May 02, 2016

Trade Secrets on the Brink of Federal Protection

Last week, a major federal law aimed at protecting businesses’ trade secrets overwhelmingly passed the U.S. House of Representatives and appears nearly certain to be signed into law by President Obama. The Defend Trade Secrets Act (DTSA), which should soon become law, is the most significant federal intellectual property measure since the Lanham Act in 1946.

What’s in the Law?

The most important part of the DTSA is creation of a federal civil cause of action for trade secret misappropriation. Currently, trade secrets are only protected under state law, and most states adopted some version of the Uniform Trade Secrets Act, some with modification. Before the DTSA, without another federal jurisdictional hook, litigants seeking trade secret protection had no avenue to federal court.

The most controversial part of the law is its ex parte seizure provision, which allows plaintiffs to obtain court orders to seize property "necessary to prevent the propagation or dissemination of the trade secret" without a hearing or response from the opposing party. As the legislation made its way through Congress, the ex parte seizure provision was the focus of significant criticism, largely pertaining to the potential for abuse of this provision.

In response, the DTSA was amended to state that seizure orders are limited to "extraordinary circumstances,” and it lays out specific requirements for an ex parte order:

  • Injunctive relief under Fed. R. Civ. P. 65 is inadequate;
  • The plaintiff will suffer "immediate and irreparable injury";
  • The harm to the plaintiff outweighs the harm to both the defendant and any third parties who may be affected by the order;
  • The plaintiff is likely to show both misappropriation and that the defendant is in possession of the trade secret;
  • A particular description of the subject of the seizure and its location;
  • The defendant would move, hide or destroy the materials if he/she/it received notice; and
  • The plaintiff has not “publicized” the requested seizure.

The ex parte provision further allows a defendant to seek damages for abusive or wrongfully acquired seizure orders. The ex parte provisions provide significantly broader protections than tend to be available under state laws.

How Did It Pass?

With broad, bipartisan support atypical of today’s Congress. The DTSA unanimously passed the Senate on April 4, 2016. It passed the House by a vote of 410-2. In a statement, House Judiciary Committee Chairman Bob Goodlatte (R-Va.), Ranking Member John Conyers (D-Mich.), Courts, Intellectual Property, and the Internet Subcommittee Chairman Darrell Issa (R-Calif.), Courts, Intellectual Property, and the Internet Subcommittee Ranking Member Jerrold Nadler (D-N.Y.), Rep. Doug Collins (R-Ga.), and Rep. Hakeem Jeffries (D-N.Y.) praised the House vote, saying:

“Intellectual property powers the engine of American innovation and creativity, creates new jobs, and helps grow our economy. Trade secrets, such as confidential formulas, manufacturing techniques, algorithms, and even customer lists, are an important part of the intellectual property portfolios of our most innovative companies and they are becoming increasingly more vulnerable to theft as a result of our globalized economy. The bipartisan Defend Trade Secrets Act will help American companies and innovators protect their intellectual property from criminal theft by foreign agents and those engaging in economic espionage.”

The DTSA appears certain to be signed by President Obama and become law. In early April, the White House released a statement strongly supporting passage, hailing it as “a more uniform, reliable, and predictable way to protect their valuable trade secrets anywhere in the country.”

What Does It Mean for Employers?

The DTSA is a major change in the landscape of trade secrets litigation. First, it provides automatic access to federal court for employers seeking protection of trade secrets. Many employers will prefer the uniformity and sophistication of litigating trade secrets claims in federal court.

Second, the potential for ex parte seizure orders arms employers with a potential weapon well beyond what is currently available in most states. But how judges will apply this provision remains to be seen. Many will likely be wary of sweeping ex parte relief, and similar seizure provisions under the Lanham Act have been limited to cases of particularly egregious conduct.

Third, the DTSA does not pre-empt state law. While it will create a new, uniform body of federal trade secrets law, it adds complexity by providing more options for trade secret litigants. Plaintiffs may still proceed in state court under state law, and even federal trade secret lawsuits will likely continue to involve significant state law claims, including the enforceability of noncompete agreements and duties arising from confidential relationships. As a result, employers will need to carefully weigh the pros and cons of proceeding in federal or state court. For example, even though federal law may provide the possibility of an ex parte seizure order, certain state jurisdictions may give faster and more desired relief. Indeed, some states allow parties to appear before a judge on a temporary restraining order the same day a complaint is filed. It is more important than ever to assess the facts and desired outcomes of a particular case in deciding how to proceed in the client’s best interests.

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