Employers Must Take Action to Reap the Full Benefits of the Defend Trade Secrets Act

President Obama signed the Defend Trade Secrets Act (DTSA) into law on May 11, addressing a long-felt need for uniformity in trade secret law by establishing a national trade secret protection standard.

Recognized by many as the largest expansion in federal law in intellectual property since the Lanham Act in 1946, the DTSA creates a new federal civil cause of action for trade secret misappropriation. To take advantage of the full range of remedies provided under the DTSA, alternative fund managers must implement new policies and agreements — a failure to do so may deprive an employer with valid claims of its attorneys’ fees and exemplary damages.

Unlike copyrights, trademarks and patents, which have long been regulated by federal law, prior to the DTSA’s enactment, trade secret disputes were governed almost exclusively by state law. To date, 47 states and the District of Columbia have adopted some version of the Uniform Trade Secrets Act, although these various state statutes are anything but “uniform,” providing different definitions of the terms “trade secret” and “misappropriation,” as well as different remedies to successful plaintiffs. Moreover, New York has not adopted the Uniform Trade Secrets Act in any form. State-by-state variations in trade secret law have led to inconsistent and unpredictable outcomes and forced plaintiffs to pursue their claims in state court unless they could establish federal jurisdiction either through diversity of citizenship of the parties or by tacking on an additional federal claim.

Under the DTSA, the owner of a trade secret that has been misappropriated may now bring a civil action in federal court “if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” Notably, the DTSA does not pre-empt state trade secret law; rather, the two regimes will operate in parallel, with plaintiffs having the option of filing suit in either federal or state court. Rather than replacing state laws, the DTSA creates an additional federal framework to shield companies from the loss of intellectual property and other trade secrets. Giving companies the right to file suit in federal court will likely result in an increase in litigation at the federal level.

The DTSA’s provisions largely mimic those of the Uniform Trade Secrets Act, although there are several new and noteworthy provisions of which trade secret owners should be aware:

• Whistleblower Immunity: The DTSA includes a “safe harbor” provision that shields individuals from both civil and criminal liability for disclosing a trade secret either (i) in confidence to a government official or an attorney solely for the purpose of reporting or investigating a suspected violation of law, or (ii) in a complaint or other pleading if the filing is made under seal.
   
• Notice Regarding Whistleblower Protection Provisions: Employers must provide notice of the DTSA’s whistleblower protections in all agreements with employees, contractors and consultants that govern the use of trade secrets or other confidential information entered into (or amended) on or after May 12. Such notice may be given either in the agreement itself or through a cross-reference to a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law. Failure to provide the required notice makes several of the DTSA’s statutory remedies — including exemplary damages and attorneys’ fees — unavailable in subsequent litigation. Employers should ensure that confidentiality policies are updated and that all agreements entered into on or after May 12, satisfy the DTSA’s notice requirement.
   
• Ex Parte Seizure: The DTSA also contains a controversial provision that permits a trade secret owner to request that federal marshals seize “property necessary to prevent the propagation or dissemination” of a stolen trade secret, without providing any advance notice to the alleged thief. This relief is available only in “extraordinary circumstances,” and parties that are injured by “wrongful or excessive seizure” may be entitled to recover damages and attorneys’ fees.

U.S. businesses suffer billions of dollars in losses annually as a result of trade secret theft. With the enactment of the DTSA, trade secrets are finally taking their place alongside copyrights, trademarks and patents as the fourth pillar of intellectual property worthy of federal protection. However, in order to reap the full benefits of the DTSA, firms must be aware of the notice requirements imposed by the law and take proactive steps to ensure compliance.