The United States is about to enact The Defend Trade Secrets Act, an overwhelmingly bipartisan effort to provide a federal law civil claim for misappropriation of trade secrets. It is anticipated that President Obama will sign the bill, and it will be effective for acts that occur on or after the date of enactment.
Technically an amendment to the Economic Espionage Act, this new federal trade secrets law will protect intellectual property beyond the patent, trademark, and copyright claims currently authorized in federal court. Human resource professionals and others involved in hiring software engineers, data analysts, and others exposed to their current employer’s trade secrets will have to take additional precautionary measures to protect the new employees from litigation under the new law.
The bill is based largely on the Uniform Trade Secrets Act that has been enacted, mostly uniformly, in almost all states, including Washington and Oregon. But the bill has key new provisions. First, it provides federal jurisdiction for a civil claim (without preempting any state statutes or common law). Second, the bill has a drastic new remedy: an ex parte seizure order that can, and almost always will, be executed without any notice to the target of the order, more often than not the new employees.
The Economic Espionage Act has been in effect since 1996 but allows only for criminal prosecutions. As a result, parties have been required to file private civil cases for trade secret misappropriation under state law. In most instances, these actions were filed in state courts, unless there was diversity of citizenship or the plaintiff could allege a violation of the Computer Fraud and Abuse Act[1] and append trade secrets claims.
The big new weapon for plaintiffs is the right to obtain an ex parte seizure order of the misappropriated information. The U.S. Marshal executing such an order will give the targeted defendant its first notice of the order when he or she arrives to collect the hardware. Although this remedy was enacted with a specific type of wrong in mind—the bad actor about to leave the United States with an auxiliary hard drive or thumb drive, or about to destroy evidence of misappropriation—the language of the bill is broader.
As a result, businesses should guard against a seizure order that may sweep too broad. If the U.S. Marshal packs away a business’s servers, desktops, and portable devices under such an order, how does the business continue?
The bill allows a motion to set aside the seizure order on two days’ notice. And the seizure order lasts only until a hearing that must take place within seven days after the order was issued. The federal judge must then make detailed findings of fact and conclusions of law to support extending the seizure order. The order must provide for the narrowest seizure necessary to achieve protection, must direct the seizure to be conducted in a way that minimizes interruption of the business operations of third parties, and must minimize the disruption of the “legitimate business operations of the person accused of misappropriation.” The bill also contains a bonding requirement providing a monetary remedy for the employer whose property is seized.
But these safeguards may be of little help to a business that is wrongfully subject to a seizure order, or that was unaware that misappropriation had taken place. After all, the only party communicating with the court when the ex parte seizure order is sought is the plaintiff. And the bond amount may be far too small to compensate the victim of an overbroad seizure order when that victim presents a claim for lost profits and other damages.
The bill was passed because of concern that American businesses suffer annual losses in the billions because of trade secret misappropriations, especially to foreign entities. The United States Attorney’s office was not prosecuting many criminal cases[2], and the cure was to turn loose civil enforcement to victim businesses. But the bill may have gone too far—we’ll have to see what happens when parties seek and obtain seizure orders.
One feature of the bill seems long overdue: the right to federal court jurisdiction. This will make it easier to issue subpoenas nationwide and conduct discovery more efficiently, given that trade secret misappropriation often involves witnesses and parties in several states. Federal jurisdiction will ultimately promote uniformity (although, to a large degree, the Uniform Trade Secrets Act has done that). There should be fewer “choice of law” battles than we now see when a state court trade secrets civil claim touches more than one state. Finally, more often than not a United States district court judge will have more experience and more resources to deal with a trade secrets case than a state court judge with general jurisdiction. A plaintiff can invoke federal jurisdiction under the bill without seeking a seizure order.
The bill also grants immunity to individuals who disclose trade secrets to federal or state law enforcement officials or to an attorney for the individuals, for the purpose of reporting or investigating a suspected violation of law. In addition, the bill requires employers to provide written notice of this immunity. And the definition of "employee" is broad: it includes “any individual performing work as a contractor or consultant for an employer.” Employers will need to quickly develop policies and language in employment agreements and independent contractor agreements to comply with these provisions.
For the intellectual property world, the bill explains that it is not to be construed as "intellectual property" for purposes of other acts of Congress. (For example, specialized treatment for licensees of intellectual property under the U.S. bankruptcy laws at 11 U.S. Code § 365(n) would not apply.)
With patents under attack from the federal courts for patent ineligibility (à la Alice[3]), trade secret protection is more important than ever for the protection of American innovation. This bill is timely. We predict a steep rise in federal court civil lawsuits once the bill is enacted, and will watch with interest to see how the seizure remedy plays out.
Stay tuned for further updates regarding this bill.
[1] Efforts to use the Computer Fraud and Abuse Act were often stymied by narrow court interpretations on whether the defendant had engaged in “unauthorized use” or was “exceeding authorized access.”
[2] Almost all criminal prosecutions took place in one district—the Northern District of California. Eighty percent of the federal jurisdictions had no such prosecutions. There were fewer than ten indictments per year from 1996 to 2012.
[3] Alice Corp. Pty. Ltd. v. CLS Bank Int'l, 573 U.S. __, 134 S. Ct. 2347, 189 L. Ed. 2d 296 (2014). The U.S. Supreme Court held that patent claims that are directed to abstract matter are patent-ineligible unless the claim has additional features that make the claim transformative. Since Alice was decided, many subsequent federal courts have determined that previously patentable subject matter is now abstract and has the effect of invalidating many patents, particularly in the business method/computer software technologies.
