The Defend Trade Secrets Act (DTSA)
The Defend Trade Secrets Act (DTSA), signed into law in May 11, 2016, "federalizes" trade secret law by providing a procedure for trade secret owners to file civil lawsuits in federal court. Any company possessing a trade secret that is "related to a product or service used in, or intended for use in, interstate or foreign commerce" can take advantage of the provisions of the DTSA.
Prior to the DTSA, trade secret owners could only bring civil lawsuits in state courts, under state laws based on the Uniform Trade Secrets Act (UTSA). (Except for New York and Massachusetts, every state has adopted some version of the UTSA.) In many important ways the DTSA and state laws based on the UTSA are similar -- for example, the definitions of trade secrets and misappropriation are the same, as are the statute of limitations (three years), and the remedies for theft (injunctive relief, compensatory damages). But the DTSA may be more favorable to trade secret owners because it provides access to federal courts and it provides for seizing trade secrets without giving any notice to the defendant, an unprecedented leap from the notice requirements of state laws based on the UTSA.
The DTSA also has some built-in protections for those accused of trade secret theft. These include:
Seizures. If a trade secret owner orders a trade secret seizure, there must be a hearing within seven days of the seizure order. At the hearing, the trade secret owner must prove the legal and factual basis for the order.
Employee injunctions. The DTSA sets limits on injunctions against former employees, particularly when an employer seeks to prevent an ex-employee from entering into another employment relationship.
Attorney's Fees for Bad Faith. A defendant accused of misappropriation can recover attorney's fees from the trade secret owner if the claims were made in bad faith.
Finally, the DTSA includes a provision that may affect the disclosure of trade secrets during and after litigation by preventing disclosures at trial and within court opinions unless the trade secret owner has first been briefed on the disclosure.
Nondisclosure agreements. Employers are now required to include a notice of immunity "in any contract or agreement with an employee that governs the use of a trade secret or other confidential information." (The notice should also be included in agreements for independent contractors as well.) An employer who fails to include the provision is prohibited from recovering exemplary (double) damages and attorney fees from the employee or IC. The failure to include the provision does not prevent filing in federal court under the DTSA. A sample provision would include the following language:
Notice of Immunity from Liability. An individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual (i) files any document containing the trade secret under seal; and (ii) does not disclose the trade secret, except pursuant to court order.
The Uniform Trade Secrets Act (UTSA)
Each state has laws that prohibit trade secret theft. Regardless of whether you use an NDA, you can sue under these laws to stop disclosures, and in some cases, obtain financial damages. Although it is always advisable to use an NDA, these state laws provide a second line of defense in the event trade secrets are stolen.
Forty-eight states and the District of Columbia have trade secret laws adopted from the Uniform Trade Secrets Act (UTSA), a "model" act created by lawyers, judges and scholars in order to conform the rules of different states. (Only New York and Massachusetts have not adopted the UTSA.) The full text of the UTSA is provided here.
Courts in states that have not adopted the UTSA follow common law principles (derived from court decisions or state laws) that are similar to the general principles expressed in the UTSA.
We include the full text of the UTSA so that you can review the standards and definitions used by state courts when reviewing trade secret disputes. For example, the definitions for misappropriation and improper means in Section 1 establish a broad range of prohibited activities that allow you to pursue a trade secret thief even if you do not use an NDA. Each state may make minor variations to this act so check your state statute to verify the standards.
States that have not adopted the UTSA. The following states protect trade secrets under unique state statutes or under the common law: Massachusetts, New York, and Texas.
As used in this Act, unless the context requires otherwise:
(1) "Improper means" includes theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means.
(2) "Misappropriation " means: (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; or (ii) disclosure or use of a trade secret of another without express or implied consent by a person who (A) used improper means to acquire knowledge of the trade secret; or (B) at the time of disclosure or use knew or had reason to know that his knowledge of the trade secret was (I) derived from or through a person who has utilized improper means to acquire it; (II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or (III) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or (C) before a material change of his 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.
(3) "Person" means a natural person, corporation, business trust, estate, trust, partnership, association, joint venture, government, governmental subdivision or agency, or any other legal or commercial entity.
(4) "Trade secret" means 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.
2. Injunctive Relief
(a) Actual or threatened misappropriation may be enjoined. Upon application to the court an injunction shall be terminated when the trade secret has ceased to exist, but the injunction may be continued for an additional reasonable period of time in order to eliminate commercial advantage that otherwise would be derived from the misappropriation.
(b) In exceptional circumstances, an injunction may condition future use upon payment of a reasonable royalty for no longer than the period of time for which use could have been prohibited. Exceptional circumstances include, but are not limited to, a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable.
(c) In appropriate circumstances, affirmative acts to protect a trade secret may be compelled by court order.
(a) Except to the extent that a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation renders a monetary recovery inequitable, a complainant is entitled to recover damages for misappropriation. Damages can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss. In lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty for a misappropriator's unauthorized disclosure or use of a trade secret.
(b) If willful and malicious misappropriation exists, the court may award exemplary damages in the amount not exceeding twice any award made under subsection (a).
4. Attorney's Fees
If (i) a claim of misappropriation is made in bad faith, (ii) a motion to terminate an injunction is made or resisted in bad faith, or (iii) willful and malicious misappropriation exists, the court may award reasonable attorney's fees to the prevailing party.
5. Preservation of Secrecy
In action under this Act, a court shall preserve the secrecy of an alleged trade secret by reasonable means, which may include granting protective orders in connection with discovery proceedings, holding in-camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.
6. Statute of Limitations
An action for misappropriation must be brought within 3 years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. For the purposes of this section, a continuing misappropriation constitutes a single claim.
7. Effect on Other Law
(a) Except as provided in subsection (b), this [Act] displaces conflicting tort, restitutionary, and other law of this State providing civil remedies for misappropriation of a trade secret.
(b) This [Act] does not affect: (1) contractual remedies, whether or not based upon misappropriation of a trade secret; or (2) other civil remedies that are not based upon misappropriation of a trade secret; or (3) criminal remedies, whether or not based upon misappropriation of a trade secret.
8. Uniformity of Application and Construction
This act shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this Act among states enacting it.
9. Short Title
This Act may be cited as the Uniform Trade Secrets Act.
If any provision of this Act or its application to any person or circumstances is held invalid, the invalidity does not affect other provisions or applications of the Act which can be given effect without the invalid provision or application, and to this end the provisions of this Act are severable.
11. Time of Taking Effect
This [Act] takes effect on , and does not apply to misappropriation occurring prior to the effective date. With respect to a continuing misappropriation that began prior to the effective date, the [Act] also does not apply to the continuing misappropriation that occurs after the effective date.