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Government Other Voices: Trade Secrets

Other Voices: Trade Secrets

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On May 11, President Barack Obama signed the Defend Trade Secrets Act of 2016 (the DTSA) into law. Although the Oval Office signing ceremony lasted only four minutes, the law itself may have far more impact than the lack of fanfare may suggest.

Before the DTSA, claims for trade secret misappropriation under civil law were required to be brought in the state court of proper jurisdiction. The new law provides a federal court cause of action for claims of trade secret misappropriation, provided that the trade secrets relate to any “product or service used in, or intended for use in, interstate or foreign commerce.” The statute covers virtually every aspect of commerce in the United States.

THE HISTORY

At its core, the DTSA is essentially a codification of the Uniform Trade Secrets Act (UTSA), which was and is a model statute designed to bring uniformity in trade secret law across the United States. The UTSA was first drafted in 1979 and amended to its current form in 1985. To date, the District of Columbia and every state except New York and Massachusetts has adopted some form of the UTSA.

Sen. Orrin Hatch (R-Utah) introduced the DTSA on July 29, 2015, as a bill to codify the UTSA and to create a federal civil cause of action for trade secret theft. An additional purpose of the bill was to ensure that as technology advances, the definition of “trade secrets” under the federal law is flexible enough to protect electronically stored data, computer programs and algorithms. Astonishingly, the DTSA had 65 Senate co-sponsors and 164 House co-sponsors and passed both houses of Congress by a combined vote of 497-2.

By far the most interesting of the president’s comments during the signing ceremony was reference to the fact that the members of Congress who worked on the bill sought input from the White House Trade Representative and the Patent Office to formulate the bill. This comment, when viewed against the backdrop of eroding protection of patents, shows an increasing desire by companies, with the listening ears of legislators, to keep their technology secret, as opposed to disclosing it to the public in exchange for the ever-more-tenuous limited monopoly granted by an issued patent.

The result is some additional teeth in the original Uniform Trade Secrets Act, which are manifested primarily in the form of the seizure provision and the relative ease of securing attorneys’ fees and exemplary damages, as discussed below.

KEY PROVISIONS

A federal cause of action, regardless of residence: First and foremost, the DTSA creates a federal civil cause of action for trade secret misappropriation, which means that a Texas business may sue another Texan (business or individual) in federal court without having to show diversity of citizenship between parties. A business seeking to protect its trade secrets is not precluded from adding state law claims under the Texas Uniform Trade Secrets Act (TUTSA) of 2013 when suing in federal court under the DTSA.

Ex Parte Seizure: One of the most interesting provisions of the DTSA is the inclusion of ex parte seizure provisions for violations of the act. Obtaining a seizure order from a federal judge will only happen in extraordinary circumstances, and even then, a seizure order is discretionary. Ex parte is Latin meaning “by one side,” and in such a hearing, only one side of an issue appears before a judge.

To obtain a seizure order, an aggrieved party must convince a federal judge that other relief is inadequate because the opposing party would evade or avoid the judgment, that the harm to the applicant for the seizure is immediate and irreparable, and that the harm to the applicant outweighs the harm to legitimate interests of the target of the seizure or third parties.

In addition to the hurdles mentioned above, the applicant must show that the information to be protected by the seizure is, in fact, a trade secret, and that the trade secret was either misappropriated or was obtained by improper means. Additionally, the property to be seized either has to contain the trade secret (an example is a computer or computers) or, because of the misappropriation, was made by use of the trade secret, and the trade secret was in the possession of the target of the seizure. Finally, the applicant for seizure cannot have publicized the requested seizure prior to the application or execution of the seizure.

Once a seizure order has been issued, the court must hold a hearing within seven days, and the applicant must prove the findings of fact and conclusions of law of the seizure order at the hearing – in other words, once you have seized the goods, you must prove to the court that you were right in obtaining the order in the first place. In the case of a wrongful seizure, the applicant is subject to penalties as set forth in the Lanham Act.

So while a seizure is possible under the DTSA, it is also a risky proposition. It is imperative that the business claiming misappropriation have a very high level of confidence that the seizure is justified.

Remedies: The DTSA is very similar to the Texas Uniform Trade Secrets Act. There are, however, some slight variations in the definitions of both “trade secrets” and what constitutes “misappropriation.” The key differences relate to the ability of the prevailing party to obtain attorneys’ fees and exemplary damages. While both the DTSA and the TUTSA provide for exemplary damages and attorneys’ fees when the misappropriation was “willful and malicious,” the DTSA allows for recovery of exemplary damages when the aggrieved party proves its case by a “preponderance” standard, as opposed to the much more difficult “clear and convincing” standard of proof.

Whistleblower Provisions: Another key aspect of the DTSA is the requirement that a party claiming misappropriation by an employee, subcontractor or ex-employee must show that the party accused of misappropriation had a notice of immunity provision for whistleblowers in a contract with the accused. While an employer may cross-reference policy documents in its agreements with employees, or contain the provision in other policy memoranda or documents, failure to include the immunity notice precludes recovery of attorneys’ fees and exemplary damages. This provision applies to all agreements entered into after May 11, 2016 – the effective date of the DTSA.

The DTSA is the latest step in a continuing sea-change of law in favor of a nationalized, central body of law for our increasingly technology-driven society. By creating a federal cause of action with seizures, easier recovery of attorney fees and injunctions, Congress is trying to create a more uniform playing field for companies that create and maintain trade secrets.

While the law is still in its infancy, there is no doubt that, as time passes, more companies will take advantage of this new avenue to protect their intellectual property. This new law has more teeth than any existing state law based on the Uniform Trade Secrets Act and it carries with it the approval of almost every member of Congress from every state.

In short, the law is not going away, and it may become the touchstone for all trade secret cases in the future.

18 U.S.C. § 1836(b)(1)

2 See https://www.whitehouse.gov/the-press-office/2016/05/11/remarks-president-signing-s-1890-defend-trade-secrets-act-2016

Decker A. Cammack is a member of Whitaker, Chalk, Swindle & Schwarts PLLC, in Fort Worth. He has been honored as a Texas Super Lawyer for intellectual property litigation (2014-2016) and recognized as one of the Best Lawyers in America in the area of litigation-patent (2014-2017). His practice focuses primarily in the area of intellectual property litigation in federal and state court. He is a member of the Leadership Fort Worth Class of 2017 and can be reached at dcammack@whitakerchalk.com.


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