The Most Important Point You Need To Know About The New Federal Trade Secrets Act

On May 11, 2016 President Obama signed the “The Defend Trade Secrets Act of 2016” (“DTSA”). The bill that the President signed had broad bipartisan support, passing the House of Representative with a vote or of 410 in favor and two against and the Senate by a unanimous vote.

Before the enactment of DTSA, statutes regulating trade secrets were exclusively a matter for the states. Forty-eight out of the fifty states had passed the Uniform Trade Secrets Act as part of their state law. Massachusetts, however, was one of two states, along with New York, that failed to adopt the Uniform Trade Secrets Act.

With the enactment of DTSA, all forms of intellectual property: patents; trademarks; copyrights; and trade secrets now have federal statutes protecting their ownership through federal civil jurisdiction. However, DTSA does not preempt any state trade secret laws but instead adds a federal right to enforce trade secret agreements in addition to any existing state trade secret law.

DTSA gives right to bring federal civil action for breach of trade secret agreement

The most important result of the passage of DTSA is the creation of a right for businesses or organizations to file legal actions against any other person who has misappropriated or illegally received trade secrets in federal court. Under DTSA, “An owner of trade secret that is misappropriated may bring a civil action [in federal court] if the trade secret is related to a product of service used in, or intended for use in, interstate or foreign commerce.”

Broad federal definition of trade secrets protectable under DTSA

Under the statutory definition applicable to the DTSA, a “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…

In order to be a protectable trade secret under federal law, however, the owner of the trade secret must have “taken reasonable measures to keep such information secret” and the information that the owner claims as a trade secret must be information that has actual or potential independent economic value, “…from not being generally known to, and not being readily ascertainable through proper means by the public.”

In short, any information on which a business can make money by keeping that information from falling into a competitor’s hands or the public domain, is a possible protectable trade secret.

DTSA has a broad definition of “Misappropriation” of trade secrets, double damages and recovery of attorney fees

The Act provides a definition of “Misappropriation” that includes:

(A.) Acquisition of trade secret by person who knows or has reason to know that the trade secret was required by improper means or;

(B.) Disclosure or use of a trade secret of another without …consent by a person who used improper means to acquire knowledge of the trade secret and… knew or had reason to know the knowledge of the trade secret was [obtained by a breach of someone’s contractual duty].

In the ordinary course, the requirement for a duty of confidentiality between the owner of the trade secret and another person to exist, there must be a clear and unequivocal duty to maintain the secrecy of the information. In almost all cases, this duty results from a written confidentiality agreement identify the trade secrets to be protected.

Also, the act allows for injunctions to “to prevent any actual or threatened misappropriation,”  “damages for actual loss caused by the misappropriation of the trade secret,” “damages for any unjust enrichment caused by the misappropriation of the trade secret that is not addressed in computing damages for actual loss,” and “if the trade secret is willfully and maliciously misappropriated, award exemplary damages in an amount not more than two times the amount of the damages awarded [and] attorney fees to the prevailing party.”

DTSA gives federal court power to order federal law enforcement officers to seize misappropriated trade secrets

DTSA provides a new remedy that allows federal judges to order without any notice the civil seizure of property by federal law enforcement officers.

Under DTSA the owner or licensee of the misappropriated trade secrets may petition United States District Court to issue an order directing that federal law enforcement officials seize property, when necessary, to protect trade secrets that have been improperly acquired.

While such an order would provide an extremely powerful remedy to the trade secret owner, the law does not give the owner obtaining such an order an easy task. The petitioner must convince a federal judge that eight separate conditions apply including, among others that: (2) if the order does not issue, the petitioner will suffer irreparable harm; (5) the target possesses the trade secret and the property to be seized; (7) the target would destroy the property if the applicant proceeded with notice; and (8) the applicant has not publicized the requested seizure.

DTSA effective date and definition of employee

The provisions of the new Federal Trade Secrets Act apply, “With respect to any misappropriation of a trade secret…for which any act occurs on or after the date of the enactment of this act [May 11, 2016].”

Under the Act an “employee” is defined as including “Any individual performing work as a contractor or consultant for an employer as well as what would be considered an employee under common law.”

The new and important condition required by DTSA for existing and future trade secret agreement

Federal jurisdiction, double damages, and attorney fees for enforcing breaches of trade secret confidentiality puts some real legal teeth into a trade secret agreement. There is a catch, however.

Congress, possibly concerned about trade secret confidentiality agreements being misused to threaten or throttle whistleblowers, put a provision in DTSA to provide immunity to whistleblowers who disclose confidential information to a state or the Federal Government solely for the purpose of reporting or investigating a suspected violation of the law.

Under DTSA, if an employer does not put a notice as to whistleblower immunity in any contract or agreement that governs the use of a trade secret or other confidential information by an employee, independent contractor, or consultant, the employer loses the right to recover double damages or attorney fees.

The notice requirement may be met by putting the notice in the trade secret agreement, or by clearly cross-referencing a policy document that describes the company’s reporting policy for a suspected violation of the law. This requirement applies to any confidentiality agreement entered into on or after May 12, 2016.

For companies that want the maximum protection allowed by law, this notice change requires a review of any existing trade secret agreements or agreements in the future to comply with this new requirement.

Agency and company takeaway: use trade secret agreements

With the addition of a federal cause of action to protect trade secrets, any agency or insurance-related business should amend its trade secret agreements and computer access agreements to comply with the notice provisions of the new act to maintain the statute’s right to enhanced damages and attorney fees if a signatory to such company’s agreement divulges protected trade secrets.

Within any given agency or company there obviously exists the expiration and marketing information. Additionally, many companies have specific marketing techniques or business methods, including program plans, that a trade secret agreement can protect.

The effort and cost to have a comprehensive trade secret agreement prepared and signed by employees, contractors, and consultants is relatively minimal compared to the costs and losses that such an agreement can prevent or minimize.

The above definition is inducement of a breach of a duty to maintain secrecy, which means its the requirement that the agency or company have clear information concerning protective trade secrets through clearly written contractual obligations.

Why you need employees, contractors and consultants to sign trade secret agreements

An agency or company may be questioning whether trade secret agreements are really necessary. To that end, it might be worthwhile to consider a 2009 survey conducted by the Ponemon Institute, a data protection research group.

The 2009 survey found that employers can expect that 60% of all departing employees will download and take the company’s data with them without authorization. The survey found that the confidential data taken usually consisted of email lists, competitive business information, customer lists, employee records, and company financial information.

A 2013 follow-up study by the same Institute found that the ubiquity of employees bringing their own devices (laptops, jump drives, etc.) into the workplace exacerbated the problem of insiders purloining customer data and trade secrets before leaving a company’s employ. Oftentimes the greatest risk in these situations came from the employees or independent contractors who the company allowed access to critical applications and data.