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What the New Defense of Trade Secrets Act Means for Your Business

Daniel Mills, Trademark Attorney

Posted Thursday, May 12, 2016 by Daniel Mills

Yesterday, President Obama signed the Defense of Trade Secrets Act (DTSA) into law. The DTSA is actually part of an existing set of laws known as the Economic Espionage Act of 1996 and the Economic Espionage Penalty Enhancement Act of 2012. What the DTSA adds to the existing statute is, among other things, it creates a private civil cause of action that allows any injured party the standing to sue for substantial damages for misappropriation of a trade secret.

In addition to the ability to bring a suit, it provides a mechanism for court ordered seizure of materials or items to prevent unlawful dissemination of a trade secret. This is an extremely powerful tool that companies can use to seize a laptop from a dishonest employee, for example. However, with great power, comes great responsibility and the law creates and a narrow scope of such power. More on that later.

To begin, the DTSA creates a criminal cause of action for theft of a trade secret and provides an increased penalty. Section 1832 states:

(a) Whoever, with intent to convert a trade secret, that is related to a product or service used in or intended for use in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will, injure any owner of that trade secret,knowingly–

(1) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains such information;

(2) without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys such information;

(3) receives, buys, or possesses such information, knowing the same to have been stolen or appropriated, obtained, or converted without authorization;

(4) attempts to commit any offense described in paragraphs (1) through (3); or

(5) conspires with one or more other persons to commit any offense described in paragraphs (1) through (3), and one or more of such persons do any act to effect the object of the conspiracy, shall, except as provided in subsection (b), be fined under this title or imprisoned not more than 10 years, or both.

(b) Any organization that commits any offense described in subsection (a) shall be fined not more than the greater of $5,000,000 or 3 times the value of the stolen trade secret to the organization, including expenses for research and design and other costs of reproducing the trade secret that the organization has thereby avoided.

So for corporate offenders, the damages start at $5M and only go up. It is not hard to imagine a trade secret that is the result of millions of dollars in R&D. These cost would be added to the amount that is 3X the value of the stolen secret.

WHISTLE BLOWER PROTECTION

The DTSA grants immunity to an individual who discloses a trade secret in confidence to a Federal, State, or local government official and solely for the purpose of reporting or investigating a suspected violation of law. Furthermore, employers must provide notice to all employees of this immunity in any contract or agreement that governs the use of a trade secret or other confidential information. Under the DTSA an employee includes any individual performing work as a contractor or consultant for an employer. An employer can be considered in compliance with the new notice provision if there is a reference to a policy document rather than including the entire immunity provisions in each agreement. Nowhere in the statute is there an exception for small businesses. When does this apply – Now! The notice requirement will “apply to contracts and agreements that are entered into or updated after the date of enactment of this subsection.” Therefore, because President Obama singed this into law yesterday, as of May 12, 2016 employers must begin providing notice under the law.

EX PARTE SEIZURE OF PROPERTY

One of the most powerful (and controversial) sections of the law grant the ability to have the government seize “property necessary to prevent the propagation or dissemination of the trade secret.” In order to get such an order, the damaged party must first show that another less drastic remedy, such as injunction, would be “inadequate to achieve the purpose… because the party …would evade, avoid, or otherwise not comply with” the less drastic remedy. In addition to this requirement, the statue also mandates that without the seizure, “immediate and irreparable injury will occur”, and the harm to the person or entity seeking the seizure “outweighs the harm to the legitimate interests” of the alleged thief, and “substantially outweighs the harm to any third party” that might be harmed by the seizure. Finally, the person or entity seeking he seizure must not publicize the requested seizure.

IMPORTANT DEFINITIONS

Another key of the DTSA is the codified definitions it contains. First, it does not materially change the definition of a trade secret that has been part of the Uniform Trade Secrets Act that has been adopted by most states. Even though it is not different it bears repeating here for context.

“Trade Secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.(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 another person who can obtain economic value from the disclosure or use of the information.

“Misappropriation” means—(A) acquisition of a trade secret of another by a person who knows or has reason to know thatthe trade secret was acquired by improper means; or(B) disclosure or use of a trade secret of another without express or implied consent by a personwho—(i) used improper means to acquire knowledge of the trade secret;(ii) (ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was—(I) derived from or through a person who had used improper means to acquire the trade secret; (II) 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(III) 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(iii) before a material change of the position of the person, knew or had reason to know that—(I) the trade secret was a trade secret; and(II) knowledge of the trade secret had been acquired by accident or mistake;

“Improper Means”(A) includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means; and(B) does not include reverse engineering, independent derivation, or any other lawful means of acquisition.

The application and interpretation will take years to mature and test. In fact, the DTSA requires that within two years the Federal Judicial Center shall develop best practices for the seizure of information, the storage of seized information, and the securing of seized information.

If you have a business, and you have any kind of advantage over your competition, then you have trade secrets worth protecting. At Ruttler Mills, we offer provide practical legal advice and tools to help you establish, maintain, and enforce protection of your trade secrets.

Ruttler Mills PLLC
One Union Square, 1730, 600 University Street, Seattle, Washington 98101 US
47.6097570-122.3321200
Phone: (206) 838-6400

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