The Defend Trade Secrets Act of 2016 New Federal Protection for Trade Secret Misappropriation
The following article was published on October 26, 2016 by The Advocate- South Palm Beach County Bar Association.
By Mark Osherow
Today, the protection of confidential information, generally electronically maintained, has become an increasingly expensive, difficult and resource consuming task. An important new federal law affecting confidential business information and trade secrets became effective on May 11, 2016, with little fanfare but with important ramifications concerning both notice and jurisdiction over trade secret misappropriation claims.
Litigation of claims concerning theft and unauthorized use of trade secrets and confidential business information, absent claims related to computer fraud, have traditionally been the province of state law claims. In Florida, those claims have generally been brought pursuant to chapter 688, Florida Statutes, Florida’s version of the Uniform Trade Secrets Act (UTSA), adopted in most states. Changing this landscape, The Defend Trade Secrets Act of 2016 (DTSA) has been enacted with prospective effect, but without preemption of state law claims. Trade secret misappropriation claims may generally still be brought in state court without implicating a federal claim. But for those who now choose to file in state court and include a DTSA claim, the case may be timely removed to federal court. Thus, claimants also now have a significant tool to bring what were otherwise non-removable claims to the federal venue through the inclusion of a DTSA claim. As with Florida’s UTSA, DTSA claims are subject to a three year statute of limitations.
“Misappropriation” and “improper means” under the DTSA are defined similarly to the UTSA. Under the DTSA the owner of a trade secret that is misappropriated may bring a civil action “if the trade se-cret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” Unlike the UTSA, the DTSA provides for civil seizure without notice (ex parte) of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action, but only in “extraordinary circumstances.” The DTSA provides for the specific findings the court must make to support the seizure similarly but more extensively to those for a temporary restringing order, and the elements to be included in a narrowly tailored seizure order. The seizure order must also provide for the protection of the seized matter, custody by the court, as well as protection from publicity against the party to whom the order is directed. Seizure is not a remedy to be entertained lightly.
The seizure order must set a date for a seizure hearing not later than 7 days after the order was issued, unless the affected parties consent to another date. Of course, those potentially harmed by the seizure order may move to modify or dissolve at any time. The movant must also provide security determined adequate by the court for the payment of the damages that any person may be entitled to recover as a result of a wrongful, excessive or attempted seizure. The security may compensate for damages to non-parties to the litigation. At the seizure hearing, the movant has the burden to establish that the seizure order was properly issued.
Seizure without notice is not without serious potential consequences. If the order was improper it may be dissolved or modified. Persons damaged by a wrongful or excessive seizure are entitled to appro-priate relief including damages for lost profits, cost of materials, loss of goodwill, punitive damages (for bad faith seizures), and, unless the court finds extenuating circumstances, to recover reasonable attorney’s fees and interest in the discretion of the court.
Remedies under the DTSA include injunctive relief to prevent actual or threatened misappropriation. The court may require affirmative actions be taken to protect the trade secret. The court may also, in exceptional circumstances where an injunction is rendered inequitable, condition future use of the trade secret by the violator upon payment of a reasonable royalty for up to the time that a prohibitive injunction could otherwise have been ordered. However, the court may not prevent a person from entering into an employment relationship and any conditions placed on the person’s employment shall be based on evidence of threatened misappropriation and not merely on “information the person knows.” The court’s order may also not conflict with a state law prohibiting restraints on the practice of a lawful profession, trade or business.
Damages under the DTSA may include actual loss caused by the misappropriation and unjust enrichment not included in actual loss. Alternatively, damages may be measured by imposition of a reasonable royalty for unauthorized disclosure or use of the trade secret. In addition, if the trade secret is “willfully and maliciously misappropriated,” exemplary damages up to double the amount of actual damages may be awarded. Prevailing party attorney’s fees may be awarded if a misappropriation claim is brought in bad faith (which may be established by circumstantial evidence), a motion to terminate is made or opposed in bad faith, or the trade secret was willfully and maliciously misappropriated.
Most significantly, in order to take advantage of the exemplary damages and attorney’s fees provisions of the DTSA, employers are now required to include a notice of immunity “in any contract or agreement with an employee [or independent contractor] that governs the use of trade secret or other confidential information.” This notice can also be provided in an employer’s policy document that is cross-referenced in the employment agreement. A sample basic notice provision to be included following other non-disclosure provisions (which may be modified for an employee manual or policy document) is as follows:
Notwithstanding the foregoing nondisclosure obligations, pursuant to 18 U.S.C. section 1833(b) [Employee/Contractor] 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 (1) in confidence to a federal, state, or local government official or to an attorney solely for the purpose of reporting or investigating a suspected violation of law, or (2) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the individual’s attorney and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret under seal; and does not disclose the trade secret, except pursuant to court order.
In addition to the above, Employers should consider implementing a company policy document containing specific instructions on reporting as well as advising that employees will not be retaliated against for reporting suspected violations in good faith. The more detailed the policy adopted the less likely that the adequacy of the disclosures will be challenged.
Because of the ramifications of failing to comply with the DTSA’s notice requirements, employers should consider updating employment agreements and policy documents to comply. Employers can positon themselves to take advantage of the potential benefits the DTSA provides to protect proprietary information and trade secrets that are critical to many business’s ongoing success and development within the typical fast passed electronically-based business environment.