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The Defense of Trade Secrets Act of 2016
A new federal cause of action for trade secret misappropriation

6.23.2016

On May 11, President Obama signed into law the Defend Trade Secrets Act of 2016. Effective immediately, the DTSA establishes a federal cause of action for trade secret misappropriation. The new statutory framework largely tracks the Uniform Trade Secrets Act and is similar to existing, state-law protections under North Carolina's Trade Secrets Protection Act. However, a few distinctions are worth mentioning:

Whistleblower Protections and Employee Notice. The DTSA creates both criminal and civil immunity for individuals that report suspected violations to law enforcement personnel. Importantly, employers must notify their employees of these whistleblower protections. If an employer fails to provide adequate notice, the employer will be barred from seeking the full range of remedies—including exemplary damages or attorneys' fees—in a subsequent misappropriation lawsuit against an employee. Therefore, prudent employers will update their employment agreements, employee handbooks, and non-disclosure agreements to preserve their rights under the DTSA.

Ex ParteSeizures. The DTSA provides a mechanism for the ex parte seizure of misappropriated trade secrets. This is a major point of departure from North Carolina's statute. The statute details the procedures for identifying, locating, and seizing misappropriated material. Note, though, that the remedy is only available where it is "necessary to prevent the propagation or dissemination of the trade secret." The prerequisites for obtaining an ex parte seizure order are substantial. Such an order will only be issued where:

  1. An order issued pursuant to Rule 65 of the Federal Rules of Civil Procedure or another form of equitable relief would be inadequate to achieve the purpose of this paragraph because the party to which the order would be issued would evade, avoid, or otherwise not comply with such an order;
  2. An immediate and irreparable injury will occur if such seizure is not ordered;
  3. The harm to the applicant of denying the application outweighs the harm to the legitimate interests of the person against whom seizure would be ordered of granting the application and substantially outweighs the harm to any third parties who may be harmed by such seizure;
  4. The applicant is likely to succeed in showing that:
    • The information is a trade secret; and
    • The person against whom seizure would be ordered
    • Misappropriated the trade secret of the applicant by improper means; or
    • Conspired to use improper means to misappropriate the trade secret of the applicant;
  5. The person against whom seizure would be ordered has actual possession of:
    • The trade secret; and
    • Any property to be seized;
  6. The application describes with reasonable particularity the matter to be seized and, to the extent reasonable under the circumstances, identifies the location where the matter is to be seized;
  7. The person against whom seizure would be ordered, or persons acting in concert with such person, would destroy, move, hide, or otherwise make such matter inaccessible to the court, if the applicant were to proceed on notice to such person; and
  8. The applicant has not publicized the requested seizure.

18 U.S.C. § 1836 (b)(2)(A)(ii).

No "Particularity" Requirement. The DTSA contains no express requirement that trade secrets be described with particularity, unless the litigant is seeking an ex parte seizure order. In North Carolina a plaintiff must "identify a trade secret with sufficient particularity so as to enable a defendant to delineate that which he is accused of misappropriating and a court to determine whether misappropriation has or is threatened to occur." The requirement is not taken lightly, either, as North Carolina's state courts routinely dismiss trade secret misappropriation claims for insufficient descriptions. This forces trade secrets plaintiffs to walk a fine line: disclose too much, and undermine the secrecy of the material; disclose too little, and risk dismissal. The distinction is meaningful, particularly for a plaintiff that is reluctant to disclose details regarding the very thing sought to be protected.

The Knowledge Requirement. The DTSA defines "misappropriation" as the "acquisition of a trade secret of another by a person who knows or has reason to know" of the improper disclosure or use of that trade secret. The DTSA remedies, both injunctive relief and monetary damages, are limited to violations by a person "who knows or has reason to know" of the misappropriation. In North Carolina, however, the knowledge element only applies to requests for damages. For injunctive relief, knowledge need not be shown.

The DTSA shares many similarities with its North Carolina counterpart. Both provide that only owners can institute an action for misappropriation. This differs from certain states, such as California, which take a much broader approach to standing. Another similarity is that both expressly state that reverse engineering and independent derivation do not constitute misappropriation. Further, both set a three-year statute of limitations for filing suit.

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The federal cause of action may provide strategic benefits over litigating in state court. Federal courts typically enjoy lighter case loads than state courts, which may allow for more expedient litigation. In addition, federal courts boast extensive experience in handling other complex, intellectual property disputes. Federal litigants also can expect greater certainty under the DTSA, particularly if a choice-of-law issue may threaten the application of two, diverging sets of state laws.

Recently, parties hoping to invoke federal jurisdiction have looked to similar federal statutory schemes, such as the Computer Fraud and Abuse Act, to land in federal court. In the Fourth Circuit, that approach can be risky. The DTSA now provides a direct avenue to obtain federal jurisdiction absent party diversity. This eliminates the need to attempt a run-around and risk dismissal for lack of jurisdiction. Note too that the DTSA does not preempt any state or other federal laws, so litigants are still free to pursue other avenues for redress.

Overall, the DTSA should provide uniformity to trade secrets litigation across the states. We can expect federal courts to look to existing state law for guidance in interpreting and applying the newly enacted law. Because the DTSA only applies to misappropriations that occurred after May 11, 2016, it will take time to shape its precise contours. Nevertheless, DTSA claims are already springing up in federal court: Mahamedi, et al. v. Paradice, et al., 5:16-cv-2805 (N.D. Cal. May 24, 2016); Bonamar, Corp. v. Turkin, et al., 1:16-cv-21746 (S.D. Fl. May 16, 2016). These lawsuits may provide early insight on how courts handle DTSA claims.

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i 18 U.S.C. § 1836; ii 18 U.S.C. § 1833(b); iii 18 U.S.C. § 1836(b)(2)(A)(i); ivAnalog Devices, Inc. v. Michalski, 157 N.C. App. 462, 468, 579 S.E.2d 449, 453 (2003); v 18 U.S.C. § 1839(5); vi See N.C.G.S. § 66-154(a)(2); viiSee, e.g., WEC Carolina Energy Solutions LLC v. Miller, 687 F.3d 199 (4th Cir. 2012) (affirming dismissal of CFAA claim because, even though employees "may have misappropriated information, they did not access a computer without authorization or exceed their authorized access" as required under the CFAA).

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