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What is the Defend Trade Secrets Act or DTSA?

Posted on May 11, 2016

What is a Trade Secret?

A trade secret is technical information or business and financial information that provides “commercial value” to its owner, that is “undisclosed” and importantly, the owner has taken “reasonable steps to keep it secret.” Historically, trade secret law in the United States was governed by the individual states which led to inconsistency of outcomes in trade secret litigation.

What is the Defend Trade Secrets Act or DTSA?

The DTSA is a new law that allows for a federal cause of action for the misappropriation of trade secrets and availability for a civil seizure.  Civil seizure allows law enforcement to take possession of assets containing trade secrets from defendants who plaintiffs allege are involved with stealing them without any criminal charges being brought against the defendants.  We anticipate that it will be signed by President Obama in the next week or so.  The DTSA extends the current Economic Espionage Act of 1996 to allow civil lawsuits.  It has been called the “single most important property development” since Congress enacted the America Invents Act in 2011 or even since the Lanham Act was introduced in 1946.

What does my company need to know?

Consider a Trade Secret Escrow.  To the extent trade secret litigation will become easier to pursue, companies should update their business processes and consider a trade secret escrow.  The process requires companies to identify and defines their trade secrets, collect copies of prototypes and other critical documentation, deposit copies with a third party, and performs regular audits on these materials to track what is happening to them. This will make it easier for a company to prove the development and existence of those trade secrets: in the event that they are misappropriated.

Update Your NDAs.  Section 7 of the DTSA includes whistleblower protection for reporting legal violations to the government and requires that employers must tell their employees about this immunity “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.”  This provision applies to all contracts entered into or updated after the enactment of that subsection and between the employer and any individual performing work as an employee, contractor or consultant for the employer.  Employers should review all confidentiality agreements and non-disclosure agreements to ensure that they abide by the new DTSA requirements.

Modernize IT Policies.  To avail oneself of the civil seizure rights, an applicant must be “likely to succeed in showing that the information was a trade secret and that the defendant had actual possession of the trade secret.”  Today, that information is primarily going to be available and maintained via the company’s information technology records.  A review and update of the policies and procedures governing those records may avoid litigation issues later.  Wrongful or excessive seizure may result in an action for damages against the company. 

Know Your Foreign Contacts.  The DTSA allows a trade secret owner to bring a civil action if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.  For international companies or companies with foreign manufacturers, this development can assist in protecting a company that does not necessarily have a global IP portfolio as it allows plaintiffs to bring suits that previously would have been barred due to jurisdictional or venue limitations.

Remember the State Law.  The DTSA expressly does not preempt the state law claims, so plaintiffs will have both state and federal causes of action to choose from.  We anticipate that plaintiffs will bring claims in federal lawsuits and assert state claims as well. 

Watch Your Patents.  The DTSA will not protect against secrets obtained through reverse engineering, independent derivation or any other lawful means of acquisition.  It is always advisable to consider whether another form of intellectual property protection better achieves your goals and protects your products or services.  Patent applications are public documents though so it may be challenging to assert both patent rights and trade secret rights for the same subject matter.

Consider Your Copyrights.  After recent changes in patent law prevented companies from seeking patent protection on software code, many companies protected their software under copyright laws.  However, where a company has asserted copyright protection, state law trade secret claims were often preempted.  Due to the DTSA’s federal status and the wording of the Copyright Act, a trade secret claim and a copyright infringement claim may now potentially coexist. 

Munck Wilson Mandala is available to assist your company with these changes.  MWM specializes in protecting companies with substantial and complex IP portfolios.  From assisting with labor and employment issues, such as drafting non-disclosure agreements and IT policies, to prosecuting your patents and copyrights, to litigating intellectual property claims across the country, MWM is prepared to work with your company to achieve the most protection possible.  We look forward to working with you.