defend trade secrets act of 2016: a polsinelli update series
TRANSCRIPT
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Defend Trade Secrets Act of 2016Substance and Strategies
Q. Todd Dickinson, Stephen E. Fox
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Agenda
Background– Uniform Trade Secrets Act (UTSA)– Economic Espionage Act (EEA)
Defend Trade Secrets Act of 2016– Background and rationale– Similarities to UTSA– Basic statutory provisions– Employment law issues
Strategic Considerations
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Basics
“Trade Secret” Form of intellectual property (different from patents, copyright
and trademarks) Focus is on proprietary, commercially valuable, information Examples:
– Confidential manufacturing processes
– Formulae
– Customer lists
– Business plans/strategies
– Technologies not protectable by patent
– Employee records• M.C. Dean v. City of Miami Beach, (SDFL) (5/16/15)
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UTSA (1985)
Traditionally, trade secrets were a matter for state law before Uniform Trade Secrets Act– 47 states and 3 others (DC, PR, VI) have adopted• Not NY, MA (pending), NC (but very similar)
– http://www.uniformlaws.org/shared/docs/trade%20secrets/utsa_finals_85.pdf
– Variation from state to state• Modest, but sometimes case dispositive: burden of
proof; innocent acquisition; scope of information protectable; “reasonable” measures to protect, etc.
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UTSA General Provisions
Provides definitions of “trade secret,” “misappropriation,” and “improper means”
Statute of limitations is 3 years Authorizes preservation of secrecy during
legal action (i.e., gag and protective orders) Provides remedies of injunction, damages
and attorneys’ fees
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Economic Espionage Act of 1996
First federal trade secret legislation
– Criminalizes trade secret theft (designed to address egregious cases of trade secrect theft by foreign agents)
– DTSA is technically an amendent to EEA “Trade secret” and “misappropriation” definitions similar to UTSA Enforced by Dept. of Justice:
– No civil cause of action, except by Attorney General
– Usually brought by local U.S. Attorney, but requires sign-off by Asst. AG for National Security at Main DOJ
– Often difficult to generate USAtty interest
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Economic Espionage Act of 1996
§1831: Economic Espionage– Misappropriation or conspiracy to misappropriate
trade secrets, intending or knowing that the theft will benefit a foreign power
– Penalties: up to $5M per offense; imprisonment up to 15 years for individuals, and fines of up to $10M for organizations
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Economic Espionage Act of 1996
§1832: Theft of Trade Secret– Misappropriated information related to or
included in a product or service, with knowledge or intent to injure the trade secret owner
– Penalties: imprisonment for up to 10 years for individuals (no fines), and fines of up to $5M for organizations
– Requires forfeiture of property used in the crime– Extraterritorial where involves U.S. citizen or
corporation
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Economic Espionage Act of 1996
DOJ Prosecution Policy– Not intended to criminalize every theft of trade secrets, especially
where civil state remedies exist
– However, availability of civil remedy should not be only factor, since such remedies usually exist in states
– Discretionary factors:• Scope of the criminal activity, including evidence of involvement by a
foreign instrumentality
• Degree of economic injury to the trade secret owner
• Type of trade secrets misappropriated
• Effectiveness of available civil remedies
• Potential deterrent value of the prosecution
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Defend Trade Secrets Act of 2016
Rationale Belief that US needed to federalize trade secret law Trade secrets becoming more economically
important– Over $3 billion (same as all exports to Asia)– 2.1 million U.S. jobs
Patent protection coming under fire State-by-state variations increasing Protection becoming more difficult
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Defend Trade Secrets Act of 2016
Rationale Obama Administration takes note:– Administration Strategy on Mitigating the Theft
of U.S. Trade Secrets (February 2013) https://www.whitehouse.gov/sites/default/files/omb/IPEC/admin_strategy_on_mitigating_the_theft_of_u.s._trade_secrets.pdf
– USPTO convenes “Trade Secret Symposium” (Jan 2015) http://www.uspto.gov/about-us/organizational-offices/office-policy-and-international-affairs/uspto-trade-secret-symposium
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Defend Trade Secrets Act of 2016
Legislation Introduced originally in 113th Congress; passage
stalls in House Some academic criticism (concerns are increase
in length and cost of litigation) 114th Congress reintroduced with broad,
bipartisan support (Hatch (R-UT)/Coons (D-DE)• Passes Senate (unanimously) 4/4/16• Passes House (410–2) 4/27/2016
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Defend Trade Secrets Act of 2016
Legislation President Obama signs May 11, 2016 Technically an amendment to EEA Text and background:
https://www.congress.gov/bill/114th-congress/senate-bill/1890
Legislative history: – S. Rept. 114-220; – H. Rept. 114-529
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Defend Trade Secrets Act of 2016
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DTSA: Outline of Provisions Forbes: “The New DTSA is the Biggest IP
Development in Years” Federal jurisdiction of theft of trade secrets in
interstate or international commerce Civil remedies for trade secret misappropriation
– Injunction– Reasonable royalties– Damages
New remedy—civil seizure
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DTSA: Outline of Provisions
Employment Law issues: No injunction to prevent new employment Injunction aimed at new employment must be
based on evidence of threatened misappropriation, and not “merely information the person knows”
Safe harbor for “whistleblowers” and “anti-retaliation” disclosure of trade secrets
Whistleblower and retaliation protection must be referenced in employment agreements and NDA’s
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UTSA-DTSA Similarities
DTSA definition of “trade secret” is substantially similar to UTSA– Trade secret is “… information, including a formula, pattern,
compilation, program, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy” UTSA § 1.4/EEA
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UTSA-DTSA Similarities
DTSA definition of “misappropriation” is substantially similar to UTSA
– (i) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means;
– (ii) Disclosure or use of a trade secret of another without express or implied consent by a person who:• used improper means to acquire knowledge of the trade secret; or
• at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was– derived from or through a person who had utilized improper means to acquire it;
– acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
– derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
• before a material change of his [or her] position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake. UTSA § 1.2/DTSA §2(b)(3)(5)
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UTSA-DTSA Similarities
DTSA definition of “improper means” is substantially similar to UTSA– … includes theft, bribery, misrepresentation, breach or
inducement of a breach of a duty to main secrecy, or espionage through electronic or other means UTSA § 1.1/DTSA §2(b)(3)(6)
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UTSA-DTSA Similarities
Remedies: Injunction – UTSA § 2(a)/ DTSA §2(a)(3)(A)– Actual/threatened misappropriation may be enjoined• For length of time the trade secret exists
• Sufficient time to eliminate any competitive advantage due to misappropriation
Reasonable Royalties – UTSA § 2(b)/DTSA §2(a)(3)(A)(iii)– “Exceptional circumstances”
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UTSA-DTSA SimilaritiesRemedies: Damages – UTSA § 3/DTSA §2(a)(3)(B)– In addition to injunctive relief, may receive damages
• Includes the actual loss AND the unjust enrichment caused by misappropriation
– “Willful and malicious” behavior results in up to 2 times regular damages §2(a)(3)(c)
Attorney’s Fees – UTSA § 2 (b)/DTSA §2(a)(30(D)– Court may award attorney’s fees to the prevailing party for willful
and malicious misappropriation or actions made in bad faith
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UTSA-DTSA Similarities
Other Provisions: Preservation of Secrecy—permits sealing and “gag
orders” during any legal action concerning the trade secrets
Statute of Limitations—claims may be brought 3 years after the misappropriation is discovered or should have been discovered by the exercise of “reasonable diligence” (UTSA § 6/DTSA §2(a)(d)
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Advantages of DTSA
Principal advantage—nationally consistent substantive and procedural law– With USTA state-to-state differences, while minor, can be case-
dispositive (e.g., burden of proof; threatened misappropriation, innocent acquisition; scope of information protectable; “reasonable” measures to protect)
Other advantages– Private party civil access to federal courts– More sophisticated judiciary– Remedies enforceable nationwide; nationwide subpoena power– Simpler trans-state procedural issues (e.g., discovery management)– Significant new remedy—civil seizure
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No State Law Preemption
DTSA does not preempt state law (including UTSA)– “Nothing in the amendments made by this section shall be
construed to . . . preempt any other provision of law.“ Trade secret owners have alternative options to protect
their IP– Depending on facts and venue considerations, trade secret
owner may decide to:• (1) bring trade secret action in federal court under DTSA (where
the trade secret owner could also potentially bring state law claims in federal court) or
• (2) bring state law trade secret claims in state court
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Jurisdiction and Venue
Jurisdiction– Involves interstate or foreign commerce• DTSA (like trademark law) is grounded in
Commerce Clause v. patents/copyrights in Constitution
– District courts have original jurisdiction (i.e., federal question 18 USC §1836 (c))
– No diversity required
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Jurisdiction and Venue
Extraterritoriality (18 USC §1837)– DTSA applies to conduct occurring outside the
United States, if• Offender is a natural person who is a citizen or
permanent resident alien of the United States, or an organization organized in United States; or
• “an act in furtherance of the offense was committed in the United States”
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Jurisdiction and Venue
Venue– Look to general venue statute (28 USC §1391) to
determine where lawsuit may be initiated• Defendant’s residence
• Where a substantial part of the events or omissions giving rise to the claim occurred, or a substantial part of property that is the subject of the action is situated
• Where any defendant is subject to personal jurisdiction
• Defendant who is not a US resident may be sued in any judicial district
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Remedies – Injunction/Royalties
Injunction– May be pursued to prevent actual or threatened
misappropriation– May be granted on such terms as the court “deems reasonable”• Different standard than eBay in patents?
– May NOT be sought to prevent changing employers if only taking “merely on information the person knows”.
Reasonable Royalties– Permissible to seek under “exceptional circumstances” where
injunction would be inequitable– Royalty period may run only from period of time where use
could have been prohibited (i.e., as a secret)
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Remedies - Damages
Damages– “Actual loss” caused by the misappropriation– “Unjust enrichment” not addressed in actual loss
computation– Reasonable royalty as damages calculation
method (“in lieu of other methods”) Enhancement– “Willfully and maliciously” misappropriated– Not more than 2 times regular damages awarded
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Remedies – Attorney’s Fees
Attorney’s fees may be awarded if– Misappropriation claim was made “in bad faith”• “May be established by circumstantial evidence”
– Motion to terminate injunction is made or opposed “in bad faith”
– Trade secret is “willfully and maliciously misappropriated”
– “Reasonable” attorney’s fees may be awarded• Octane Fitness standard?
• Costs?
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Remedies – Ex Parte Civil Seizure
Civil Seizure New remedy—potentially very powerful Order may issue “only in extraordinary
circumstances” Limitations– Stringent requirements for issuing– Stringent requirements for elements of order itself
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Remedies – Ex Parte Civil Seizure
– Application for Seizure Order; DTSA §2(b)(2)(A)(i)
– Ex parte application for an order made by made “by affidavit or verified complaint”
– May be sought only in “extraordinary
circumstances”– Seizure is appropriate only when “necessary to
prevent the propagation or dissemination” of the trade secret
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Ex Parte Seizure Order
Requirements for issuing order: DTSA §2(b)(2)(A)(ii)
– Appropriate when ordinary injunction “would be inadequate” because party would “evade, avoid or otherwise not comply”• Legislative history examples:
– Fleeing the country
– Planning to disclosure immediately
– “Otherwise not amenable” to enforcement
– Immediate and irreparable injury
– Harm to applicant of denying order …(1) Outweighs harm to “legitimate interests” of ‘Seizee’
(2) Substantially outweighs harm to third parties
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Ex Parte Civil Seizure
Applicant must show “likelihood of success” that:– Information is a trade secret
– 'Seizee' misappropriated by “improper means”
– ‘Seizee’ has “actual possession” of property to be seized
– Application describes matter to be seized “with reasonable particularity” and identifies its location
– 'Seizee' would otherwise “destroy, move, hide or otherwise make inaccessible to the court” if applicant put ‘Seizee' on notice
– Applicant “has not publicized” the requested seizure
• “Don’t want to make news” – Leg history
• Query—only an “applicant” … what happens if media monitoring court dockets publicizes application?
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Ex Parte Civil Seizure
Elements of the Order: DTSA §2(b)(2)(B)
– Set forth findings of fact and conclusions of law
– Narrowest seizure necessary to achieve purpose• “Minimizes interruption” to business of third parties
• “Does not interrupt” legitimate business operations of ‘Seizee‘ “to the extent possible”
– Should be combined with another order prohibiting access or copying by either party to “prevent undue damage” until hearing
– If court does grant access to either, must comply with court custody requirements
– Scope:• Hours of execution
• Whether force can be us to “access locked areas”
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Ex Parte Civil Seizure
Elements of the Order, cont’– Set hearing date: “earliest possible time”, but no later
than 7 days after order, unless both consent– Post bond: Applicant must provide adequate security
for damages for wrongful or wrongfully attempted seizure
Protection from publicity: Court shall take appropriate action to protect ‘Seizee' from publicity about the order of seizure • Query—does this run afoul of First Amendment (i.e.,
gag order)?
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Civil Seizure
Protection of Seized Materials– Court shall take custody and secure from physical
and electronic access– If information is on “storage medium”, court shall
prohibit connection to Internet until hearing– Confidentially of other unrelated information shall
be protected, unless 'Seizee' consents– Special Master may be appointed to protect
misappropriated information and return unrelated property (and is bound by NDA)
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Civil Seizure
Service of Order– Must be made by federal law enforcement
officer (presumably U.S. Marshall, possibly FBI)
– State or local agents may also participate– Applicant or agent may NOT participate– Technical expert may be allowed to help
facilitate (and is bound by NDA)
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Civil Seizure
Seizure Hearing:– Court that issues order shall hold hearing on
the date set in order– Burden of proof is on applicant– Dissolution of order permitted on motion
any time by 'Seizee' or harmed third party, with notice to applicant
– Time limits for discovery may be set to avoid “frustration of purpose of hearing”
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Wrongful Seizure and Encryption
Wrongful Seizure– If wrongful or excessive seizure, 'Seizee' has cause of action against
applicant– Relief: same as under Lanham Act: 15 U.S.C. §1116(d)(11)
• “Lost profits, cost of materials, loss of good will, and punitive damages in instances where the seizure was sought in bad faith, and, unless the court finds extenuating circumstances, to recover a reasonable attorney’s fees”
• Posted security doesn’t limit amount of relief
Motion for Encryption– Any person who “claims to have an interest” in the seized material
may move for encryption in method of their choice– May be heard ex parte
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Whistleblower Protections
DTSA provides safe harbor to whistleblowers who provide trade secrets to government
Whistleblower entitled to civil/criminal immunity for disclosing trade secret so long as purpose of reporting or investigating is a suspected violation of law and is made to:– Whistleblower's attorney– Government– Court-filing under seal
If whistleblower files lawsuit for retaliation against employer based on reporting of a suspected violation of law, whistleblower may also use the trade secret in that anti-retaliation lawsuit
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Whistleblower Protections
Employer must provide notice of immunity in any employment contract that governs the use of trade secret or confidential information
Notice of immunity must be provided in the contract itself or the contract must cross reference to a company policy document that includes discussion of immunity
If employer fails to include notice in contract, it is prohibited from being awarded exemplary damages or attorneys' fees in suit under DTSA
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Miscellaneous Provisions Statute of Limitations: 3 years after discovery
or should have been discovered with “reasonable diligence”
Effective Date: Applies to acts occurring on or after signing
Increases EEA $5M limit to “greater of $5M or 3 times value of TS “to the organization”
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Miscellaneous Provisions
Non-disclosure: Court won’t disclose asserted information without sealed submission and can’t be used later against owner
RICO: EEA criminal provisions are now “predicate offenses” under RICO racketeering definition
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AG Reporting Obligations
DTSA fails to provide protection to US companies for trade secret theft occurring abroad
But, AG must submit biannual report House/Senate Committees – Must report on scope/breadth of trade secret theft from
US companies occurring outside US and extent such theft is being sponsored by foreign governments/agents
– Report must discuss mechanisms for US companies to prevent trade secret theft abroad and identify any country whose laws on trade secret theft pose problem for US companies
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Contact Information
Q. Todd DickinsonShareholder | PolsinelliWashington, [email protected]
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Contact Information
Stephen E. Fox, Esq. Shareholder | PolsinelliDallas, [email protected]@StephenEFoxhttps://www.linkedin.com/in/stephenefox
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