Trade Secret Law- Recent Federal Changes

On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (the “DTSA”). The DTSA expands the Economic Espionage Act of 1996 to include a private cause of action for trade secret misappropriation. Before the DTSA, Trade secrets and their subsequent legal ramifications have traditionally been left to the states.  Most states have adopted the Uniform Trade Secrets Act (New Mexico’s can be found at NMSA 1978, Section 57-3A-2 et seq.).  The DTSA is similar to the Uniform Act, but contains new provisions that have immediate implications for any business with trade secrets.

Trade Secret Misappropriation Is Now a Federal Question

The heart of the DTSA is the addition of a private cause of action for trade secret misappropriation.  Owners of trade secrets can now file suit in federal court for misappropriation of trade secrets related to products or services that are used (or intended to be used) in interstate or foreign commerce.  Actions under this section must be brought in federal court, and a three-year statute of limitations applies.

The DTSA offers remedies that are very similar to the Uniform Act.  It allows plaintiffs to seek injunctive relief (i.e., court orders forcing a defendant to do or not do certain things) or money damages (such as actual losses or reasonable royalties).  The DTSA also allows for punitive damages up to two times actual damages, and in certain cases prevailing parties can recover attorney fees.

One new remedy not available under the Uniform Act is civil seizure.  In extraordinary circumstances, a federal court may order the seizure of property to prevent propagation or dissemination of a trade secret.  However, this powerful new remedy is only available in certain narrowly defined circumstances.

New Requirements for Contractor and Employment Agreements

In another departure from the Uniform Act, the DTSA contains exceptions from liability for disclosures made to government officials for the purpose of investigating violations of law.  Essentially, this exception that allows controlled disclosure of trade secrets for whistleblowers, either for reporting violations or defending against retaliation.

The DTSA requires employers to provide notice of this whistleblower exception in employment contracts and contractor agreements created or modified after the law goes into effect that govern the use of trade secrets or confidential information.  Failure to provide notice can prevent the employer from recovering punitive damages or attorney fees, depriving them of what is often their biggest weapon.  Employers should review their agreements immediately to assess what changes may be needed.

Enhanced Criminal Penalties

The economic espionage act has always contained criminal penalties.  Under the DTSA, they are enhanced.  Previously, the maximum allowable fine was $5,000,000.  Under the new law, the maximum allowable fine is “the greater of” $5,000,000 or three times the value of the stolen trade secrets.  The increased damages are a significant disincentive for companies considering engaging in corporate espionage.  In addition, individuals can be fined and/or imprisoned; individuals who misappropriate trade secrets can face sentences of up to ten years. Mitigating these damages somewhat is a strong intent requirement:  individuals must know or intend that the offense will injure the owner of the trade secret.

What Should Your Company Do?

To the extent that the DTSA is similar to the Uniform Act, the DTSA is not a sea change for business with trade secrets.  Nevertheless, the ability to sue in federal court will likely provide welcome options for some businesses.  All businesses should review their employment contracts and contractor agreements to implement the new notice requirements.  And, given the enhanced criminal penalties, some businesses may wish to review their own practices (given the intent requirements, they know who they are!).  We are always happy to help businesses protect their trade secrets and intellectual property.  If you need assistance, don’t hesitate to call!

Law 4 Small Business, P.C (L4SB). A little law now can save a lot later.

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