A New Weapon In the Battle to Protect Against Stolen Trade Secrets - The 2016 "Defend Trade Secrets Act"


Employers have long been frustrated by the impacts of departing key employees who walk off with the corporate "gold" – customer lists, technical drawings, formulas and the like – and then set up shop down the street chasing the same customers, undercutting the old employer's pricing and doing so without the same outlay of start-up capital and sweat equity that normally would have been required to start such a business from scratch. California can be particularly difficult on employers because, as a "right to work state," state law here favors the free mobility of the work force and outlaws many restrictions (such as covenants not to compete) that would otherwise benefit the jilted employer.

California has, for many years, had in place the state's version of the Uniform Trade Secrets Act ("UTSA") which has been the primary tool used to protect against the "light fingered" departing employee. Now the federal government is about to jump in with its own version. Both the United States Senate and House have passed the "Defend Trade Secrets Act" ("DTSA") and the bill, at the time of writing, is in need only of President Obama's signature, which it is reported he will soon provide.

The DTSA will amend the federal criminal code to create a federal private cause of action for trade secret misappropriation. The federal legislation borrows significantly from the UTSA, but does have some differences. A plaintiff suing for trade secret misappropriation under DTSA can file a federal court civil action seeking relief for a trade secret misappropriation relating to a product or service involved in interstate or foreign commerce. The remedies parallel many of the remedies under UTSA, but contains a new remedy - seizure - which allows the federal court judge to make in its discretion an ex parte seizure order (without prior notice to the defendant) to prevent dissemination of trade secrets if the court find that there will be irreparable injury absent the seizure order. The court, presumably through local law enforcement, can take custody of the seized materials and then hold a seizure hearing within seven days. There are damages remedies available against the party obtaining a wrongful or excessive seizure.

The DTSA also contains a new requirement that some of the available remedies will not be available to the aggrieved employer unless the employer has notified all employees of their right to disclose trade secrets as "whistleblowers" in furtherance of a government investigation. This should be another provision added to all employer's 2016 Employee Handbook and policies.

The key differences between UTSA and the DTSA are: (a) UTSA does not have a specific ex parte seizure provision; (b) the DTSA, unlike UTSA, has "employment protection," namely, it does not prevent a person from accepting employment even if an injunction is issued to prevent misappropriation; (c) the DTSA does not contemplate an end to an injunction once a trade secret has ceased to exist; (d) royalties under the DTSA are awardable only where an injunction is inequitable; (e) the DTSA awards treble damages in exemplary damages, compared to two-times damages under UTSA; (f) the DTSA imposes an additional condition for damages recovery, namely, a prejudice element with respect to detrimental change in position by the defendant; (g) the DTSA, outside of the ex parte seizure area, is not as protective in preserving secrecy during the course of litigation; (h) the DTSA has a five-year statute of limitations compared to UTSA's 3-year statute; and (i) the DTSA does not preempt any law, whereas UTSA has preemption impact on certain claims.

The DTSA is not likely to change the landscape for trade secret litigation in California but, because of the availability of the new remedy of ex parte seizure, does provide an additional tool to combat trade secret misappropriation and certainly should be considered as a preferred claim where the situation requires immediate action to prevent a catastrophic dissemination of critical trade secrets.

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