Employers May Soon Receive Federal Trade Secret Protection

Employers may soon receive federal protection for their trade secrets.  On April 27, 2016, the United States House of Representatives passed the Defend Trade Secrets Act of 2015 (“DTSA”) by an overwhelming 410-2 margin, and the legislation will now go to President Obama, who supports the bill, for his signature.[1]  The DTSA will provide a federal private right of action for employers and increase protections for employers’ trade secrets, however, the DTSA may also present challenges to employers who seek the Act’s protections.  This article analyzes the DTSA, its potential benefits and disadvantages, and best practices for employers.

The DTSA’s Provisions and How it Compares with the UTSA

Trade secret theft costs American employers over 300 billion dollars annually according to Senate estimates.[2]  While previous attempts to pass similar federal legislation failed, the DTSA appears headed towards enactment and would amend the Economic Espionage Act of 1996 to allow private companies to bring a civil lawsuit in federal court in order to protect the company’s trade secrets.[3]  The DTSA would also permit employers to seek injunctions to protect proprietary information, and monetary damages for harm caused by trade secret theft.[4]  Further, the DTSA would allow federal courts to seize purported trade secret materials and information to prevent further dissemination and harm to employers.[5] 

Many employers’ trade secrets are protected under state law iterations of the Uniform Trade Secrets Act (“UTSA”),[6] which generally permit employers to receive an injunction and monetary damages for misappropriating trade secrets.  However, not every state has adopted the UTSA, and variations exist among those that have.[7] 

The DTSA’s Potential Benefits and Disadvantages

The DTSA provides several potential benefits for employers.  First, it will create uniformity for trade secret law at the federal level.  For example, the statute of limitations to bring a claim under the UTSA varies by state, but under the DTSA, there will be a uniform 3-year statute of limitations.[8]  Second, employers will be able to go to any federal court to enforce their rights under the Act, and will not have to worry about meeting federal court diversity requirements.[9]   The DTSA’s seizure remedy also is an added tool not available under the UTSA

Supporters of the DTSA also contend that trying the case in federal court will result in a streamlined discovery, easier service of defendants and witnesses located throughout the country, and potentially prevent foreign parties from leaving the country.[10]      Despite the DTSA’s advantages, it will not eliminate the need for employers to carefully navigate the requirements of various state laws.  While the DTSA seeks uniformity, it does not preempt states that have already enacted trade secret protections, but will instead supplement state trade secret laws.  Accordingly, federal courts hearing DTSA cases may diverge from state trade secret precedent, creating separate case law and potential uncertainty for employers who rely on state court decisions.

Best Practices

Employers who wish to take advantage of the DTSA and protect their proprietary information should begin protecting themselves now by: (1) implementing strong non-disclosure policies detailing all proprietary information that may form the basis of a DTSA claim; (2) limiting distribution of proprietary information to only those individuals who have a business need for the information; and (3) developing physical and electronic protections to prevent trade secret theft.

[1] Jacob Gershman, Congress May Be About to Shake Up Trade Secret Law: Is That a Good Thing? The Wall Street Journal (Apr. 27, 2016) http://blogs.wsj.com/law/2016/04/27/congress-may-be-about-to-shake-up-trade-secret-law-is-that-a-good-thing/ (last accessed Apr. 28, 2016).  On April 4, 2016, the United States Senate passed the bill 87-0.  Coupled with the President’s support, the DTSA is almost certain to be enacted in the near future. 

[2] Anthony Stiegler and Adam Gershenson, Are They Going to Federalize Trade Secrets Law? Inside Counsel (Mar. 30, 2016).

[3] Jennifer O’Conner and David J. Clark, Will There Finally Be Federal Private Right of Action for Trade Secret Misappropriation, The National Law Review, http://www.natlawreview.com/print/article/will-there-finally-be-federal-private-right-action-trade-secret-misappropriation (last accessed Apr. 28, 2016).  The Economic Espionage Act permitted federal prosecutors to bring criminal charges for stealing a company’s trade secrets, but provided no private remedy.

[4] Id.  Attorneys’ fees would also be available where the theft was willful or malicious.

[5] Id.  The seizure order would only be issued after an ex parte hearing where the Plaintiff demonstrated that: (1) an injunction would be inadequate; (2) the Plaintiff will suffer an immediate and irreparable injury; (3) the harm to the Plaintiff outweighs the legitimate interests of the Defendant and any third parties; (4) the Plaintiff is likely to succeed on its trade secret claim; (5) the item(s) to be seized are reasonably identifiable; (6) the Defendant would make the trade secrets inaccessible; and (7) the Defendant has not already publicized the purported trade secret.  See H.R. 3226, 114th Cong. § 2(b)(2)(A) (2015). 

[6] The Uniform Trade Secrets Act is a uniform act published by the Uniform Law Commission. (See http://www.uniformlaws.org/Act.aspx?title=trade%20Secrets%20Act)

[7] Stiegler and Gershenson, supra note 2. 

[8] Id.

[9] Anthony Stiegler, et al., Trade secret bill could redefine protection for company secrets, Inside Counsel (Apr. 28, 2016).

[10] Stiegler and Gershenson, supra note 2.