Dawning of New Era in Trade Secrets Litigation
Both houses of Congress have now approved a bill (the Defend Trade Secrets Act) that would create a federal civil cause of action for trade secrets misappropriation—a sea change for claims previously subject only to state law. The House of Representatives approved the bill in a landslide yesterday, while the bill passed the Senate earlier this month. President Obama is expected to sign the bill into law.
Historically, unlike other forms of intellectual property, trade secrets have been subject to state, not federal, regulation. In an attempt to provide uniformity and certainty, many states enacted the Uniform Trade Secrets Act (“UTSA”). However, they have not been consistent in their implementation or interpretation of the UTSA. On the federal level, there were no civil remedies but only criminal penalties for trade secret misappropriation.
The Defend Trade Secrets Act, however, will provide the first federal civil remedy for trade secrets misappropriation. It supporters believe that the new federal law will promote even greater uniformity in trade secret law than that provided by the UTSA and provide easier access to federal courts which they see as better equipped than their state counterparts to handle national and international cases.
The Defend Trade Secrets Act substantially overlaps with the UTSA in terms of elements and definitions but it will preempt no state laws. It also specifically limits the ability of federal district courts to enjoin a person from entering an employment relationship (employee defections are a common scenario for trade secrets claims) or enter injunctions that conflict with state laws concerning restraints on a profession, trade, or business.
The Defend Trade Secrets Act, like other federal intellectual property laws and the UTSA, provides for enhanced damages and attorney’s fees. Specifically, enhanced damages are available for trade secrets “willfully and maliciously misappropriated,” and reasonable attorney’s fees are available to a prevailing party based on certain bad faith litigation conduct or willful and malicious misappropriation.
The Defend Trade Secrets Act also includes broad provisions regarding civil seizures. Under the Act, a party may be able to obtain, on an ex parte basis by an affidavit or verified complaint, an order to seize “property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” The requirements for obtaining such an order are strict. Specifically, the court may not grant an application unless the court finds it clearly appears from specific facts that—
- an order issued pursuant to Rule 65(b) of the Federal Rules of Civil Procedure would be inadequate because the party to which the order would be issued would evade, avoid, or otherwise not comply with such an order;
- an immediate and irreparable injury will occur if such seizure is not ordered;
- the harm to the applicant of denying the application outweighs the harm to the legitimate interests of the person against whom seizure would be ordered of granting the application and substantially outweighs the harm to any third parties who may be harmed by such seizure;
- the applicant is likely to succeed in showing that—
- the information is a trade secret;
- the person against whom seizure would be ordered—
- misappropriated the trade secret of the applicant by improper means; or
- conspired to use improper means to misappropriate the trade secret of the applicant; and
- the person against whom seizure would be ordered has possession of the trade secret;
- the application describes with reasonable particularity the matter to be seized and, to the extent reasonable under the circumstances, identifies the location where the matter is to be seized;
- the person against whom seizure would be ordered, or persons acting in concert with such person, would destroy, move, hide, or otherwise make such matter inaccessible to the court, if the applicant were to proceed on notice to such person; and
- the applicant has not publicized the requested seizure.
If the court enters a seizure order, it must protect the person against whom the order is directed from publicity and hold a hearing within seven days of entry of the order. The applicant bears the burden of proof at the hearing and must post a bond sufficient for the payment of the damages that any person may be entitled to recover as a result of a wrongful or excessive seizure or wrongful or excessive attempted seizure.
As with all changes in law, open questions are created by the passage of the Defend Trade Secrets Act. For example, it remains to be seen how the creation of federal cause of action parallel to existing state law causes of action will influence plaintiffs’ forum selection. Despite significant overlap, differences exist between the causes of action. The USTA, for example, in the majority of states that have considered the issue “preempts” all other state law causes of action based on misappropriation of trade secrets, while the federal statute has no similar provision. Will the preference for a federal forum, including potential for civil seizure, and no preemption, render state USTA claims obsolete? Will the federal courts create an implied preemption to promote uniformity? Or, will parties find continued use for USTA claims?