Hepler Broom, LLC

New Trade Secret Protection Weapon

May 4, 2016

Unleashing a Trade Secret Misappropriation Federal Private Right of Action

President Obama is poised to sign a bill passed unanimously by the Senate and House Judiciary Committee.  What issue of the day could possibly secure such bipartisan support in a tumultuous presidential election year?  One that even Donald Trump and Bernie Sanders could agree upon.

The emergence of relatively anonymous cyber threats and persistent state-sponsored economic espionage, together with breaches of confidence and traditional bribery, corrupt employee, and misrepresentation schemes, simply demand enhanced mechanisms to protect trade secret rights.  A recent study by Pricewaterhousecoopers and the Center for Responsible Enterprise and Trade concludes that trade secret theft losses approximate 1-3% of the U.S. GNP, and there are many reasons why that range may underestimate the impact of trade secret misappropriation.

The Defend Trade Secrets Act (“DTSA”) (S. 1890 and H.R. 3326) will create a new federal private right of action for trade secret misappropriation to permit U.S. companies to seek monetary and injunctive relief in federal court when their trade secrets are stolen.

Current U.S. Trade Secret Enforcement

Unlike patents, copyrights, and trademarks, trade secret IP protection has historically been relegated to state law protection. Although the Uniform Trade Secrets Act (“UTSA”) has been adopted in some form in forty-four states and the District of Columbia, there has been no uniformity and court decisions vary widely. UTSA provides civil liability for: (a) acquisition of a trade secret if one knows or has reason to know it was improperly acquired; and (b) unauthorized disclosure or use of a trade secret if improperly acquired or knowingly received from someone who improperly acquired it or received it under a duty of confidence. The UTSA remedies include injunctive relief, compensatory damages, an accounting for profits, reasonable royalties for improper use or disclosure, and punitive damages and attorneys’ fees for willful and malicious misappropriation.  Approximately half of the states also have criminal statutes for intentional trade secret theft or knowing use of stolen trade secret information.  In the final analysis, however, State courts are ill-equipped to deal effectively with multi-jurisdictional and particularly international threats.

Federal involvement has largely been left to Department of Justice criminal prosecutions for “economic espionage,” including trade secret theft with the intent to benefit a foreign government, instrumentality, or agent, and more general “theft of trade secrets” under the Economic Espionage Act of 1996, 18 U.S.C. §§ 1831-1839 (“EEA”).  The EEA authorizes U.S. Attorneys to seek criminal penalties and civil injunctive relief.   However, limited prosecutorial resources and priorities and competing demands on the FBI and other investigative assets, have limited the effectiveness of the EEA to protect trade secrets from increasingly sophisticated foreign and domestic threats.  Additionally, the International Trade Commission has employed “misappropriation” principles defined in the EEA to enforce U.S. trade laws that prohibit “unfair methods of competition and unfair acts in the importation of articles…in the United States.”  For example, the ITC has barred importation of foreign products using misappropriated processes protected under domestic trade secret laws under the Section 337 if the Tariff Act of 1930, 19 U.S.C. §1337.  Altogether, existing federal law has not stemmed the tide of trade secret misappropriation.

The New Federal Trade Secret Claim

A trade secret owner may pursue a civil action for misappropriation of a trade secret related to a product or service used or intended to be used in interstate or foreign commerce.

The DTSA is intended to complement and not preempt state law protection and federal EEA remedies, and will be added as a subsection of the EEA, entitled “private civil actions.” 18 U.S.C.  §1836(b)(1). It incorporates definitions of “misappropriation” and “improper means” drawn from the UTSA and uses the broad definition of a “trade secret” already found in the EEA.  18 U.S.C. §1839.

So what is the big change?  The usual comparative benefits of federal courts over state courts in such complex matters requiring broad jurisdictional reach are an important factor.  But the basic remedies sound all too familiar:

  • Damages for actual loss or unjust enrichment or reasonable royalty for unauthorized use;
  • Punitive Damages for willful and malicious misappropriation of up to two times the damages awarded;
  • Reasonable attorneys’ fees; and
  • Injunctive Relief for actual or threatened misappropriation

The real kicker is the opportunity to obtain ex parte seizure orders in extraordinary circumstances to secure materials or information or property “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” 18 U.S.C.  §1836(b)(2)(A)(i).   The trade secret owner must shoulder a heavy burden (irreparable harm, likelihood of removal or destruction of property, least drastic means to avoid interruption of business etc.) to obtain an ex parte order. DTSA also incorporates substantial procedural requirements (required findings of fact and conclusions of law, a TRO like accelerated hearing and bond requirement, and damages for wrongful seizure).  In practice, seizure orders to protect trade secrets will be managed similar to those in use for seizure of counterfeit goods and trademarks under the Trademark Act of 1946, 15 U.S.C. §1116.  This is a potential game changer for businesses going on offense to protect their trade secrets.

This is very good news for business, particularly small business owners who rely on trade secret protection more than patents, copyrights and trademarks.  It does not solve the problem of detection of trade secret theft, but helps substantially with containment of harm and compensation for loss.  It is important to note that the majority of trade secret thefts, whether performed physically or electronically, are done by insiders and parties to whom disclosures are made in confidence.   You can protect yourself by implementing internal compliance procedures and security measures to limit access to and control dissemination of trade secret information and data.

If you have questions about protection of your trade secrets or the potential applicability of the Defend Trade Secrets Act (when effective), please contact Glenn Davis at HeplerBroom, LLC for further information and details.