Implementing and Interpreting the Defend Trade Secrets Act

By Dennis Crouch

With today’s 410-2 House vote, the Defend Trade Secrets Act (DTSA) has now passed both the House and Senate and is headed to President Obama for his expected signature.[1]  The DTSA amends the Economic Espionage Act to create a private civil cause of action for trade secret misappropriation based upon the Congressional sense that trade secret theft exists and is harmful.[2]  Trade secret misappropriation (as a civil matter) has previously been purely a matter of state law.  Although there is substantial uniformity between the states,[3] there are also a number of differences and perceived procedural weaknesses.[4]  The DTSA would not eliminate or preempt the various state trade secret rights but rather would operate as an additional layer of potential protection.[5] The law is designed to go into effect on its day of enactment and apply to any misappropriation that occurs on or after that date.

On March 10, 2017, the University of Missouri’s Center for Intellectual Property and Entrepreneurship (CIPE) along with our new Business, Entrepreneurship, and Tax Law Review (BETR) will host a symposium on Implementing and Interpreting the Defend Trade Secrets Act.  I expect that we will live-stream the event and will also publish speaker articles in BETR.  There is a lot to figure out. Contact me if you are interested in sponsorship opportunities (dcrouch@patentlyo.com).

The central provision of the DTSA will be codified as 18 U.S.C. § 1836(b) and reads:

An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.

Defining Trade Secret: The DTSA broadly defines the term “trade secret” to mean “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the another person who can obtain economic value from the disclosure or use of the information.”  Although this definition is broad and certainly includes abstract ideas and laws of nature, it might not encompass information that is only stored in the human mind.[6]

Defining Misappropriation of a Trade Secret:  The statute also defines “misappropriation” in detail.  My rough approximation is as follows: without permission (A) obtaining a trade secret that was knowingly obtained through improper means or (B) disclosing or using a trade secret without knowing either (1) that it is a trade secret or (2) that it was obtained through improper means.  These “improper means” include “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.” However, misappropriation does not include “reverse engineering, independent derivation, or any other lawful means of acquisition.”  The DTSA does not otherwise include a more general fair-use or news-reporting exception.  However, the First Amendment will certainly serve as a backstop.  Further, these definitions do not include any express territorial limit – it will be very interesting to see the extent that these limits will be implied into the law.  Thus, if a U.S. company is holding trade-secrets in India that are stolen in India, could the U.S. company bring action against the Indian entity that caused the injury (presuming personal jurisdiction over the defendant)?

Remedies Civil Seizure: A key procedural benefit of the DTSA is to offer a mechanism for Civil Seizure ordered by courts and enforced by Federal, State, and/or local law enforcement as a preventive measure (akin to a temporary restraining order).

Remedies: Once misappropriation is found, the court will be authorized to grant injunctive relief as “reasonable.”  If “exceptional circumstances” render injunctive relief is “inequitable” then a court may order a reasonable royalty for the misappropriator’s continued use of the trade secret.  Depending upon how the statute is interpreted, this setup appears to create a presumption of injunctive relief – a stark difference from contemporary patent law doctrine under eBay v. MercExcange.  The statute also provides for compensatory damages for either (i): (I) “actual loss of the trade secret” and, in addition (II) “any unjust enrichment” not compensated in (I); or (ii) a reasonable royalty for the use.  Willful misappropriation can double damages.[7] In these calculations, I suspect that courts will take into account both the market-value of the trade secret as well as the “expenses for research and design and other costs of reproducing the trade secret” that were avoided by the misappropriation. The provision also includes an attorney fee shifting provision limited to cases involving bad-faith or willful-misappropriation.

Remedy against Former Employees: Most trade secret cases involve former employees moving (or starting-up) to a competitor.  A major concern raised against early versions of the bill was that the DTSA would empower employers to prevent such movement.  As amended, the bill now indicates that injunctive relief that would “prevent (or place conditions on) a person from entering into an employment relationship” must be “based on evidence of threatened misappropriation and not merely on the information the person knows.”[8]  Of course, such “threat” does not necessarily mean that the employee expressly threatened misappropriation but rather will likely be based upon circumstantial evidence regarding likelihood of misappropriation (i.e., ‘threat level’).[9]  In addition, the injunction preventing or limiting employment cannot “otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.”  This bit appears to be directed toward giving credence to non-compete and other limits in various states. However, of key importance is that it only limits injunctive relief and does not appear to limit any cause of action against former employees.  As a consequence, this sets the likelihood of a fight between certain state employment laws that favor employee rights against the new federal trade secret law.

Whistle Blowers: Professor Peter Menell was instrumental in proposing a public policy immunity provision that is included in the DTSA.  The provision would offer immunity from liability (whistle blower protection) for confidential disclosure of a trade secret to the Government or in a Court Filing (made under seal).  The provision includes a notification requirement that employers should immediately implement.

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Notes:

[1] Defend Trade Secrets Act of 2016, S. 1890.

[2] Although trade secret rights are thought of as a form of intellectual property, the bill is clear that the DTSA “shall not be construed to be a law pertaining to intellectual property.”  The result of this could, for example, mean that the intellectual property licensee exception in bankruptcy law would not apply to licenses of trade secret information.  See 11 U.S.C. § 365(n).  [In Bankruptcy Law, Trade Secrets are defined as a form of IP, but it is unclear to me at this point which statute would prevail.]  Because the DTSA is an amendment to the Economic Espionage Act – a criminal law – it will also be codified in Title 18 of the United States Code that is generally directed to “crimes and criminal procedure.”  Although I don’t know exactly, there may be aspects of Title 18 (such as general definitions) that will shape the interpretation of federal trade secret law.  As an example, 18 U.S.C. § 2(b) offers a “general principle” of respondeat superior that “[w]hoever willfully causes an act to be done which if directly performed by him or another would be an offense against the United States, is punishable as a principal.”

[3] Consider the popularity of the Uniform Trade Secrets Act in the various states.

[4] Jury trial should still apply to the extent it has in state cases.

[5] The Economic Espionage Act already includes a rule of construction that the statute “shall not be construed to preempt or displace any other remedies, whether civil or criminal, provided by United States Federal, State, commonwealth, possession, or territory law for the misappropriation of a trade secret, or to affect the otherwise lawful disclosure of information by any Government employee under section 552 of title 5(commonly known as the Freedom of Information Act).”  The DTSA reaffirms this principle by stating that “[n]othing in the amendments made by this section shall be construed to modify the rule of construction under section 1838 of title 18, United States Code, or to preempt any other provision of law.”  The bill provides for original jurisdiction of these trade secret cases in federal district court. However, it does not create exclusive jurisdiction – as such it would be proper for a party to bring such a claim in state court (when permitted by the state court). However, in that case, the other party may attempt to remove the case to Federal Court.  You might also query as to whether the federal claim is a ‘compulsory claim’ under the law such that if someone brings a state-law claim and loses they would later be estopped from bringing the federal claim.

[6] There may also be constitutional limitations on a company owning and controlling that information.

[7] This provision suggests by implication that misappropriation may be non-willful despite the fact that the misappropriation definition includes a mens rea element.

[8] My understanding is that Jim Pooley and Mark Lemley were instrumental in suggesting the addition of this provision that has now put the Bill in form where it is broadly supported by the politicians.

[9] Improperly obtaining a trade secret is a form of misappropriation – this creates some potential confusing situations in the interpretation of the provision.

Dennis Crouch

About Dennis Crouch

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

22 thoughts on “Implementing and Interpreting the Defend Trade Secrets Act

  1. Given we have moved beyond notice pleading, I wonder just how one drafts a proper trade secret complaint without disclosing the trade secret itself? I assume the trade secret can be filed under seal, and referenced by the complaint?

  2. We looked up the definition of misappropriation in the DTSA (link to congress.gov) and found that prong (B) – “(B) disclosing or using a trade secret without knowing either (1) that it is a trade secret or (2) that it was obtained through improper means” – is incorrectly stated. The Bill identifies misappropriation with a requirement of knowledge for all prongs – “known or should have known.” Prong B should state “disclosing or using a trade secret *with* knowledge that the trade secret was acquired through improper means, under a duty of secrecy, or from a person who owed a duty of secrecy.”

    (5) the term ‘misappropriation’ means—

    (A) 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

    (B) disclosure or use of a trade secret of another without express or implied consent by a person who—

    (i) used improper means to acquire knowledge of the trade secret;

    (ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was—

    (I) derived from or through a person who had used improper means to acquire the trade secret;

    (II) acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or

    (III) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or

    (iii) before a material change of the position of the person, knew or had reason to know that—

    (I) the trade secret was a trade secret; and

    (II) knowledge of the trade secret had been acquired by accident or mistake;

    1. Tom, and what of the employee who goes to a competitor? What is his skill and knowledge. What is his employer’s trade secret. How does he know which is which?

      We have definitions of what is a trade secret, but we do not have definitions of what a person’s skill and knowledge is, and what he or she has a right to use that is not subject to a lawsuit from the former employer.

      When someone writes a specification of a patent, we generate a description of what the invention is, and that is later examined for novelty. But a trade secret? Is it written down? Described? Are its borders clear and definite? Claimed? Notified to the employee that this is a trade secret?

      Without such formalities, everything is vague and indefinite. The rights of the employee are snared in fog and mud.

      Having actually “litigated” against IBM in the largest trade secret case ever(I was inside counsel), I know of the problems here intimately. Everyone talks like an expert here when they really know very little about the topic.

      Eventually, we need to document trade secrets like we do patents, write them down. Defined clearly their scope.

      Moreover, the trade secrets actually have to be used in the business, or be in the technology pipeline. Otherwise, what we have is not a trade secret, but something else.

  3. it might not encompass information that is only stored in the human mind

    Why not? “whether or how stored, compiled, or memorialized” seems to include cases where the information is stored, compiled, or memorialized and cases where it is not.

    I suppose you could take it to mean “whether it is (one of) stored, compiled, or memorialized”, but even then I would argue that information that exists in the human mind has been physically stored or memorialized. Unless you think Congress is positing that memories exist somewhere other than the physical brain.

    1. James – I wanted to keep this post as short as possible and so did not delve into possible meanings — but I agree with you regarding the statute. The most natural reading is that the statute a trade secret can still be a trade secret even if never “stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.”

    2. I read the passage a few times and concluded that I wasn’t sure what the “natural reading” is.

      ‘Whether” could mean “whether or not stored, compiled, or memorialized, period”. Or it could mean “whether stored comiled or memorialized in the following list of options”.

      What’s odd is that, if the authors intended the first meaning, why did they choose the term “whether or how” instead of “whether or not”? It’s not clear to me what the term “how” adds to the statute.

      All that said, “enforcing” a trade secret that has only been memorized — not memorialized — should, in most cases, present serious evidentiary problems for the plaintiff …

  4. “this definition is broad and certainly includes abstract ideas and laws of nature”

    Nope. Abstract ideas and laws of nature cannot be kept secret and are ascertainable by others through proper means. They cannot be owned, whether by patents or calling them “trade secrets.”

    1. Laws of nature cannot be kept secret…?

      You do not understand science – or the capability of man to hoard knowledge.

      As to ascertainable by others through proper means, that is not a definitional limitation on what a Trade Secret is, but rather is an element in the potential violation of the Trade Secret law. You very well can have a situation in which the Trade Secret IS ascertainable, and one party does so ascertain (and is not guilty of breaking the law) and another party does not independently ascertain and can be found guilty of violating the law.

      Put bluntly, you speak of which you have no clue. Take a remedial Trade Secret law class and you will be amazed at what can be a Trade Secret. It is not so much the individual (and quite possibly mundane) items that are going to be impinged here, but quite possibly the combinations of very mundane things. Trade Secrets lack any requirement for invention or novelty.

      For those that love to criticize “grifting attorneys,” this lovely box with Pandora’s monogram will make your head spin.

      1. For those that love to criticize “grifting attorneys,” this lovely box with Pandora’s monogram will make your head spin.

        No worries. We’ve been assured that there is no such thing as trade secret tr0lling.

    2. “all forms and types of financial, business, scientific, technical, economic, or engineering information including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible.”

      Clearly “information” is what the trade secret is on, the information can be “tangible or intangible”. I am pretty sure that intangible information necessarily includes abstract idea.

  5. “Depending upon how the statute is interpreted, this setup appears to create a presumption of injunctive relief ”

    I don’t know if it even depends on the “interpretation” of the section. Injunctions are always equitable remedies, as there is no injunctive remedy at law. And equity is not affected by law as it is a whole other legal system unto itself.

    1. “And equity is not affected by law as it is a whole other legal system unto itself.”

      Well, as you are not entitled to equitable relief unless your relief at law is inadequate, equity would seem to be “affected by law” somewhat. In other words, you can’t even get to equity until you’ve established that the law can’t help you. And establishing that takes a little bit more than saying, “B-b-b-but your Honor, legal remedies would not be adequate in this case. Whaaaahhhh!!!!!”

      “And equity is not affected by law as it is a whole other legal system unto itself.”

      Again, equity is “affected by law.” And I’m not sure what you mean that equity “is a whole other legal system unto itself.” In every state in the country except Delaware, and maybe one other state (I can’t remember, bar review was a long time ago), and in the federal court system, the courts of law and the courts of equity are merged. The same “system” provides legal as well as equitable remedies. Delaware may have a Court of Chancery, but you’re not going to find any other (except like I said maybe one other state).

      1. That’s true, if they give sufficient remedy at law then sure. But that’s not what this is about. D is saying they’re trying to create a presumption of injunctive relief. You cannot so create such a thing “at law”, though you could leave the remedies so bad that an injunction might issue slightly more often. But that would be a terrible move.

  6. Although I don’t know exactly, there may be aspects of Title 18 (such as general definitions) that will shape the interpretation of federal trade secret law.

    Rule of lenity is one such “aspect.”

      1. That is hypertechnical. The rule of lenity applies because this is a criminal statute. Title 18 just happens to be the place where criminal statutes are codified.

        What Congress has done here is create a civil remedy for a criminal violation (assuming the violation caused damage or injury to the plaintiff). IMO, that kind of hybrid creates problems, because courts are reluctant to interpret the statute to effect its purpose because then they end up expanding criminal liability.

        Last year, I litigated a civil CFAA claim and had precisely this problem. The other side’s conduct was clearly wrongful, but the court was reluctant to label it criminal for fear of opening the door to making (relatively) low-level wrongdoing into a crime. My preference is to keep civil and criminal statutes separate.

        In trademark law, for example, the Lanham Act is separate from the criminal statute of trafficking in counterfeit goods, 18 USC 2320. There is a range of conduct that should be liable civilly but not criminally.

  7. Dennis, on the constitutional right, I would call it liberty. Others might call it, property. It is the right to work.

    “Equity will to the fullest extent protect the property rights of employers in their trade secrets and otherwise, but public policy and natural justice require that equity should also be solicitous for the right inherent in all people, not fettered by negative covenants upon their part to the contrary, to follow any of the common occupations of life. [4] Every individual possesses as a form of property, the right to pursue any calling, business or profession he may choose. A former employee has the right to engage in a competitive business for himself and to enter into competition with his former employer, even for the business of those who had formerly been the customers of his former employer, provided such competition is fairly and legally conducted.”

    Continental Car-Na-Var Corp. v. Moseley (1944) 24 Cal.2d 104, 110 [148 P.2d 9].

    Here when the employee knows of confidential information of the employer, we have the rights of the employer vs. the rights of the employee, the latter being a personal right of constitutional importance. Like Roe v. Wade, there must be a balancing, so that no injunction should ever issue unless it the employee has already done something to show bad faith, which could imply intent, to use the trade secrets of his former employer.

    1. provided such competition is fairly and legally conducted.

      That “legally conducted” element is about to change….

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