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The Defend Trade Secrets Act of 2016: New Tools to Protect Your Business

Sep. 30, 2016|By Geoffrey S. Kercsmar


The U.S. Government estimates that trade secret theft costs the U.S. economy over $400 billion dollars annually.[1]This isn’t new: trade secret theft has been a problem since the Industrial Revolution. For the most part, the federal government has remained silent on the issue and allowed states to address it on their own. Most states have enforced some variation of the Uniform Trade Secrets Act. But recently, Congress has gotten involved to help curb the ongoing effects of trade secret theft.

 On May 11, 2016 President Obama signed the Defend Trade Secrets Act of 2016 (the “DTSA”). The new law immediately brought trade secrets in line with three other types of intellectual property—patents, copyrights, and trademarks—in one major aspect. For the first time, the federal courts now have jurisdiction to address trade secret misappropriation. This jurisdiction is not exclusive or even guaranteed: state courts can still hear many trade secret claims, and federal jurisdiction is restricted to those trade secrets “used in, or intended for use in, interstate or foreign commerce.” Nonetheless, Congress appears eager to help address concern about trade secret theft, and the DTSA should prove favorable for those businesses affected by this issue.

This is good news for businesses. Growing businesses often owe their success to a nonpublic competitive advantage—some sort of distinguishing feature that separates a company’s product from its competitors’. Companies aggressively protect these distinguishing aspects of their product. Most have heard that Coca-Cola’s recipe is locked in a guarded safe and only known by two people, or that KFC’s “secret spices” are mixed by two different factories to ensure secrecy. Unfortunately, for most businesses, this level of security is unrealistic.

As defined by the DTSA, a trade secret can be anything from a customer list to a methodology or technique to utilize financial information. Succinctly summarized, it is “information that is (1) valuable because it is a secret and (2) treated by its owner as a secret.”[2] Of course, employees will frequently need access to this information to perform their jobs. When an employee uses such an opportunity to steal the information, it can immediately jeopardize the employer’s operations and bottom line.

 The DTSA gives businesses some powerful new tools to address the problem and, if necessary, to facilitate the return of misappropriated trade secrets. Perhaps most importantly, while injunctions have always been available as a temporary remedy in trade secret litigation, the DTSA provides for a civil seizure remedy as well. Civil seizure allows a plaintiff company to remove its trade secrets from a former employee’s custody altogether (such information is then retained by the court until trial). This procedure differs from a typical injunction where the former employee is ordered to cease use and dissemination of the protected information but is allowed to retain possession of that information pending a full-blown trial. As a result, civil seizure provides greater protection for trade secrets and reassures the victim corporation of their security. When the court has custody of the misappropriated information, there is a decreased risk of the former employee violating a temporary restraining order or injunction and continuing to disseminate the trade secrets.

Not all companies may choose to use civil seizure, however, because the downside of losing is significant. The DTSA provides in 18 U.S.C. § 1836(b)(2)(G) that a defendant who is damaged by “a wrongful or excessive seizure” has a cause of action against the plaintiffs for “lost profits, cost of materials, loss of good will, punitive damages . . . [and] attorney’s fee[s].”[3]Those counterclaims seem to have deterred some early plaintiffs.

For example, in one of the first complaints specifically alleging violation of the DTSA, Effex Capital, LLC (“Effex”) contended its former Chief Technology Officer “took [his] computer, which contained [c]onfidential nformation, . . . in his full custody and control and retained possession of the . . . computer . . . without the consent or knowledge of Effex[].”[4] According to Effex, the former CTO then offered that information to a competitor in exchange for employment. While this would seem to be a archetypal scenario for using DTSA’s civil seizure remedy, Effex opted against such a request in favor of the DTSA’s more-traditional remedies—suggesting that the potential of counterclaims acted as a deterrent to a civil seizure.

The DTSA specifically requires that a civil seizure should be authorized only in “extraordinary circumstances.” This appeared to impact the claims in another recent case, Dazzle Software II, LLC. There, plaintiff Dazzle Software alleged that a former customer engaged in deception and subterfuge in order to obtain the contents of a computer containing protected trade secrets.[5] In its application for civil seizure of the computer’s storage devices, Dazzle alleged that further use or dissemination of the trade secrets could destroy their economic value, and that irreparable harm was imminent. In spite of this, the court refused to grant civil seizure.[6] While the court’s reasons for denying the civil seizure are not publicly available, a reasonable inference is that the court concluded an injunction would have been an adequate remedy even when the defendant is alleged to have been deceptive and the risk to the plaintiff is significant.

By providing a path to the federal courts, Congress clearly intends to add additional deterrents to interstate (and international) trade secret theft occurring throughout the country. Indeed, Congress stated it enacted the Act, in part, to reduce the “costly compliance plans to meet each individual state’s law.” And even though most trade secrets litigants will continue to allege violations under their respective state’s Uniform Trade Secrets Act, the DTSA’s expanded federal jurisdiction will make trade secret litigation more accessible. As more cases migrate from state to federal courts, it is expected that, “the DTSA will likely be heavily litigated, and a large body of case law will develop that will provide . . . guidance.”[7]We predict that, as this occurs and the case law surrounding the DTSA expands, businesses will become more aggressive in pursuing those who have misappropriated their trade secrets. Given this evolving landscape, any business concerned with the conduct of former or current employees who have access to crucial trade secrets would be well advised to seek legal advice as soon as possible.

 

[1] PricewaterhouseCoopers LLC, Economic Impact of Trade Secret Theft: A framework for companies to safeguard trade secrets and mitigate potential threats 8 (2014).

[2] Bailey King and Whit Pierce, Creative Opportunities: The defend Trade Secrets Act of 2016 Is Here, and It's a Big Deal, 58 No. 7 DRI for Def. 42 (2016).

[3] 15 U.S.C. § 1116(d)(11).

[4] Complaint at 7,Effex Capital, LLC v. Wilson, No. 1:16-cv-05438 (S.D.N.Y. July 7, 2016).

[5] Brief in Support of Ex Parte Application for Seizure of Computer Storage Devices and Computers Pursuant to the Defend Trade Secrets Act of 2016 at 3-5, Dazzle Software II, LLC v. Kinney, No. 2:16-cv-12191-MFL-MKM (E.D. Mich filed Jun. 14, 2016).

[6] Order (1) Denying Plaintiff's Application for Seizure of Defendant's Computer Storage Devices and Computers, and (2) Granting in Part and Denying in Part Defendants' Motion for Expedited Discovery at 2, Dazzle Software II, LLC v. Kinney, No. 2:16-cv-12191-MFL-MKM (E.D. Mich. Jul. 18, 2016).

[7] Bailey King and Whit Pierce, Creative Opportunities: The defend Trade Secrets Act of 2016 Is Here, and It's a Big Deal, 58 No. 7 DRI for Def. 42 (2016).

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