June 28, 2016
Law360
Authored by Patrick J. Coyne
Nothing passes Congress during an election year. Well, something did: the Defend Trade Secrets Act of 2016. In some ways, the act is unexceptional. In other ways, however, it is exceptional. For decades, trade secrets have been the poor stepchild of intellectual property law. Although trade secret law had its beginnings in the Industrial Revolution, until May 2016 it had never been federally codified. We were left instead with inconsistent state laws. By the end of the 20th century, this situation had improved dramatically and state laws took one of two basic forms: the Uniform Trade Secrets Act; or the Restatement of Trade Secrets.
The Uniform Trade Secrets Act was drafted by the National Conference of Commissioners on Uniform State Laws, approved by the American Bar Association in 1980, and has been adopted by almost every state that has enacted trade secret laws. The Restatement of Trade Secrets summarized these varying state trade secret laws and waned as more states adopted the Uniform-Trade-Secrets-Act approach. At this point, every state that has trade secret legislation except New York and Massachusetts has enacted the Uniform Trade Secrets Act.
In 1996, Congress passed the Economic Espionage Act (EEA). The EEA was directed at the theft of trade secrets by foreign governments, instrumentalities and agents. The EEA expanded the definition of trade secrets to include information technology but it provided no private cause of action. It relied, instead, on overburdened U.S. attorneys' offices to investigate and prosecute trade secret misappropriation. This has been less than fully effective. By providing a private cause of action, the Defend Trade Secrets Act provides substantial additional enforcement capacity by empowering those persons who are most affected by misappropriation—trade secret owners.
The Defend Trade Secrets Act of 2016 is in many ways comparable to the Lanham Act, the federal statute that codified trademark protection in 1946. In the Lanham Act, Congress did not preempt state law and experience under this dual system has been positive. Although the Defend Trade Secrets Act of 2016 federalizes trade secret protection, it preserves state law trade secret protections. The act provides a uniform definition of trade secrets, a uniform standard for misappropriation, nationwide service of process, and nationwide execution of judgments.
The Defend Trade Secrets Act became effective May 11, 2016. The act provides a federal cause of action that is potentially international in scope: "An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce." 18 U.S.C. § 1836(b)(1). The claim arises when the misappropriation is or should have been discovered. The act incorporates a three-year statute of limitations, as does the Uniform Trade Secrets Act.
"[T]he term 'trade secret' means all 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." 18 U.S.C. § 1839(3).
The term "misappropriation" means:
(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 . . .
18 U.S.C. § 1839(5). This is the same definition of misappropriation used in the Uniform Trade Secrets Act.
Similarly, the term "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 ...
18 U.S.C. § 1839(6). This last exclusion is significant.
States vary widely in the degree to which they protect an employee's right to work. Some vigorously protect it. Nonetheless, common law doctrines have evolved in even these more protective states to preclude employment if the employee would inevitably disclose a prior employer's secrets.
This "inevitable disclosure" doctrine is not applicable under the Defend Trade Secrets Act. An employee cannot be enjoined from employment based on information the person knows. Rather, any conditions on employment must be based on evidence of threatened misappropriation. Nor can injunctions conflict with applicable state law provisions prohibiting restraints on the practice of a lawful profession, trade, or business.
Perhaps the single most important provision of the act is the availability of ex parte seizure orders. These are available not only as a remedy but also to preserve evidence.
Astronomer Carl Sagan is quoted as saying: "Extraordinary claims require extraordinary evidence." Ex parte seizure is extraordinary relief and the Act requires extraordinary evidence. An ex parte seizure order may be obtained only as "necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action." 18 U.S.C. § 1836(b)(2)(A)(i).
The act incorporates the basic requirements for preliminary injunctive relief, and goes well beyond them:
1. The relief available under Rule 65 of the Federal Rules of Civil Procedure, or other comparable equitable relief, must not be adequate.
2. The movant must show immediate and irreparable injury if seizure is not ordered.
3. The harm to the applicant from denying relief must outweigh the harm to the legitimate interests of the person who would be subject to the seizure order.
4. The applicant must be likely to succeed on the merits.
But, the act goes well beyond these basic requirements.
5. The person against whom seizure is ordered must have actual possession of the trade secret.
6. The application must describe with reasonable particularity the matter to be seized and where it is located.
7. The movant must show that the person against whom the seizure is requested would "destroy, move, hide, or otherwise make such matter inaccessible to the court" if they were given notice.
8. Finally, the applicant must not have publicized the requested seizure. 18 U.S.C. § 1836(b)(2)(A)(ii)(I)-(VIII).
In addition to these elements, the court must undertake substantial additional work in issuing an ex parte seizure order:
1. The order must include findings of fact and conclusions of law.
2. The order must provide the narrowest seizure of property necessary to achieve the purpose and be conducted in a manner that minimizes any interruption of the business operations of third parties. Further, to the extent possible, the order must prevent undue damage to the legitimate business operations of the person subject to the seizure order.
3. It must be accompanied by an order protecting the seized property from disclosure and prohibiting access by the applicant or the person against whom the order is directed.
4. It must provide specific guidance to law enforcement officials, including the time when the seizure is to occur and whether or not force may be used to enter locked areas.
5. The court must set a date for the hearing not later than seven days after the order has been issued.
6. The applicant must provide adequate security in the event the seizure is wrongful. 18 U.S.C. § 1836(b)(2)(B)(i)-(vi).
And the burden of proof at the hearing remains on the applicant.
The act also specifically protects information provided in confidence to a government official or to an attorney solely for the purpose of reporting or investigating a suspected violation of law. This includes a complaint or other document filed under seal.
The act requires employers to notify employees of these protections. Failing to comply with these requirements may preclude the employer from securing either exemplary damages or attorney's fees against an employee who was not provided the required notice.
The remedies available under the act are robust. The trade secret owner is entitled to recover its actual loss. The trade secret owner may also recover any unjust enrichment caused by the misappropriation that is not adequately compensated by its actual loss. Alternatively, the trade secret owner may recover a reasonable royalty for the unauthorized disclosure or use of the trade secret.
The act also provides for exemplary damages of not more than double the compensatory award in the case of willful or malicious misappropriation. Reasonable attorneys' fees may also be recovered in the case of willful or malicious misappropriation.
The act specifically provides for injunctive relief to prevent actual or threatened misappropriation. In exceptional cases, the court may condition future use of the trade secret on the payment of a reasonable royalty.
One could look cynically at this legislation coming after decades of technology transfer—both voluntary and involuntary—from the United States to dozens of Southeast Asian economies. Since the economic opening of China in the 1980s, U.S. technology has flowed freely, some of it through trade secret theft. Does the act close the barn door after the horses have gone?
The irony of this situation would not be lost on the English and Scottish textile barons of the Industrial Revolution. The U.K. established a vibrant textiles industry based on water power and innovative weaving techniques. Rather than resort to patent protection which would have published these inventions enabling competitors, the United Kingdom passed a series of trade secret laws precluding the disclosure and export of this critical technology and imposing severe penalties for misappropriation. None of this, however, prevented the rise of Lowell, Massachusetts, and dozens of other U.S. mill towns. They thrived on the use of misappropriated trade secrets. Is the United States walking down the same path?
The answer is clearly no. The U.S. economy has been and continues to be hugely innovative. And, although much harm has already occurred, these measures will be powerful tools in preventing additional future harm.
The Defend Trade Secrets Act includes a teaser of additional congressional action that may be coming. The Economic Espionage Act was an attempt to stem foreign trade secret theft from U.S. companies. But enforcement of the EEA has not been as thorough as expected. The Defend Trade Secrets Act specifically requires the attorney general to report, within one year of the date of enactment, on the extent of this problem. In addition to reporting, the attorney general must make recommendations for additional legislation: to reduce the threat and economic impact of trade secret misappropriation; to educate U.S. companies regarding these threats; to provide assistance to them; and to provide mechanisms for redressing trade secret theft occurring outside the United States.
As with many federal statutes, jurisdiction, once conferred, is rarely taken away. As the scope of legislation to prevent trade secret theft increases, expect increasing enforcement as well as additional legislation strengthening trade secret protections.
What can you do to prepare effectively for these changes? Several things.
First, effective portfolio management is critical. Trade secret litigation has historically been ad hoc. Trade secret cases are frustrating for all participants. The plaintiff may not have maintained the information as a trade secret in the regular course of its business, and now asserts that it is secret for the first time in litigation. Consequently, the plaintiff often withholds identifying its trade secrets until after it has discovery from the defendant. Then, after the defendant has disclosed its activities, the plaintiff identifies the trade secret as some subset of what the defendant is doing. Only after time-consuming and expensive motions practice is the plaintiff typically compelled to identify its trade secrets with sufficient particularly that the defendant can reasonably defend the claim.
Understandably, defendants are reluctant to provide discovery until after the plaintiff has identified its alleged trade secrets with particularity. Although this is legitimately driven in many cases by fear that the plaintiff will simply claim defendant's technology as its own, this standoff typically results in substantial waste of time and additional expense.
The Defend Trade Secrets Act enables the courts to end this standoff. The trade secret owner is required to identify the trade secret with particularity at the beginning of the case. It must provide sufficient detail that the court can understand what the secret is. And, the court may deny relief if the secret is not adequately identified.
This provision highlights that effective portfolio management is critical. No longer can trade secret owners rely on identifying the secret, post hoc. Nor will they be able to allege their trade secret based on the discovery provided by the defendant. Prudent trade secret owners will develop and maintain an effective trade secret portfolio management system, similar to what they maintain for a patent or trademark practice. It must capture, catalog, document, and maintain adequate control over the trade secrets. It should be able to provide contemporaneous evidence of precisely what the trade secret is and what steps were taken to protect it.
Second, although the act imposes substantial requirements on the patent owner in order to secure an ex parte seizure order, prudent competitors will evaluate these risks well in advance. The act does include provisions that the court must minimize the disruption of the defendant's legitimate business interests. Nonetheless, what the court may consider appropriate may, nonetheless, impose substantial burdens on the defendant's business operations. Just as the company maintains disaster recovery plans to ensure business continuity, so too should it maintain these disaster recovery systems with an eye to potential business disruption from an ex parte seizure order.
Third, the whistleblower protection provisions of the Defend Trade Secrets Act impose new and additional notice obligations on employers. It is critical for the legal and human resources departments to understand these requirements and to put in place effective systems to ensure compliance. Although they do not preclude relief if notice is not given, they do preclude enhanced damages and attorneys' fees. And these may be powerful deterrents to misuse or misappropriation.
It remains to be seen what the scope and effectiveness of these new provisions will be. But if experience under the Lanham Act is any indicator, and it likely is, trade secrets will enjoy a substantial scope of enforcement under the act, just as trademarks have for the past 70 years.
Originally printed in Law360 (www.law360.com). Reprinted with permission. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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