New law opens federal courts to trade secrets disputes

The world’s most famous trade secret, the vigilantly guarded recipe for Coca-Cola, is kept in a purpose-built vault in the company’s Atlanta headquarters. Most trade secrets, however, are kept on computers, where they are decidedly more vulnerable to hackers and avaricious employees. Most are not as valuable as the Coke recipe, but they are highly valuable nevertheless—one malicious click of a send button can instantly destroy the value of assets worth millions of dollars to their rightful owners.

In response to the increasing vulnerability of trade secrets, Congress passed with near-unanimous votes the Defend Trade Secrets Act, which President Obama signed into law May 11. The law for the first time creates a civil cause of action in federal courts for misappropriation of trade secrets, which had previously been exclusively the domain of state courts. Intellectual property attorneys say that the law will help companies more easily pursue trade secret theft across both state and international borders.

“As our economy trends toward an information-based, technology-based economy, stealing information which is contained in computer system, which a lot of trade secret theft is, becomes more of a concern,” said James Cleland, an IP attorney with Brinks Gilson & Lione in Ann Arbor, Michigan. “You can pop a thumb drive into a computer, and that thumb drive becomes so portable and easy to take wherever somebody wants to take it. So I think the ability to police and enforce trade secrets quickly, and with some strong teeth, becomes very important for U.S. companies.”

The DTSA is expected to provide greater uniformity in trade secret law. Although 48 states have adopted some form of the Uniform Trade Secrets Act, their courts have applied it in inconsistent ways, down to how to define a trade secret itself. The federal law defines the term broadly to include all secrets “related to a product or service used in, or intended for use in, interstate or foreign commerce”—a definition expansive enough to confer federal jurisdiction on seemingly almost any trade secret dispute.

Carpe secreto

The DTSA also gives trade secret owners a powerful, and controversial, tool unavailable to them in state courts: It allows plaintiffs to request, without notice to the defendant, that a judge instruct federal marshals to seize any property necessary to prevent the dissemination of trade secrets.

Such ex parte seizures are a decidedly strong remedy against potential trade secret theft. But John Williamson, an IP attorney with Finnegan in Washington, D.C., believes that such requests will likely be granted only very rarely, since federal judges are already empowered to issue temporary restraining orders prohibiting parties from disseminating specific information. The law allows seizures only in extraordinary circumstances, such as, Williamson said, if the target of the order might be inclined to flee the country.

“In order to obtain one of these ex parte seizures, you have to convince a federal judge that a temporary restraining order wouldn’t be good enough, and I think that’s going to be hard to do,” Williamson said. “It requires a judge to assume that a company would ignore a temporary restraining order, and that’s a hard assumption for a judge to make.”

The DTSA also allows for countersuits to recover damages for wrongful or excessive seizures, which will likely further constrain their use. Williamson did predict that the new law might make judges more inclined to issue temporary restraining orders as an alternative remedy, since such orders would put less strain on federal resources and would no longer be the most draconian option available to the court.

Re-writes needed to keep rights

The DTSA does offer some significant protections for employees, who are the most common vessel for smuggling out a company’s trade secrets. These changes in the law figure to be the most immediately important for companies. While most of the law’s provisions won’t make an impact unless or until companies suspect that their trade secrets are being spirited away, IP attorneys said that companies should begin updating their employment contacts promptly.

Whistleblowers are provided immunity for divulging trade secrets to law enforcement agencies or attorneys for the purpose of reporting suspected law-breaking, or in documents filed in court under seal. Employers are required to provide notice of the immunity rules in any employment contracts governing the use of trade secrets or confidential information. Companies that fail to do so can still bring actions against those employees, but forfeit their new right to collect exemplary damages or attorneys’ fees from the employee for misappropriation of trade secrets.

“Whether you have a trade secret problem right now or not, it makes sense to review your trade secret contracts right now to make sure that you preserve all your rights in the future, and to make sure that employees are aware of all their rights under this new scheme,” Williamson said. “That’s the one thing that isn’t necessarily implicated by future litigation, but is implicated right now by contract law and imposes obligations right now on employers and grants rights to employees.”

One thing that companies won’t be able to do is use federal law to preclude employees from moving to new jobs with competitors. The DTSA forbids courts from imposing such remedies, and provides that conditions placed on new employment must be based on evidence of threatened misappropriation and not merely on the information the person knows. The federal law does not preempt any existing state law, however, some of which are more restrictive on employee mobility.

Now the real fun begins

Trade secrets have long been the most overlooked field of intellectual property law, playing fourth-fiddle to patent, trademark and copyright law, each of which has a robustly developed body of federal law. Now trade secrets can plant their flag in federal case law to go along with their increasing economic importance. The federal courts already hear many trade secrets claims based on diversity jurisdiction, but do so applying the applicable state laws, which can vary in important ways.

Russell Beck, an IP attorney with Beck Reed Riden in Boston, predicted a much higher volume of trade secrets disputes in federal courts, both because of cases moving from state courts to federal courts and also because he expected more trade dispute litigation overall as companies avail themselves of the DTSA’s new protection. Beck said he expected trade secret law both to become more uniform and also more protective of the secret-keepers.

“What I think you’ll find is as things make their way to the circuit level, and ultimately to the Supreme Court, the laws will end up getting harmonized at the federal level and that will probably trickle down to state level,” Beck said. “I think the courts will take a very expansive view of what constitutes a trade secret, and I think they will take a narrow view of what constitutes an exception. There is a congressional intent that this be read as broadly as possible.”

The differing nuances of state laws result from the different ways courts have interpreted them. (States are enforcing, for the most part, identical statutes, after all.) Much of the DTSA’s impact will likewise depend on how the courts interpret its new language.

Follow David Donovan on Twitter @NCLWDonovan