Using the Defend Trade Secrets Act to Protect Your Company's Trade Secrets

Understanding key provisions of the Defend Trade Secrets Act (DTSA).

Like many companies, yours might possess trade secrets; that is, information that gives you a competitive advantage because it's not generally known and cannot be readily learned by others who could benefit from it.

The best way to protect a trade secret is, of course, to keep it under wraps. However, lawsuits are another possible tool once a secret has leaked.

The Defend Trade Secrets Act (DTSA), signed into law in 2016, “federalizes” trade secret law, by offering a procedure by which trade secret owners can file civil lawsuits in federal court. Any company possessing a trade secret that is “related to a product or service used in, or intended for use in, interstate or foreign commerce” can take advantage of the provisions of the DTSA.

Importance of Trade Secret Protection

There are many forms of intellectual property protected by U.S. law, such as copyrights, trademarks, and patents. Trade secrets are another critical form of intellectual property.

Trade secrets give a business some sort of competitive advantage over competitors. Their potential scope is expansive; they can include a formula, pattern, compilation, program, device, method, technique, or process that you have made reasonable efforts to keep secret.

Common examples of trade secrets include a secret formula for a product, a customer or client list, or a well-developed technical method for manufacturing goods.

Unlike other forms of intellectual property, a business owner does not need to formally register a trade secret with a government entity. Rather, these exist simply because of the manner in which you use the information. The "secret" part of a trade secret is critical. If the information is publicly available or the owner doesn't make reasonable efforts to keep it secure, it may lack protection.

Prior to the DTSA, trade secrets existed mostly as a matter of state common law or local statutes. Their precise scope and enforceability varied from one state to another.

Learn more about Trade Secret Basics.

Federal and State Trade Secret Acts

The DTSA, at 18 U.S. Code § 1836 and following, aims to federalize the various protections surrounding trade secrets. Specifically, the statute provides that: "An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce."

In other words, as long as your trade secret is used in interstate or foreign commerce, and not just domestically within the four walls of your state, you can bring an action in federal court.

A winning party can, under the terms of 18 U.S.C. 1836(b)(3)(B) of the DTSA, recover injunctive relief, monetary damages, and attorney’s fees. Moreover, because the action is in federal court, the winning party's injunction could be national in scope, which creates a major advantage over an equivalent state court proceeding.

Before the DTSA, trade secret owners could, for the most part, bring civil lawsuits only in state courts, under state laws. These state laws were typically based on the Uniform Trade Secrets Act (UTSA). (Except for New York and Massachusetts, every state has adopted some version of the UTSA.)

In many ways, the DTSA and UTSA-based state laws are similar. For example, the definitions of trade secrets and misappropriation are the same, as are the statute of limitations (three years), and the remedies for theft (injunctive relief and compensatory damages).

The DTSA may, however, be more favorable to trade secret owners than state laws, particularly because it provides access to federal courts. In addition, it provides for seizing trade secrets without giving notice to the defendant, an unprecedented leap from the notice requirements of state laws based on the UTSA.

Federal Protections for Defendants in

Trade Secret Lawsuits

Unlike most state laws, the DTSA has some built-in protections for people accused of trade secret theft (who are often former employees of the plaintiff corporation). These include:

  • Hearings in cases of seizures. If a trade secret owner orders a trade secret seizure, a hearing must be held within seven days of the seizure order. At the hearing (which takes place in front of a federal district court judge), the trade secret owner must prove the legal and factual basis for the order.
  • Employee injunctions. The DTSA sets limits on injunctions against former employees, particularly when an employer seeks to prevent an ex-employee from entering into another employment relationship.
  • Attorneys' fees for bad faith. A defendant accused of misappropriation can recover attorneys' fees from a trade secret owner who is found to have made the claims in bad faith.

Finally, the DTSA includes a provision that might affect the disclosure of trade secrets during and after litigation, by preventing disclosures at trial and within court opinions unless the trade secret owner has first been briefed on the intended disclosure.

Federal Requirements for Nondisclosure Agreements

This federal law further protects employees by requiring employers to include a notice of immunity “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” The notice should also be included in agreements for independent contractors (ICs). This notice informs employees of the circumstances in which a trade secret disclosure would not be a violation of a nondisclosure agreement (when it is done, for example, in confidence to an attorney).

A sample provision would include the following language:

Notice of Immunity from Liability. An individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual (i) files any document containing the trade secret under seal; and (ii) does not disclose the trade secret, except pursuant to court order.

An employer who fails to include the provision is prohibited from recovering exemplary (double) damages and attorney fees from the employee or ICs. The failure to include the provision does not prevent filing in federal court under the DTSA.

If you are an employer, it is ordinarily a smart idea to have your employees sign a nondisclosure agreement that explains the types of trade secrets that are prohibited from disclosure, and explains precisely what information they must maintain as confidential.

Such an agreement would be helpful if you needed to pursue legal action either in state court (under common law and state statutes) or in federal court (under the DTSA).

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