Federal Defend Trade Secrets Act of 2016: Action Item, Added Ammunition and Comparison to Maryland’s Statute

A version of this article was published in the Maryland Bar Association Intellectual Property Section Bulletin in June 2016.

The new Federal Defend Trade Secrets Act of 2016 (P.L. 114- 53), effective when President Obama signed it into law May 11, 2016, is a strong addition to an intellectual property owner’s arsenal to stop infringement of its trade secrets.  The federal law is an amendment to, and adds more remedies to, the already-existing Economic Espionage Act of 1996 (18 U.S.C. §1831 et. seq.) and is a compliment to the Maryland Uniform Trade Secrets Act (Md. Code, Com. Law § 11-1201 et. seq.).  The DTSA also provides immunity for those who identify misappropriation of trade secrets, which is cleverly tied to a significant incentive for all future confidentiality agreements with workers to include specific language providing notice of this “whistleblower” provision.

Much of the DTSA statute relates to what businesses and attorneys need to consider and causes of actions they may use once misappropriation is threatened or occurs.  However, one aspect of the DTSA points to businesses and attorneys needing to be proactive in providing notice in all new and amendments to confidentiality agreements entered into with employees, contractors and consultants.  This bears repeating:  Any agreement with an employee or an individual performing work as a contractor or consultant that governs the use of a trade secret or other confidential information , that is signed or amended after May 11, 2016, should include a notice that complies with the DTSA. 

The DTSA approaches the notice requirement a bit in reverse.  Under Section 7 of the DTSA which will be codified as 18 U.S.C. §1833(b), an individual who files a lawsuit against an employer for retaliation for reporting a suspected violation of law may disclose the trade secret as part of the retaliation suit, so long as the person files documents containing the trade secret under seal and it does not disclose the trade secret except pursuant to a court order.  An employee may also reveal a trade secret as part of a report to a governmental official about a violation of law.  The DTSA requires a company to provide a notice of this immunity in any agreement relating to protecting trade secrets or confidential information, whether the agreement is with an employee, independent contractor or consultant.  Alternately, the notice in the nondisclosure agreement can cross reference a “Policy Document” that had been provided to the employee which sets forth the employer’s reporting policy for suspected violation of the law.  An employee handbook fits this description; although some notice must still be included in the confidentiality agreement. 

The incentive to an employer for including the notice in an agreement is that if the employer fails to provide proper notice, it will not be able to obtain exemplary damages or attorneys’ fees under 18 U.S.C. §1836(b)(3)(C) or (D), as discussed below.  Existing unamended agreements do not need to be changed just to provide the notice, and an employer loses no rights because the notice is not included in an older unamended agreement.  Similarly confidentiality agreements unrelated to an employee/worker relationship need not have the notice.

From a litigation perspective, the most obvious advantages of the DTSA is that trade secret cases may now be brought in federal court, without the need to find diversity or pendent jurisdiction.  Litigators now should include in their forum-shopping calculus the fact that their local federal court is now available when previously a trade secret dispute might otherwise have necessitated a state court action.  That federal action is not exclusive, and a lawsuit can also include a state court claim, such as under Maryland Uniform Trade Secrets Act.

A remedy in DTSA that is not in MUTSA is the ability to obtain an ex parte seizure of property if the misappropriated trade secret is related to that item. (18 U.S.C. §1836(b)).  The seizure is available only in extraordinary circumstances and only when necessary to prevent the propagation or dissemination of the trade secret.  The federal statute includes a series of facts that must exist before granting the seizure, including:

  • An injunction under FRCP 65 would be inadequate due to the possibility of evasion or avoidance;
  • There would be an immediate and irreparable injury without a seizure;
  • The property could be destroyed, moved or hidden or made otherwise inaccessible without the seizure; and
  • The plaintiff has not publicized the seizure.

The statute goes on to describe how seized materials must be held, how the storage medium must be protected, that the storage medium cannot be connected to the Internet and that the confidentiality of the seized item should be protected. 

Additionally, if it turns out that the item was wrongfully seized and the new possessor suffers damages because of wrongful or excessive seizure, then that new possessor can seek relief similar to the relief granted under the Lanham Act for trademarks (15 U.S.C. §1116(d)(11)).  This allows the party subject to wrongful seizure the ability to receive lost profits, cost of materials, loss of good will, and punitive damages in instances where the seizure was sought in bad faith, and, unless the court finds extenuating circumstances, to recover a reasonable attorney’s fee. Congress understood the nature of materials that might be seized, so DTSA also includes a provision that either party to a seizure action can request that the material seized be encrypted.

Another preemptive remedy provided in the DTSA focuses on an effort a former employer may make to restrain a departing employee from moving to a new “employment relationship” and taking trade secrets to a different company. (18 U.S.C. §1836(b)(3)(A)(i)).  Injunctive relief relating to an employee switching jobs must be based on evidence of threatened misappropriation and not merely on the information the person knows.  The threatened misappropriation can be based on circumstantial evidence; it is not necessary that the threat be actual.  This tempers the former employer’s ability to block an employee from moving to a new job.  The power to use DTSA to inhibit an employee’s movement is also tempered by the DTSA requirement that the effort to stop the former employee’s movement must not conflict with state law.

In another nod to Congress understanding the complex nature of the relationship among the parties to a trade secret and of the use of trade secrets, the DTSA provides some flexibility to a court to determine that, in exceptional circumstances, where a requested injunction would be inequitable, the court can impose a licensing scheme allowing the new recipient of the trade secret to pay a reasonable royalty to the original owner.  The license can be for no longer than the time for which the original trade secret owner could have prohibited the new use. (18 U.S.C. §1836(b)(3)(A)(ii)).

The measure of damages under the DTSA includes actual loss and (not or) unjust enrichment, or, as an alternative option, measured as the value of a reasonable royalty based on the unauthorized disclosure or use of the trade secret.  The DTSA also amends the current Act by increasing maximum damages allowed.  Previously the Act limited damages to $5,000,000.  The cap is now the greater of $5,000,000 or three times the value of the stolen trade secret, including expenses for research and design and other costs of reproducing the trade secret that the recipient of the trade secret has thereby avoided. (18 U.S.C. §1832 (a)(1)).

In the event of a willful or maliciously misappropriated trade secret, exemplary damages of no more than two times the amount of the original damage award is allowed, as well as an award of reasonable attorneys’ fees.  Reasonable attorneys’ fees can be awarded to either party to a suit, if either the claim was made in bad faith or a motion to terminate injunction is made or opposed in bad faith. (18 U.S.C. §1836 (b)(3)).  These are the damages unavailable to an employer who fails to provide the required notice in the confidentiality agreement with the employee.

While earlier versions of the legislation contemplated a five year statute of limitation, the enacted legislation provides a three year statute of limitation after the misappropriation is discovered or should have been discovered by reasonable diligence.  Note that a continuing misappropriation constitutes a single claim rather than a series of claims. (18 U.S.C. §1836 (3)).

The DTSA makes clear that disclosure of a trade secret to the United States Government or in a court proceeding does not subject the disclosure to liability under the Act.  The disclosure to the governmental entity, whether federal, state or local, must be in confidence and solely for the purpose of reporting or investigating a suspected violation of law.  To gain immunity in disclosure in court documents, the documents must be filed under seal. (18 U.S.C. §1833(b)).

As a comparison between the Federal and Maryland statutes, the language of what constitutes a trade secret, and misappropriation of a trade secret under the DTSA is almost identical to those definitions in the MUTSA.  There are minor differences in using pronouns and punctuation which will likely have no effect on an outcome and which would make any action appropriate for resolution under the MUTSA equally appropriate for resolution under the DTSA, and vice versa.  Another minor difference is that the DTSA includes a definition of what does not constitute “improper means,” relating to how one acquires a trade secret.  Under the DTSA, improper means does not include reverse engineering, independent derivation or any other lawful means of acquisition.  Although the federal law makes this caveat clear, these exceptions are likely implied in the MUTSA, so there is little difference in this aspect of the two statutes.

The most significant difference in what is covered under the two statutes is based on the already-existing definition of a trade secret under the Espionage Act, which has not changed, and is slightly different from the MUTSA.  Under the MUTSA, the list defining a trade secret is a slightly narrower set of items that would be protected: “information, including a formula, pattern, compilation, program, device, method, technique, or process.”  In contrast, the federal law includes a broader listing, using the terms:  “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.”  More may be protected under the DTSA than under Maryland law.

Additionally, there is a nuance in the language of what efforts must have been taken to protect information to qualify it as a trade secret.”  Under the DTSA, the owner needs to have “taken reasonable measures to keep such information secret,” while under Maryland law, the efforts must be “reasonable under the circumstances.”  These may mean the same thing, but are not identical. 

Finally, the federal law requires only that the information is a trade secret if its economic value derives from not being known or ascertainable by the public.  The MUTSA has a narrower view of what constitutes a trade secret, by qualifying a trade secret only if the economic value derives from not being known to or ascertainable by “other persons who can obtain economic value from its disclosure or use.”  The nuance is that federal law provides a slightly broader definition and the owner of the trade secret merely needs to show it derives economic value itself from the secrecy, where under Maryland, a trade secret owner would need to show it derives economic value itself and others must also be able to derive economic value.  This may be a distinction without a difference, although in the heat of litigation, every nuance matters.