By William J. McCabe and Gene W. Lee
Bill McCabe
Eighty-five to 90% of trade secret misappropriation is due to the actions of employees and business partners.[2] The good news is that companies can typically enter into written agreements with employees and business partners that will help them preserve their trade secrets and position themselves for a strong action under the DTSA. Although the DTSA covers both civil and criminal misappropriation, this article focuses on its civil aspects.
DTSA Background
Prior to enactment of the DTSA, trade secret owners had to look to individual state laws for a civil remedy. Although 47 states have adopted a version of the Uniform Trade Secrets Act (UTSA), it has not been adopted in a uniform manner. Such a patchwork of laws made civil remedies for trade secret misappropriation difficult, especially for companies whose business, employees, or trade secrets cover multiple states.
Prior to the DTSA, a federal civil action based on a state law claim for misappropriation (absent a federal question) required “diversity of citizenship” between the trade secret owner and the accused misappropriator. Because companies and their employees are often citizens of the same state, the “diversity of citizenship” requirement often served as a barrier to trade secret actions being filed in federal court. With the DTSA, a civil action under the DTSA can include claims based on other federal or state laws, including claims under the UTSA or other appropriate state laws because the DTSA does not “preempt or displace” other federal or state laws for trade secret misappropriation.[3]
Elements of a DTSA Case
The DTSA allows a trade secret owner to bring an action “if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.”[4] The DTSA contains a broad definition of “trade secret”:
the term ‘‘trade secret’’ means 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….[5]
For “information” to qualify as a trade secret, the owner must have “taken reasonable measures to keep [the] information secret” and the information must have “independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”[6] Taking “reasonable measures” to maintain secrecy is the responsibility of the trade secret owner. Interpreting “reasonable measures” in a pre-DTSA case, one Court stated, “It is not necessary ‘that an “impenetrable fortress” be erected to retain legal protection for a trade secret.’”[7]
Misappropriation under the DTSA requires that the trade secret be acquired by “improper means,” which can include “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.”[8] Misappropriation “does not include reverse engineering, independent derivation, or any other lawful means of acquisition.”[9] In other words, if the public can discover a “trade secret” from analysis of the products or services that a company puts in the marketplace, there is likely no relief under the DTSA.
Company employees are often the creators of trade secrets or work with them as part of their jobs. However, an employee who acquires a trade secret by “theft” or “breach … of a duty to maintain secrecy” likely has acquired it by “improper means.”[10] In order to best take advantage of the DTSA, a company should have clear non-disclosure agreements that require employees (and others with access) to maintain the confidentiality of company information and to return all confidential information immediately at the end of employment (or at the end of a project). Breach of such an agreement may constitute “improper means” and will help lay the foundation for a successful misappropriation claim.
The DTSA has a three-year statute of limitations running from the date on which misappropriation was discovered or “by the exercise of reasonable diligence should have been discovered.”[11]
Remedies under the DTSA
Although the DTSA allows a Court to issue an injunction “to prevent any actual or threatened misappropriation,”[12] the Court may not “prevent a person from entering into an employment relationship” and any “conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows.”[13] In other words, the DTSA cannot be used to prevent an employee from joining a competitor unless there is evidence of threatened improper disclosure.
Damages under the DTSA can include “actual loss,” “unjust enrichment,” or a “reasonable royalty” caused by the misappropriation.[14] If the misappropriation was willful and malicious, the court may “award exemplary damages in an amount not more than 2 times the amount” of actual damages.[15] In such circumstances the court may also award reasonable attorney’s fees to the prevailing party.
In extraordinary cases, the DTSA allows ex parte “seizure of property necessary to prevent the propagation or dissemination of the trade secret.”[16] An ex parte order should not be requested lightly. A party “who suffers damage by reason of a wrongful or excessive seizure”[17] may be entitled to damages and attorney’s fees if the claim of misappropriation was made in bad faith.[18]
Conclusion
Trade secret owners can protect themselves by having carefully-drafted, thoughtful, written policies coupled with signed agreements that specify the types of information that are confidential and how such information should be handled. Written policies should include provisions for marking confidential information “confidential” and limiting access to persons authorized to receive it. Agreements should include obligations to maintain confidentiality and to return any and all company information – including confidential information – when appropriate. Agreements should be signed at the beginning of employment (or the start of a business relationship) and be acknowledged – preferably in writing – at the end of employment (or end of the business relationship).
During litigation, accused misappropriators often try to show that trade secret owners failed to take “reasonable measures” to maintain secrecy or allowed the trade secret to leak out. Trade secrets and other confidential information should be treated as valuable and be kept in a secure environment and accessed only by those with permission.
Finally, it is important that companies provide their employees with the tools they need to keep their proprietary information confidential. Those tools should include clear policies, training, secure electronic devices, and appropriate ways to securely interface with the company that meet the demands of modern business.
About the Authors
Bill McCabe and Gene Lee are both partners with Perkins Coie. You can find Bill’s bio here, and Gene’s here.
Footnotes
[1] Defend Trade Secrets Act of 2016, Senate Report 114-220, 114th Cong., 114-2 at 2 (March 7, 2016).
[2] See David S. Almeling et al., A Statistical Analysis of Trade Secret Litigation in State Courts, 46 Gonz. L. Rev. 57 at 69 (2010).
[3] 18 U.S.C. §1838 (“Except as provided in section 1833(b), this chapter shall not be construed to preempt or displace any other remedies, whether civil or criminal, provided by United States Federal, State, commonwealth, possession, or territory law for the misappropriation of a trade secret…”).
[4] 18 U.S.C. §1836(b)(1).
[5] 18 U.S.C. §1839(3).
[6] Id.
[7] Boston Scientific Corp. v. Dongchul Lee, No. 1:13-cv-13156-DJC (D. Mass.), Memo. and Order at 7, Dkt. 95 (citations omitted).
[8] 18 U.S.C. §1839(6).
[9] Id.
[10] Id.
[11] 18 U.S.C. §1836(d).
[12] 18 U.S.C. §1836(b)(3)(A)(i).
[13] 18 U.S.C. §1836(b)(3)(A)(i)(I).
[14] 18 U.S.C. §1836(b)(3)(B).
[15] 18 U.S.C. §1836(b)(3)(C).
[16] 18 U.S.C. §1836(b)(2)(A)(i).
[17] 18 U.S.C. §1836(b)(2)(G).
[18] 18 U.S.C. §1836(b)(3)(D).