defend trade secrets act of 2016: a polsinelli update series

© Polsinelli 2016 1

Defend Trade Secrets Act of 2016Substance and Strategies

Q. Todd Dickinson, Stephen E. Fox


Agenda

Background– Uniform Trade Secrets Act (UTSA)– Economic Espionage Act (EEA)

Defend Trade Secrets Act of 2016– Background and rationale– Similarities to UTSA– Basic statutory provisions– Employment law issues

Strategic Considerations


Basics

“Trade Secret” Form of intellectual property (different from patents, copyright

and trademarks) Focus is on proprietary, commercially valuable, information Examples:

– Confidential manufacturing processes

– Formulae

– Customer lists

– Business plans/strategies

– Technologies not protectable by patent

– Employee records• M.C. Dean v. City of Miami Beach, (SDFL) (5/16/15)


UTSA (1985)

Traditionally, trade secrets were a matter for state law before Uniform Trade Secrets Act– 47 states and 3 others (DC, PR, VI) have adopted• Not NY, MA (pending), NC (but very similar)

– http://www.uniformlaws.org/shared/docs/trade%20secrets/utsa_finals_85.pdf

– Variation from state to state• Modest, but sometimes case dispositive: burden of

proof; innocent acquisition; scope of information protectable; “reasonable” measures to protect, etc.

http://www.uniformlaws.org/shared/docs/trade%20secrets/utsa_finals_85.pdf

http://www.uniformlaws.org/shared/docs/trade%20secrets/utsa_finals_85.pdf


UTSA General Provisions

Provides definitions of “trade secret,” “misappropriation,” and “improper means”

Statute of limitations is 3 years Authorizes preservation of secrecy during

legal action (i.e., gag and protective orders) Provides remedies of injunction, damages

and attorneys’ fees


Economic Espionage Act of 1996

First federal trade secret legislation

– Criminalizes trade secret theft (designed to address egregious cases of trade secrect theft by foreign agents)

– DTSA is technically an amendent to EEA “Trade secret” and “misappropriation” definitions similar to UTSA Enforced by Dept. of Justice:

– No civil cause of action, except by Attorney General

– Usually brought by local U.S. Attorney, but requires sign-off by Asst. AG for National Security at Main DOJ

– Often difficult to generate USAtty interest



§1831: Economic Espionage– Misappropriation or conspiracy to misappropriate

trade secrets, intending or knowing that the theft will benefit a foreign power

– Penalties: up to $5M per offense; imprisonment up to 15 years for individuals, and fines of up to $10M for organizations



§1832: Theft of Trade Secret– Misappropriated information related to or

included in a product or service, with knowledge or intent to injure the trade secret owner

– Penalties: imprisonment for up to 10 years for individuals (no fines), and fines of up to $5M for organizations

– Requires forfeiture of property used in the crime– Extraterritorial where involves U.S. citizen or

corporation



DOJ Prosecution Policy– Not intended to criminalize every theft of trade secrets, especially

where civil state remedies exist

– However, availability of civil remedy should not be only factor, since such remedies usually exist in states

– Discretionary factors:• Scope of the criminal activity, including evidence of involvement by a

foreign instrumentality

• Degree of economic injury to the trade secret owner

• Type of trade secrets misappropriated

• Effectiveness of available civil remedies

• Potential deterrent value of the prosecution


Defend Trade Secrets Act of 2016

Rationale Belief that US needed to federalize trade secret law Trade secrets becoming more economically

important– Over $3 billion (same as all exports to Asia)– 2.1 million U.S. jobs

Patent protection coming under fire State-by-state variations increasing Protection becoming more difficult



Rationale Obama Administration takes note:– Administration Strategy on Mitigating the Theft

of U.S. Trade Secrets (February 2013) https://www.whitehouse.gov/sites/default/files/omb/IPEC/admin_strategy_on_mitigating_the_theft_of_u.s._trade_secrets.pdf

– USPTO convenes “Trade Secret Symposium” (Jan 2015) http://www.uspto.gov/about-us/organizational-offices/office-policy-and-international-affairs/uspto-trade-secret-symposium

https://www.whitehouse.gov/sites/default/files/omb/IPEC/admin_strategy_on_mitigating_the_theft_of_u.s._trade_secrets.pdf



http://www.uspto.gov/about-us/organizational-offices/office-policy-and-international-affairs/uspto-trade-secret-symposium





Legislation Introduced originally in 113th Congress; passage

stalls in House Some academic criticism (concerns are increase

in length and cost of litigation) 114th Congress reintroduced with broad,

bipartisan support (Hatch (R-UT)/Coons (D-DE)• Passes Senate (unanimously) 4/4/16• Passes House (410–2) 4/27/2016



Legislation President Obama signs May 11, 2016 Technically an amendment to EEA Text and background:

https://www.congress.gov/bill/114th-congress/senate-bill/1890

Legislative history: – S. Rept. 114-220; – H. Rept. 114-529



https://www.congress.gov/congressional-report/114th-congress/senate-report/220/1

https://www.congress.gov/congressional-report/114th-congress/house-report/529/1


DTSA: Outline of Provisions Forbes: “The New DTSA is the Biggest IP

Development in Years” Federal jurisdiction of theft of trade secrets in

interstate or international commerce Civil remedies for trade secret misappropriation

– Injunction– Reasonable royalties– Damages

New remedy—civil seizure


DTSA: Outline of Provisions

Employment Law issues: No injunction to prevent new employment Injunction aimed at new employment must be

based on evidence of threatened misappropriation, and not “merely information the person knows”

Safe harbor for “whistleblowers” and “anti-retaliation” disclosure of trade secrets

Whistleblower and retaliation protection must be referenced in employment agreements and NDA’s


UTSA-DTSA Similarities

DTSA definition of “trade secret” is substantially similar to UTSA– Trade secret is “… information, including a formula, pattern,

compilation, program, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy” UTSA § 1.4/EEA



DTSA definition of “misappropriation” is substantially similar to UTSA

– (i) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means;

– (ii) Disclosure or use of a trade secret of another without express or implied consent by a person who:• used improper means to acquire knowledge of the trade secret; or

• at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was– derived from or through a person who had utilized improper means to acquire it;

– acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or

– derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or

• before a material change of his [or her] position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake. UTSA § 1.2/DTSA §2(b)(3)(5)



DTSA definition of “improper means” is substantially similar to UTSA– … includes theft, bribery, misrepresentation, breach or

inducement of a breach of a duty to main secrecy, or espionage through electronic or other means UTSA § 1.1/DTSA §2(b)(3)(6)



Remedies: Injunction – UTSA § 2(a)/ DTSA §2(a)(3)(A)– Actual/threatened misappropriation may be enjoined• For length of time the trade secret exists

• Sufficient time to eliminate any competitive advantage due to misappropriation

Reasonable Royalties – UTSA § 2(b)/DTSA §2(a)(3)(A)(iii)– “Exceptional circumstances”


UTSA-DTSA SimilaritiesRemedies: Damages – UTSA § 3/DTSA §2(a)(3)(B)– In addition to injunctive relief, may receive damages

• Includes the actual loss AND the unjust enrichment caused by misappropriation

– “Willful and malicious” behavior results in up to 2 times regular damages §2(a)(3)(c)

Attorney’s Fees – UTSA § 2 (b)/DTSA §2(a)(30(D)– Court may award attorney’s fees to the prevailing party for willful

and malicious misappropriation or actions made in bad faith



Other Provisions: Preservation of Secrecy—permits sealing and “gag

orders” during any legal action concerning the trade secrets

Statute of Limitations—claims may be brought 3 years after the misappropriation is discovered or should have been discovered by the exercise of “reasonable diligence” (UTSA § 6/DTSA §2(a)(d)


Advantages of DTSA

Principal advantage—nationally consistent substantive and procedural law– With USTA state-to-state differences, while minor, can be case-

dispositive (e.g., burden of proof; threatened misappropriation, innocent acquisition; scope of information protectable; “reasonable” measures to protect)

Other advantages– Private party civil access to federal courts– More sophisticated judiciary– Remedies enforceable nationwide; nationwide subpoena power– Simpler trans-state procedural issues (e.g., discovery management)– Significant new remedy—civil seizure


No State Law Preemption

DTSA does not preempt state law (including UTSA)– “Nothing in the amendments made by this section shall be

construed to . . . preempt any other provision of law.“ Trade secret owners have alternative options to protect

their IP– Depending on facts and venue considerations, trade secret

owner may decide to:• (1) bring trade secret action in federal court under DTSA (where

the trade secret owner could also potentially bring state law claims in federal court) or

• (2) bring state law trade secret claims in state court


Jurisdiction and Venue

Jurisdiction– Involves interstate or foreign commerce• DTSA (like trademark law) is grounded in

Commerce Clause v. patents/copyrights in Constitution

– District courts have original jurisdiction (i.e., federal question 18 USC §1836 (c))

– No diversity required



Extraterritoriality (18 USC §1837)– DTSA applies to conduct occurring outside the

United States, if• Offender is a natural person who is a citizen or

permanent resident alien of the United States, or an organization organized in United States; or

• “an act in furtherance of the offense was committed in the United States”



Venue– Look to general venue statute (28 USC §1391) to

determine where lawsuit may be initiated• Defendant’s residence

• Where a substantial part of the events or omissions giving rise to the claim occurred, or a substantial part of property that is the subject of the action is situated

• Where any defendant is subject to personal jurisdiction

• Defendant who is not a US resident may be sued in any judicial district


Remedies – Injunction/Royalties

Injunction– May be pursued to prevent actual or threatened

misappropriation– May be granted on such terms as the court “deems reasonable”• Different standard than eBay in patents?

– May NOT be sought to prevent changing employers if only taking “merely on information the person knows”.

Reasonable Royalties– Permissible to seek under “exceptional circumstances” where

injunction would be inequitable– Royalty period may run only from period of time where use

could have been prohibited (i.e., as a secret)


Remedies - Damages

Damages– “Actual loss” caused by the misappropriation– “Unjust enrichment” not addressed in actual loss

computation– Reasonable royalty as damages calculation

method (“in lieu of other methods”) Enhancement– “Willfully and maliciously” misappropriated– Not more than 2 times regular damages awarded


Remedies – Attorney’s Fees

Attorney’s fees may be awarded if– Misappropriation claim was made “in bad faith”• “May be established by circumstantial evidence”

– Motion to terminate injunction is made or opposed “in bad faith”

– Trade secret is “willfully and maliciously misappropriated”

– “Reasonable” attorney’s fees may be awarded• Octane Fitness standard?

• Costs?


Remedies – Ex Parte Civil Seizure

Civil Seizure New remedy—potentially very powerful Order may issue “only in extraordinary

circumstances” Limitations– Stringent requirements for issuing– Stringent requirements for elements of order itself


Remedies – Ex Parte Civil Seizure

– Application for Seizure Order; DTSA §2(b)(2)(A)(i)

– Ex parte application for an order made by made “by affidavit or verified complaint”

– May be sought only in “extraordinary

circumstances”– Seizure is appropriate only when “necessary to

prevent the propagation or dissemination” of the trade secret


Ex Parte Seizure Order

Requirements for issuing order: DTSA §2(b)(2)(A)(ii)

– Appropriate when ordinary injunction “would be inadequate” because party would “evade, avoid or otherwise not comply”• Legislative history examples:

– Fleeing the country

– Planning to disclosure immediately

– “Otherwise not amenable” to enforcement

– Immediate and irreparable injury

– Harm to applicant of denying order …(1) Outweighs harm to “legitimate interests” of ‘Seizee’

(2) Substantially outweighs harm to third parties


Ex Parte Civil Seizure

Applicant must show “likelihood of success” that:– Information is a trade secret

– 'Seizee' misappropriated by “improper means”

– ‘Seizee’ has “actual possession” of property to be seized

– Application describes matter to be seized “with reasonable particularity” and identifies its location

– 'Seizee' would otherwise “destroy, move, hide or otherwise make inaccessible to the court” if applicant put ‘Seizee' on notice

– Applicant “has not publicized” the requested seizure

• “Don’t want to make news” – Leg history

• Query—only an “applicant” … what happens if media monitoring court dockets publicizes application?



Elements of the Order: DTSA §2(b)(2)(B)

– Set forth findings of fact and conclusions of law

– Narrowest seizure necessary to achieve purpose• “Minimizes interruption” to business of third parties

• “Does not interrupt” legitimate business operations of ‘Seizee‘ “to the extent possible”

– Should be combined with another order prohibiting access or copying by either party to “prevent undue damage” until hearing

– If court does grant access to either, must comply with court custody requirements

– Scope:• Hours of execution

• Whether force can be us to “access locked areas”



Elements of the Order, cont’– Set hearing date: “earliest possible time”, but no later

than 7 days after order, unless both consent– Post bond: Applicant must provide adequate security

for damages for wrongful or wrongfully attempted seizure

Protection from publicity: Court shall take appropriate action to protect ‘Seizee' from publicity about the order of seizure • Query—does this run afoul of First Amendment (i.e.,

gag order)?


Civil Seizure

Protection of Seized Materials– Court shall take custody and secure from physical

and electronic access– If information is on “storage medium”, court shall

prohibit connection to Internet until hearing– Confidentially of other unrelated information shall

be protected, unless 'Seizee' consents– Special Master may be appointed to protect

misappropriated information and return unrelated property (and is bound by NDA)


Civil Seizure

Service of Order– Must be made by federal law enforcement

officer (presumably U.S. Marshall, possibly FBI)

– State or local agents may also participate– Applicant or agent may NOT participate– Technical expert may be allowed to help

facilitate (and is bound by NDA)


Civil Seizure

Seizure Hearing:– Court that issues order shall hold hearing on

the date set in order– Burden of proof is on applicant– Dissolution of order permitted on motion

any time by 'Seizee' or harmed third party, with notice to applicant

– Time limits for discovery may be set to avoid “frustration of purpose of hearing”


Wrongful Seizure and Encryption

Wrongful Seizure– If wrongful or excessive seizure, 'Seizee' has cause of action against

applicant– Relief: same as under Lanham Act: 15 U.S.C. §1116(d)(11)

• “Lost profits, cost of materials, loss of good will, and punitive damages in instances where the seizure was sought in bad faith, and, unless the court finds extenuating circumstances, to recover a reasonable attorney’s fees”

• Posted security doesn’t limit amount of relief

Motion for Encryption– Any person who “claims to have an interest” in the seized material

may move for encryption in method of their choice– May be heard ex parte


Whistleblower Protections

DTSA provides safe harbor to whistleblowers who provide trade secrets to government

Whistleblower entitled to civil/criminal immunity for disclosing trade secret so long as purpose of reporting or investigating is a suspected violation of law and is made to:– Whistleblower's attorney– Government– Court-filing under seal

If whistleblower files lawsuit for retaliation against employer based on reporting of a suspected violation of law, whistleblower may also use the trade secret in that anti-retaliation lawsuit


Whistleblower Protections

Employer must provide notice of immunity in any employment contract that governs the use of trade secret or confidential information

Notice of immunity must be provided in the contract itself or the contract must cross reference to a company policy document that includes discussion of immunity

If employer fails to include notice in contract, it is prohibited from being awarded exemplary damages or attorneys' fees in suit under DTSA


Miscellaneous Provisions Statute of Limitations: 3 years after discovery

or should have been discovered with “reasonable diligence”

Effective Date: Applies to acts occurring on or after signing

Increases EEA $5M limit to “greater of $5M or 3 times value of TS “to the organization”


Miscellaneous Provisions

Non-disclosure: Court won’t disclose asserted information without sealed submission and can’t be used later against owner

RICO: EEA criminal provisions are now “predicate offenses” under RICO racketeering definition


AG Reporting Obligations

DTSA fails to provide protection to US companies for trade secret theft occurring abroad

But, AG must submit biannual report House/Senate Committees – Must report on scope/breadth of trade secret theft from

US companies occurring outside US and extent such theft is being sponsored by foreign governments/agents

– Report must discuss mechanisms for US companies to prevent trade secret theft abroad and identify any country whose laws on trade secret theft pose problem for US companies


Contact Information

Q. Todd DickinsonShareholder | PolsinelliWashington, [email protected]

mailto:[email protected]


Contact Information

Stephen E. Fox, Esq. Shareholder | PolsinelliDallas, [email protected]@StephenEFoxhttps://www.linkedin.com/in/stephenefox

mailto:[email protected]


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