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The Defend Trade Secrets Act: Federalizing Trade Secret Law

May 12, 2016

by Alan Boynton, Jr.

On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act (DTSA).  The United States House of Representatives voted 410-2 to approve the legislation following the Senate’s earlier unanimous approval of the bill.  This rare display of legislative and executive cooperation and goodwill is, on its own, quite impressive. Along the way, a couple of key compromises were required to gain consensus. Putting those compromises aside for the moment, what ultimately emerged is a law that creates a private, Federal cause of action to enforce trade secrets, including establishing procedures for obtaining civil seizure orders, injunctive relief, and damages for trade secret misappropriation and unjust enrichment.

The law is effective immediately and applies to any theft of trade secrets that takes place after the date of enactment.  The new law defines trade secret misappropriation as either (a) acquiring a trade secret by a person who knows or should know the trade secret was acquired improperly or (b) disclosing or using another’s trade secret without consent if the person disclosing it improperly acquired that knowledge.  Those improper measures are defined to include theft, bribery, misrepresentation, breach of a duty to maintain secrecy, and espionage, but specifically excludes information learned by reverse engineering and independent derivation.

The new law might be expected to have some of its greatest effect in how employers can deal with rogue ex-employees.  The departure of employees for competitors is not an unusual occurrence in modern business. Also fairly common is the assertion that those employees took with them the employer’s intellectual property in the form of technical data, product specifications, customer lists, spreadsheets and (even more so today) gigabytes of electronic business data. Faced with such misconduct, because trade secret misappropriation has been considered a tort under state law, employers have traditionally been compelled to seek relief in state court, often in employee friendly jurisdictions and courts. In recent years, most states have adopted variations of the Uniform Trade Secrets Law.  While that leveled the playing field considerably, some significant variations still exist from state to state. Through the DTSA, Congress has decided to largely eliminate those distinctions. Moreover, and critically, it has shifted the venue for handling most post-employment matters to federal district courts.

The DTSA technically applies only to trade secrets related to products or services used in interstate or foreign commerce. In today’s world, finding products that don’t qualify under this standard may be difficult. Once that threshold is met, and federal jurisdiction is established on the trade secret claim, all related state-law claims can follow the trade secret claim into federal court, now allowing the injured party to pursue claims for breaches of non-competition, non-solicitation and confidentiality agreements alongside the trade secret ones in a venue which might be less employee-friendly than a local state court where the defendant may reside.

One final observation: the DTSA is being inserted into the federal crimes code. Perhaps it is appropriate, then, that a new weapon granted to employers in the DTSA but not found in the Uniform Trade Secrets Acts in most states is the possibility of ex parte seizure of the alleged misappropriated trade secrets. The use of this powerful weapon by federal courts is supposed to be limited to “extraordinary circumstances” (the addition of this limitation was one of the compromises that led to overwhelming approval of the bill) but it could provide quite a strong tool.