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Federal Law Provides New Protections for Trade Secrets: the Defend Trade Secrets Act

Trade Secrets and Unfair Competition Law Update Jonathan Hudis, Emily M. Feinstein

After years of discussion and rumor, the U.S. House and Senate have now approved a federal law protecting trade secrets, called the Defend Trade Secrets Act of 2016 (DTSA) (to be codified at 18 U.S.C. §§ 1831-39). Because the President has praised the legislation, companies are very likely to have new tools at their disposal to protect key intellectual property. Below we explain the soon-to-be new law and how it may be helpful to your business.

Access to the Federal Courts under a Unified Law of National Application

The first new resource available under the law is access to the federal court system. Access to the federal courts under a unitary statute of nationwide application will promote consistency in the application of trade secrets law, and enable companies to better address trade secret misappropriation by national and international defendants.

Before passage of the DTSA, with the exception of the Computer Fraud and Abuse Act (codified at 18 U.S.C. § 1030) —a statute of limited applicability—misappropriation of trade secrets could only be addressed in state court. Though the great majority of states have adopted some form of the Uniform Trade Secrets Act (UTSA), the laws in each state vary in their scope and application. Many aspects of the new DTSA protect trade secrets in federal court by replicating several of the most common aspects of the various states' laws. The UTSA and the DTSA similarly define what can be a trade secret and how a trade secret can be misappropriated. Both provide similar legal remedies for misappropriation. Under either, a trade secret plaintiff can seek an injunction to stop someone from using its trade secrets and assert a claim for money damages.

Ex parte Seizure

The second tool provided by the new law is unique to the DTSA—an ex parte seizure remedy. Ex parte seizure is a distinctive (and controversial) remedy that is likely to be available only in extraordinary circumstances. A court can enter a seizure order if a plaintiff demonstrates: 1) that a temporary restraining order or injunction would be inadequate because the defendant would evade the court’s order; 2) it would suffer an immediate and irreparable injury if the seizure is not ordered; 3) the harm to plaintiff in denying the seizure order outweighs the harm to the legitimate interests of the defendant in ordering the seizure; and 4) the harm to the plaintiff in denying the seizure order substantially outweighs the harm to any possible harm to third parties.

It is anticipated that an ex parte seizure order is likely to be granted rarely. Nonetheless, this could be helpful when a traditional injunction or temporary restraining order is insufficient, such as with a corporate spy who or a foreign company that refuses to respect U.S. laws.

A defendant subject to an ex parte seizure order under the DTSA is entitled to a hearing within a week after issuance of the order. Also, the court will take steps to protect the seized information in the meantime. Moreover, a third party whose information is at issue can also ask the court to protect that information, such as by encryption.

Notification of Employees of Their Rights Under the DTSA

Finally, the DTSA presents limits on the ability to seek relief against former employees who have not been given appropriate notice. In order to take full advantage of the remedies under DTSA, employers must add a new notice to their employee contracts or through a cross reference to a written policy. Employers must notify their employees that they can use the company's trade secrets in a retaliation suit. An employer who fails to provide this notice cannot obtain punitive damages or attorneys’ fees in a theft of trade secrets case against an un-notified employee. Importantly, the DTSA also creates protections to prevent dissemination of the trade secrets in such a suit.

Taking Advantage of the DTSA

A business looking to be protected by the DTSA or UTSA (or state laws based on the UTSA) needs to identify its trade secrets and take reasonable measures to protect them. This is not new, but it can be a difficult first step. We regularly meet with our clients to identify and help them protect their trade secrets; what we call a trade secret audit. Trade secrets can protect all forms of financial, business, scientific, technical, economic, or engineering information, including compilations of these types of information. However, it is important that the company take reasonable measures to prevent others from discovering these trade secrets. It also must be demonstrated that the proprietary information and has actual or potential independent economic value. Identifying valuable information and the constructs appropriate for protecting that information is a key component of an audit.

Under the DTSA, a new component of the trade secret audit is to consider the addition of the DTSA's notice language to employee non-disclosure agreements. We are happy to talk with you about the risks and benefits of such a change.

When is the best time for a trade secret audit? As soon as possible. There is no redress under the DTSA or other laws if a company fails to protect its valuable information. No company can protect its crown jewels if it doesn't know whether and how they can be protected.

If you would like more information about the Defend Trade Secrets Act or how a trade secrets audit can help you, please contact Jonathan Hudis at jonathan.hudis@quarles.com/(202) 372-9528, Emily Feinstein at emily.feinstein@quarles.com/(608) 283-2470, or your Quarles & Brady attorney.