The Defend Trade Secrets Act of 2016: The Employer’s Perspective And The Employee’s Perspective

Written by: Trent A. Echard

On May 11, 2016, President Obama signed the Defend Trade Secrets Act of 2016 (the “DTSA”) into law. This law creates a new procedure that private citizens can use to protect their intellectual property rights. In exceptional circumstances, the owner of a trade secret can apply to a federal court ex parte (without the other person present) and obtain an order to seize trade secret materials that were allegedly misappropriated.

This article provides an overview of the DTSA, some of the requirements for an ex parte seizure application, and the rights that each party has when a seizure order is sought.

BACKGROUND

The term “trade secret” is defined by various statutes, and the definition is quite lengthy. In very general terms, a “trade secret” is usually defined to include information that has economic value to a person or a company because it is not known to other people.

In 2004, Pennsylvania enacted a Uniform Trade Secrets Act (“PUTSA”). Before the PUTSA was enacted, Pennsylvania trade secrets law was embodied in court decisions. The PUTSA provides a private cause of action under state statute for ‘misappropriation’ of trade secrets. See 12. Pa. C.S. § 5301, et seq. Like the term, ‘trade secret,’ the word ‘misappropriation’ is also defined by statute. In a very general sense, ‘misappropriation’ usually means to acquire a trade secret in an improper manner. The person who is accused of taking a trade secret is sometimes called a ‘misappropriator.’ Until recently, there was no federal statute providing a private cause of action for misappropriation of trade secrets.

Effective May 11, 2016, the DTSA provides a private federal cause of action for misappropriation “if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” The DTSA specifically states that it does not preempt any other provision of law.

The DTSA provides for three main potential remedies: (1) money damages; (2) an injunction; and (3) ex parte seizure. The statute of limitations under the DTSA is three years from the date after the misappropriation is discovered, or by the exercise or reasonable diligence should have been discovered.

The text of the PUTSA and the DTSA is very similar. The largest difference between the PUTSA and the DTSA is that the federal law provides a new ex parte seizure procedure, which is described below. Below, this article will describe the provisions of the DTSA. Then, it will address how the new ex parte seizure provisions can affect trade secret owners and people accused of misappropriating trade secrets.

DAMAGES UNDER THE DTSA

With respect to money damages under the DTSA, a party may be awarded: damages for actual loss caused by the misappropriation of the trade secret and damages for any unjust enrichment caused by the misappropriation of the trade secret that is not addressed in computing damages for actual loss. In lieu of damages measured by any other methods, the owner of the trade secrets may be entitled to damages measured by a reasonable royalty for the misappropriator’s unauthorized disclosure or use of the trade secret.

The DTSA also states that if the trade secret is willfully and maliciously misappropriated, the owner of the trade secret may seek: (i) exemplary damages in an amount not more than 2 times the amount of the damages awarded (the amounts in the above paragraph); and (ii) attorneys’ fees.

The defendant to a DTSA claim has potential remedies as well. A defendant may be awarded reasonable attorney’s fees, if the defendant shows that the plaintiff’s claim of misappropriation was made in bad faith.

INJUNCTIONS UNDER THE DTSA

An owner of trade secrets may also seek an injunction to prevent actual or threatened misappropriation within the scope of the DTSA. The injunction order must be on terms that the court deems reasonable. In this regard, the DTSA allows a court to place limitations on an alleged misappropriator’s employment. As a notable difference from the PUTSA, the DTSA expressly states that the alleged misappropriator cannot be prevented from entering an employment relationship.

Additionally, the court may require steps to be taken to protect the trade secret. In exceptional circumstances, the court may also order that the trade secret only continue to be used upon payment of a reasonable royalty and for a certain period of time.

A court may award attorneys’ fees on a showing that a motion to terminate an injunction is made (by the plaintiff) or that it was opposed (by the defendant) in bad faith.

EX PARTE SEIZURE ORDERS UNDER THE DTSA

In extraordinary circumstances, a party may apply to the federal court ex parte (without the other person present)for seizure of the property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the lawsuit under the DTSA.

To obtain the initial seizure order, the DTSA requires a party claiming trade secret misappropriation to file an affidavit or a verified complaint (i.e., sworn under oath). Under the DTSA, there are several specific requirements that an applicant must meet when making an application for an ex parte seizure order. For the purposes of this article, suffice it to say that the application must be quite detailed with respect to the alleged ownership of the trade secret, the alleged misappropriation, the reasons that an ex parte seizure order is necessary, and the reasons that no remedy beside ex parte seizure would be adequate.

Generally, if a seizure order is granted, the court will enter a detailed order that describes the reasons for its findings and provides instructions to law enforcement officials for carrying out the seizure. The court will require the applicant to provide security that is sufficient to pay for the damages that may result if the seizure (or attempted seizure) was wrongful or excessive. The court will also set a date for a hearing at the “earliest possible time,” but no later than 7 days after the order has issued – unless the party against whom the order was issued (and any others who are harmed) consent to a later date for a hearing. The court will take custody of the materials seized and secure them from the parties in the lawsuit. The court will then hold a hearing to determine if its seizure order will be dissolved or be modified.

According to the DTSA, the court’s order should minimize the impact on the business of the person from whom the alleged trade secrets are being seized. Additionally, a person who suffers damage by reason of a wrongful or excessive seizure has a cause of action against the applicant of an order for a seizure. The person may seek damages for lost profits, cost of materials, loss of good will, and punitive damages in instances where the seizure was sought in bad faith, and, unless the court finds extenuating circumstances, to recover a reasonable attorney’s fee. The security posted with the court under the DTSA does not limit the recovery of third parties for damages.

CONCLUSION

Trade Secret Owner’s Perspective

The Defend Trade Secrets Act of 2016 creates a new procedure for ex parte seizure hearings. Trade secret owners should be aware of the new tools available to protect their intellectual property rights under the DTSA. To apply for an ex parte seizure, a trade secret owner must file a detailed and comprehensive application and be prepared to post the required security with the court. Importantly, the application requires that the trade secret owner “has not publicized the requested seizure.” This means that if you are thinking about requesting an ex parte seizure order, you should consult a lawyer promptly. A disclosure to other people may jeopardize your rights to seek a seizure order. The trade secrets owner should also be aware that the DTSA provides for the seized information to be protected from further disclosure pending the hearing before the court.

Defense and Third Party (New Employer) Perspective

The ex parte seizure hearing can appear intimidating. The DTSA has several built-in rights for those affected by the procedure. People who are affected by an ex parte seizure order can include former employees, new employers, and others who have access to information that is allegedly a trade secret.

All of these people should know their rights under the DTSA’s ex parte hearing provision. These may include:

If you received a seizure order, you will not have much time to respond. You should consider consulting an attorney promptly to discuss your rights and options.

A copy of the Defend Trade Secrets Act of 2016 is available here.

If you have a question about the Defend Trade Secrets Act of 2016, please contact Trent Echard at techard@smgglaw.com or at (412) 281-5423. Trent is a shareholder and a registered patent attorney at Strassburger McKenna Gutnick & Gefsky in Pittsburgh. This article is provided for informational purposes only. Nothing in this article creates an attorney client relationship.