute.  The new law, however, closely resembles in many ways the current state trade secrets laws but provides jurisdiction in federal courts. The federal Intellectual Property protection scheme until now has been a three-legged approach: Patent protection, trademark laws, and copyright provisions.  After the DTSA, however, the trade secrets protection of the enactment becomes the fourth leg.  While the new law overlaps in many respects the Uniform Trade Secrets Act (“UTSA”) on the books in 47 states (including Virginia, Maryland, and D.C.), the DTSA changes the federal jurisdiction analysis, expands the definition of “trade secrets,” adds new remedies, and includes express whistleblower protections.  While the DTSA does not significantly alter the substance of U.S. trade secrets law, the procedures and available civil remedies – especially the civil ex parte seizure terms – introduce new and potentially powerful enforcement tools. The DTSA arrives as an amendment to the Economic Espionage Act of 1996, 18 USC  § 1331 et seq.   The coverage below highlights five points in the new law.
  1. Federal Jurisdiction. Just about any trade secret claims is now a federal claim which can provide subject matter jurisdiction in the federal courts.  2(b)(1) allows for civil actions this way:
An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce. This expansive coverage seemingly reaches to the limits of the Commerce Clause as a basis for Congressional action and federal court jurisdiction. Previously, the Economic Espionage Act was mostly a criminal statute that offered no private civil action route.  Now with passage of the DTSA, nearly any trade secret claim can be brought by a private party in the federal courts.  It is no longer necessary to cleverly plead a Computer Fraud and Abuse claim (18 § USC 1030 et seq.) or some other federal claim to get a case into federal court when there is no diversity jurisdiction.
  1.    Broader Definition of “Trade Secrets?”   Much of the new law’s substance is found in the Definitions, either already included in or added to 18 USC § 1839.  For example, the current “trade secrets” definition reads:
(3) the term “trade secret” means 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, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if— (A) the owner thereof has taken reasonable measures to keep such information secret; and (B)  the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public []. Most any type of information can qualify as a trade secret under this definition provided the information is a secret and the owner took reasonable steps to maintain the secrecy.  This is slightly different than the UTSA definition, which list eight specific types of trade secrets but then applies roughly the same two-part test found in subparts (A) and (B) above.  If there is a difference, then the DTSA offers the broader definition. The statute also adds definitions of “misappropriation” and “improper means.”  These track almost exactly the UTSA definitions.
  1. Ex Parte Seizure Remedy.   The DTSA goes beyond the state laws where it includes in Sec. 2(b)(2) a “Civil Seizure” remedy:
(i) APPLICATION.—Based on an affidavit or verified complaint satisfying the requirements of this paragraph, the court may, upon ex parte application but only in extraordinary circumstances, 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. The drafters plainly contemplate a preliminary civil remedy that goes beyond any currently available Fed. R. Civ. P. 65 TRO or Preliminary Injunction. The statute spells out the process for obtaining a Seizure Order, and limits what a court may order.  The seizure is not a private action, but would be conducted by federal or local law enforcement.  Then the court “shall secure the seized material from physical and electronic access during the seizure and while in the custody of the court.” But even with the various statutory protections, the availability of an ex parte seizure remedy markedly expands the potency of the law.
  1. Trade Secrets Misappropriation as Racketeering Activity.   3(b) amends the RICO statute’s definition of Racketeering Activity found in 18 USC 1961(1) to include “sections 1831 and 1832 (relating to economic espionage and theft of trade secrets).”
If RICO claims have faded in the last decade, this will surely boost their popularity and frequency.  Expect to see DTSA claims coupled with a RICO count built around the trade secrets allegations.
  1. Whistleblower Protection. 7(b) provides immunity from all criminal and civil liability for disclosure of trade secrets made “in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney” provided the disclosure is “solely for the purpose of reporting or investigating a suspected violation of law . . .”
Employers are now required to provide notice of this immunity.  Sec. 7(a)(3)(A) includes this language: An employer shall provide notice of the immunity set forth in this subsection in any contract or agreement with an employee that governs the use of a trade secret or other confidential information. Subsequent paragraphs restrict remedies available to employers who fail to include the immunity notice; the failure precludes recovery of exemplary damages and attorneys’ fees in a subsequent suit against disclosing employee.  Also, the statute by its terms applies to all contracts entered into or updated after the law’s enactment (on May 11, 2016).   This notice requirement and remedy restriction seemingly applies to employment contracts, employee handbooks, consulting contracts, and even to routine employee/consultant non-disclosure agreements.
  1. Summary—What to Expect from the DTSA
The first consequence of the DTSA in the EDVa will likely be a shifting of trade secrets litigation from the state courts to the federal court.  As mentioned, the necessity of pleading other claims to secure federal jurisdiction has been removed.  Also, we can expect frequent tag-along RICO counts, at least until case law addresses the consequences of the RICO definition adjustments to include trade secrets. We also should see some early clarifying opinions on the DTSA definitions—is the substantive law essentially unchanged, or is there a broader “trade secrets” definition to be applied? The Civil Seizure provisions will also be tested early.   Expect the courts to use these rarely, and to impose stringent requirements.  The quasi-criminal process will probably be pushed back except for the most egregious cases, and certainly the court and the clerks will show minimal interest in having to supervise seizures and take possession of the offending materials.  The DTSA allows for the appointment of special masters to handle details of seizures—expect the courts to utilize this option. The remaining consequence is that entities should and will quickly modify and amend their agreements to include the DTSA immunity notice.