5 Key Aspects of New Fed Trade Secret Protection Law

President Obama has signed the Defend Trade Secrets Act (DTSA) into law, which gives a party the right to file civil lawsuits in federal court against a person or organization that improperly obtains, discloses, or uses its trade secrets.

The DTSA is an extension of the Economic Espionage Act of 1996, which allowed the government to criminally prosecute anyone who stole or illegally used trade secrets in interstate or international commerce. With the addition of the DTSA, parties can now file civil trade secret lawsuits. The law had tremendous support in the legislature, passing unanimously in the Senate with a 410-2 vote in the House of Representatives.

Here are five key things that companies and individuals should know about the new law:

1. The DTSA does not preempt state law
While parties have not been able to file civil lawsuits under federal law regarding trade secrets in federal courts, they have been able to file trade secret lawsuits in state courts and bring state law claims in federal courts in certain cases. Most states have adopted some form of the Uniform Trade Secrets Act, but there are many variations among the versions adopted in each state, which creates complications for companies that operate in multiple states. While the DTSA will help to bring some consistency to trade secret law, especially for multi-state companies, it will not preempt state laws. Companies that wish to file a trade secret lawsuit will be able to choose whether to file lawsuits in state or federal courts.

2. The law defines trade secrets as both technical & business information
Currently, there’s no universal definition of trade secrets, which may generally include any information that gives a company a competitive edge by virtue of being unknown. Technical information such as proprietary formulas, prototypes or designs almost always qualify as trade secrets, but many courts have debated whether business information such as customer lists, marketing strategies or pricing qualify as trade secrets. The DTSA provides a broad definition of trade secrets that includes “all forms and types of financial, business, scientific, technical, economic or engineering information” as long as:

1) the owner took reasonable measures to keep the information secret; and
2) the information provides economic value to the company by virtue of not being known to others.

3. The DTSA provides broad set of remedies
The DTSA will allow parties to pursue many different types of remedies, including compensatory monetary damages, seizure of property necessary to prevent disclosure of the trade secrets and injunctive relief, which is a court order to stop doing something. In certain circumstances where an injunction is not available, courts may also award royalties for a competitor’s continued use of the trade secret. This “fall-back” to a reasonable royalty could mean that courts will find it appropriate to award injunctive relief in most cases. As is the case in other types of federal intellectual property law, the DTSA will allow courts to award legal fees if the court determines that the defendant stole or misused the trade secrets willfully or in bad faith. Willful misappropriation can also double damages.

4. Companies may have less power to enforce non-compete restrictions under the DTSA
Because departing employees are the most common source of leaked trade secrets, one of the major debates surrounding the DTSA was whether it would unfairly limit employees from moving between competitors. Under the DTSA, employers cannot seek a court order to stop an employee from working for a competitor, although the employer may be able to restrict certain activities, such as limit the employee’s contact with certain clients or on particular product development. But even in those cases, the DTSA only allows courts to grant injunctions “based on evidence of threatened misappropriation and not merely on the information the person knows.” Also, the scope of any injunction must take into account applicable state laws restricting enforcement of non-compete agreements. In states with laws that allow for broader enforcement of non-compete agreements, employers may choose to seek an injunction in state court or bring state law claims in federal court.

5. Courts will have to decide how to enforce civil seizure
One unique part of the DTSA is that it will allow civil seizure, which means that a court can order the defendant to turn over and stop using certain property to prevent the propagation or dissemination of stolen trade secrets until the case is decided. While civil seizure may prevent companies from making money on the allegedly stolen trade secret while the case is ongoing, it could also result in abuse. For example, a company purposely could try to use civil seizure to prevent a competitor from selling or producing items for a period of time. However, a party subject to a wrongful or excessive seizure can seek damages, similar to the seizure procedures under the trademark statute involving counterfeit goods.