Defending trade secrets

The world’s most famous trade secret, the vigilantly guarded recipe for Coca-Cola, is kept in a purpose-built vault in the company’s Atlanta headquarters. Most trade secrets, howev­er, are kept on computers, where they are decidedly more vul­nerable to hackers and avaricious employees. Most are not as valuable as the Coke recipe, but they are highly valuable nev­ertheless—one malicious click of a send button can instantly destroy the value of assets worth millions of dollars to their rightful owners.

In response to the increasing vulnerability of trade secrets, Congress passed with a near-unanimous vote the “Defend Trade Secrets Act,” which President Obama signed into law May 11. The law for the first time creates a civil cause of action in federal courts for misappropriation of trade secrets, which had previously been exclusively the domain of state courts. In­tellectual property attorneys say that the law will help com­panies more easily pursue trade secret theft across both state and international borders.

“As our economy trends toward an information-based, tech­nology-based economy, stealing information which is con­tained in computer system, which a lot of trade secret theft is, becomes more of a concern,” said James Cleland, a lawyer in Ann Arbor, Michigan. “You can pop a thumb drive into a computer, and that thumb drive becomes so portable and easy to take wherever somebody wants to take it. So I think the ability to police and en­force trade secrets quickly, and with some strong teeth, becomes very important for U.S. companies.”

Importantly, “the federal Act covers trade secret misap­propriations that oc­cur overseas, so it can extend to a subsidiary or a related company,” said Alexandria law­yer Cecil E. Key.

The “flip side of the coin is, one can be ex­posed as well. If you hire an employee or contractor overseas from a competitor, you have to be aware of possible exposure” to enforcement against you, Key said.

The DTSA is expected to promote greater uniformity in trade secret law. Although 48 states have adopted some form of the Uni­form Trade Secrets Act, their courts have applied it in inconsistent ways, down to how to define a trade secret itself. The fed­eral law defines the term broadly to include all secrets “related to a product or service used in, or intended for use in, interstate or foreign commerce” – a definition expan­sive enough to confer federal jurisdiction on seemingly almost any trade secret dispute.

State court interpretations of the Uni­form Trade Secret Act have been shaped by dominant industries in various states, whether it’s the entertainment and tech industries in California, or the oil and gas industry in Oklahoma, according to Key.

Pick a court

The international scope of the federal act makes it attractive to big corporations, but it’s also a potent new tool for smaller busi­nesses, Virginia lawyers said.

Virginia state courts see a lot of commer­cial litigation. Businesses unhappy with a departing employee head to state court to enforce noncompete, nonsolicitation and nondisclosure agreements, and often add a claim under the Vir­ginia Uniform Trade Secrets Act for good measure.

“As word gets out about the scope of the federal law, you’ll start to see more garden-variety busi­ness disputes being brought in federal court,” with a federal claim for trade secret misappropriation, and pendent state law claims such as a Virginia business conspiracy claim, Alex­andria lawyer Jonathan R. Mook said.

Lawyers like having the federal-court filing option for trade-secret cases. In Vir­ginia state courts, “parties do not have the ability to get summary judgment based on depositions,” said Roanoke lawyer Beth Burgin Waller. The new federal statute “gives business and individuals a choice of what court they want to file in.”

We can expect to “see an uptick in the federal docket,” Waller said.

A wider range of remedies also makes the federal statute an attractive option for litigants, who can seek actual damag­es, damages for un­just enrichment and exemplary damages of twice the actual damages, according to Key.

Attorney’s fees may be available to a par­ty who wins a DTSA claim, or may be assessed against a party who improperly pursues a federal claim, perhaps in an effort “to get some leverage in a case,” Waller said.

Carpe secreto

The DTSA also gives trade secret own­ers a powerful, and controversial, tool un­available to them in state courts: It allows plaintiffs to request, without notice to the defendant, that a judge instruct federal marshals to seize any property necessary to prevent the dissemination of trade se­crets.

A party seeking this extraordinary reme­dy also can move for encryption of confiden­tial material for further protection, Waller said. A party defending against an ex parte seizure also enjoys some protection from unfavorable publicity that could arise from the seizure.

Such ex parte seizures are a decided­ly strong remedy against potential trade secret theft. But Washington D.C. lawyer John Williamson believes such requests likely will be granted only rarely.

Williamson predicted that the new law might make judges more inclined to issue temporary restraining orders as an alter­native remedy, since such orders would put less strain on federal resources and would no longer be the most draconian option available to the court. The DTSA also al­lows for countersuits to recover damages for wrongful or excessive seizures, which will likely further constrain their use.

Re-writes needed to keep rights

The DTSA offers “important whis­tleblower protections for employees,” Mook said.

And the federal law’s “very broad defini­tion of ‘employee’ can include consultants and independent contractors,” Waller said.

We now have “codified in federal law a protection for employees we haven’t had before,” Mook said. Employers need to up­date trade-secret provisions in employment contracts and employee handbooks to set forth procedures employees must follow to take advantage of the new employee immu­nity.

These changes in the law figure to be the most immediately important for com­panies.

Whistleblowers are provided immunity for divulging trade secrets to law enforce­ment agencies or attorneys for the pur­pose of reporting suspected law-breaking, or in documents filed in court under seal.

Employers are required to provide no­tice of the immunity rules in any employ­ment contracts governing the use of trade secrets or confidential information. Com­panies that fail to do so can still bring ac­tions against those employees, but forfeit their new right to collect exemplary dam­ages or attorneys’ fees from the employee for misappropriation of trade secrets.

The DTSA’s “very elastic definition of trade secrets” means “it’s important to de­fine what aspects of a business constitute a trade secret,” Mook said. Businesses need to have protocols about defining what doc­uments and files are trade secrets, who has access to them, and how those protections are maintained, including restrictions on the use of personal mobile devices.

One thing that companies won’t be able to do is use federal law to preclude em­ployees from moving to new jobs with com­petitors. The DTSA forbids courts from imposing such remedies and provides that conditions placed on new employment must be based on evidence of threatened misappropriation and not merely on the information the person knows. The federal law does not preempt any existing state laws, however, some of which are more re­strictive on employee mobility.

Now the real fun begins

Trade secrets may have been somewhat overlooked in intellectual property law, playing fourth-fiddle to patent, trademark and copyright law, each of which has a well-developed body of federal law. The federal courts already hear many trade secrets claims based on diversity juris­diction, but do so applying the applicable state laws, which can vary in important ways.

“What I think you’ll find is as things make their way to the circuit level, and ultimately to the Supreme Court, the laws will end up getting harmonized at the fed­eral level and that will probably trickle down to the state level,” Boston lawyer Russell Beck said. “I think the courts will take a very expansive view of what consti­tutes a trade secret, and I think they will take a narrow view of what constitutes an exception. There is a congressional intent that this be read as broadly as possible.”

— By David Donovan, Dolan Media Newswires

— With additional reporting by Deborah Elkins