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Defend Trade Secrets Act of 2016: A Polsinelli Update Series


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Just last Wednesday, President Obama signed into law a major revision to U.S. trade secrets law. Entitled the Defend Trade Secrets Act of 2016 (“DTSA”), the legislation creates, for the first time, a Federal private, civil cause of action to protect trade secrets. As an additional body of protection over and beyond current state law, the legislation provides for nationwide substantive and procedural consistency and enhances the basic remedies of injunctive relief and damages. Most significantly, for the first time, it will provide for ex parte civil seizure of stolen trade secrets.

The following provisions of the new law will be discussed, along with implications for labor and employment practitioners:

-Details of the new law’s major provisions and the differences from and advantages over current state law;
-Requirements for and limitations on obtaining ex parte seizure;
-Enhanced judicial protections from disclosure in litigation;
-New protections for whistleblowers who disclose trade secrets to governmental authorities or courts;
-New requirements for employment agreements and policy documents containing confidentiality provisions

Published in: Law
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Defend Trade Secrets Act of 2016: A Polsinelli Update Series

  1. 1. Defend Trade Secrets Act of 2016 Substance and Strategies Q. Todd Dickinson, Stephen E. Fox © Polsinelli 2016 1
  2. 2. Agenda  Background – Uniform Trade Secrets Act (UTSA) – Economic Espionage Act (EEA)  Defend Trade Secrets Act of 2016 – Background and rationale – Similarities to UTSA – Basic statutory provisions – Employment law issues  Strategic Considerations © Polsinelli 2016 2
  3. 3. Basics “Trade Secret”  Form of intellectual property (different from patents, copyright and trademarks)  Focus is on proprietary, commercially valuable, information  Examples: – Confidential manufacturing processes – Formulae – Customer lists – Business plans/strategies – Technologies not protectable by patent – Employee records • M.C. Dean v. City of Miami Beach, (SDFL) (5/16/15) © Polsinelli 2016 3
  4. 4. UTSA (1985)  Traditionally, trade secrets were a matter for state law before Uniform Trade Secrets Act – 47 states and 3 others (DC, PR, VI) have adopted • Not NY, MA (pending), NC (but very similar) – ecrets/utsa_finals_85.pdf – Variation from state to state • Modest, but sometimes case dispositive: burden of proof; innocent acquisition; scope of information protectable; “reasonable” measures to protect, etc. © Polsinelli 2016 4
  5. 5. UTSA General Provisions  Provides definitions of “trade secret,” “misappropriation,” and “improper means”  Statute of limitations is 3 years  Authorizes preservation of secrecy during legal action (i.e., gag and protective orders)  Provides remedies of injunction, damages and attorneys’ fees © Polsinelli 2016 5
  6. 6. Economic Espionage Act of 1996  First federal trade secret legislation – Criminalizes trade secret theft (designed to address egregious cases of trade secrect theft by foreign agents) – DTSA is technically an amendent to EEA  “Trade secret” and “misappropriation” definitions similar to UTSA  Enforced by Dept. of Justice: – No civil cause of action, except by Attorney General – Usually brought by local U.S. Attorney, but requires sign-off by Asst. AG for National Security at Main DOJ – Often difficult to generate USAtty interest © Polsinelli 2016 6
  7. 7. Economic Espionage Act of 1996  §1831: Economic Espionage – Misappropriation or conspiracy to misappropriate trade secrets, intending or knowing that the theft will benefit a foreign power – Penalties: up to $5M per offense; imprisonment up to 15 years for individuals, and fines of up to $10M for organizations © Polsinelli 2016 7
  8. 8. Economic Espionage Act of 1996  §1832: Theft of Trade Secret – Misappropriated information related to or included in a product or service, with knowledge or intent to injure the trade secret owner – Penalties: imprisonment for up to 10 years for individuals (no fines), and fines of up to $5M for organizations – Requires forfeiture of property used in the crime – Extraterritorial where involves U.S. citizen or corporation © Polsinelli 2016 8
  9. 9. Economic Espionage Act of 1996  DOJ Prosecution Policy – Not intended to criminalize every theft of trade secrets, especially where civil state remedies exist – However, availability of civil remedy should not be only factor, since such remedies usually exist in states – Discretionary factors: • Scope of the criminal activity, including evidence of involvement by a foreign instrumentality • Degree of economic injury to the trade secret owner • Type of trade secrets misappropriated • Effectiveness of available civil remedies • Potential deterrent value of the prosecution © Polsinelli 2016 9
  10. 10. Defend Trade Secrets Act of 2016  Rationale  Belief that US needed to federalize trade secret law  Trade secrets becoming more economically important – Over $3 billion (same as all exports to Asia) – 2.1 million U.S. jobs  Patent protection coming under fire  State-by-state variations increasing  Protection becoming more difficult © Polsinelli 2016 10
  11. 11. Defend Trade Secrets Act of 2016  Rationale  Obama Administration takes note: – Administration Strategy on Mitigating the Theft of U.S. Trade Secrets (February 2013) EC/admin_strategy_on_mitigating_the_theft_of_u.s._tr ade_secrets.pdf – USPTO convenes “Trade Secret Symposium” (Jan 2015) us/organizational-offices/office-policy-and- international-affairs/uspto-trade-secret-symposium © Polsinelli 2016 11
  12. 12. Defend Trade Secrets Act of 2016  Legislation  Introduced originally in 113th Congress; passage stalls in House  Some academic criticism (concerns are increase in length and cost of litigation)  114th Congress reintroduced with broad, bipartisan support (Hatch (R-UT)/Coons (D-DE) • Passes Senate (unanimously) 4/4/16 • Passes House (410–2) 4/27/2016 © Polsinelli 2016 12
  13. 13. Defend Trade Secrets Act of 2016  Legislation  President Obama signs May 11, 2016  Technically an amendment to EEA  Text and background: bill/1890  Legislative history: – S. Rept. 114-220; – H. Rept. 114-529 © Polsinelli 2016 13
  14. 14. Defend Trade Secrets Act of 2016 © Polsinelli 2016 14
  15. 15. DTSA: Outline of Provisions  Forbes: “The New DTSA is the Biggest IP Development in Years”  Federal jurisdiction of theft of trade secrets in interstate or international commerce  Civil remedies for trade secret misappropriation – Injunction – Reasonable royalties – Damages  New remedy—civil seizure © Polsinelli 2016 15
  16. 16. DTSA: Outline of Provisions Employment Law issues:  No injunction to prevent new employment  Injunction aimed at new employment must be based on evidence of threatened misappropriation, and not “merely information the person knows”  Safe harbor for “whistleblowers” and “anti- retaliation” disclosure of trade secrets  Whistleblower and retaliation protection must be referenced in employment agreements and NDA’s © Polsinelli 2016 16
  17. 17. UTSA-DTSA Similarities  DTSA definition of “trade secret” is substantially similar to UTSA – Trade secret is “… information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy” UTSA § 1.4/EEA © Polsinelli 2016 17
  18. 18. UTSA-DTSA Similarities  DTSA definition of “misappropriation” is substantially similar to UTSA – (i) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; – (ii) Disclosure or use of a trade secret of another without express or implied consent by a person who: • used improper means to acquire knowledge of the trade secret; or • at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was – derived from or through a person who had utilized improper means to acquire it; – acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or – derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or • before a material change of his [or her] position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake. UTSA § 1.2/DTSA §2(b)(3)(5) © Polsinelli 2016 18
  19. 19. UTSA-DTSA Similarities  DTSA definition of “improper means” is substantially similar to UTSA – … includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to main secrecy, or espionage through electronic or other means UTSA § 1.1/DTSA §2(b)(3)(6) © Polsinelli 2016 19
  20. 20. UTSA-DTSA Similarities Remedies:  Injunction – UTSA § 2(a)/ DTSA §2(a)(3)(A) – Actual/threatened misappropriation may be enjoined • For length of time the trade secret exists • Sufficient time to eliminate any competitive advantage due to misappropriation  Reasonable Royalties – UTSA § 2(b)/DTSA §2(a)(3)(A)(iii) – “Exceptional circumstances” © Polsinelli 2016 20
  21. 21. UTSA-DTSA Similarities Remedies:  Damages – UTSA § 3/DTSA §2(a)(3)(B) – In addition to injunctive relief, may receive damages • Includes the actual loss AND the unjust enrichment caused by misappropriation – “Willful and malicious” behavior results in up to 2 times regular damages §2(a)(3)(c)  Attorney’s Fees – UTSA § 2 (b)/DTSA §2(a)(30(D) – Court may award attorney’s fees to the prevailing party for willful and malicious misappropriation or actions made in bad faith © Polsinelli 2016 21
  22. 22. UTSA-DTSA Similarities Other Provisions:  Preservation of Secrecy—permits sealing and “gag orders” during any legal action concerning the trade secrets  Statute of Limitations—claims may be brought 3 years after the misappropriation is discovered or should have been discovered by the exercise of “reasonable diligence” (UTSA § 6/DTSA §2(a)(d) © Polsinelli 2016 22
  23. 23. Advantages of DTSA  Principal advantage—nationally consistent substantive and procedural law – With USTA state-to-state differences, while minor, can be case- dispositive (e.g., burden of proof; threatened misappropriation, innocent acquisition; scope of information protectable; “reasonable” measures to protect)  Other advantages – Private party civil access to federal courts – More sophisticated judiciary – Remedies enforceable nationwide; nationwide subpoena power – Simpler trans-state procedural issues (e.g., discovery management) – Significant new remedy—civil seizure © Polsinelli 2016 23
  24. 24. No State Law Preemption  DTSA does not preempt state law (including UTSA) – “Nothing in the amendments made by this section shall be construed to . . . preempt any other provision of law.“  Trade secret owners have alternative options to protect their IP – Depending on facts and venue considerations, trade secret owner may decide to: • (1) bring trade secret action in federal court under DTSA (where the trade secret owner could also potentially bring state law claims in federal court) or • (2) bring state law trade secret claims in state court © Polsinelli 2016 24
  25. 25. Jurisdiction and Venue  Jurisdiction – Involves interstate or foreign commerce • DTSA (like trademark law) is grounded in Commerce Clause v. patents/copyrights in Constitution – District courts have original jurisdiction (i.e., federal question 18 USC §1836 (c)) – No diversity required © Polsinelli 2016 25
  26. 26. Jurisdiction and Venue  Extraterritoriality (18 USC §1837) – DTSA applies to conduct occurring outside the United States, if • Offender is a natural person who is a citizen or permanent resident alien of the United States, or an organization organized in United States; or • “an act in furtherance of the offense was committed in the United States” © Polsinelli 2016 26
  27. 27. Jurisdiction and Venue  Venue – Look to general venue statute (28 USC §1391) to determine where lawsuit may be initiated • Defendant’s residence • Where a substantial part of the events or omissions giving rise to the claim occurred, or a substantial part of property that is the subject of the action is situated • Where any defendant is subject to personal jurisdiction • Defendant who is not a US resident may be sued in any judicial district © Polsinelli 2016 27
  28. 28. Remedies – Injunction/Royalties  Injunction – May be pursued to prevent actual or threatened misappropriation – May be granted on such terms as the court “deems reasonable” • Different standard than eBay in patents? – May NOT be sought to prevent changing employers if only taking “merely on information the person knows”.  Reasonable Royalties – Permissible to seek under “exceptional circumstances” where injunction would be inequitable – Royalty period may run only from period of time where use could have been prohibited (i.e., as a secret) © Polsinelli 2016 28
  29. 29. Remedies - Damages  Damages – “Actual loss” caused by the misappropriation – “Unjust enrichment” not addressed in actual loss computation – Reasonable royalty as damages calculation method (“in lieu of other methods”)  Enhancement – “Willfully and maliciously” misappropriated – Not more than 2 times regular damages awarded © Polsinelli 2016 29
  30. 30. Remedies – Attorney’s Fees  Attorney’s fees may be awarded if – Misappropriation claim was made “in bad faith” • “May be established by circumstantial evidence” – Motion to terminate injunction is made or opposed “in bad faith” – Trade secret is “willfully and maliciously misappropriated” – “Reasonable” attorney’s fees may be awarded • Octane Fitness standard? • Costs? © Polsinelli 2016 30
  31. 31. Remedies – Ex Parte Civil Seizure Civil Seizure  New remedy—potentially very powerful  Order may issue “only in extraordinary circumstances”  Limitations – Stringent requirements for issuing – Stringent requirements for elements of order itself © Polsinelli 2016 31
  32. 32. Remedies – Ex Parte Civil Seizure – Application for Seizure Order; DTSA §2(b)(2)(A)(i) – Ex parte application for an order made by made “by affidavit or verified complaint” – May be sought only in “extraordinary circumstances” – Seizure is appropriate only when “necessary to prevent the propagation or dissemination” of the trade secret © Polsinelli 2016 32
  33. 33. Ex Parte Seizure Order  Requirements for issuing order: DTSA §2(b)(2)(A)(ii) – Appropriate when ordinary injunction “would be inadequate” because party would “evade, avoid or otherwise not comply” • Legislative history examples: – Fleeing the country – Planning to disclosure immediately – “Otherwise not amenable” to enforcement – Immediate and irreparable injury – Harm to applicant of denying order … (1) Outweighs harm to “legitimate interests” of ‘Seizee’ (2) Substantially outweighs harm to third parties © Polsinelli 2016 33
  34. 34. Ex Parte Civil Seizure  Applicant must show “likelihood of success” that: – Information is a trade secret – 'Seizee' misappropriated by “improper means” – ‘Seizee’ has “actual possession” of property to be seized – Application describes matter to be seized “with reasonable particularity” and identifies its location – 'Seizee' would otherwise “destroy, move, hide or otherwise make inaccessible to the court” if applicant put ‘Seizee' on notice – Applicant “has not publicized” the requested seizure • “Don’t want to make news” – Leg history • Query—only an “applicant” … what happens if media monitoring court dockets publicizes application? © Polsinelli 2016 34
  35. 35. Ex Parte Civil Seizure  Elements of the Order: DTSA §2(b)(2)(B) – Set forth findings of fact and conclusions of law – Narrowest seizure necessary to achieve purpose • “Minimizes interruption” to business of third parties • “Does not interrupt” legitimate business operations of ‘Seizee‘ “to the extent possible” – Should be combined with another order prohibiting access or copying by either party to “prevent undue damage” until hearing – If court does grant access to either, must comply with court custody requirements – Scope: • Hours of execution • Whether force can be us to “access locked areas” © Polsinelli 2016 35
  36. 36. Ex Parte Civil Seizure  Elements of the Order, cont’ – Set hearing date: “earliest possible time”, but no later than 7 days after order, unless both consent – Post bond: Applicant must provide adequate security for damages for wrongful or wrongfully attempted seizure  Protection from publicity: Court shall take appropriate action to protect ‘Seizee' from publicity about the order of seizure • Query—does this run afoul of First Amendment (i.e., gag order)? © Polsinelli 2016 36
  37. 37. Civil Seizure  Protection of Seized Materials – Court shall take custody and secure from physical and electronic access – If information is on “storage medium”, court shall prohibit connection to Internet until hearing – Confidentially of other unrelated information shall be protected, unless 'Seizee' consents – Special Master may be appointed to protect misappropriated information and return unrelated property (and is bound by NDA) © Polsinelli 2016 37
  38. 38. Civil Seizure  Service of Order – Must be made by federal law enforcement officer (presumably U.S. Marshall, possibly FBI) – State or local agents may also participate – Applicant or agent may NOT participate – Technical expert may be allowed to help facilitate (and is bound by NDA) © Polsinelli 2016 38
  39. 39. Civil Seizure  Seizure Hearing: – Court that issues order shall hold hearing on the date set in order – Burden of proof is on applicant – Dissolution of order permitted on motion any time by 'Seizee' or harmed third party, with notice to applicant – Time limits for discovery may be set to avoid “frustration of purpose of hearing” © Polsinelli 2016 39
  40. 40. Wrongful Seizure and Encryption  Wrongful Seizure – If wrongful or excessive seizure, 'Seizee' has cause of action against applicant – Relief: same as under Lanham Act: 15 U.S.C. §1116(d)(11) • “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 fees” • Posted security doesn’t limit amount of relief  Motion for Encryption – Any person who “claims to have an interest” in the seized material may move for encryption in method of their choice – May be heard ex parte © Polsinelli 2016 40
  41. 41. Whistleblower Protections  DTSA provides safe harbor to whistleblowers who provide trade secrets to government  Whistleblower entitled to civil/criminal immunity for disclosing trade secret so long as purpose of reporting or investigating is a suspected violation of law and is made to: – Whistleblower's attorney – Government – Court-filing under seal  If whistleblower files lawsuit for retaliation against employer based on reporting of a suspected violation of law, whistleblower may also use the trade secret in that anti- retaliation lawsuit © Polsinelli 2016 41
  42. 42. Whistleblower Protections  Employer must provide notice of immunity in any employment contract that governs the use of trade secret or confidential information  Notice of immunity must be provided in the contract itself or the contract must cross reference to a company policy document that includes discussion of immunity  If employer fails to include notice in contract, it is prohibited from being awarded exemplary damages or attorneys' fees in suit under DTSA © Polsinelli 2016 42
  43. 43. Miscellaneous Provisions  Statute of Limitations: 3 years after discovery or should have been discovered with “reasonable diligence”  Effective Date: Applies to acts occurring on or after signing  Increases EEA $5M limit to “greater of $5M or 3 times value of TS “to the organization” © Polsinelli 2016 43
  44. 44. Miscellaneous Provisions  Non-disclosure: Court won’t disclose asserted information without sealed submission and can’t be used later against owner  RICO: EEA criminal provisions are now “predicate offenses” under RICO racketeering definition © Polsinelli 2016 44
  45. 45. AG Reporting Obligations  DTSA fails to provide protection to US companies for trade secret theft occurring abroad  But, AG must submit biannual report House/Senate Committees – Must report on scope/breadth of trade secret theft from US companies occurring outside US and extent such theft is being sponsored by foreign governments/agents – Report must discuss mechanisms for US companies to prevent trade secret theft abroad and identify any country whose laws on trade secret theft pose problem for US companies © Polsinelli 2016 45
  46. 46. Contact Information Q. Todd Dickinson Shareholder | Polsinelli Washington, D.C. 202.626.8379 © Polsinelli 2016 46
  47. 47. Contact Information Stephen E. Fox, Esq. Shareholder | Polsinelli Dallas, TX 214.661.5582 @StephenEFox © Polsinelli 2016 47
  48. 48. Polsinelli provides this material for informational purposes only. The material provided herein is general and is not intended to be legal advice. Nothing herein should be relied upon or used without consulting a lawyer to consider your specific circumstances, possible changes to applicable laws, rules and regulations and other legal issues. Receipt of this material does not establish an attorney-client relationship. Polsinelli is very proud of the results we obtain for our clients, but you should know that past results do not guarantee future results; that every case is different and must be judged on its own merits; and that the choice of a lawyer is an important decision and should not be based solely upon advertisements. © 2016 Polsinelli PC. In California, Polsinelli LLP. Polsinelli is a registered mark of Polsinelli PC © Polsinelli 2016 48