Skip to content

The Defend Trade Secrets Act of 2016: United States federalizes trade secret misappropriation law

On May 11 2016, the Defend Trade Secrets Act of 2016 (DTSA) was signed into law, amending the Economic Espionage Act of 1996, to add a private civil cause of action for trademark misappropriation, make available racketeering claims based on economic espionage and trade secret misappropriation offenses and increase criminal penalties for companies convicted of trade secret theft. The DTSA is widely viewed as one of the most significant pieces of trade secret legislation in decades.

Prior to the enactment of the DTSA, civil claims based on misappropriation of trade secrets could only be brought under state law in state courts, unless another basis for federal court jurisdiction existed. The DTSA provides a uniform law of trade secret misappropriation nationwide and affords litigants a federal forum for all trade secret misappropriation claims; thus, it should lead to greater predictability in an area of law of importance to domestic and international business. Although the DTSA does not preempt state law, and a plaintiff may still proceed on a trade secret misappropriation claim under state law (instead of or in parallel with a DTSA claim), it affords more lenient pleading standards than some state laws and its nationwide application is likely to generate more case law, giving more certainty.

Remedies

Like most state trade secret laws, the definition of "trade secret" under the DTSA is extremely broad, and expressly includes intangible information. Claims under the DTSA are subject to a three-year statute of limitations, and various remedies are available for DTSA violations, including injunctive relief, double damages for wilful and malicious misappropriation, and attorneys' fees. The available remedies also include ex parte seizure where a plaintiff can show that a defendant, if given notice of the seizure application, "would destroy, move, hide, or otherwise make [a trade secret] inaccessible to the court ….". If a seizure is ordered, it may be carried out immediately by law enforcement, and the seized property will be held by the court pending and a full hearing, which must be held not less than seven days after the seizure order.

The DTSA also recognizes the challenges associated with protecting trade secrets in the digital age, and requires that seized property containing trade secrets be secured from physical and electronic access while in the custody of the court and instructs the court to ensure that no seized storage medium is connected to the Internet pending a full hearing. The DTSA further allows for a person who claims to have an interest in seized trade secrets to apply to have the material encrypted.

In addition to creating a new cause of action for trade secret misappropriation, the DTSA adds foreign economic espionage and criminal trade secret theft as predicate offenses under the Racketeer Influenced and Corrupt Organizations Act (RICO). Thus, a civil plaintiff can establish a RICO claim based on trade secret theft occurring abroad if it causes damages in the United States. As civil RICO claims may result in the award of treble damages and attorneys' fees, the DTSA provides a strong incentive for U.S. companies to police the misappropriation of their trade secrets by foreigners.

Whistleblowers

Finally, the DTSA prohibits retaliation against whistleblowers who disclose trade secrets to the government in connection with reporting a suspected violation of the law. Employers must notify employees, contractors and consultants of the whistleblower immunity provisions in the DTSA, so contracts with employees or contractors that govern the use of trade secrets or other confidential information should be updated accordingly. To incentivize companies to provide the required notice, the DTSA limits the damages available from employees who commit trade secret misappropriation (even where no whistleblowing occurred) if their confidentiality agreements did not contain the notice.

 
Legal and Regulatory Risk Note
United States