Making a Federal Case Out of Trade Secret Misappropriation

It’s official.  Defying all odds, the Senate and House passed the Defend Trade Secrets Act (DTSA) with bipartisan support and President Obama signed it.  Now what?


Same Standard, + 1

Under the DTSA and under most state laws (48 states adopted the Uniform Trade Secrets Act-get with the program NY and MA), the standard is the same, a trade secret is: (A) information that derives value from not being generally known and (B) owner took reasonable steps to keep information secret.  However under the DTSA the secret information must also affect interstate commerce.

Likely Major Effects of Federal vs. State Court Venue

State courts are generally perceived to be more lenient about allowing questionable cases to survive the initial pleading stage, whereas Federal courts apply the stricter Rule 12(b) standards for dismissal and are often considered more likely to weed out unmeritorious claims.

State courts tend to permit more discovery gamesmanship and delay, whereas Federal Rule 26 mandatory disclosures require parties to initially disclose key information near the outset of the case.

Similar Penalties + The Nuclear Remedy

Like the UTSA adopted by most states, the DTSA allows injunctions, damages, disgorgement of ill-gotten gains and a multiplier (double the penalties for “willful or malicious” misappropriation).  Also like the UTSA, the DTSA allows the courts to award attorneys’ fees either against a defendant who willfully or maliciously misappropriated or against a plaintiff who brought a trade secret claim in bad faith.

However, under extraordinary circumstances, the DTSA authorizes ex parte seizure of “property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.”

Carve-Out for State Law Employee Protections

Many observers were concerned that the DTSA might replace state laws protecting employee’s rights, but the DTSA expressly provides that it is not intended to supersede “an applicable State law prohibiting restraints on the practice of a lawful, trade or business.”

What’s Next

The DTSA requires trade secret owners to include language giving notice regarding a whistleblower exception, so trade secret owners who intend to rely on the DTSA should be scrambling to amend their employment agreements and non-disclosure agreements to include the whistleblower exception language. 

The whistleblower amendment immunizes employees from civil or criminal prosecution if, in the course of reporting their employer’s wrongdoing, they disclose their employer’s trade secrets confidentially to government agency or in court, under seal.

Once the required language is in place, we should expect trade secret owners and their counsel to weigh the tactical pros and cons of litigating their trade secrets claims under the DTSA in federal court vs. bringing them under the applicable USTA in state courts.