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.

Crime Does Not Pay

You have to feel a little sorry for Yihao Pu. Pu was a finance engineer who worked for two companies with proprietary systems for executing high frequency stock trading (HFT.)  Pu illegally downloaded his employers’ software, but instead of selling it to a competitor, he decided to use it to further his own investments, and promptly managed to lose $40,000 of his own money.

Somehow this criminal mastermind got caught, and Pu faced federal indictments for wire fraud, transmission of trade secrets, unauthorized access of a protected computer and obstruction of justice. Pu pled guilty to possession and transmission of trade secrets.

Pu’s Sentencing

At sentencing, Pu argued that since he hadn’t gained anything (remember he lost $40,000) and his employers hadn’t suffered any actual loss, he should not have to pay restitution. The district court disagreed, finding that Pu’s employers had spent more than $12 million developing their respective HFT algorithms, and this represented the “intended loss amount.”  Using this intended loss amount, the trial court applied the sentencing guidelines and sentenced Pu to three years in prison, three years of probation and ordered him to pay $759,649.55 in restitution.

Pu’s Appeal

Pu appealed the restitution order, and his luck must be turning because the 7^th Circuit agreed.  The 7^th Circuit held the district court erred in finding that “it was more likely than not that Pu intended to cause a loss to the victims that equaled the cost of development [$12 million].”  The 7^th Circuit noted that there was no evidence that Pu had some grander scheme other than his own inept attempts to use the HFT system for his own trading.  The 7^th Circuit criticized the district court for failing to consider Pu’s argument that he only stole the outputs and not the source code and thus “the intended loss should be zero, or at most $2,000.”

On appeal, Pu further argued that the district court mistakenly believed that because Pu had pled guilty, it was required to find intended loss and impose restitution. The 7^th Circuit agreed that “the guidelines do not require a loss calculation greater than zero,” and left it to the district court to determine the proper restitution award on remand.

Finally, Pu objected that the district court appears to have ordered restitution based on his employers’ conclusory summary of their costs investigating Pu’s misdeeds, which (not coincidentally) totaled $759,649.55. The 7^th Circuit agreed, noting that “the district court is required to base its restitution order, the extent practicable, on a complete accounting of the loss” and that Pu’s employer’s conclusory summary was not sufficient.

In a prior post, Feds Focus on Trade Secrets, we noted that federal lawmakers had introduced two bills designed to provide a federal civil remedy for trade secret theft.

In late January 2016, the Senate Judiciary Committee approved the Senate version of the legislation (S. 1890) called the Defend Trade Secrets Act (“DTSA”).  The bill will likely be brought to the Senate floor for a vote, and is expected to pass.

This is a big deal, since previously trade secret claims could be pursued only under state law.  (Most states have adopted some variation of the Uniform Trade Secrets Act.)  One legal commentator has stated the impending DTSA passage will be a “watershed event in trade secret law” and “will be to trade secret law what the creation of the Federal Circuit was to patent law.”

Here is a re-cap of the final amendments made by the Senate to the DTSA:

• The language allowing ex parte seizures has been tightened; seizure is now available only in “extraordinary circumstances” and the court must find that the person against whom seizure would be ordered has “actual possession” of the trade secret material.
• Injunctions must be supported by proof of an “actual or threatened misappropriation” and an injunction cannot “prevent a person from entering into an employment relationship.”
• Exemplary damages were reduced from up to three times actual damages to up to two times actual damages.
• Whistleblowers who disclose trade secrets either in confidence to government officials or in a lawsuit alleging retaliation by an employer are now protected by “safe harbor” provisions.
• The statute of limitations has been reduced from five years to three years.

Stay tuned for further developments.

This is a short update to a previous post, Zillow Case Shows Danger of Unprotected Trade Secrets During Business Negotiations, posted on May 8, 2015.

In that post, we described a trade secrets lawsuit filed against Zillow by a competing online real estate information company, Top Agent Network.  Zillow prevailed in an early skirmish in that case when the District Court issued an order dismissing Top Agent’s core trade secrets claim.  The court held that Top Agent failed to allege sufficient detail showing that its alleged trade secrets were, in fact, trade secrets instead of mere non-protectable ideas, features, and functions of design and operation.

But the dismissal order allowed Top Agent leave to amend (i.e., to try to state a proper trade secrets claim).  Top Agent amended, and now its trade secrets claim is back.  Score round 2 in this bout to Top Agent.

The amended trade secret claim

In its amended complaint, Top Agent specified its alleged trade secrets in far greater detail.

The amended complaint focuses on slides distributed at a March 12, 2014 meeting between Top Agent and Zillow executives.  Those slides, according to the complaint, included “internal metrics concerning client engagement, market penetration, members’ use of information on [Top Agent’s] private web pages, and the size of its homebuyer secondary market; the frequency with which members in different markets open their emails; the percentage of home sales made by [Top Agent] member agents in three geographic areas and member statistics from those markets; and market research survey results indicating how clients specifically use [Top Agent] in advancing their businesses.”

The amended complaint further alleged that all of the above information was kept confidential (through confidentiality provisions in employment agreements) and had economic value.

Finally, Top Agent alleged Zillow misappropriated its trade secrets by using the aforementioned metrics and market data without Top Agent’s permission, after Zillow assured Top Agent that the information would be kept confidential.

Zillow filed a motion to dismiss Top Agent’s amended complaint.

The District Court’s Order

This time around, the District Court ruled that Top Agent stated a valid claim for trade secret misappropriation.  Whereas Top Agent’s first complaint failed to specify what constituted its trade secrets (with the allegations sounding more like non-protectable ideas, features, and functions), the amended complaint provided the necessary details and focused on protectable metrics and market data.

As to misappropriation, the court acknowledged that Top Agent’s allegations remained “somewhat conclusory,” in that they fell short of “chronicling in precisely what manner such data proved integral to the development of” Zillow’s competing product offerings.  But, the court held, “to impose such a steep hurdle prior to discovery would be inappropriate.”

The court also upheld Top Agent’s claim for breach of oral contract, which alleged that Zillow broke its verbal promise to keep Top Agent’s information confidential.

The court dismissed, without leave to amend, Top Agent’s fraud and unfair competition claims on the grounds that they were superseded by the California Uniform Trade Secrets Act.

Takeaway

The main lesson from this case, as stated in our prior post, remains that companies should be acutely aware of their trade secrets, and should always obtain a written NDA before sharing those secrets.

Top Agent’s failure to properly articulate its trade secrets in its original complaint and its failure to obtain a written NDA turned out to not be fatal to its case, but it forced the case into an early defensive posture, which is never good for a plaintiff.

We’ll continue to monitor this case for developments.

As I mentioned in a prior post on real estate investment vehicles’ use of intellectual property, the real estate industry is not immune from legal disputes arising from that “other” type of property: intellectual property – specifically trade secrets.

A recent case involving Zillow in the federal Northern District of California illustrates the point. In that case, Zillow, one of the nation’s most recognizable online real estate information marketplaces, was accused of trade secret misappropriation by Top Agent Network, Inc., a competing online real estate information dissemination service.

Score the early rounds of this battle to Zillow.

The complaint

Top Agent is a private online community and web application available to the top ten percent of real estate agents in certain local markets, focusing on “Upcoming Listings” – properties for sale that do not yet appear on the Multiple Listing Service (MLS), which is available to all registered real estate agents.

Top Agent’s complaint accused Zillow of misappropriating Top Agent’s trade secrets. According to the complaint, executives from Top Agent and Zillow began communicating in early 2014. Top Agent expressed interest in Zillow’s potential investment in the company. Zillow’s executive verbally assured Top Agent that all information provided by Top Agent would be kept confidential and used solely to evaluate a potential investment, but no non-disclosure agreement (NDA) was signed.

Top Agent set up an account for Zillow’s executive, allowing him to access Top Agent’s member-only content, including its “Upcoming Listings,” and the executives discussed Top Agent’s features, membership model, and business strategy. Through its account access, Zillow viewed dozens of pages within Top Agent’s private web application and opened more than a hundred member posts.

But Zillow eventually informed Top Agent that it would not be investing in the company. Soon after, Zillow launched its own “Upcoming Listings” product, which Top Agent alleged  contained all of the core features of Top Agent’s service.

In addition to trade secret misappropriation, Top Agent also asserted claims under the federal Computer Fraud and Abuse Act, California’s Computer Data Access and Fraud Act, and an assortment of other claims.

The District Court’s Order

On Zillow’s motion, the District Court dismissed all but one claim – breach of oral contract.

Top Agent’s complaint failed to state a trade secret misappropriation claim, the court held, because Top Agent failed to adequately identify the alleged trade secrets.

The court started with the familiar statutory definition of a trade secret under the California Uniform Trade Secrets Act:

1. information, including a formula, pattern, compilation, program, device, method, technique, or process, that
2. derives independent economic value, actual or potential, from not being generally known to the public or to other persons who could obtain economic value from its disclosure or use, and
3. is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

The court found that Top Agent only described its alleged trade secrets in “broad strokes,” without sufficient detail. Top Agent’s complaint alluded to the manner in which its “Coming Soon” feature was developed and implemented, the strategy behind the feature, and the identity of Top Agent member agents who made listing posts. Nothing in the complaint, the court held, showed how Top Agent’s information amounted to more than non-protectable ideas, features, and functions of design and operation (as opposed to protectable facts or “empirical data”). The court also held the complaint failed to describe Top Agent’s reasonable efforts to maintain the secrecy of its web content.

The court dismissed the Computer Fraud and Abuse Act claim on the ground that Top Agent had plainly given Zillow “authorization” to access its site (noting that how Zillow used information gained from that access was beyond the scope of the statute). The court likewise dismissed the Computer Data Access and Fraud Act because Zillow had “permission” to access Top Agent’s site.

The court dismissed all the remaining claims (other than breach of oral agreement) on the grounds of preemption, since they were all based on “the same nucleus of facts” as the trade secret claim.

Moving forward

The court’s dismissal order was “with leave” to amend, meaning Top Agent will have a chance to amend its complaint to more specifically describe its trade secrets and to show how its other claims arise from rights separate from trade secret law.

This early victory for Zillow, however, reinforces two lessons:

• Companies should have a very clear understanding of their trade secret inventory, and should be able to articulate how the information meets the statutory requirement of a trade secret as well as the reasonable efforts undertaken to protect them. There is a lot of “gray” in this area of the law, and it helps to have clarity before dealing with potential business partners or adversaries.
• Companies possessing trade secrets should always enter into a written NDA before sharing trade secrets with an outsider as part of any business relationship. Failing to obtain an NDA might constitute a per se failure use reasonable efforts to protect the trade secrets.

Until recently, trade secrets have been mostly overlooked by federal lawmakers.  While federal laws govern patents, trademarks, and copyrights, trade secret protection has been left primarily to the states, most of which have enacted some variation of the Uniform Trade Secrets Act (which, itself, provides for no federal civil remedies).

But differences among state trade secret laws remain substantial (and often difficult to predict), and recent high profile examples of trade secret theft and economic espionage (see below) have illustrated the increasingly national scope of trade secret issues.

At the same time, intellectual property owners have become increasingly aware that trade secret laws sometimes offer more meaningful protection for valuable company information than patent and other laws.  Put simply, trade secret protection can include more diverse types of information than patent law, does not require the disclosure of sensitive information in connection with any registration process, and doesn’t expire after an arbitrary time.

Trade secrets now have the attention of federal lawmakers, as demonstrated by two pending bills.

Proposed 2014 Federal Trade Secret Legislation: And Then There Were Two

My partner Josh Cohen previously published a post detailing the first proposed federal trade secret legislation, the Defend Trade Secrets Act of 2014 (S. 2267), which was introduced in April.

In July, a second bill was introduced in the House — the Trade Secrets Protection Act of 2014 (H.R. 5233).

Both pending bills seek to create a federal civil remedy for trade secret theft.  The bills are similar: both would permit a trade secret owner to bring a federal civil action seeking redress for trade secret theft relating to a product or service that is used in, or intended for use in, interstate or foreign commerce.  Both bills also contain similar provisions regarding available remedies, which include damages, injunctive relief, potential fee shifting, and potential treble damages.

The Senate bill (the Defend Trade Secrets Act of 2014) would also allow for a trade secret owner to apply to the district court for an ex parte order for preservation of evidence and seizure of property used to commit trade secret theft.  The House bill (the Trade Secrets Protection Act of 2014) includes a similar mechanism, but imposes slightly higher procedural requirements before a seizure order can issue (including a showing of likely success on the merits of the trade secret claim).

Economic Espionage Act Roots

Both pending federal bills are technically amendments to the 1996 Economic Espionage Act, which was an early step toward increased federal  attention to the topic of trade secrets.  That Act criminalized acts of trade secret theft by foreign parties or governments, or by domestic parties if the trade secret relates to interstate commerce.

The concerns giving rise to the Economic Espionage Act have made some headlines recently.  In March, a man was found guilty of stealing DuPont’s trade secrets and selling them to a Chinese chemical company, and was later sentenced to 15 years in prison.  In May, an indictment was issued against five Chinese military officers, accusing them of stealing trade secrets of five companies specializing in solar panels, metals, and nuclear power plants.  New stories like this seem to emerge almost every week.

The pending federal bills would provide federal civil remedies in addition to the criminal penalties available under the Economic Espionage Act.

What about trade secret claims based on state law?

Neither of the pending federal bills would preempt the patchwork of existing state trade secret laws, so trade secret owners can continue to rely on state law even if one of the federal bills is enacted.  But for companies conducting business across several states, the new federal proposals may offer greater stability and predictability for pursuing trade secret thieves.

While the term “trade secret” generally makes people think of Coca-Cola’s secret formula, software source codes, or company client lists, trade secret law has evolved to include everything from proprietary formulae to abstract ideas.  It may not come as a surprise then, that the “trade secret” claim is now being used in a variety of different contexts to broadly shield companies, including non-profit organizations, from disclosing sensitive financial information.

After coming under fire for its purported lack of transparency with regard to the way it used Hurricane Sandy donations, the Red Cross fueled the flames by invoking the trade secret exemption under New York’s Freedom of Information Law to prevent disclosure of “confidential proprietary data” in response to a public records request.  Can the Red Cross, a self-described “nonprofit, tax-exempt, charitable institution” with the legal status of “a federal instrumentality,” use the trade secret exemption? And even if it can, should it?

Under expansive trade secret laws, non-profits may be able to invoke trade secret protections to prevent disclosure of certain sensitive information.  Although its primary objective is not to seek financial returns for its members, a non-profit competes with other organizations for funding and donations to support a cause.  In that sense, non-profits are competitive businesses just like for-profit companies or corporations.  Just as a for-profit company may refuse to disclose certain sensitive financial or other proprietary information that may put it at an economic disadvantage in relation to other companies involved in the same trade, a non-profit may also do so if disclosure of certain information would put it at a competitive disadvantage with other similar organizations by reducing the amount of donations it receives.

However, unlike a for-profit company, which generates revenue by providing some tangible good or service, a non-profit relies mostly on external funding sources for financial support (e.g. the government and donors) to achieve its goals.  This means that a non-profit is particularly dependent on its public image in ways that a for-profit company might not be.  Just because non-profits may claim broad trade secret protections over their financial information doesn’t mean they should.  Any indication that a non-profit is being less than forthright with the public (i.e. its donor base) may undercut the organization’s image – and its donations – and may ultimately negate any benefit of keeping certain information a secret.  This is especially true in the Red Cross’s case, which touts its special relationship with the federal government as a source of legitimacy, and therefore, may be held to a higher standard of public accountability, fairly or unfairly.

The Red Cross subsequently released additional information about its general spending allocations voluntarily, while keeping other, more-detailed information secret.   Arguably, if it had taken this more considered approach in the first place rather than stonewalling the public records request, the Red Cross could have avoided further criticism about its lack of transparency and whatever deleterious effect it might have on its future donations.

Just because something is legal doesn’t mean it makes business sense.  Like other businesses, non-profits should be able to invoke trade secret for confidential or sensitive proprietary information.  While it makes sense for a non-profit to keep its donor lists a secret to prevent other organizations from poaching and diverting donations, it makes less sense for an organization dedicated to disaster relief to refuse to disclose to its donors if and how their money was distributed in response to a natural disaster.  As businesses that exist for the public good and by virtue of public support, non-profit organizations in particular should remain mindful of public perception when invoking trade secret protections.

Conventional wisdom holds that software algorithms and source code can be protected as trade secrets, but broader technology “design concepts” can only be safeguarded by registering for patent protection.  But that conventional wisdom is bending as more and more courts grapple with the boundaries between trade secret and patent law.  In one of the more interesting California trade secret cases from the second quarter of 2014 — Altavion, Inc. v. Konica Minolta Systems Laboratory Inc. — the court of appeal confirmed that technology design concepts can be trade secrets.

Altavion’s Digital Stamping Technology (DST)

The plaintiff, Altavion, was a small company that invented a process for self-authenticating documents through the use of barcodes containing encrypted data about the contents of the original documents, otherwise known as digital stamping technology or DST.  Altavion alleged that several aspects of its DST process constituted trade secrets and that the defendant, Konica, stole those trade secrets.  Altavion and Konica had entered negotiations, subject to a nondisclosure agreement, aimed at embedding Altavion’s DST in Konica’s multifunction printers.  After those negotiations failed, Altavion discovered that Konica had secretly filed for patents encompassing Altavion’s DST process.

The trial court found that Altavion’s DST concepts were trade secrets, that Konica gained all of its knowledge of DST through the confidential negotiations with Altavion, and that Konica misappropriated Altavion’s DST trade secrets.  The court of appeal affirmed.

Can a patentable idea also be a trade secret?

On appeal, Konica argued that “[g]eneralized ideas and inventions are protectable by patents and thus cannot be trade secrets.”  The court of appeal disagreed, holding that “it is clear that if a patentable idea is kept secret, the idea itself can constitute information protectable by trade secret law.”  The court noted the different aims of patent law (shielding a publicly disclosed idea from infringement) and trade secret law (the right to control the dissemination of secret information), and observed that due to concerns regarding patent validity many businesses now choose to protect commercially valuable information through trade secret protection.

The court distinguished between the various components of Altavion’s DST technology.  At one end of the spectrum was Altavion’s “general idea” for a barcode allowing for self-authentication of documents, which was not a trade secret because it had been disclosed to several companies without a nondisclosure agreement.  At the other end of the spectrum was Altavion’s “algorithms and source code,” which was the most specific and secret level of information, and unquestionably a trade secret.  In the middle of this spectrum, and the focus of the lawsuit, were the “design concepts” underlying Altavion’s DST concepts.

Design concepts are protectable as trade secrets

The court held that Altavion’s design concepts were protectable trade secrets because they had independent economic value, were created through Altavion’s substantial investment of time and effort, were not readily ascertainable by competitors, and had not been previously disclosed.  The last part — “not previously disclosed” — was key to the court’s decision.  The court recognized that some earlier decisions had ruled that software design concepts were not trade secrets where those concepts were already “disclosed and evident to the end user.”  According to those prior cases, “plans, flows, inputs, outputs, rules of operation, priorities of operation, and the like are not trade secrets to the extent they are manifest in the way a program works.”

But here, the court ruled that Altavion’s design concepts maintained trade secret protection because they had not yet been disclosed in any finished product.  Altavion and Konica merely anticipated that the concepts would be disclosed later if and when the finished product containing the concepts was placed on sale.  The parties never reached that point, however, because negotiations ended and Konica pursued its secret patent applications covering Altavion’s concepts.

Takeaway

Trade secrets are not just for formulas, algorithms, and customer information.  An idea or design concept that might otherwise be patentable can also constitute a trade secret if it has independent economic value, is not readily ascertainable, and the owner diligently keeps it confidential.  Given recent concerns over heightened standards for patent validity and the high stakes of disclosing inventions in patent applications that might be rejected, expect more companies to rely on trade secret protection for their design ideas.

The terms “intellectual property” and “real estate” are rarely found in the same sentence.  Real estate industry veterans generally view “property” as an asset comprised at least partly of dirt.  But real estate investment vehicles – including REITs, private equity real estate firms, and private lending/investment entities – often have valuable intellectual property worth fighting over, most often in the form of trade secrets.

KBS v. ARC

Allegations of trade secret theft are at the center of ongoing litigation between two major sponsors of nontraded REITs (American Realty Capital Advisors and KBS Capital Advisors), a dispute that also includes the sponsors’ broker-dealers (Realty Capital Securities and KBS Capital Markets Group).  And this is no small skirmish.  The battle is being waged on two fronts – a Financial Industry Regulatory Authority (FINRA) arbitration, which was initiated in 2009, and an Orange County Superior Court action, filed in 2011, which is scheduled for a jury trial on March 9, 2015.

A “trade secret” is defined as information that derives independent economic value from not being generally known to the public or competitors, and which is the subject of reasonable efforts to maintain its secrecy.  Trade secret theft (or “misappropriation”) occurs when a person acquires another’s trade secret by improper means or uses or discloses another’s trade secret without consent.  If the information is generally known by the public or those within the industry, or if the information is readily ascertainable (i.e., via the internet), then it’s not a trade secret.

In the litigation between KBS and ARC, KBS claims that three of its former broker-dealer employees misappropriated trade secrets by downloading KBS information and using it to compete against KBS after they joined ARC.  Specifically, KBS claims that one former employee, on the day that he resigned, emailed to ARC a large spreadsheet containing a record of all KBS sales.  KBS also claims that two other former employees downloaded confidential information from KBS’ proprietary sales database, including contact information for registered dealers who sold the company’s REITs, and KBS’ former employees used that information after joining ARC.  That information could have value because nontraded REITS are sold almost exclusively through independent broker-dealers.

Who will win?

Who will win?  In trade secret cases, the ultimate outcome is so fact driven and there is so much “gray area” in the law that it is difficult to predict or handicap the final verdict.  For example, courts often hold that basic contact information of clients or key allies is not a trade secret, especially where that information is readily available on LinkedIn and other websites.  On the other hand, a trade secret finding is much more likely if contact information is mixed with more detailed (and less publicized) data such as pricing, ordering preferences, or other operational facts built up through research and experience.  If successful, trade secret claims can result in actual damages, recovery of unjust enrichment, imposition of a reasonable royalty on profits made through the trade secret theft, and (in cases of willful/malicious misappropriation) exemplary damages and attorney’s fees.

Just like other companies, real estate investment vehicles need to protect their valuable trade secrets, most typically by requiring employees to sign agreements acknowledging the company’s trade secrets, limiting and monitoring access to confidential information, with extra sensitivity during times of key employee departures.  Similarly, when hiring, great care should be taken to ensure that the new employees don’t bring their former firm’s stolen trade secrets with them.  Simple steps like these can avoid the courtroom and keep the focus on the “dirt-based” kind of property.

NEWSFLASH-Congress may actually do something.

There is talk of a bipartisan (you read that right, BIPARTISAN) bill to provide redress for trade secret theft in federal courts. Today trade secrets are the poor relations of patent, copyright and trademark, which all enjoy federal protection, but that may soon change.

Trade Secrets Sound Cool, Do I Have One?

A trade secret is confidential/proprietary information that (1) has economic value because it is not generally known and (2) is the subject of reasonable efforts to keep confidential/proprietary. KFC’s 11 herbs and spices, Coca Cola’s formula or perhaps your customer list (assuming you took reasonable steps and the list has economic value) are prime examples of trade secrets. On the other hand, if your competitor can hire a Gen-Xer or Gen-Yer to obtain the same information on Google, it’s not a trade secret.

Current Trade Secret Protection

Trade secret law evolved from the common law, law created over time by judges’ decisions, which was then codified by a group of intellectual property lawyers into the Uniform Trade Secrets Act (the “UTSA”). The UTSA has been adopted, at least in some form, by 48 states. Apparently New York and Massachusetts are holding out for a sweeter deal. For example, in California, a state where you can’t throw a cat without hitting a trade secret, the UTSA begins at section 3426 of the Civil Code. Today, there is no federal cause of action for trade secret theft, and victims are generally required to litigate in state court.

The Proposed Federal Trade Secret Legislation

The proposed federal “Defend Trade Secrets Act” would expand the Economic Espionage Act, set forth in 18 U.S.C. § 1831, to create a federal cause of action for trade secret theft. The Defend Trade Secrets Act generally mirrors existing state law under the UTSA, but the proposed federal law is limited to trade secret theft relating to “a product or service used in, or intended for use in, interstate of foreign commerce.” As with most state trade secret statutes, a victim can seek ex parte injunctions (emergency Court orders preventing the destruction, dissemination or use of alleged trade secrets, requiring the return of such information and, in some instances, prohibiting a former employee with such information from working for a competitor). It also authorizes awards of treble damages and/or attorneys’ fees for willful or malicious misappropriation. Under the proposed Defend Trade Secrets Act, the statute of limitations (deadline for filing a lawsuit) is five years, which is longer than the three-year deadline in California and many of the states that have adopted the UTSA.

Why Should I Care?

If the 48 civilized states have adopted the UTSA and the remedies are similar, why do we need a federal Defend Trade Secrets Act? First, if your trade secrets are stolen and the thief is using them in multiple states, you’ll have any easier time litigating the entire case in one federal court compared to suing in multiple state courts, which may have different rules and standards and might well require you to deploy a platoon of lawyers. Second, federal courts apply federal rules, which in many cases are more efficient than state rules. For instance, in federal court the parties are required to voluntarily exchange key documents and information at the outset of a case. Whereas in state court, parties usually must serve discovery requesting such documents and information and actually obtaining these can be like pulling teeth. Third, in many jurisdictions, federal courts are less impacted than state courts, so litigants are likely to get more attention and get relief sooner. Finally, the Defense of Trade Secrets Act may provide a good reason to ignore the idiom “don’t make a federal case out of it.” If you’re looking to protect your trade secrets, you might prefer to drag the thief in front of a federal judge, appointed for life and approved by the Senate, whom the thief might find little more intimidating than facing a local state judge, whose reelection signs can be seen on lawns and billboards every four years.

In most cases, those looking to protect their trade secret rights will benefit from the proposed Defense of Trade Secrets Act.