Protecting Critical Company Assets – Part I: DTSA Basics for Employers

On May 11, 2016, President Obama signed the Defend Trade Secrets Act of 2016 (DTSA) which amends the Economic Espionage Act of 1996 (EEA) (18 U.S.C. § 1831, et. seq.). The EEA has allowed federal prosecutors to bring criminal charges for the theft of trade secrets, but until the DTSA, there was no federal civil claim for damages or equitable relief. The DTSA addresses this problem and grants private companies (and other trade secret owners) the right to bring a civil suit to protect their trade secrets and recover damages, so long as the trade secret relates to a product or service that is used in or intended to be used in interstate or foreign commerce.[1]

Trade secrets are an important form of intellectual property, but unlike patents, copyrights and trademarks, they are not registered with the federal government. A “trade secret” can be any form of business or scientific information that derives independent value from not being generally known or readily accessible to another through proper means so long as the owner has taken reasonable measures to keep it secret.[2] The DTSA modifies the definition of “trade secret” previously used in the EEA and in most state statutes under the Uniform Trade Secrets Act (UTSA). Under the DTSA, a trade secret owner is required to show that the protected information is not generally known or readily accessible to “another person who can obtain economic value from the disclosure or use of the information.” The prior definition in the EEA was a broader proscription of “the public” at large, as opposed to a person who can use it and obtain economic value. Whether this definitional change will have any real significance in future cases is hard to predict at this point, but it will require the owner to identify the “secret” and establish clearly the economic value of the specified information.

In many respects, the DTSA is similar to the provisions of the Virginia Uniform Trade Secrets Act (VUTSA) and affords very similar remedies (e.g., injunctive relief to prevent actual or threatened misappropriation, damages, exemplary damages and attorneys’ fees for willful and malicious misappropriation).[3] On the other hand, the DTSA introduces several new features that could be significant considerations as determinations are made as to what claims to pursue.

Seizure Procedure. First, the DTSA provides a unique remedy for a trade secret owner, but it will only be available in “extraordinary” circumstances where there is a demonstrable risk that the trade secret is about to be disseminated or destroyed. While the VUTSA allows a court to issue a temporary injunction, the DTSA now permits an owner to institute an ex parte proceeding (one where the other side is not there) to establish its need to send in law enforcement personnel to seize the “trade secret” to prevent its propagation or dissemination.[4] While use of this civil seizure remedy will not likely apply in the routine case, where there is an imminent risk of destruction of the material or other pertinent factors, employers will now have the opportunity to convince a federal judge shortly after filing the lawsuit that law enforcement personnel should be sent to seize a computer containing the data or other property from another company’s office or private residence. The details of how this process will work, its limitations and the risks and consequences of misuse will be addressed in a subsequent article.

Federal Jurisdiction. By allowing trade secret claims to be filed directly in federal court without having to prove diversity of citizenship, the DTSA also gives the trade secret owner the ability to more easily engage in multi-state and international discovery. This can be a real benefit when key witnesses or parties live and/or work in another state. Depositions and document production often must happen on an expedited basis in these cases.

Injunctive Relief. While the DTSA provides the new civil seizure remedy for owners, the DTSA limits the types of injunctive relief that a federal court may issue against a former employee. Under the DTSA, the federal court cannot stop a person from going to work for a competitor. Instead, the injunction can only place restrictions on what that individual can do for the competitor, and those restrictions will need to be based on evidence of threatened misappropriation and “not merely based on information the person knows.”[5] Further, the injunction issued by the federal court cannot conflict with applicable state law that prohibits restraints on the practice of a lawful profession, trade or business. This latter provision is a nod to states (like California) that have statutes prohibiting the use of restrictive covenants or non-competes. In Virginia, there are currently no statutory restrictions that will trigger this provision.

Whistleblower Protection. Other new features of the DTSA are its immunity and anti-retaliation provisions. These provisions are designed to protect whistleblowers who disclose trade secrets in confidence to federal or state government agencies or an attorney when reporting suspected unlawful conduct,[6] or make confidential disclosures to their own attorneys or court officials in connection with anti-retaliation lawsuits.[7] The DTSA provides that such persons are immune from criminal and civil liability if the disclosure is made in confidence and “solely for” the purpose of reporting or investigating a suspected violation of law. To ensure this provision is enforced, the DTSA imposes a new notice obligation on employers which will be the subject of our next article in this series.[8]

While new whistleblower protection provisions are provided, the DTSA does not authorize unlawful actions, and will not be construed to limit liability for an act that is otherwise prohibited by law, such as gaining access by unauthorized means.[9] So, a person who trespasses or steals information, or exceeds his/her authorized level of access to computer systems, may still be held accountable for their improper and unauthorized conduct.

No Preemption. The DTSA does not preempt (replace or override) Virginia’s UTSA.[10] The question of whether to bring a claim under both statutes or only one will need to be decided in each case based on its unique circumstances.

International Application. The DTSA also contains a number of provisions that are designed to combat international economic espionage, including a provision that makes it clear that conduct occurring outside the United States is covered if the bad actor is a U.S. citizen, a permanent resident alien of the United States, or is a business entity organized under the laws of the United States, including states and territories.[11]

Concluding Points

In short, passage of the DTSA is a positive development and provides a new avenue by which trade secret owners can combat misappropriation. It is too early to tell how the federal courts will respond to some of the issues that will arise, and what unintended consequences will inevitably flow from this new federal legislation. For certain, employers must review their existing employment agreements and policies and determine what changes may be required. These issues will be addressed in our next article in this series. Stay tuned to our next articles.

If you have questions about the DTSA, the Virginia Uniform Trade Secrets Act or other concerns regarding your rights as an employer to protect your critical company assets, please contact David Paxton or any other member of the Gentry Locke Employment Team.

[1] 18 U.S.C. § 1836(b). Notably, on May 27, 2016, the Council of the European Union announced that it had adopted a new Directive setting out the rules for the protection of trade secrets and confidential information of EU companies. This Directive had been in the works for two years. Member states now have two years to incorporate the provisions of this EU Directive into their domestic laws. A comparison of the DTSA to the EU Directive will be the subject of a subsequent article in this series.

[2] 18 U.S.C. § 1839(3)(B).

[3] A detailed comparison of the DTSA and the VUTSA will be provided in a subsequent article in this series.

[4] 18 U.S.C. § 1836(b)(2)

[5] 18 U.S.C. § 1836(b)(3)(A). Some commentators see this provision of the DTSA as a repudiation of the “inevitable disclosure” doctrine and worry that federal courts may become unwilling to enforce “reasonable” non-compete agreements that would prohibit employment with a direct competitor for a designated period. These issues will be addressed in future articles.

[6] 18 U.S.C. § 1833(b)(1)

[7] 18 U.S.C. § 1833(b)(2)

[8] 18 U.S.C. § 1833(b)(3)

[9] 18 U.S.C. § 1833(b)(5). This issue of when an employee can access, take and disclose confidential information to the government for the purpose of reporting a violation of law arises in many contexts and will be addressed in subsequent articles. See US ex rel Cieszyski v. Life Watch Servs. Inc., 2016 U.S. Dist. LEXIS 60993 (N.D. Ill. May 9, 2016) (Dismissed claim against employee who disclosed protected patient information to the government. The employee had no right to access this information as part of his job but the disclosure was made as part of a False Claims Act investigation).

[10] 18 U.S.C. § 1833(b)(5)

[11] These provisions will be addressed in the article analyzing the EU Directive in the next month.

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These articles are provided for general informational purposes only and are marketing publications of Gentry Locke. They do not constitute legal advice or a legal opinion on any specific facts or circumstances. You are urged to consult your own lawyer concerning your situation and specific legal questions you may have.