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5 Things To Know About The Defend Trade Secrets Act

With approval Wednesday from the U.S. House of Representatives, a major federal overhaul of American trade secrets law is now headed to President Barack Obama for his almost certain signature.

The House voted 410-2 to pass the already Senate-approved Defend Trade Secrets Act, which would effectively "federalize" trade secrets law by allowing companies to file private civil lawsuits under the federal Economic Espionage Act.

The bill is a sweeping shake-up for American trade secrets law, which for decades was exclusively the domain of state law. It will create truly nationwide trade secrets law, give litigants easier access to federal court, and hopefully provide more certainty for those on either end of a trade secrets lawsuit.

It's also packing controversial new civil seizure rules, and has drawn criticism from those in the academic community who say it won't address the nation's most pressing trade secrets problems.

With enactment a near certainty — the Obama administration released a statement praising the bill after it passed — here's what you need to know about the changes in store under the Defend Trade Secrets Act.

What's the point of DTSA?

In short: to bring the protections for trade secrets on par with those afforded to patents, copyrights and trademarks.

Unlike other areas of intellectual property, trade secrets are exclusively to domain of state law, a distinction that manifests itself in a few ways that modern companies find problematic.

For one, though most states follow a shared blueprint laid out by the so-called Uniform Trade Secrets Act, the law still varies from state to state. For companies that believe their secrets were stolen, that can lead to unpredictable results based merely on geographic location. And when those inconsistencies develop into major splits, there's no way to harmonize the rules.

It also means many trade secrets cases are stuck in state court unless the parties can prove federal jurisdiction, either through diversity or side claims filed under a federal statute. Many experts feel federal judges are better suited than state judges for dealing with cross-state and international cases, as well as complicated technological subject matter.

Supporters say the DTSA will address both of those problems.

By allowing for claims under a single federal statute, it would foster the development of unified national case law on how the law should be applied, to be harmonized by the U.S. Supreme Court when necessary. And, equally important, those claims could be automatically brought in federal court.

"The biggest thing is that this opens the doors to the federal court house," said Peter J. Toren, a partner with Weisbrod Matteis & Copley PLLC and a former federal prosecutor of trade secrets cases.

"It will bring uniformity in the laws, and many lawyers and litigants feel more comfortable with federal courts in terms of the quality overall, in terms of sophistication of the judges," Toren said.

Will the DTSA replace state trade secrets law?

Importantly, no. The bill includes a provision expressly stating that it does not preempt existing state-level trade secrets laws.

That's probably because it couldn't. While the federal government's power to grant patents and copyrights is expressly mentioned in the Constitution, Congress could likely only regulate trade secrets under its commerce clause power. That means that trade secrets cases involving only intrastate commerce are still solely the domain of state law.

Thus like the trademark law and the federal Lanham Act, trade secrets law and the DTSA will co-exist with existing state law.

"That raises the possibility that a defendant may face a claim for federal trade secret misappropriation, as well as related state law claims," said F. Christopher Mizzo, a partner at Kirkland & Ellis LLP. "In other words, although the DTSA provides greater uniformity by providing a layer of federal protection, it creates complexity by providing more — not less — options to trade secret holders."

What's 'ex parte seizure'?

The short answer is: It's the DTSA's most controversial provision.

The new law allows plaintiffs to ask courts to order law enforcement officials to seize any property "necessary to prevent the propagation or dissemination of the trade secret" — all without a hearing or answer from the accused party.

Such a harsh remedy is available under both the Copyright Act and the Lanham Act in certain circumstances, and supporters say it's needed to prevent fast-paced modern trade secrets theft. But, since the first iteration of the DTSA was introduced years back, critics have warned that the orders could be used abusively, particularly against small companies and former employees.

Bowing to those concerns, lawmakers added important limitations to the seizure provision as it made its way through Congress.

The statute that passed Wednesday says that such orders are only to be used in "extraordinary circumstances," and it lays out clear set of requirements for those circumstances. It also requires that parties show "with particularity" what property is to be seized, as well as proof that the target of the seizure order has "actual possession" the trade secret or the property.

In addition, the ex parte provision always included a subsection allowing targets of such orders to seek damages if they feel the provision has been abused or they were unfairly targeted.

Whether those limitations succeed in preventing ex parte seizures from being abused is up for debate.

"I think there is merit on both sides," said Peter M. Brody, a partner with Ropes & Gray LLP. "They are a powerful and sometimes appropriate remedy, but they are there for very unusual cases."

Brody noted that the application of the analogous provision in the Lanham Act has largely been limited to egregious violations like outright counterfeiting operations.

"What I suspect ... will emerge in the trade secrets context is also something fairly narrow," Brody said. "I think it's going to be used, but I think it will be used cautiously and sparingly."

Is this going to lead to more trade secrets litigation?

Almost certainly, thanks in part to growing doubts in today's patent system.

The new federal trade secrets law is arriving on the scene in the wake of several developments that have weakened the strength of patent protection, like the America Invents Act and its tougher patent review proceedings, as well as Supreme Court rulings like Alice Corp. v. CLS Bank that have made it far easier to invalidate certain types of patents.

"With certain actions of Congress and the Supreme Court over the past five years, it's become much more difficult to enforce patents, but the value of intellectual property is continuing to increase," said Toren, the Weisbrod partner.

A new federal cause of action for trade secrets theft was always likely to spur more cases, but the recent changes to patent landscape mean companies are going to be even more likely to dabble in the new space.

"If you're a company with intellectual property, do you really want to go the route of trying to protect it through patents, or might it be better to keep the information secret and protect it under trade secrets law?" asked Brody, the Ropes & Gray partner.

"If a company was already inclined to go that direction, the existence of a new federal trade secrets statute is going to reinforce that inclination," Brody said.

Is everyone onboard with this?

The bill has widespread support, but there are still a few major dissenting voices.

The DTSA enjoyed broad approval across sectors in the business community, and it drew a rare level of bipartisan support. A few Democrats previously voiced concerns about the ex parte seizure provisions, but the bill passed the Senate unanimously, passed the House by a wide margin, and is headed for a Democratic president who has been outspoken supporter. In a post-compromise era of politics, that's quite the accomplishment.

But a large group of prominent law professors sounded the alarm in August 2014, penning a letter to Congress that called the bill "ill-advised" and "dangerous." The group, led by Elon University law professor David S. Levine and Hamline University law professor Sharon Sandeen and joined by 29 other prominent academics like Lawrence Lessig and Tim Wu, doubled down in November, once again urging Congress to reject the measure.

The crux of their argument? That the DTSA fails to actually deal with the largest threat to American trade secrets — cybersecurity — while creating uncertainty in a current state-based system that works just fine, all while inviting potential abuse through untested new measures like the ex parte seizures.

With the bill nonetheless nearing enactment, Levine said he was disappointed that Congress had "ignored" the group's concerns.

"This is a law that has no meaningful upsides and a ton of downsides," he said.

Noting that there is a "dearth of empirical" data on trade secrets law, Levine said policymakers "simply don't know enough" about the subject to enact the "the greatest expansion of IP law in the last 30 years."

"Congress is basically throwing darts on the hunch that this is going to help," Levine said.