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The Defend Trade Secrets Act

Word is that President Obama is planning to sign the Defend Trade Secrets Act of 2016 (DTSA.) [Update: this act was signed into law on May 11, 2016.] The DTSA was passed in April by both houses of Congress. What’s the DTSA, and how will it change the status quo? Read on to find out.

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You can read the full text of the Defend Trade Secrets Act of 2016 here.

What’s a Trade Secret?

Let’s start here. A “Trade Secret” is a piece of information, not generally known or reasonably ascertainable, that gives a business an economic advantage over its competitors. Trade secret protection requires reasonable efforts to maintain secrecy.

Some of the most famous trade secrets include:

  • Recipes (Coca-Cola)
  • Formulas (WD-40)
  • Algorithms (Google Search)

Most businesses have trade secrets. These may include customer lists, internal specs, upcoming products, and best practices guides.

What’s the Status Quo?

Currently, there’s no right to sue in federal court for trade secret misappropriation, with the exception that you can bring a trade secret claim if it’s attached to another, unrelated federal claim.

But as a general matter, trade secrets are enforced at the state level. This means that the law varies somewhat from state to state (although most states have adopted a form of the Universal Trade Secrets Act.) So a business that operates in multiple states may have to deal with a different set of circumstances depending on where the trade secret misappropriation occurs.

The Defend Trade Secrets Act

The DTSA will do several things. First, it will create a federal civil cause of action for trade secret misappropriation. This means, simply, that you can sue in federal court. This may be advantageous to the business, if the courts in a particular state are less business-friendly.

Second, and this is a significant change to the status quo, the DTSA will allow a federal court to seize the property of a potential misappropriator and prohibit the dissemination of the trade secret “ex parte” (meaning, without advance notice to the misappropriator.) Note that this can only occur in “extraordinary circumstances.”

What does this all mean? Well, let’s say you become aware that a former employee has stolen a valuable trade secret—say, the specs of an upcoming product. He is out trying to sell that information to the highest bidder.

Under current law, you can go to state court and request that the court issue a “preliminary injunction.” This is an order by the court telling the ex-employee not to proceed with his plan. But what if he doesn’t comply? Once a trade secret is out, it’s no longer a secret, and its value may disappear. You can sue the ex-employee for damages, but if he doesn’t have a dollar to his name, and the secret was worth millions or billions, you’re out of luck.

Under the DTSA, if you can prove to a court that the injunction won’t be sufficient to prevent your secret from being exposed, the court can order federal officials to physically seize the ex-employee’s property (say, a hard drive where the plans are stored.) This is a difficult standard to meet, which is appropriate—we don’t want federal officials banging down doors left and right on phony trade secret witch hunts.

This remedy is in addition to the other remedies outlined by the DTSA for civil claims, which include: actual damages (the amount of money you lost), restitution (getting the secret information or property back), injunctive relief (explained above), exemplary relief (up to two times the actual damage that you suffered), and attorney’s fees.

All of the info above applies under civil law (meaning, actions brought directly by the party whose secrets were stonlen.) The DTSA also increases the criminal penalties for trade secret misappropriation. The status quo (under the Economic Espionage Act of 1996) allows for penalties of up to $5 million. The DTSA increases that number to the greater of either (a) $5 million, or (b) three times the value of the trade secrets. The value includes the cost of reproducing those secrets.

To wrap it up: the DTSA will give businesses new powers to protect their valuable trade secrets. Does the DTSA go too far, or not far enough? We’ll have to see how it’s applied and how courts interpret its provisions.

In the meantime, this is a good reminder to review your company’s employment and independent contractor agreements to make sure they include robust trade secret protection.

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