REPORT AND ANALYSIS OF RECENT AMENDMENTS TO S. 1890 (The Defend Trade Secrets Act 2016)

By Professor Sharon K. Sandeen, Mitchell Hamline School of Law  

The Defend Trade Secrets Act (S. 1890) passed out of the U.S. Senate Committee on the Judiciary today, but not before it was amended to address a number of concerns that were voiced by opponents over the past two years. The following is my quick analysis of the changes.  Note that there were actually two sets of amendments to the legislation. The so-called manager’s amendment (labeled “S. 1890 Substitute Amendment”) and amendments offered by Senators Leahy and Grassley (labeled “Leahy-Grassley1”). The following page and line references are to the Substitute Amendment. The Leahy-Grassley amendments are discussed thereafter.  [S.1890 Substitute Amendment][Leahy-Grassley1].

1. S. 1890 Substitute Amendment

Page 1:

The legislation is now to be known as the “Defend Trade Secrets Act of 2016” instead of “2015.”

Page 2, line 2:

“Misappropriated” added and language “aggrieved by misappropriation” deleted

Sandeen Comment: This change was apparently made in response to expressed concerns that “aggrieved” might be introducing a new concept of wrongdoing into trade secret law. Since “misappropriation” is a defined term in the DTSA (copied from the UTSA), it is better to stick with that language.

Page 2, lines 11-12:

With respect to the ex parte civil seizure remedy, the language “but only in extraordinary circumstances” was added.

Sandeen Comment: I am not sure what this language adds other than to emphasize the fact that this remedy should rarely be granted. But that begs the question: Why is the remedy needed at all if it will rarely or ever be granted? No one has ever explained to me why egregious cases that might justify such a remedy would not be championed by the U.S. Department of Justice in a criminal case. But there is a clue in later amendments to the EEA criminal provisions that give trade secret owners standing to assert secrecy concerns in such cases. (See report on new Section 3 below).

Page 2, lines 24-25:

The language “another form of equitable relief” was added to limit the circumstances under which an ex parte seizure order could be granted.

Sandeen Comment: As I understand the limitations built into the civil seizure provision, such an order is not to be granted unless other available equitable relief is inadequate. What seems to be lost in the discussion of all forms of equitable relief is that there are legal remedies available, including potential exemplary damages. Typically, equitable relief is not available when such is the case. In this regard, I wonder if “another form of equitable relief” would include a royalty injunction.

Page 4, line 5 et seq:

A new section (V) has been created (and subsequent subsections re-lettered accordingly) to highlight that “the person against whom seizure would be ordered” must have actual possession of both the trade secret and the property to be seized.

Sandeen Comment: While seemingly limiting the scope of the civil seizure remedy, this addition confirms what the opponents of DTSA were afraid of: that the civil seizure remedy can be used to seize property in addition to the actual trade secrets. While the person against whom seizure would be ordered must be shown to have either misappropriated a trade secret or conspired to misappropriate a trade secret, this language is actually much broader than it may seem on the surface. This is because the definition of misappropriation under the DTSA (and the UTSA) can apply to third-parties who were not directly involved in the initial misappropriation, provided they have the requisite (but obviously later acquired) knowledge. For instance, new employers.

Page 5, line 13:

Deletes the language “that are unrelated to the trade secret that has allegedly been misappropriated” in describing the elements of any civil seizure order.

Sandeen Comment: This was apparently intended to limit the scope of a civil seizure order, which is a good thing if it works.

Page 5, line 16 – page 6, line 11: 

Uses “prohibiting” instead of “restricting” and makes other changes to the provision concerning the required content of a civil seizure order, the most significant change being the addition of a new sub section (iv) which requires the court to “provide guidance to law enforcement officials” concerning how they are to execute the order.

Sandeen Comment: This language was undoubtedly added to address concerns that Senator Sheldon Whitehouse raised during the hearing on DTSA that was held before the U.S. Senate Committee on the Judiciary in December of 2015. His principal concern related to the use of force in the event that the person against whom seizure would be ordered was uncooperative.  

Page 7, line 13 – page 8, line 22:

The “Materials in Custody” provision was re-labeled and expanded, particularly with respect to the newly labeled sub-section “Storage Medium” and new provisions labeled “Protection of Confidentiality” and “Appointment of a Special Master.”

Sandeen Comment: The added language was undoubtedly added in an attempt to address concerns about the scope of any civil seizure order (including the very real possibility that property not relevant to the trade secret case might be seized), the handling of seized information, and the practical reality that federal court staff is ill equipped to manage such materials. Nothing in the legislation indicates who will pay for the services of a Special Master.

Page 9, line 2-15:

Deleted the language that used to allow state and local officials to execute a civil seizure order and instead specifies that a civil seizure order must be executed by federal law enforcement personnel.  State and local law enforcement personnel can be involved, but they cannot be involved in the actual seizure of property. Further, the court may allow for the use of a technical expert to assist federal law enforcement officials in executing the civil seizure order, again without specifying who will pay for the technical expert.

Sandeen Comment: These amendments address some of the concerns that have been expressed about how a civil seizure order will be executed and how it can be done without including the legitimate business information of the “person against whom civil seizure is ordered.” However, the more that efforts are made to address the concerns of critics, the more the risks of such a remedy are revealed. If this remedy will be used very infrequently as its proponents argue, Congress should ask if the marginal benefits of this remedy are worth its tremendous costs, particularly given the fact that: (1) criminal prosecution and seizure are possible in egregious cases; and (2) plaintiffs in trade secret cases have very robust legal remedies in the event of the loss of trade secrecy.

Page 11, line 6 et seq:   

The standing to file a motion for encryption has been broadened to include both parties to the litigation and “a person who claims an interest in the subject matter seized.”

Sandeen Comment: This is a positive development, but obviously it acknowledges that non-parties may be affected by a civil seizure order and be forced to hire an attorney to protect their interests.

Page 11, line 23 – page 12, line 8: 

The provisions concerning the effect of injunctions on employment were re-worked, re-lettered and expanded. First, the original language was amended so that any injunction must “be based upon evidence of threatened misappropriation and not merely on the information a person knows.” Second,   the legislation now includes language which states that an injunction cannot “otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.”

Sandeen Comment: This is a very positive development that makes it clear that State law governing restrictive covenants, including non-compete agreements, will continue to apply as limits on the scope of injunctive relief. More specifically, it rejects the worst aspects of the inevitable disclosure doctrine which many states (most notably California) have found to be inconsistent with their laws against restrictive covenants, particularly those that restrict employee mobility. Issues of choice of law remain, of course. 

Page 13, line 9: 

The measure of potential exemplary damages has been lowered to 2 times instead of 3 times.

Sandeen Comment: This is a positive development, particularly for the proponents of the DTSA who claim that its primary purpose is greater uniformity in trade secret law. The new language is consistent with the UTSA. However, it appears that this change may have been part of a compromise since (as discussed below), the criminal penalties for a violation of the EEA have been increased.

Page 13, line 23: 

The statute of limitations has been lowered to 3 years from 5 years.

Sandeen Comment: This change also makes the statute of limitations consistent with the language of the UTSA (although some UTSA states have not adopted the statute of limitations specified in the UTSA). This is a positive development because businesses can now be more certain when threats of trade secret litigation will end. Since the statute of limitation follows the discovery rule, plaintiffs will have plenty of time to bring a lawsuit once the facts giving rise to such claims are discovered.

Page 14, line 8:

The definitions provisions of the DTSA must be read alongside the existing definition provisions of the EEA, which is where you will find the definition of a trade secret. A change from earlier versions of the legislation is that the word “public” in 18 U.S.C. §1839 (3)(B)  (the definition of a trade secret) will be substituted with “another person who can obtain economic value from the disclosure or use of the information.”

Sandeen Comment: This is another positive development that makes the definition of a trade secret under the EEA (as amended) more consistent with the language of the UTSA. Without this amendment, the EEA might be interpreted to include information that is in the public domain under state law. Not changed in the EEA to be consistent with the UTSA is the first part of the definition of a trade secret which, under the EEA, includes a litany of types of information that might qualify for trade secret misappropriation. However, this greater specificity always struck me as necessary since the EEA was initially, and will remain in part, a criminal statute.

Page 17, line 21 – Page 19, line 2:   

A new Section 3 was added titled “Trade Secret Theft Enforcement” and old Section 3 was re-labeled as Section 4. This section increases the penalties for a violation of 18 U.S.C. §1832 from $5,000,000 to the greater of $5,000,000 or 3 times the value of the stolen trade secrets to the organization, including the costs of reproducing the trade secrets. Second, it adds a new provision titled “Rights of Trade Secret Owners” that essentially allows trade secret owners to be heard in criminal court concerning the need to protect their trade secrets. Lastly, it amends 18 U.S.C. §1961 (the RICO statute) to add a violation of the EEA as a predicate act.

Sandeen Comment: At first blush, these changes seem to more directly address the concerns that motivated the proposed legislation and should have been tried first before risking the disruption of U.S. trade secret law by creating a federal civil cause of action for trade secret misappropriation. What they reveal is the concern that trade secret owners have about the effectiveness of federal criminal prosecution to stop (or punish) the most egregious cases of trade secret misappropriation. They also reflect the risks to trade secrets posed by the public nature of criminal prosecutions. Robust criminal laws are already on the books to punish those who would engage in the most egregious forms of trade secret misappropriation, but trade secret owners might be hesitant to report such crimes out of fear that their trade secrets might be lost in the process. Allowing trade secret owners to express their confidentiality concerns in a criminal court seems like a good idea. More study of the implications of the RICO provision is needed, particularly with respect to the potential for the over assertion of criminal prosecutions which was a major concern of business interests when the EEA was first adopted.

Page 22, line 23 et seq.:

The re-numbered “Sense of Congress” provision (now Section 5) added point (4) concerning the civil seizure order and Congress’ sense that the need for such a remedy should be balanced  against the risk of interrupting the business of third parties and the legitimate interests of the party accused of wrongdoing.

Sandeen Comment: While this is helpful language, it is interesting that this language is included in the “Sense of Congress” provision and not in the text of the civil seizure provision itself. While Congress is at it, I would urge it to add point (5) to the “Sense of Congress” and state that the DTSA should be interpreted and applied in a manner that is consistent with the commentary to the UTSA.

Page 23, Line 4 et seq:  

New Section 6 was added titled “Best Practices” to require the Federal Judicial Center “using existing resources” to, within two years, recommend best practices related to civil seizure orders.

Sandeen Comment: Again, this indicates that concerns about the abuse of civil seizure orders remain.

2. Leahy-Grassley Amendments

These amendments would add a section to the DTSA, in a place to be determined, titled “Immunity from Liability for Confidential Disclosure of a Trade Secret or in a Court Filing.” This new section is designed to protect whistleblowers from liability for the disclosure of trade secrets to the government and in the context of retaliation lawsuits, provided that steps are taken by the whistleblower to keep such information confidential. It also would require employers to give notice of such immunity to employees, thereby requiring an exception to confidentiality provisions.

Sandeen Comment: This is a very positive development for those who are concerned that the assertion of trade secret rights can be used to prevent the timely disclosure of information that is needed by law enforcement authorities. However, it only applies where there is an alleged violation of law and not, more broadly, in situations where threats to public health exist, for instance.  

= = = = =

[Prior Patently-O Posts on the DTSA]

About Dennis Crouch

Law Professor at the University of Missouri School of Law. Co-director of the Center for Intellectual Property and Entrepreneurship.

53 thoughts on “REPORT AND ANALYSIS OF RECENT AMENDMENTS TO S. 1890 (The Defend Trade Secrets Act 2016)

  1. This bill was motivated by the “sense of Congress” to act against foreign hackers and fails to prevent such misappropriation. While it establishes a federal cause of action for theft of trade secrets, its harmonization with the UTSA essentially makes it a gap filler where diversity is lacking or in the few situations where states deviate from the UTSA.

    The controversial seizure provisions will continue to be a source of confusion and potential abuse, but ultimately will be much ado about nothing since they are limited in scope to products or media. Since trade secrets are intangible, it is impossible to “seize” a misappropriated trade secret. If a trade secret is recorded or stored on a document or electronic medium, it is unlikely that any reasonably identifiable and locatable copy may be found for seizure (unless it is marked “Stolen Trade Secret — Look Here!”).

    1. and fails to prevent such misappropriation.

      Excellent point steve.

      Legislation that fails to achieve its stated purpose (and additionally can be seen to present so-called “unforeseen” consequences), should be fixed before passing into law.

      Good to see this bill seeing scrutiny from multiple concerns.

    2. Senators at the hearing in December conceded that this legislation is not about cyber-espionage and will not solve the cyber-espionage problem, accepting an argument that the opponents have made for years. Now the two principal arguments in favor are: (1) it will create more uniformity, something that I do not believe given the lack of federal jurisprudence on the issue and the failure of DTSA to incorporate the commentary to the UTSA; and (2) state court procedures are bad; federal court procedures are better.

      1. Agree with your point (1) – see the conversation between J and I.

        Point (2) is simply nebulous and would apply on its face to federalizing everything. As such, it cannot be correct.

  2. OT :

    link to

    This would be why people in the tech industry have this tendency to think of some (not all) patent lawyers as slimy amphibians. Essentially, it’s a patent on how to do a library checkout card on a computer. I remember signing a check out card to check out books back in the 70’s. This thing issued only recently. blech…

  3. Thank you for the summary, Professor.

    To the extent that there will be differences between states that do not have a statute of limitations and this bill (if it were to become law), the state law would be preempted, correct?

    1. That’s a good question J, and my understanding is no, this bill is not intended to preempt any state law (it is another layer of law in addition to state laws).

      Least wise, as I have heard so far…

      1. How does that work? The law is trying to harmonize this area of the law?

        Express preemption… intent matters. Implied preemption… I’m not sure Congressional intent matters as much.

        1. My understanding is that the congressmen pushing the bill have expressly stated this is not to have ANY pre-emptive effect.

          I initially balked too, as merely adding another layer and NOT pre-empting does not sound too helpful for the aim of clarifying and streamlining this (current) area of hodge-podge law.

          1. Sometimes, parts of a statute become dead letter. To make sense of the mess this statute will make, something becomes dead-letter.

            Perhaps the non-preemption clause?

            1. Sorry, Friday afternoon blogging.

              Parts of a law, though technically on the books, can become dead letter; that is, it is unenforceable, or inoperative. This bill, if it becomes law, might be so self-defeating that parts of it are dead letter.

              I have to really study the language, but if the statute becomes unworkable, the section that states “no preemption intended” either defeats most of the statute or itself is dead letter.

              1. I had to chuckle at your post J – there are plenty of laws on the books that have evolved to become dead letters. Yep, they’re still on the books and no one pays attention to them; however, this would be a very different situation – first it is a new law and dead on arrival… not quite sure that is what you’re aiming at; second you’re looking at a state versus federal issue, which I don’t think has ever been the type of thing that evolves into a dead letter.

                Interesting thoughts though.

              2. Yes, dead letter usually occurs after a period of time. Dead letter on arrival would be, at most, a rare occurance.

                But Courts must try to interpret statutes. If a statute is self-defeating, then something has to give.

                1. If a statute is self-defeating, then something has to give.

                  Completely agree, J.

                  This is where it makes the AIA in particular very interesting. Of course, since the present item is still a bill, plenty can (and should) happen so as to not arrive at the same precarious place that the AIA is in.

        2. I still don’t know how to rectify this. You are either harmonizing via Supremacy Clause or you are not doing either.

          I understand the Federal Gov’t supplementing existing state law, minimum requirements for wages, for example; but when the goal is harmonization, that means state decisions on these issues are jettisoned.

          Am I wrong that the goal is harmonization?

          1. I’m not sure about the goals. But you can offer an alternative route, i.e., harmonize by offering a single cause of action that is uniform throughout the United states (the proposed legislation) that would be separate and distinct from any state trade secret cause of action.

            Basically, the same thing as a trademark lawsuit: plead the federal trademark lawsuit (federal question jurisdiction) and append all the misc. state level claims as well (e.g., state common law trademark and business torts that don’t go anywhere).

            Therefore, the state level trade secret protection is not preempted AND harmonization is accomplished.

            1. drop by,

              I have to disagree with your version of harmonization.

              Adding another layer that may be consistent across the states (the federal layer) is just another layer.

              You STILL have the same other layers that are NOT harmonized. Each and every vagary present before the federal layer remains present. Harmonization is not accomplished. Only the new layer added is a single “harmonized layer.”

              True harmonization would come with federal preemption.

              Hence the discussion betwixt J and I.

            2. drop by,

              See the additional “clarifications” from Mr. Pooley on the new thread – and how “harmonization” really will not be achieved with this additional layer.

              The vagaries of State by State differentials will remain.

    2. Good question–the proposed bill states that the Act is not intended to
      “preempt any other provision of law.” It might come down to a preemption analysis (impossibility or frustration of purpose). It is not clear to me whether there will be concurrent state/federal protection. I’m curious to read responses.

      1. It is important to recognize that the UTSA (Section 7) does preempt other provisions of law so, when Section 7 is applied as it was intended, the only tort or equitable claim that can be brought for misappropriation of business information is a trade secret claim. There is no relief (other than contractual) for business information that does not meet the definition of a trade secret.

    3. I believe so for the federal claim, but I would anticipate a state claim to be brought as well. The majority of states, however, follow the 3 year Statute of Limitations of the UTSA. Interestingly, recent amendments to the penultimate draft of the EU Trade Secret Directive delete specificity with respect to a Statute of Limitations, leaving it up to each EU country to specify both the length and when the Statute of Limitations begins to toll.

      1. eaving it up to each EU country to specify both the length and when the Statute of Limitations begins to toll.

        In other words, introducing MORE (not less) variations and complexity….

  4. Prof. Sandeen, thank you for the excellent summary.

    The concern about third-party property threw me for a loop because I am under the assumption that if a trade secret is disclosed publicly, it no longer is a trade secret. Why are we seizing the property of third parties who receive trade secret on a nonconfidential basis without showing that those third parties are complicit?

    1. Ned:

      “This is because the definition of misappropriation under the DTSA (and the UTSA) can apply to third-parties who were not directly involved in the initial misappropriation, provided they have the requisite (but obviously later acquired) knowledge.”

      Commentator’s position: DTSA and UTSA apply to third parties that later acquire knowledge of the misappropriation AND are in possession of physical medium that could reveal such.

      Not sure if the commentator is correct.

      Re your point about trade secret protection being instantly lost: I’m struggling to remember if a trade secret instantly loses protection if a liable party takes the information to a third party. I wouldn’t be surprised if courts have interpreted that narrowly.

      i.e., the trade secret has not been revealed outside the bad actor and the [single] third party = still trade secret
      bad actor publishes online [broader definition of “public”] + third party obtains trade secret = no longer trade secret)

      1. drop by, trade secret law is equitable in nature, protecting the owner against betrayal of confidence. For the law to impose an obligation on a third party, there has to be some complicity with a bad actor.

        Thus if one received from an individual documents marked confidential X company, that person should know that something is amiss — duty of inquiry at least.

        But next consider that one receives the information with no knowledge that the information is confidential, under circumstances where there is no suggestion of any breach of confidence, then makes heavy investments based upon the information, I hardly think that equity would intervene on behalf of the trade secret order to shut down such an innocent user.

        1. I agree, e.g., accessory after the fact kind of liability.

          Are you suggesting that the current federal cause of action would reach to innocent third parties?*

          * Let’s define innocent third parties negatively so that we focus on liable third parties, to wit: an individual who knew or was purposefully blind to the misappropriation.

          This would leave the idea of duty of inquiry for any out of place indication – which furthers trade secret’s use as enforcing a de minimis business standard (the ol’ golden rule: do unto others, as you would have done to yourself).

          I don’t see anyone throwing the baby out with the bathwater. But, if that IS what is happening, then the proposed legislation is bit extreme.

          Back to the point: I don’t think your initial point (loss of protection) is so easily granted because there is much more nuance betwixt the parties and their duties and obligations to each other.

          1. drop by, I think patent law should have this nuance as well. If the party receiving confidential information is somehow placed on notice, we the information remains confidential.

    2. Potential third party liability is why we have trade secret law in the first place, otherwise contract law would probably work just fine. However there is a know or reason to know requirement that will not be met in all cases.

    3. There are two factual aspects to this question. If information is disclosed to third parties in a non-confidential manner, then the trade secret status of the information would be lost. But often those who misappropriate trade secrets continue to keep that information secret and share it with third parties under circumstances of confidentiality. In such situations, the third party may be liable for misappropriation if they acquired the information improperly or disclosed or used it with the requisite knowledge (or reason to know) of the existence of the trade secrets and their earlier misappropriation. See the definition of “misappropriation” in the UTSA (and the DTSA). It is long and convoluted, but the potential third party liablity is there.

  5. This is the way to analyze this. Real story. Inventors came to me recently and said the following: (1) our invention is really good and we do not want to explain to people how to do this. The big companies and other small companies will likely just copy it if we get some market share. (2) How can build this and keep it a secret rather than going the patent application route. (3) Patents are so weakened now and maybe the courts will find ours invalid under Alice. (4) How could we hire lots of software engineers and force them to keep our secrets?

    That is reality. That is what is going on. The only piece that is missing is federal trade secret laws to allow the companies to shut-down the engineers. We are about to go dark.

    1. (4) How could we hire lots of software engineers and force them to keep our secrets?

      Why “force” them?

      Try paying them good wages, with good benefits, and giving them a stake in the company’s success.

      maybe the courts will find ours invalid under Alice

      Probably. Regardless, your success won’t depend on your awesome logic-applied-to-data “trade secret” for very long.

    2. That’s a difficult situation, especially if one can reverse engineer the product. It’s difficult to force people to keep secrets, especially when those secrets involve the ability to move from one company to another.

      As for Alice, I just had a case with an Alice rejection where the Examiner did not reject a claim under Alice. We added that limitation into the main claim. However, when I reviewed that limitation in the amended claim, it was unclear to me whether we’d meet the “something significantly more” prong of Alice. Then I realized I have no idea what the boundaries of “something significantly more” are. None. I can’t counsel my clients. I had to say, “I have no idea whether this meets with Alice or does not; you’ll have to wait until this is litigated.”

      1. Then I realized I have no idea what the boundaries of “something significantly more” are. None. I can’t counsel my clients. I had to say, “I have no idea whether this meets with Alice or does not; you’ll have to wait until this is litigated.”

        Were you fired? I would have sent you packing.

        1. LOL – so DanH, what ARE the (explicit) limits of “something significantly more“..?

          What is the definition of “abstract” per the Court (not per a dictionary, which the Court expressly chose NOT to use)….?


          Can’t hear you.

          You’re Fired (in the best mock-Donald Trump tones)

          1. What are the (explicit) limits of “the reasonable person”? What are the explicit limits of “would have been obvious to the person of ordinary skill in the art”?

            Quit pretending that law is nothing more than a collection of bright-line rules. If it was, anyone could do it.

            What PatentBob said, in any case, was not that he couldn’t articulate the “explicit limits” of “something significantly more.” What he said was that he has no idea whether or not his client’s claim is directed to statutory subject matter. That’s shocking, because I’m absolutely certain that there are more than a few patent attorneys out there who could give his client pretty good advice for any given claim.

              1. You’re saying that PatentBob made the whole story up? He said “I just had a case…” and “I had to say, ‘I have no idea whether this meets with Alice or does not; you’ll have to wait until this is litigated.'” If you’re telling me that didn’t happen, then we’re not talking about hyperbole, we’re talking about an outright falsehood.

                1. ?

                  What does the larger point have to do (at all) with “making something up”…?

                  His situation still has a larger point.

                  1. His “point” appeared to be that he, as an attorney, cannot provide any advice to his client with regards to the patentability of its claim. My point is that if that’s true, then he shouldn’t be practicing patent law.

                    What’s your point?

    3. This is my concern too, coupled with the AIA and the asserted changes to the definition of prior art…..but information is needed for innovation and competition.

  6. You know Google has done this before. The way Google became the monopoly on search engines was to pretend they were only going to be the back-end of Yahoo. They even said they were only interested in the back-end not their own website.

    Here, we get Google saying we want everything open. We can do innovation without patents, but then we get new federal trade secret laws. What Google is going to do is shut down their engineers from discussing anything to anybody and moving to other companies. They will do this soon after they get the new federal trade secret legislation. That is the game.

    1. Yes, unfortunately confidentiality agreements are not as limited as non compete agreements. The best thing that individuals can do is keep track of the knowledge that they already have when they start a job and the general skill and knowledge they learn on the job. Such information cannot be rightly claimed by their employers.

      1. The best thing that individuals can do is keep track of the knowledge that they already have when they start a job

        How (and at what cost)? In what (legally recognized) form?

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