Last July, legislation was introduced in both houses of Congress that would amend the Economic Espionage Act to create a Federal cause of action based on trade secrets: the “Defend Trade Secrets Act of 2015” filed as S. 1890 and sponsored by Senator Orrin Hatch, and also filed as H.R. 3326 and sponsored by Rep. Gary Collins. The amendments are apparently intended to expand the already broad, bipartisan support for the legislation.
The DTSA would create a Federal cause of action for trade secret misappropriation. Currently, trade secrets are only by state law, with applicable laws varying from state to state, even in states having laws modeled after the Uniform Trade Secrets Act. For example, the California Uniform Trade Secret Act does not require a plaintiff to establish “ownership” of the trade secret(s) that form the basis for the misappropriation claim, extending protection to mere licensees of a trade secret. Moreover, presently Federal courts can only exercise limited jurisdiction over trade secret claims, in cases of diversity of citizenship or through ancillary jurisdiction based on a related claim such as patent infringement. Even when jurisdiction vests in Federal cases, the Court must apply state law through resort to often convoluted choice of law principles and conflicting state law precedent. Without pre-empting state law claims, the DTSA would vest original jurisdiction to federal trade secret claims brought under one body of law and precedent that is uniform throughout the United States.
The amendments to the pending DTSA legislation cover four general categories: seizure; employee mobility; protectable subject matter; and whistleblower protection.
Seizure had been the most controversial issue within the proposed legislation, but is significantly circumscribed under the amendments. Seizure of records and articles (computers, servers, etc.) based on an ex parte court order under the DTSA will now be a limited remedy available only in “extraordinary circumstance,” with seizure executed under the control of federal law enforcement and with guidance only from independent experts (not an individual affiliated with the aggrieved party). Courts will be required to specify timing and use of force restrictions in execution of a seizure, seized materials will be reviewed and sorted for return by an special master, and access to the seized material by the aggrieved party will be constrained.
Senator Diane Feinstein proposed amendments that will protect the employee mobility essential to California’s high-turnover labor market. For several decades, the “inevitable disclosure” doctrine has allowed former employees to be enjoined from working for competitors due to “threatened misappropriation.” Under the proposed amendments, both the preclusion of employment and any conditions placed on employment will require more proof than merely the knowledge of the former employee, with the specific caveat that employment not be enjoined or constrained without evidence that trade secret disclosure would, in fact, actually be inevitable.
The subject matter protectable as a trade secret is also refined in the DTSA amendments. Under the Economic Espionage Act and the DTSA as initially proposed, information would qualify as a trade secret only if not known to or readily ascertainable by “the public.” The amendments conform the DTSA to the UTSA by substituting “persons who can obtain economic value from its disclosure or use” for “the public,” making information widely known within an industry but not to the general public unprotectable.
Finally, whistleblowers reporting illegal activity by their employers would be protected from suit for trade secret misappropriation under the amended DTSA. Any disclosure made in confidence to an attorney or government official for the purpose of reporting a legal violation of filed under seal in a lawsuit would enjoy immunity under federal or state law against claims for violation nondisclosure obligations.
Federal courts may provide a better forum for preventing international business espionage under the DTSA. The recent amendments revise many of the disputed provisions to make the legislation, as a whole, more palatable to a larger swath of industry. Passage in 2016 is now more likely, with these amendments.