The New Federal Trade Secrets Act
Richard J.R. Raleigh, Jr.
Wilmer & Lee, P.A.
A new federal law, the Defend Trade Secrets Act of 2015 (“DTSA”), Public Law No: 114-153 (S.1890 (114th Congress 2015-16)), sponsored by Sen. Orrin Hatch, R-Utah, and signed into law by President Barack Obama on May 11, 2016, creates a new private right of action for trade secret misappropriation. Previously, civil lawsuits to prevent misappropriations of trade secrets raised common law causes of action or they were brought under a state trade secret act, in many cases a state’s version of the Uniform Trade Secrets Act (“UTSA”). The Alabama Trade Secrets Act is based on the UTSA. With the passage of the DTSA, civil litigants can now bring their lawsuits in federal courts. The DTSA applies to actions based on acts occurring on or after May 11, 2016.
Ultimately, this may lead to more uniformity in the area of trade secrets law, as litigants may turn to federal courts to resolve their controversies. But, state law claims are not preempted by DTSA. Thus, part of the decision-making process will be where to file - state or federal court.
Defining Trade Secrets
Key to both the DTSA and UTSA are the definitions of “trade secrets” and “misappropriation.” The DTSA defines “trade secrets” as “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, another person who can obtain economic value from the disclosure or use of the information.”
The UTSA defines the term as follows:
(4) "Trade secret" means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:
(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable
by proper means by, other persons who can obtain economic value from its disclosure or use, and
(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
Melvin F. Jager, 3 Trade Secrets Law Appendix A1 (1979, and March 2016 Update).
Section 8-27-2 of the Alabama Act defines a trade secret as follows:
(1) A "trade secret" is information that:
(a) Is used or intended for use in a trade or business;
(b) Is included or embodied in a formula, pattern, compilation, computer software, drawing, device, method, technique, or process;
(c) Is not publicly known and is not generally known in the trade or business of the person asserting that it is a trade secret;
(d) Cannot be readily ascertained or derived from publicly available information;
(e) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy; and
(f) Has significant economic value.
Ala. Code 8-27-2.
One difference appears to be that the DTSA does not require the information must be information used or intended for use in a trade or business, as the Alabama Trade Secrets Act does; although if it were not, it arguably may not have the economic value required by the act.
What is Misappropriation?
“Misappropriation” is defined by the DTSA as acquisition of a trade secret by improper means or disclosure or use of a trade secret without consent. In particular, it provides:
(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
(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;
S. 1890, amending Section 1839 of title 18, United States Code, by adding the above language at the end.
The Alabama Code section on “misappropriation” provides:
A person who discloses or uses the trade secret of another, without a privilege to do so, is liable to the other for misappropriation of the trade secret if:
(1) That person discovered the trade secret by improper means;
(2) That person's disclosure or use constitutes a breach of confidence reposed in that person by the other;
(3) That person learned the trade secret from a third person, and knew or should have known that (i) the information was a trade secret and (ii) that the trade secret had been appropriated under circumstances which violate the provisions of (1) or (2), above; or
(4) That person learned the information and knew or should have known that it was a trade secret and that its disclosure was made to that person by mistake.
Ala. Code § 8-27-3.
The language of the Alabama Trade Secrets Act focuses on disclosure or use. The DTSA adds “acquisition” as well. Arguably, under the Alabama Trade Secrets Act, if one acquired a trade secret from another, but did not disclose it to another or use it, then there would be no liability. See, e.g., Movie Gallery US, LLC v. Greenshields, 648 F. Supp. 2d 1252, 1265 (M.D. Ala. 2009)(focusing on whether the information was used). See also Ala. Code § 8-27-3 (“A person who discloses or uses the trade secret of another…”); Jay M. Ezelle & Cole R. Gresham, Big Verdicts, Limited Discovery: The Rising Importance of Trade Secrets in Alabama, 44 Cumb. L. Rev. 55, 63 (2014)(“The use or disclosure of a trade secret alone does not create a cause of action under the ATSA. The use or disclosure must accompany one of the forms of wrongful conduct set out in § 8-27-3.”). Under the DTSA, there does not appear to be any such requirement. However, arguably there would be no damage under such circumstances.
Both the DTSA and UTSA include injunctive relief to prevent actual or threatened misappropriation, damages for actual loss and unjust enrichment, exemplary damages up to two times actual damages in cases of willful and malicious misappropriation, conditioning the future use of the trade secret on the imposition of a reasonable royalty where exceptional circumstances would render it inequitable to enjoin use of the trade secret, and awarding attorneys’ fees in cases of willful and malicious misappropriation or where a claim of misappropriation is made in bad faith.
By contrast, Ala. Code § 8-27-4 provides for injunctive and other equitable relief to prevent any actual or threatened misappropriation of a trade secret, recovery of any profits and other benefits conferred by the misappropriation that are attributable to the misappropriation, actual damages suffered as a result of the misappropriation, exemplary damages in an amount not to exceed the actual damages award but not less than ten thousand dollars ($10,000) if willful and malicious misappropriation exists, and awards of attorneys’ fees in cases of willful and malicious misappropriation or where a claim of misappropriation is made in bad faith.
Obviously, the exemplary damages at two-times actual damages in the DTSA would allow for greater recovery for prevailing plaintiffs than they would be entitled to under the Alabama Trade Secrets Act. This alone may be enough to convince some plaintiffs to bring their claims in federal court under the DTSA.
Statue of Limitations for Actions
The DTSA includes a three-year statute of limitations. Claims accrue from “the date on which the misappropriation with respect to which the action would relate is discovered or by the exercise of reasonable diligence should have been discovered.” The Alabama Trade Secrets Act provides: “An action for misappropriation must be brought within two years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.” Alabama Code § 8-27-5. Clearly, the three year statute of limitations for the DTSA is more favorably to prospective trade secrets plaintiffs. The discovery rule is the same under both acts.
Other Features of the DTSA
The DTSA goes further than either the UTSA or Alabama Trade Secrets Act. In addition to providing prospective trade secrets plaintiffs the option to bring their claims in federal court, it also provides owners of trade secrets with various additional procedural protections, such as the right to explain why their trade secrets should be kept confidential by the court. Too, it provides for the issuance of ex parte seizure orders by federal courts. Additionally, and significantly for employers, it contains whistleblower protections.
The DTSA provides: “the court shall enter such orders and take such other action as may be necessary and appropriate to preserve the confidentiality of trade secrets,” and “[t]he court may not authorize or direct the disclosure of any information the owner asserts to be a trade secret unless the court allows the owner the opportunity to file a submission under seal that describes the interest of the owner in keeping the information confidential.” Section 1835, DTSA. Then, in Section 1836 it provides for preliminary seizure of “property necessary to prevent the propagation or dissemination of the trade secret.” The trade secret plaintiff would apply, under Section 1835, to have the alleged trade secret confiscated in order to prevent its dissemination. The court would consider the request with the burden on the moving party being similar to that applied to motions for preliminary injunction, and similar consequences if the relief was improperly sought.
Additionally, the DTSA protects whistleblowers who disclose trade secrets, if the disclosure is made in confidence to a government official, directly or indirectly, or to an attorney, and it is made for the purpose of reporting a violation of law. The DTSA provides for immunity to both civil and criminal liability. The whistleblowers may disclose the trade secret information to the government or in a court filing without creating DTSA liability.
Significantly, employers have an affirmative duty to provide employees and contractors notice of the new immunity provision in “any contract or agreement with employee that governs the use of a trade secret or other confidential information.” Therefore, any employer who presently has non-compete, non-disclosure, or confidentiality agreements that deal with these subjects need to immediately insert additional information into the agreements. Failure to comply would result in the employer not being able to recover exemplary damages or attorney fees in a DTSA action for theft of trade secrets against an employee to whom no notice was provided. Employers should add a provision stating that the employee agrees the employer informed the employee, in accordance with 18 U.S.C. § 1833(b), that they may not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret if the disclosure is made in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and is made solely for the purpose of reporting or investigating a suspected violation of law, or in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.
As compared to the Alabama Trade Secrets Act, the DTSA has a longer statute of limitations period and the availability of greater exemplary damages. It provides Alabama businesses access to federal courts to remedy trade secret misappropriation when diversity jurisdiction does not exist and without regard to the amount monetary damages. Businesses should consider bringing their claims in federal court under the DTSA in cases of trade secret misappropriation. Too, Alabama employers need to act now if they have non-compete, non-disclosure, or confidentiality agreements with their employees. They need to include a provision addressing the whistleblower protections of the DTSA. Otherwise, much otherwise available relief will not be available to them in actions to protect their trade secrets.