Businesses Have a New Remedy to Protect Trade Secrets

By: David L. Simmons, Drewry Simmons Vornehm, LLP

A new federal law governing trade secrets – the “Defend Trade Secrets Act” (DTSA) – went into effect on May 11, 2016. The DTSA authorizes a company that has been the victim of trade secret theft to bring suit under federal law to recover its losses. Remedies for trade secret theft were previously governed by a variety of state laws that were often not uniform in protecting trade secrets. The DTSA creates a federal civil cause of action for trade secret disputes and is intended to bring more uniformity to trade secret protection.

Many businesses regard trade secrets as an important intellectual property asset. A trade secret is often defined as a “formula, practice, process, design, instrument, pattern, commercial method, or compilation of information that is not generally known or reasonably ascertainable by others, and by which a business can obtain an economic advantage over competitors or customers.”

Even mundane items such as customer lists may be treated as a trade secret, and there are a significant number of property interests that may qualify for trade secret protection. A trade secret doesn’t need to be a patentable invention or an intellectual creation qualifying for copyright protection. For example, a procedure for calculating construction bids may be treated as a trade secret.

Trade secret issues may arise under a variety of circumstances, including employee hiring and firing, business contracts that contain non-disclosure or confidentiality clauses, and employees that discuss company business with competitors, members of the public, or friends and family. Companies that are serious about protecting trade secrets should catalogue their trade secrets and implement appropriate agreements and policies to limit disclosure.

The DTSA was intended to establish a uniform national law of trade secrets to resolve the complexities and costs created by a patchwork of state trade secret laws. Unfortunately, the DTSA leaves all state trade secret laws in place and simply adds another level of protection. Instead of creating a uniform national law, the DTSA simply adds an additional layer of regulation to existing state law provisions, which may result in more complex litigation and increased legal expense for the parties involved.

The DTSA mostly tracks the Uniform Trade Secret Act (UTSA), which has been adopted by 47 states. However, there are some differences between the DTSA and the UTSA, and courts in different states have sometimes interpreted provisions in conflicting ways. Consequently, parties may encounter situations where they can win under one law, but not the other. In addition, claimants may now bring both state and federal claims with respect to trade secret disputes, or they might strategically choose to bring only state or only federal claims. Claimants may also choose between federal or state courts, depending on which venue increases the chances of winning.

The DTSA authorizes trade secret owners to use a “code language” to protect their trade secrets from being revealed in court, a provision that adds significant protection for the owners of trade secrets. The DTSA also contains a “whistleblower” provision that provides employees with immunity from civil or criminal claims under federal or state law for the disclosure of trade secrets when reporting a suspected violation of law. An employer is required to provide its employee with written notice of the whistleblower immunity afforded by the law in any contract or agreement with the employee that governs the use of trade secrets or confidential information. An employer that fails to provide the notice will not be able to recover attorneys’ fees or enhanced damages in a suit against the employee.

The DTSA also contains an unusual provision that authorizes trade secret owners to seek an ex parte order to seize stolen trade secret items in another party’s possession. The ex parte seizure provision contains safeguards to avoid abuses, but any ex parte procedure is more error-prone than an adversarial proceeding where the targeted party gets to tell its side of the story.

Businesses that maintain trade secrets will no doubt need to consider the requirements of both the DTSA as well as trade secret provisions that exist under state law. Company operations should be modified to conform to both the existing and new trade secret laws.

Practice Pointers:

  1. A business that is serious about protecting its trade secrets should catalogue the trade secrets, clearly mark the information as confidential, and implement appropriate agreements and policies.
  2. Policies and agreements that govern trade secrets should be clearly communicated to the employees that have access.
  3. A business should provide its employees with written notice of the whistleblower immunity that is afforded by the DTSA in order to enhance the available remedies.
  4. A business should review its current procedures for maintaining confidentiality of trade secrets in light of new requirements imposed by DTSA and the governing provisions of state law.

The attorneys of the DSV Business Group have the expertise required to advise your business on how to avoid trade secret disputes, as well as the legal remedies available to enjoin the unauthorized disclosure of trade secret and recover any resulting losses.