Article Legaltech News

How to Take Advantage of the New Federal Trade Secret Law

15 July 2016

The Defend Trade Secrets Act (DTSA) provides new ways for companies to protect a broader range of commercially sensitive information. This article discusses some practices that can help companies take full advantage of these new protections.

Updating Trade Secret Inventories

While companies should already have an inventory of trade secrets, that inventory should be re-evaluated in light of the DTSA, which broadened subject-matter eligibility and fortified legal protections. Today, not only can companies protect a greater range of information, but they have more incentives to rely on trade secret protections than in the past.

Before the DTSA, trade secret was the province of individual states, which could decide differently whether certain information is a trade secret, or certain conduct is actionable, or certain remedies are available. For example, common-law states such as New York and Massachusetts require trade secrets to be "continuously used" in business operations, while states adopting versions of the Uniform Trade Secrets Act (UTSA) do not. State-to-state uncertainty often made trade secret protection less attractive than other more uniform and robust intellectual property regimes. Consequently, in some instances trade secret law may have been relegated to a supplemental form of protection or ignored altogether.

The DTSA has created a uniform body of federal law that exists in parallel with the patchwork of state laws. The DTSA grants protection for "all forms and types of financial, business, scientific, technical, economic, or engineering information," including "patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes." This formulation brings under federal purview information also covered in the states, but embraces other information that may not have been protectable.

The DTSA also created a more robust and reliable trade secret regime that is more attractive than in the past. For example, the DTSA may provide an alternative for industries, such as software, biotech and life sciences, with ebbing protections under other IP laws in the wake of the Supreme Court's decisions in Alice , Mayo and Myriad Genetics . For example, according to one source, 70 percent of patents challenged under Alice in 2015 were invalidated, while monthly rejection rates in certain Patent and Trademark Office technical centers were over 85 percent for most of the year. The DTSA has also altered the cost-benefit balance between limited but robust patents and potentially perpetual trade secrets.

Ensuring Trade Secret Protection

Companies should take steps to protect their trade secrets. Specifically, the DTSA, like most state statutes, requires the use of "reasonable measures to keep such information secret," and that "the information derives independent economic value … from not being generally known to, and not being readily ascertainable through proper means by another person who can obtain economic value from the disclosure or use of the information." "Reasonable measures" are not defined in the DTSA, but the language echoes the UTSA. Thus, the same best practices that applied in UTSA states will likely apply nationally under the DTSA, including, among other things:

Nondisclosure, confidentiality and nonuse agreements with employees, customers and members of the supply and distribution chain;
Need-to-know limitations on access to protected information;
Security measures for physical materials (e.g., locked file repositories) and electronic data (e.g., encryption and password protections);
Policies and procedures for designating, managing and disclosing trade secrets, and for disposing of sensitive materials, and responding appropriately and expeditiously to suspected breaches;
Exit interviews for departing employees, including requests for the return or destruction of sensitive materials and compliance assessments during and following departure; and
Routine monitoring and audits to ensure compliance with corporate policies and procedures, including ensuring that sensitive materials are marked accordingly, and that access to sensitive information is effectively restricted and controlled.

Companies have likely implemented some of these measures with regard to their pre-DTSA trade secret inventories. But companies will want to review their practices and procedures to ensure adequate coverage of the expanded post-DTSA inventory.

Companies will also want to update their confidentiality agreements to avoid forfeiting certain remedies. The DTSA incorporates a safe harbor from state and federal liability for whistleblowers who disclose trade secrets to government officials or as part of a lawsuit filed under seal. Companies must give notice of the safe harbor to employees, contractors and consultants in any agreements governing their use of the company's trade secrets. Failure to comply prevents recovery of attorney fees and enhanced damages.

Enforcing Trade Secrets

It has always been imperative that company executives and in-house counsel respond forthwith in the event of a suspected or actual misappropriation of trade secrets. Delayed or inadequate responses are often held against victims of trade secret theft. Skilled trade secret litigators who know how to use the tools available under new and old legal regimes can greatly increase the chances of minimizing or avoiding the loss of valuable trade secrets.

In addition to the various remedial measures long available at the state level, the DTSA provides new mechanisms for enforcing trade secrets. Fundamentally, the DTSA empowers companies to bring a claim in federal court based on a uniform body of federal law. For various reasons, companies may prefer federal litigation, including uniform and structured procedures under the Federal Rules of Civil Procedure, certain discovery limitations and nationwide subpoena power. Further, a federal decision streamlines enforcement across state lines.

The DTSA guarantees the availability of certain provisional and final remedies. The DTSA's most notable innovation is the ex parte seizure provision. In "extraordinary circumstances," specific property can be seized without notice to prevent imminent loss of trade secrets. To succeed, the plaintiff must show, among other things:

1) Likely success on the merits;
2) Immediate and irreparable injury;
3) That the accused actually possesses the trade secret and property to be seized (which must be described with "reasonable particularity");
4) That the accused would "destroy, move, hide, or otherwise make the [property] inaccessible to the court"; and
5) The applicant has not publicized the requested seizure.

If the court agrees, it will issue "the narrowest" order that "minimizes any interruption" of legitimate activities, and set a hearing not later than seven days after the order. The court order must also protect the accused from publicity with respect to the seizure order, and protect the seized property from access by the applicant and others. To prevent abuse of this process, the court must require that the trade secret owner provide security adequate to pay damages as a result of any wrongful or excessive seizure.

Victims of trade secret theft can also win preliminary and permanent injunctions and recover actual financial losses and unjust enrichment. In certain circumstances, the DTSA also allows royalty injunctions, and exemplary damages up to twice the compensatory amount for willful and malicious misappropriation. Like the UTSA, and unlike common-law jurisdictions, reasonable attorney fees are recoverable for bad-faith conduct and willful misappropriation.

The DTSA created new ways for companies to protect a broader range of commercially sensitive information. For companies that are prepared to take full advantage of the new federal legal regime, trade secrets are poised to become an increasingly prominent fixture in the corporate IP portfolio.

Joseph A. Loy, P.C.

Practices