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.

A recent  episode of “Silicon Valley” was brought to you by the letters N-D-A.  The protagonists are seeking funding for their start-up, Pied Piper, and one of the potential investment groups starts asking curiously technical questions regarding how Pied Piper’s algorithm works.  Pied Piper’s developers are so flattered that somebody finally appreciates their genius that they fail to recognize that the investors aren’t conducting due diligence, the investors are trying to steal Pied Piper’s intellectual property.

Beware of TMI; don’t overshare without the protection of a nondisclosure agreement.  Nobody expects an investor to take a meeting, much less invest, without understanding the general nature of your start up.  But start-ups are often so hungry for investors that they provide too many details of their product or service, their business plans or other proprietary information without the protection of an NDA.

Under the Uniform Trade Secrets Act, there are two prongs to a trade secret:

(1) the information must provide the owner with independent economic value by not being generally known to the public or those in the relevant industry; and

(2) the owner must have taken reasonable efforts to keep the information secret.

A start-up that shares its proprietary information with a potential investor or partner without an NDA has blown the second prong by failing to take “reasonable steps.”  So even if the investor passes and doesn’t misappropriate your idea, evidence that you failed to obtain an NDA from the investor can and will be used against you if a third party, say a disgruntled employee, misappropriates your trade secret.

A potential investor or partner will respect you more if you act professional and insist on an NDA.

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.

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.