Trade Secrets are now Protected by Federal Law

Trade Secrets are now Protected by Federal Law: The Defend Trade Secrets Act of 2016

Until recently, trade secret misappropriation was mostly a matter of state law and, in many cases, litigants seeking relief were limited to state courts. But in 2016, Congress passed the Defend Trade Secrets Act (we’ll call it the DTSA for brevity), creating a federal private right of action for trade secret misappropriation that can be brought in state and federal courts. It leaves state trade secret laws undisturbed, while providing for a nationally uniform cause of action. Here are a few key aspects of the DTSA:

The DTSA’s Definition of Trade Secrets is Similar to Many State Laws

The DTSA defines a trade secret as “all forms and types of financial, business, scientific, technical, economic, or engineering information” if the owner “has taken reasonable measures to keep such information secret” and “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.”

This is similar to the Uniform Trade Secrets Act, which many states have enacted (sometimes with their own changes). But some states have additional requirements, such as a requirement that the trade secrets be in continuous use.

The new federal trade secret law, however, has an additional requirement that state trade secret laws do not: the trade secret must be used in, or intended to be used in, interstate or foreign commerce. So trade secret litigation between two inherently local businesses might not give rise to a DTSA claim.

The DTSA Does Not Pre-empt State Law

Much like the Lanham Act, the DTSA does not preempt or displace state law and can be litigated in either federal or state court right alongside a trade secret misappropriation claim under state law. This means that plaintiffs (or would-be defendants who preemptively file a declaratory judgment action) now have the strategic benefit of choosing their forum.

A plaintiff who has a strong preference for state court, however, should carefully consider omitting the federal claim: once a federal claim is pled, the case is subject to removal to federal court by a defendant.

A would-be defendant who has been threatened with a trade secret misappropriation should consider their strategic options: if the defendant has a preference for federal court, it should consider a preemptive move by filing a declaratory judgment action that seeks a declaration under both state and federal law.

The DTSA is Plaintiff Friendly

The DTSA, unlike many state laws, does not require the plaintiff to identify the trade secrets with particularity prior to commencing discovery. This gives plaintiffs an informational advantage and allows them to limit disclosure of details about their trade secrets in a public forum.

It also has one unique remedy: a plaintiff can, under extraordinary circumstances, obtain an ex parte seizure order to prevent the use or dissemination of the trade secret—that is, without the defendant having an opportunity to be heard. But there are strict requirements:

  • The relief available for temporary restraining orders and preliminary injunctions under Rule 65, Federal Rules of Civil Procedure, must be inadequate.
  • The plaintiff must show immediate and irreparable injury if seizure does not occur.
  • The harm to the plaintiff from denying seizure must outweigh the harm to the defendant’s legitimate interests from granting it.
  • The plaintiff must demonstrate a likelihood of success on the merits.
  • The defendant must have actual possession of the trade secret.
  • The plaintiff must describe the matter to be seized with particularity.
  • The plaintiff must show that the defendant would destroy, move, hide, or otherwise make the trade secrets inaccessible if given notice.
  • The plaintiff must not have publicized the requested seizure.
The DTSA has Similar Remedies to Many State Laws

A successful plaintiff can recover actual damages and any unjust enrichment not adequately compensated for by actual damages. Alternatively, they can request a reasonable royalty for use of the trade secret. In cases of willful or malicious misappropriation, plaintiffs can collect exemplary damages (not more than double compensatory damages) and reasonable attorneys’ fees.

They can also seek injunctive relief to prevent actual or threatened misappropriation, but the DTSA specifically provides that injunctive relief cannot conflict with state law. That is important in California, where state law prohibits noncompetition agreements and other restraints on the right to engage in an occupation or profession.

DTSA Does not Recognize the Inevitable Disclosure Doctrine

Even among states that have adopted the UTSA, some states have judicially adopted the inevitable disclosure doctrine, which allows a trade secret owner to prevent a former employee from working for a competitor if there is a risk the trade secrets could be disclosed. California courts, on the other hand, have rejected the inevitable disclosure doctrine, citing the same code provision that prohibits restraints on the right to engage in an occupation or profession.

Rather than leave the question to the courts like many states, the DTSA expressly rejects the inevitable disclosure doctrine.

The DSTA Statute of Limitations is Three Years

The statute of limitations for DTSA claims is three years from the date the misappropriation was discovered or should have been discovered by the exercise of reasonable diligence, which is the same as California’s statute of limitations for trade secret misappropriation claims.

The DTSA has Whistleblower Protections

The DTSA protects those who provide trade secret information to government officials or an attorney solely for the purpose of reporting a suspected violation of the law.

It also creates a notice requirement: employers must give notice of these protections to their employees. If the employer does not, they are precluded from seeking exemplary damages or attorneys’ fees if they are successful in litigation against the employee.

If you are a business with trade secrets, you should speak with an attorney experienced in trade secret litigation—before a dispute arises—to ensure you effectively protect your trade secrets under federal and state law. You should also do so at the first sign of a dispute: how you act could have major consequences in litigation. If you are interested in consulting with Bona Law about trade secrets or trade secret misappropriation, please contact us.