The Defend Trade Secrets Act: Is It a Game Changer?
By Derek B. Ensminger
Trade secrets are the commercially valuable designs, processes, techniques and other forms of information kept confidential by companies because, by virtue of their secrecy, they give companies an edge in a competitive marketplace.”1 According to expert testimony provided to the United States House Judiciary Subcommittee on Courts, Intellectual Property and the Internet, “[t]rade secrets are an integral part of a company’s competitive advantage in today’s economy, and with the increased digitization of critical data and increased global trade, this information is highly susceptible to theft.”2
“Unlike other types of intellectual property, which are primarily protected under Federal law, trade secrets [have been] primarily governed by State law.”3 Indeed, some version of the Uniform Trade Secrets Act (UTSA) has been adopted in most states,4 including Oklahoma.5 The UTSA’s supremacy over trade secret protection was diminished May 11, 2016, however, when President Obama signed the Defend Trade Secrets Act (DTSA), which establishes for the first time a federal civil cause of action for trade secret misappropriation.6 According to Congress, the new sheriff in town is warranted because “[w]hile 48 states have adopted variations of the UTSA, the state laws vary in a number of ways and contain built-in limitations that make them not wholly effective in a national and global economy.”7 The legislative intent is to “provide a single, national standard for trade secret misappropriation with clear rules and predictability for everyone involved.”8
Although the DTSA incorporates much of the UTSA’s substance, the new federal law has some notable procedural and substantive nuances that may significantly affect trade secret litigation. Additionally, employers should beware of a unique notice mandate in the DTSA.
BASIC PROCEDURAL IMPLICATIONS
The DTSA does not pre-empt state law9 such as Oklahoma’s UTSA (OUTSA) and other state versions of the UTSA. Thus, claimants now have the option to utilize one or both of the statutes. Like the OUTSA,10 the DTSA has a three-year limitation period.11
The most obvious procedural implication of the DTSA is that it establishes federal question jurisdiction for trade secret misappropriation cases.12 As a result, it is possible that federal — rather than state — courts will become the primary forum for trade secret cases. At a minimum, litigants will have added procedural considerations and options.
The DTSA incorporates the pre-existing definition of “trade secret” under the Federal Economic Espionage Act (EEA), a federal criminal prohibition on trade secret misappropriation. Under that definition, information is a protected trade secret if:
(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, another person who can obtain economic value from the disclosure or use of the information.13
The OUTSA includes the same definition.14
However, the EEA definition adopted by the DTSA also explains that protected trade secret information includes:
[A]ll 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.15
In contrast, the OUTSA definition merely states that trade secret information can include “a formula, pattern, compilation, program, device, method, technique or process.”16 The DTSA’s wide-ranging language — specifically the language expressly protecting intangible information and rejecting any rigid storage requirements — arguably offers broader trade secret protection than the OUTSA.
“The [DTSA’s] definition of misappropriation is modeled on the [UTSA], versions of which have been adopted by 48 states.”17 Congress “intentionally used this established definition to make clear that [the DTSA] is not intended to alter the balance of current trade secret law or alter specific court decisions.”18 And so, like the OUTSA,19 the DTSA defines misappropriation as:
(A) 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
(B) disclosure or use of a trade secret of another without express or implied consent by a person who —
(i) used improper means to acquire knowledge of the trade secret;
(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.20
Both statutes also define improper means as “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.”21 However, the DTSA definition also states that improper means “does not include reverse engineering, independent derivation, or any other lawful means of acquisition.”22 The OUTSA does not include this exclusionary language.23
Injunctive relief is available under the DTSA.24 Additionally, “[i]f determined appropriate, a court may require affirmative actions to be taken to protect the trade secret, and, in exceptional circumstances that render an injunction inequitable, may condition future use of the trade secret upon payment of a reasonable royalty for no longer than the period of time for which such use would have been prohibited.”25
Injunctive relief under the DTSA is subject to two caveats. The first relates to the doctrine of inevitable disclosure, which states “a plaintiff may prove a claim of trade secret misappropriation by demonstrating that defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.”26 This rule has obvious consequences concerning employee mobility. As a result, “courts interpreting State trade secret laws have reached different conclusions on the applicability of the inevitable disclosure doctrine.”27 To protect jurisdictions that have expressly rejected the doctrine of inevitable disclosure, the DTSA states that an injunction for actual or threatened misappropriation cannot hinder employment mobility, and any “conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows.”28
However, the second caveat states that an injunction cannot “conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.”29 Likewise, according to the DTSA’s legislative materials, “if a State’s trade secrets law authorizes additional remedies, those State-law remedies will still be available.”30 Thus, an injunction enjoining a former employee “based on the information possessed by the employee alone” may be permissible if sanctioned by applicable state law.31
For the most part, the DTSA’s injunctive relief provisions are the same as the corresponding provisions in the OUTSA.32 In-deed, Congress intended to copy the equitable provisions in the UTSA.33 The only distinction, of course, is the DTSA’s language specifically protecting employee mobility, individual knowledge and state laws.
Regarding monetary damages, the DTSA expressly permits 1) actual damages; 2) unjust enrichment damages; 3) a reasonable royalty in lieu of damages measured by other methods; 4) for willful and malicious misappropriation, exemplary damages not to exceed two times the amount of compensatory damages and 5) reasonable attorney fees to the prevailing party for willful and malicious misappropriation or bad faith conduct.34 The legislative intent was not “to encourage the use of reasonable royalties to resolve trade secret misappropriation.”35 The DTSA’s damages provisions were drawn directly from the UTSA,36 and the same damages are available under the OUTSA.37
CIVIL SEIZURES AND DIGITAL SAFEGUARDS
The most significant substantive aspect of the DTSA is its authorization of an entirely new means of protection — ex parte seizure orders.38 The DTSA expressly cautions that ex parte seizure orders are only for “extraordinary circumstances.”39 Congress included this provision “to be used in instances in which a defendant is seeking to flee the country or planning to disclose the trade secret to a third party immediately or is otherwise not amenable to the enforcement of the court’s orders.”40
A court may not issue an ex parte seizure order unless the applicant has clearly shown:
1) a temporary restraining order issued pursuant to Federal Rule of Civil Procedure 65(b) would be inadequate because the party to which the order would be issued would evade, avoid, or otherwise not comply with it; 2) immediate and irreparable injury will occur if the seizure is not ordered; 3) the harm to the applicant of denying the application outweighs the harm to the legitimate interests of the person against whom the seizure is ordered and substantially outweighs the harm to any third parties; 4) the applicant is likely to succeed in showing that the person against whom the seizure is ordered misappropriated the trade secret by improper means, or conspired to misappropriate the trade secret by improper means, and is in actual possession of it and any property to be seized; 5) the applicant describes with reasonable particularity the matter to be seized and, to the extent reasonable, identifies the location where the matter is to be seized; 6) the person against whom the seizure would be ordered, or those working in concert with that person, would destroy, move, hide, or otherwise make such matter inaccessible if the applicant were to provide that person notice; and 7) the applicant has not publicized the requested seizure.41
A court issuing an ex parte seizure order must “minimize any interruption to the business operations of third parties, protect the seized property from disclosure, and set a hearing date at the earliest possible time and not later than 7 days after the order has issued.”42
Although the ex parte seizure order is a significant tool, claimants should proceed with caution as the DTSA also 1) “provides that a person who suffers damage by reason of a wrongful or excessive seizure has a cause of action against the applicant … to recover damages, including punitive damages, and reasonable attorney’s fees”43 and 2) directs the court to require an applicant “to provide the 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 or excessive seizure or a wrongful or excessive attempted seizure.”44
The DTSA also includes some unique digital safeguards regarding seized material. Under the DTSA, a court taking custody of seized materials is instructed to 1) secure the seized material from physical and electronic access45 and 2) prohibit any seized storage mediums from being connected to a network or the internet without the consent of both parties.46 Moreover, a party or a person with an interest in material seized “may make a motion at any time, which may be heard ex parte, to encrypt any material seized or to be seized.”47 “The motion shall include, when possible, the desired encryption method.”48
EMPLOYER NOTICE REQUIREMENTS
Under the DTSA, an individual is immune from criminal or civil liability for a trade secret disclosure made either 1) in confidence to the government or an attorney for the purpose of reporting or investigating a suspected violation of law or 2) in a court filing under seal.49 Notably, employers must provide notice of the DTSA immunity protection “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.50 “[T]he term ‘employee’ includes any individual performing work as a contractor or consultant.”51 It is sufficient for an employer to cross-reference a policy document “that sets forth the employer’s reporting policy for a suspected violation of law.”52 The employer notice requirement only applies “to contracts and agreements that are entered into or updated after [May 11, 2016].”53 If an employer does not comply with the DTSA notice requirements, the employer will not be entitled to exemplary damages or attorney fees in a DTSA civil action against an un-notified employee.54
THE BOTTOM LINE
The obvious significance of the DTSA is that it opens up the federal courts to civil actions for trade secret misappropriation. Although the DTSA’s substance largely mirrors the OUTSA, practitioners and companies should be mindful of the new substantive protections created by the DTSA, namely ex parte seizure orders and the accompanying digital protections. Additionally, employers desiring full-trade secret protection under the DTSA should be aware of its immunity notice obligations.
Since the DTSA does not pre-empt state laws like the OUTSA, claimants have the flexibility to make claims under one or both statutes. Depending on the circumstances, a claimant’s desired forum and/or remedies may guide pleading strategy. For example, a claimant wishing to avoid removal to federal court for strategic reasons may refrain from asserting a claim under the DTSA, whereas a claimant desiring an ex parte seizure and/or digital protections may proceed with a DTSA-focused claim in federal court. Practitioners should re-main cognizant of the new strategic options created by the DTSA.
1. H.R. Rep. No. 114–529, at 2 (2016).
2. Id. at 3.
3. S. Rep. No. 114–220, at 2 (2016).
4. Id.; H.R. Rep. No. 114–529, at 4.
5. See 78 Okla. Stat. §§85–94 (1986).
6. See Pub. L. No. 114–153, 130 Stat. 376 (codified in scattered sections of 18 U.S.C.).
7. H.R. Rep. No. 114–529, at 4.
8. S. Rep. No. 114–220, at 14.
9. Pub. L. No. 114–153, §2(f), 130 Stat. 376, 382.
10. See 78 Okla. Stat. §91.
11. 18 U.S.C. §1836(d).
12. See Id. §1836(c); 28 U.S.C. §1331.
13. 18 U.S.C. §1839(3).
14. See 78 Okla. Stat. §86(4).
15. 18 U.S.C. §1839(3).
16. 78 Okla. Stat. §86(4).
17. H.R. Rep. No. 114–529, at 5.
18. Id. at 14; S. Rep. No. 114–220, at 10.
19. See 78 Okla. Stat. §86(2).
20. 18 U.S.C. §1839(5).
21. Id. §1839(6)(A); 78 Okla. Stat. §86(1).
22. 18 U.S.C. §1839(6)(B).
23. See 78 Okla. Stat. §86(1); cf. AvidAir Helicopter Supply, Inc. v. Rolls-Royce Corp., 663 F.3d 966, 973 (8th Cir. 2011) (“The fact that information can be ultimately discerned by others — whether through independent investigation, accidental discovery, or reverse engineering — does not make it unprotectable [under the UTSA].”).
24. See 18 U.S.C. §1836(b)(3)(A).
25. H.R. Rep. No. 114–529, at 12; S. Rep. No. 114–220, at 8–9; see 18 U.S.C. §1836(b)(3)(A)(ii)–(iii).
26. PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995).
27. H.R. Rep. No. 114–529, at 12 n.16; S. Rep. No. 114–220, at 8 n.16.
28. 18 U.S.C. §1836(b)(3)(A)(i)(I).
29. Id. §1836(b)(3)(A)(i)(II); cf. 15 Okla. Stat. §217.
30. H.R. Rep. No. 114–529, at 12; S. Rep. No. 114–220, at 9.
31. H.R. Rep. No. 114–529, at 12–13; S. Rep. No. 114–220, at 9.
32. Compare 18 U.S.C. §1836(b)(3)(A) with 78 Okla. Stat. §87.
33. See H.R. Rep. No. 114–529, at 12; S. Rep. No. 114–220, at 8.
34. 18 U.S.C. §1836(b)(3)(B)–(C).
35. H.R. Rep. No. 114–529, at 13; S. Rep. No. 114–220, at 9.
36. H.R. Rep. No. 114–529, at 13; S. Rep. No. 114–220, at 9.
37. See 78 Okla. Stat. §§88–89.
38. See 18 U.S.C. §1836(b)(2).
39. Id. §1836(b)(2)(A)(i).
40. H.R. Rep. No. 114–529, at 9–10; S. Rep. No. 114–220, at 6.
41. H.R. Rep. No. 114–529, at 10; S. Rep. No. 114–220, at 6; see 18 U.S.C. §1836(b)(2)(A)(ii).
42. H.R. Rep. No. 114–529, at 5; see 18 U.S.C. §1836(b)(2)(B).
43. H.R. Rep. No. 114–529, at 12; S. Rep. No. 114–220, at 8; see 18 U.S.C. §1836(b)(2)(G).
44. 18 U.S.C. §1836(b)(2)(B)(vi).
45. Id. §1836(b)(2)(D)(i).
46. Id. §1836(b)(2)(D)(ii).
47. Id. §1836(b)(2)(H).
49. Id. §1833(b)(1).
50. Id. §1833(b)(3)(A).
51. Id. §1833(b)(4).
52. Id. §1833(b)(3)(B).
53. Id. §1833(b)(3)(D).
54. Id. §1833(b)(3)(C).
ABOUT THE AUTHOR
Derek Ensminger is associate general counsel at SONIC® Drive-In and an adjunct professor of law at the OCU School of Law. His primary focus is on labor and employment law. He received his J.D. from the OCU School of Law where he was a Hatton W. Sumners scholar and staff editor for the Oklahoma City University Law Review.
Originally published in the Oklahoma Bar Journal --
OBJ 88 pg. 123 (Jan. 21, 2017)