April 29, 2016

Congress Passes Bill Creating Federal Cause Of Action For Trade Secret Misappropriation

3 min

On April 26, 2016 the United States House of Representatives joined the Senate in passing the Defend Trade Secrets Act of 2016 (DTSA), putting the bill before President Obama, who is expected to sign it within days. DTSA creates a federal civil cause of action for trade secret misappropriation and an ex parte mechanism for civil seizures when necessary to prevent dissemination. In order to bring a federal action under the Act, the trade secret must be related to a product or service used in, or intended for use in, interstate or foreign commerce.

Currently trade secrets are protected by state law for civil actions and both federal and state law for criminal actions. On the civil side, most states implement the Uniform Trade Secrets Act, and the DTSA incorporates many of the provisions from the Uniform Act. The DTSA additionally has a provision not found in the Uniform Act, that allows for a court to order law enforcement to seize misappropriated trade secrets.

DTSA provides for both injunctive and monetary damages as possible remedies. An injunction can be granted in order to prevent any actual or threatened misappropriation of the trade secret, with certain exceptions, as the court deems reasonable. Many trade secret actions arise from an employee moving from one company to another, and an injunction that would completely prevent a person from entering into an employee relationship cannot be issued. Also, the injunction is subject to applicable state laws prohibiting restraints on the practice of a profession, trade or business.

Regarding monetary damages, the DTSA allows recovery for actual loss caused by the misappropriation in addition to recovery for any unjust enrichment that is not addressed in computing the actual loss. Alternatively, a reasonable royalty is available for the disclosure or use of the trade secret. These damages can be potentially doubled if the misappropriation was willful. Attorney fees are potentially available to both sides for a claim made in bad faith.

The ex parte seizure provisions allow the court to seize property in order to prevent the propagation or dissemination of the trade secret. The court can rely on an affidavit or verified complaint showing that: 1) relief under Rule 65 or other equitable relief would be inadequate because the party would not comply with such an order; 2) an immediate and irreparable injury would occur absent seizure, 3) the harm to the applicant outweighs the harm to the party subject to seizure, and substantially outweighs any harm that would be caused to a third party, and 4) the applicant is likely to succeed on the merits of its misappropriation claim. Any such seizure must be narrowly tailored and the seized property will be held by the court until a full hearing can be arranged which must be within seven days of the seizure.

DTSA also has an immunity provision that precludes liability, including under state law, for both criminal and civil trade secret misappropriation for disclosing trade secrets to the government or an attorney in connection with reporting a suspected violation of the law (e.g. for whistleblowers), and also for disclosures made in connection with a lawsuit, so long as the filing is done under seal.

The Act is subject to a three year statute of limitations, measured from the date on which the misappropriation was discovered or should have been discovered through reasonable diligence.