Congress Federalizes Trade Secret Protection

Nicholas Fortuna, April 28, 2016

This week, Congress passed the Defend Trade Secrets Act (DTSA) which is an expansion of the Economic Espionage Act. The legislation had wide bipartisan support and the President is expected to sign it as soon as it reaches his desk. The law effectively federalizes trade secrets law and allows companies to bring civil actions in federal court.

Up until now, trade secrets were protected under state law. All states except New York and Massachusetts adopted some form of the Uniform Law Commission’s Uniform Trade Secrets Act. New York and Massachusetts rely on common law for trade secret protection.

Trade secrets typically include formulas, patterns, compilations, programs, devices, plans, methods, techniques or processes. To be protected a trade secret, certain common elements must exist: information that is not publically known, reasonable measures have been taken to protect the information, and there is economic value in keeping such information secret. Examples of trade secrets include marketing and business plans, designs, proprietary computer programs, and manufacturing information.

Trade secret protection secures business resources and promotes investment in intellectual assets that are not patentable or copyrightable, but nevertheless have significant economic value in remaining secret. The legal protection of trade secrets is intended to shelter commercial intellectual investment from wrongful use by others.

The DTSA will not replace state trade secrets law. The bill expressly states that it does not preempt existing state law. Similar to trademark law and the federal Lanham Act, DTSA will coexist with existing state law. Cases will now involve a mix of federal and state law claims and most likely will predominately be filed in federal court as opposed to state court.

A significant difference between state and federal trade secret law is that the DTSA permits courts to order law enforcement officials to seize any property “necessary to prevent the propagation or dissemination of the trade secret.” Such orders may be obtained ex parte and are only to be used in “extraordinary circumstances.” The statute requires the party to show “with particularity” what property is to be seized, as well as proof that the target of the seizure order has “actual possession” of the trade secret or property. Targets of a seizure order, under the statute, have the right to recover damages if the seizure was abusive.

Other remedies available under DTSA are similar to those provided under the Uniform Trade Secret Act adopted to varying degrees by most states. They include an injunction to prevent actual or threatened misappropriation; damages for actual loss, unjust enrichment, and/or a reasonable royalty for the unauthorized disclosure or use of the trade secret. In the event of willful and malicious misappropriation, exemplary damages up to twice the amount of other damages may be awarded.

In actions brought for misappropriation in bad faith, the court may award attorneys’ fees. The statute allows a target to prove bad faith by circumstantial evidence. The attorney fee provision was inserted to discourage baseless claims.

The passage of DTSA is the most significant expansion of federal protection of intellectual property since enactment of the Lanham Act in 1946. The DTSA was passed in order to provide uniformity of protection for trade secrets across the country. Businesses operating in multiple states had to contend with different protections afforded their trade secrets, depending on where the issue arose. The goal is that DTSA will eliminate this disparity going forward.


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