Providing Developments & Insight on Trending Topics in Employment Law

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On April 4, 2016, the Senate unanimously passed the Defend Trade Secrets Act, bringing a federal civil remedy for trade secret misappropriation one step closer to becoming law. House Judiciary Chairman Bob Goodlatte released a statement a few days later saying he planned to move the legislation through the House Judiciary Committee in the coming weeks. Given the signals that a federal civil trade secret law is imminent, this article will address the basics of the bill just passed by the Senate, so that any businesses and employers with trade secret issues can begin planning for changes that may be needed in written employment policies, nondisclosure policies, and litigation strategy.

Currently, trade secrets lack a federal civil remedy. They are instead protected by state law under the Uniform Trade Secrets Act (UTSA), and enforceable in federal court only under a particular state’s law and if there is diversity jurisdiction. The idea behind the proposed federal legislation is in part to provide a uniform body of law and to strengthen the enforcement procedures available. The federal bills deviate from current enforcement under the UTSA in some significant ways, including as follows:

Remedies – ex parte seizure

Both House and Senate bills provide for ex parte seizure of “property necessary to prevent the propagation or dissemination of the trade secret.” The federal proposals contain restrictions designed to balance the rights of the trade secret holder with those of the alleged misappropriator and third parties who may be harmed by a seizure. The Senate version would allow ex parte seizure only in “extraordinary circumstances.” It further requires any seizure order to delineate clearly the scope of the seizing officials’ authority, including the hours during which the seizure may be executed, and whether force may be used to access locked areas. Both the Senate and House versions contemplate that the seizure order shall be made by federal law enforcement. The Senate version appears to allow the state or local authorities to “participate” only if allowed by court order, and prohibits an applicant or its agent from participating in the seizure.

Both versions of the act provide a cause of action for wrongful or excessive seizure. A successful claimant under this provision could recover damages for lost profits, costs of materials, loss of good will, punitive damages for bad faith conduct, and attorneys’ fees. The language of any final version of this cause of action will likely provide limiting parameters to these remedies, and will be important to any decision regarding whether to seek an ex parte seizure order.

Limitations on injunction and other remedies

The federal bills explicitly address whether a court can enjoin an alleged misappropriator from accepting an offer of employment or continuing to be employed by a rival business. The Senate version explicitly notes that an injunction may not conflict with applicable state law prohibiting restraints on employment. Further, it addresses the inevitable disclosure doctrine by specifying that an injunction shall be based on evidence of threatened misappropriation, and not on the type of information the person accused knows. These issues will likely be closely examined by the House.

In terms of damages available, it is worth noting that both bills explicitly contemplate imposition of a reasonable royalty as a measure of damages. Both also include exemplary damages for willful and malicious misappropriation, damages, and attorneys’ fees for a bad faith misappropriation claim or defense. The parameters of these are likely to change in any final version of the law.

Statute of limitations, whistleblower, and non-waiver provisions

Other provisions of note are a statute of limitations, whistleblower protections, and non-waiver provisions. The Senate version contains a three-year statute of limitations, while the House version’s is five years. Also of note in the Senate version are whistleblower protections for reporting a trade secret misappropriation, and an explicit non-waiver provision for trade secret owners who disclose trade secrets to federal law enforcement in connection with a prosecution. It is unclear whether those provisions will be considered or adopted by the House, but trade secret holders should be aware that if enacted as written in the Senate bill, revisions to nondisclosure agreements with employees and contractors, and to employee policies, will be needed.

These are only some of the proposals in the draft federal trade secrets legislation. Stay tuned in the coming weeks for more information, and for a full analysis of any final federal trade secrets law.

Defend Trade Secrets Act Close to Becoming Law