New Defend Trade Secrets Act Provides Recourse Against Trade Secret Misappropriation

Baker & McKenzie – In the U.S. alone, trade secret theft costs innovators an estimated $450 billion per year and constitutes a threat to U.S. security and the U.S. economy.
Thanks to increasing employee mobility, data transfer capabilities, and globalization, trade secret loss is a growing threat to innovators worldwide.  U.S. courts have recognized the great value of trade secrets.  For example, in 2011, a California court awarded a global medical device company $2.3 billion for trade secret theft by a former employee.  Beyond economic value, trade secret misappropriation is also a threat to safety and security—multiple former employees of defense contractors have been caught attempting to sneak valuable military secrets to both Iran and China.

In response, on May 11, 2016, President Obama signed the Defend Trade Secrets Act (“DTSA”) into law.  The DTSA arms U.S. businesses with better weapons to combat trade secret theft by adding a federal civil cause of action to the Economic Espionage Act of 1996, which, previously, only provided criminal sanctions.

The DTSA also could be interpreted to apply to non-U.S. employers as it specifically addresses conversion of trade secrets related to products or services used in, or intended to be used in, foreign commerce, and is intended to address the internationalization of trade secret theft.  This additional weapon in the intellectual property owner’s arsenal is crucial in today’s globalized economic climate.  As explained below, for employers to take advantage of the exemplary damages and attorneys fees provisions prescribed in the DTSA, they must provide the required notice provisions in their employment agreements, proprietary inventions agreements, confidentiality agreements, or policies.

The importance of trade secret protection cannot be overstated.  And the threat is often closer than you think.  In a recent Symantec study, 50 percent of employees surveyed who left or lost their jobs said that they retained confidential corporate data, and 40 percent planned to use that data in their new jobs.

Further, 62 percent believe it is acceptable to transfer work documents to personal devices or online sharing applications, and generally fail to delete the data afterwards.  A 2015 Ernest & Young Global Information Security Survey found that 88 percent of corporate counsel said that the current security measures at their company are insufficient to prevent trade secret misappropriation.  In this study, corporate counsel saw employees as the second-largest threat to trade secret security, behind only criminal syndicates.

Regardless of the form of misappropriation, a problem plaguing U.S. business has always been enforcement—which has previously been subject to often contradictory state regulations.  For example, the geographic scope of and amount of protection, proper discovery, and available remedies can vary materially state-by-state.

Beyond this, trade secret owners run the risk of actually exposing their own trade secrets by the very act of filing suit in court—particularly when they are unfamiliar with the variations in state rules and regulations.  The DTSA does not eliminate or pre-empt state law, but instead adds a layer of federal protection for trade secrets.  To avoid exposing trade secrets in the process of litigating over them, the DTSA now permits trade secret owners to file a sealed statement with the court explaining why the secret(s) should be protected.

In addition, the DTSA provides civil and criminal immunity to individuals who disclose a trade secret in confidence to a government official (federal, state or local) or to an attorney for the sole purpose of reporting or investigating a suspected legal violation.  Per the DTSA, employers must notify employees and contractors of these immunity rights in any employment, proprietary inventions, and confidentiality agreement they ask employees to sign.  Failure to provide such notice eliminates the possibility of exemplary damages and attorneys fees in action for violation of the DTSA.

The DTSA provides the following remedies:

  • Damages for actual loss and for unjust enrichment.  For willful and malicious misappropriation, the DTSA provides for exemplary damages up to double the amount of damages otherwise awarded.
  • Injunctive relief across all states, if the plaintiff can show actual or threatened misappropriation.  Note that a court may not wholly prevent a person from entering into an employment relationship, but may restrict employment upon evidence of threatened misappropriation (more than the person’s mere possession of proprietary information).
  • Ex parte property seizure upon a showing of “extraordinary circumstances,” where seizure is “necessary to prevent the propagation or dissemination of the trade secret.”  This remedy has not previously been available under the states’ laws.  Note that the plaintiff’s burden to show “extraordinary circumstances” is high, and seizure may only occur in exceptional situations, such as a flight risk or massive theft of information that cannot otherwise be prevented by an injunction.
  • Civil and criminal immunity for whistleblowers, permitting individuals to disclose trade secrets if the disclosure was made to report or investigate an alleged violation of law.  Importantly, the DTSA requires employers to include notice of this immunity in any agreement with an employee, contractor, or consultant that governs the use of trade secrets or confidential information.  Without this notice, the employer cannot recover exemplary damages or attorneys’ fees from the employee in a later DTSA suit.
  • Increased criminal penalties.
  • Reasonable Royalty for up to the length of time of the improper use, in lieu of damages, in “exceptional circumstances,” and where injunctive relief is deemed “inequitable.”

The passage of this important bill reflects the growing global recognition of the importance of trade secrets, as further evidenced in the trade secrets provisions of the Trans-Pacific Partnership Agreement now under consideration, the Amendments to Japan’s Unfair Competition Prevention Act that took effect in January 2016, and the adoption by the European Parliament of the Trade Secrets Directive in early May 2016.  These recent efforts are respectable attempts to curtail the massive theft of crucial and valuable trade secrets.

If you are interested in discussing the protection of your trade secrets and compliance under the DTSA, please contact the Baker & McKenzie lawyer with whom you work or any of the lawyers listed below in our Employment Counseling & Litigation and Intellectual Property Practice Groups.

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