Author: John Richards | Practices: , | Tags: ,

CHANGE HAS COME TO TRADE SECRETS IN THE United States: The Defend Trade Secrets Act of 2016

Concerns about trade secret theft have been increasing in recent years and the America Invents Act included provisions that reduced the commercial risks that a business would run by trying to keep inventions as trade secrets rather than patenting them. However, until now trade secret law in the United States has for the most part been a matter of state law, although the Economic Espionage Act of 1996 makes it a criminal offense to carry out various acts relating to or included in a product that is produced for or placed in interstate or foreign commerce, if this is done for “the economic benefit of anyone other than the owner thereof.”

Change has come. Both houses of Congress have passed the Defend Trade Secrets Act of 2016 and it was signed into law by President Obama on May 11, 2016.

The new law has four main features:

  1. It creates a civil right of action in the federal district courts for those who have suffered misappropriation of a trade secret related to a product or service used in or intended for use in interstate or foreign commerce;
  2. It creates a new right of civil seizure whereby, in extraordinary circumstances, a court may grant an ex parte application providing for seizure of property necessary to prevent the propagation or dissemination of a trade secret;
  3. It increases the maximum fine under the Economic Espionage Act from $5 million to the greater of $5 million or three times the value of the stolen trade secret; and
  4. It provides some protection for whistle blowers.

A trade secret is defined in the same way as in the Economic Espionage Act, which is itself slightly amended to read 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:

  • The owner thereof has taken reasonable measures to keep such information secret; and
  • The information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by another person who can obtain economic value from the disclosure or use of the information.

Misappropriation is defined as:

  • Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
  • Disclosure or use of a trade secret of another without express or implied consent by a person who:
    • Used improper means to acquire knowledge of the trade secret;
    • At the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was:
      • Derived from or through a person who had used improper means to acquire the trade secret;
      • Acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or
      • Derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or
    • Before a material change of the position of the person, knew or had reason to know that:
      • The trade secret was a trade secret; and
      • Knowledge of the trade secret had been acquired by accident or mistake

“Improper means” referred to in the definition of “misappropriation” are defined as:

  • Including theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means; and
  • Not including reverse engineering, independent derivation, or any other lawful means of acquisition

Civil Right of Action

The statute, once enacted, provides a right of action against not only those who steal trade secrets or otherwise obtain them by improper means but also against those who disclose trade secrets obtained by improper means or even against those who obtain trade secrets by mistake, but know them to be trade secrets.

Upon finding that there has been misappropriation of a trade secret, the court can grant an injunction to prevent actual or threatened misappropriation or to take other steps to protect the trade secret. Concerns that overzealous application of trade secret law could be used to prevent skilled employees from changing jobs (for example by application of the “inevitable disclosure doctrine”) are met by providing that injunctions should not prevent a person from entering into an employment relationship, although conditions may be placed on such employment as long as they are “based on evidence of threatened misappropriation and not merely on the information the person knows.”

In exceptional circumstances where an injunction would be inequitable, the court may order payment of a reasonable royalty for a period no longer than that for which use of the trade secret could have been enjoined.

In addition to an injunction the owner of the misappropriated trade secret may be entitled to damages based on the actual loss suffered, any unjust enrichment by the misapproriator that is not covered by the actual loss suffered by the owner of the trade secret or a reasonable royalty. In cases of “willful and malicious” misappropriation, any award of damages may be doubled.

The statute of limitations is three years from the date on which the misappropriation was discovered or could have been discovered by exercise of reasonable diligence.

Civil Seizure

The new law allows a court to “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.”

Such orders should be issued only when other forms of relief would be unable to achieve the stated objective and only upon submission of an affidavit or verified complaint. After consideration of the harm that might be done to the person against whom the seizure might be ordered and the likelihood that the party seeking the order will succeed in showing that the party against whom the order is made had misappropriated a trade secret or conspired to use improper means to misappropriate a trade secret. In order to prevent abuse of this process, any such order should inter alia define the property to be seized as the “narrowest … necessary to achieve the purpose,” set a date for an inter partes hearing at which the requester of the seizure bears the burden of proof that the seizure was necessary and require the requester to provide security to compensate the party whose property was seized in the event that the seizure was wrongful or excessive. The target of the seizure must be in “actual” possession of the trade secret and property to be seized. Any seizure that is ordered must be performed by a federal law enforcement officer although the court may allow state or local law enforcement officials to participate, but may not permit the applicant or any agent of the applicant to participate in the seizure. Any seized property should be taken into the custody of the court and access to it restricted.

Protection for Whistle Blowers

A number of concerns have been raised in recent years that trade secret law or confidentiality agreements inhibit the ability of employees or others to report wrongdoing to the relevant authorities. The new law, once enacted, seeks to address this by providing that:

An individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that:

  • is made in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and
  • is solely for the purpose of reporting or investigating a suspected violation of law; or
  • is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

Furthermore, anyone who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding as long as steps are taken to maintain the confidentiality of the secret.

Finally, employers are required to provide notice of this immunity in any contract or agreement with an employee entered into or updated after the law comes into force that governs the use of a trade secret or other confidential information. Failure to do so may limit the employer’s ability to obtain exemplary damages or attorney fees in federal trade secrets action against an employee to whom notice was not provided.

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