The Defend Trade Secrets Act

A new federal law allows federal courts to hear civil trade secret cases.

The Defend Trade Secrets Act (DTSA), signed into law in May 11, 2016, “federalizes” trade secret law by providing a procedure for trade secret owners to 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.

The Federal Act and State Acts

Prior to the DTSA, trade secret owners could bring civil lawsuits only in state courts, under state laws 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 important ways, the DTSA and state laws based on the UTSA 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, compensatory damages).

But the DTSA may be more favorable to trade secret owners than state laws 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

The DTSA also has some built-in protections for those accused of trade secret theft. These include:

  • Seizures. If a trade secret owner orders a trade secret seizure, there must be a hearing within seven days of the seizure order. At the hearing, 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.
  • Attorney’s fees for bad faith. A defendant accused of misappropriation can recover attorney’s fees from the trade secret owner if the claims were made in bad faith.

Finally, the DTSA includes a provision that may 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 disclosure.

Nondisclosure Agreements

The new 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.) 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 IC. The failure to include the provision does not prevent filing in federal court under the DTSA.