Tiffany D. Gehrke, Partner and Chair, Trademarks and Copyrights

Parties might finally have a federal private cause of action for trade secret misappropriation. On April 27, 2016, the House of Representatives passed the Defend Trade Secrets Act (Senate Bill 1890) (“DTSA”) by a vote of 410-2. The Senate passed the bill 87-0 on April 4, 2016. The new Act provides: “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.”

For many years parties have had to rely on state legislation and common law to protect trade secrets. Although the majority of states have adopted the Uniform Trade Secrets Act (“UTSA”), they have not always adopted it in its entirety and the differences from state to state can be significant. These differences, according to the Committee Report for Senate Bill 1890, can be case dispositive:

they may affect which party has the burden of establishing that a trade secret is not readily ascertainable, whether the owner has any rights against a party that innocently acquires a trade secret, the scope of information protectable as trade secret, and what measures are necessary to satisfy the requirement that the owner employ ‘reasonable measures’ to maintain secrecy of the information.[1]

Once signed by the President, the Defend Trade Secrets Act would not preempt state law, but would provide new federal remedies. The Committee explains that it is the intent of Congress to provide victims with the ability to move quickly to federal court where the Act would provide clear rules and predictability to the parties, and would stop trade secrets from dissemination and lost value. The DTSA would apply with respect to misappropriations of trade secrets occurring on or after the date of the enactment of the DTSA.

The Defend Trade Secrets Act provides comprehensive and nuanced sections addressing numerous issues related to trade secret misappropriation.

Overview of the Defend Trade Secrets Act

1. What Is A Trade Secret?

As used in the DTSA, the 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 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.

Although the use of “trade secret” in the DTSA is not a verbatim copy of the UTSA definition, the Committee explained it does not intend for the definition of a trade secret in the DTSA to be meaningfully different from the scope of that definition as understood by courts in states that have adopted the UTSA.

2. What Is Misappropriation?

In general, “misappropriation” means the 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 disclosure or use of a trade secret of another without express or implied consent. Both the UTSA and the DTSA provide the same specific definition of “misappropriation.”[2] In fact, the Committee intentionally used the same, established definition of “misappropriation” from the UTSA to make clear that the DTSA is not intended to alter the balance of current trade secret law or alter specific court decisions.

The Committee also kept nearly the same definition of “improper means,” a term that “includes theft, bribery, misrepresentation, breach, or inducement of a breach of a duty to maintain secrecy, or espionage though electronic or other means.” The DTSA also clarifies that reverse engineering and independent derivation of the trade secret do not constitute improper means.

3. What Can Be Done?

a. Ex Parte Seizure

Ex Parte Seizure is available only in “extraordinary circumstances.” The Act lists eight different factors that must be present to have such “extraordinary circumstances,” including, among others, that a temporary restraining order would be insufficient and that the person against whom seizure would be ordered (or persons acting in concert with such person) would destroy, move, hide, or otherwise make the matter containing the misappropriated trade secrets inaccessible to the court if the person had notice of a seizure. In addition, the statute requires that the person requesting ex parte seizure has not publicized the requested seizure.

The Committee also carefully notes the Act requires that the person against whom seizure would be ordered has “actual possession” of the matter, meaning that the person has actual possession of the trade secret and any property to be seized. This requirement was added to protect third-parties from seizure. For example, the Committee explains, “the operator of a server on which another party has stored a misappropriated trade secret, or an online intermediary such as an Internet service provider, would not be subject to seizure because their servers, and the data stored upon them, would not be in the actual possession of the defendant against whom seizure was ordered.” Importantly, the Committee notes, while the court cannot issue a third-party seizure under this provision, it may issue a third-party injunction preventing disclosure of the trade secret using its existing authority to provide equitable relief.

The DTSA also includes important provisions to balance the interest of all parties when issuing an ex parte seizure order. For example, the Act requires that the court protect the seized property by protecting it from disclosure and by prohibiting access by the applicant until the parties have had an opportunity to be heard in court. It also requires that the person obtaining the order provide the security determined adequate by the court for payment of damages that the other party may be entitled to recover as a result of a wrongful or excessive seizure, or attempted seizure. The federal court may also appoint a technical expert to assist in the seizure, and/or a special master to locate and isolate all misappropriated trade secret information and to facilitate the return of unrelated property and data to the person from whom the property was seized.

The Committee anticipates the ex parte seizure provision would be used in situations in which a defendant is seeking to flee the country or planning to disclose the trade secret to a third‑party immediately or otherwise is not amenable to the enforcement of the court’s orders.

b. Traditional Remedies

The DTSA permits the court to enter injunctive relief so long as it does not prevent a person from entering into an employment relationship or otherwise conflict with applicable state laws prohibiting restraints on trade.

The Defend Trade Secrets Act damages provision also follows the Uniform Trade Secrets Act and provides that: the court may award damages for (1) actual loss and unjust enrichment caused by the misappropriation or (2) damages caused by the misappropriation measured by a reasonable royalty. If the trade secret is willfully and maliciously misappropriated, then the court may award exemplary damages of not more than 2 times the amount of damages awarded under (1) or (2).

In addition, like the UTSA, the DTSA also provides for the award of reasonable attorney’s fees in three situations: (1) if a party makes a claim of trade secret misappropriation in bad faith, (2) a motion to terminate an injunction is made or opposed in bad faith, or (3) the trade secret was willfully and maliciously misappropriated.

4. When Can a Claim Be Brought?

The DTSA has a three-year statute of limitations from the date on which the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. While the Uniform Trade Secrets Act also has a three-year statute of limitations, some states, have other statutes of limitations. For example, Illinois has a five-year statue of limitations.

The full text of the Defend Trade Secrets Act, S. 1890, is available here.

For more information, please contact Tiffany D. Gehrke or another attorney at the Firm.

The information contained in this alert is for informational purposes only and is not legal advice or a substitute for obtaining legal advice. Under applicable rules of professional conduct, this communication may constitute Attorney Advertising. © 2016 MARSHALL, GERSTEIN & BORUN LLP, Chicago, Illinois. All rights reserved.