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Congress Creates a New Cause of Action for Trade Secret Theft

On Behalf of | May 11, 2016 | Business Litigation, Employment & Labor Law

On April 27, 2016, in a move lauded as the most significant expansion of federal intellectual property law in the last half-century, Congress passed the Defend Trade Secrets Act of 2016 (“DTSA”) and established the first civil remedy for trade secret misappropriation under federal law.   The bill was passed as an amendment to the Economic Espionage Act, 18 USCA § 1832, which currently permits the Attorney General to enjoin trade secret misappropriation, but does not provide equivalent standing to civil litigants. Following significant cross-partisan support and easy passage through Congress, the DTSA was today signed into law by President Obama.The most ostensible feature of the DTSA is jurisdictional, as the bill forges a new road to federal court without the barriers that previously confined a great deal of trade secret litigation to state tribunals.  Since a trade secret dispute brought under the DTSA arises under federal law, litigants no longer need to worry about the state citizenships of parties to get their case into federal court for relief.  However, not every trade secret dispute will be eligible for adjudication under the DTSA. Unlike patents and copyrights, the bill is grounded in the legislature’s “commerce power,” so only trade secrets relating to a product or service intended for use in interstate commerce may qualify for federal protection.

A noteworthy aspect of the DTSA is its similarity to the current legal framework.  With few exceptions, almost all states have enacted misappropriation statutes modeled after the Uniform Trade Secrets Act (“UTSA”), albeit with some variation.   The DTSA uses strikingly similar language to the UTSA in defining what constitutes a “trade secret” and “misappropriation.”  In interpreting the federal law, courts will likely rely on the robust case law that has developed under UTSA for the past three decades.  With that said, this preexisting statutory framework across 48 states perhaps undercuts the need for uniformity in trade secret law, as touted by proponents of the bill.

Despite its continuation of this common statutory language, the DTSA does contain certain unique features.  Notably, it includes a provision for the pre-trial seizure of property related to the improper use or dissemination of a trade secret.  The bill allows a trade secret owner to present an “ex-parte” petition to the court requesting that certain property of a defendant be seized and retained by the court pending the outcome of the case.  Although such seizure should only issue in “extraordinary circumstances,” the availability of this powerful mechanism raises concerns as to its effect on the cost and complexity of trade secret lawsuits.  If trade secret litigation becomes unduly expensive, parties will be pressured to enter early settlements just to avoid the cost of defending against such actions.

Finally, the DTSA’s whistleblower provision is sure to keep human resources departments busy over the next few months. Under the bill, any agreement with an employee governing the use of trade secrets (i.e. many non-competition and non-disclosure contracts) must include a notification that an employee is immune from liability if information is disclosed to address a potential violation of law. If a contract does not contain this notification, an employer who sues an employee for trade secret misappropriation in violation of such an agreement will be unable to recover exemplary damages or attorney’s fees.  These kinds of new features ensure that the DTSA will have a big impact.

David Moon is an attorney with Washington, DC regional business law firm, Berenzweig Leonard. David can be reached at [email protected]