United States: Practical Implications For California Companies Under The New Federal Trade Secret Law That Gives Businesses New Means To Protect Their Rights

On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 ("the DTSA"). Effective immediately, the DTSA grants trade secret owners a private right of action to sue in federal court for misappropriation of a trade secret that occurs on or after the date of enactment.

The DTSA should generally be welcome news to businesses that rely upon trade secrets to protect "financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes[.]" 18 U.S.C. § 1839(3). As explained below, the DTSA is similar to, but contains key differences from, the California Uniform Trade Secrets Act ("the CUTSA"). Going forward, the DTSA and the CUTSA will provide trade secret owners with a federal and state option for enforcing their trade secret rights.

Companies should be aware that there is a potentially immediate action item arising out of the DTSA: Agreements with employees (including individuals working as consultants and contractors) concerning use of a trade secret or confidential information that are entered into or updated after enactment of the DTSA must provide notice of an immunity provision in the law that shields certain disclosures of trade secrets to government officials, in court proceedings under seal, and to counsel, in connection with trade secret claims. Failing to include notice of the immunity provision prevents the employer from recovering attorneys' fees or exemplary damages in an action against an employee/contractor/consultant.

Summary of Key Features and Provisions of the DTSA

  • No preemption of state law trade secret claims despite offering the potential for a new, uniform federal body of trade secrets law: A new federal cause of action opens federal courts to ordinary trade secret misappropriation litigation, but state law trade secret misappropriation rights and remedies under the CUTSA remain available to owners if they elect to invoke them (whether in tandem with federal claims or independent of federal claims).
    • The DTSA will likely allow businesses to realize efficiencies of federal practice (e.g., nationwide subpoena service) and craft a uniform body of federal trade secret law subject to U.S. Supreme Court review.
  • Remedies under the DTSA: Traditional injunctive relief; damages; "exemplary damages," which are not to exceed double damages; and attorneys' fees are available under the DTSA. Attorneys' fees are available where misappropriation is "willful and malicious," a claim of misappropriation is filed in bad faith or a motion to terminate an injunction is made or opposed in bad faith.
    • Limitations on the scope of authorized injunctive relief: Under the DTSA, federal courts do not have the power to "prevent a person from entering into an employment relationship" on account of trade secrets, though courts can impose conditions on employment to the extent they are based on evidence of threatened misappropriation and not merely on account of a person's knowledge of certain information and do not otherwise conflict with state laws prohibiting restraints on practice of a lawful profession, trade or business (i.e., Cal. Bus. & Prof. Code § 16600).
  • The DTSA authorizes ex parte civil seizure, a significant new form of injunctive relief: Available under "extraordinary circumstances" where typical injunctive relief would be insufficient or ineffective, civil seizure is designed to help businesses use the courts to temporarily seize "property necessary to prevent the propagation or dissemination of the trade secret" pending a full hearing. Any seized material is taken into the custody of the court, and it may be collected with the assistance of "independent experts" unaffiliated with the party requesting seizure or special masters.
    • Required contents of a seizure order: A court may issue an ex parte seizure order that includes, among other things, a finding that:
      • other forms of equitable relief would be inadequate;
      • immediate and irreparable injury will occur absent seizure;
      • the party seeking seizure will likely prevail in showing that the targeted party "misappropriated the trade secret" and has "actual possession" of it and any physical property to be seized;
      • the party subject to the seizure order would destroy, move, hide or otherwise make the trade secret matter inaccessible to the court if on notice of the potential litigation; and
      • the party seeking the seizure has not publicized the request.
    • Protections to persons or entities subjected to the seizure order: Given the extraordinary nature of the seizure remedy, courts will:
      • generally protect the confidentiality of seized materials unrelated to the trade secret information seized;
      • schedule a hearing at least within seven days after the seizure order's issuance; and
      • determine an adequate security to be paid by the party obtaining the seizure order to cover (at least in part) the damages that any person may be entitled to recover as a result of a wrongful or excessive seizure or attempted seizure.
    • Notice of immunity in agreements concerning trade secrets or confidential information: In agreements governing the use of a trade secret or other confidential information with an employee, contractor or consultant signed or updated after the DTSA's enactment, employers must explain that a confidential disclosure to government officials or attorneys "solely" for purposes of reporting or investigating a "suspected violation of the law" (or disclosures made in an under-seal complaint) is immune from civil and criminal liabilities under federal and state trade secret laws. Alternatively, trade secret owners may cross-reference an applicable policy addressing the same issue.
      • Risk of not including this notice: A trade secret owner loses the right to seek fee-shifting or exemplary damages for misappropriation.
    • Criminal penalties for organizational misappropriation are enhanced: The DTSA amends the Economic Espionage Act of 1996 to increase the maximum penalty for a criminal violation from $5 million to "the greater of $5,000,000 or three 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[.]"
    • Racketeer Influenced and Corrupt Organizations Act (RICO) predicate offenses expanded to include foreign economic espionage and criminal theft of trade secrets.

Comparison of Key Provisions of the DTSA and the CUTSA

The DTSA creates a federal, civil cause of action for misappropriation of trade secrets that applies to trade secrets related to a product or service used in, or intended for use in, interstate or foreign commerce, and to actions that arise on or after the enactment of the DTSA.

The DTSA is similar to the CUTSA, with key differences:

  • The definition of trade secrets is similar under the DTSA and CUTSA, but the DTSA identifies more examples of potential trade secret information and includes a requirement that the trade secret is "not . . . readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information." California declined to include the "not being readily ascertainable" language when it adopted the CUTSA.
  • DTSA creates a procedure for ex parte civil seizures to prevent propagation or dissemination of trade secrets under extraordinary circumstances; that is not available under the CUTSA.
  • DTSA provides that injunctions must not prevent a person from entering an employment relationship, and restrictions on employment cannot be based merely on what a person knows and cannot conflict with state laws prohibiting restraints on lawful profession, trade or business, such as California Bus. Prof. Code § 16600.
  • DTSA immunizes certain disclosures of trade secrets to government officials, in court filings under seal, and to attorneys in anti-retaliation suits and requires employer agreements concerning use of confidential information or trade secrets, that are entered into or updated after DTSA, to contain notice of same. Absent notice, the employer cannot recover attorneys' fees or exemplary damages in trade secret suit.
  • DTSA has no explicitprovision to require identification of trade secrets before proceeding with discovery, as applies to claims made under CUTSA. However, federal courts could fashion and apply similar restrictions to prevent fishing expeditions, protect trade secrets and manage scope of discovery.

What This Means for Companies

Companies may want to familiarize themselves with the immediately effective DTSA and develop and revise confidentiality and trade secrets provisions in employment agreements and standalone confidentiality and trade secrets agreements to include the new disclosure immunity notices (or cross-reference applicable policies). Although pre-enactment agreements governing use of confidential information or trade secrets are grandfathered, employers that take these remedial steps promptly will preserve their right to seek attorneys' fees and exemplary damages in the event of an actionable willful and malicious misappropriation down the road.

Companies should also consider using this opportunity to evaluate whether they are adequately protecting their intellectual property portfolio (including trade secrets, patents, copyrights and trademarks), particularly in light of the changing patent landscape and the greater federal protections now available for employers' trade secrets.

California businesses that rely on trade secret, confidentiality provisions to protect their intellectual property should consult with legal counsel to ensure that they are considering the DTSA's new protections and requirements in connection with their agreements and potential trade secret disputes.

If you have any questions about this Alert, please contact Karineh Khachatourian or Daniel McCloskey of our Silicon Valley office, any of the attorneys in our California Trade Secrets Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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