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    Defend Trade Secrets Act of 2016: Protecting Trade Secrets

    Individuals who contemplate misappropriating or stealing intellectual property, take heed: a new federal law has significantly increased the potential costs and penalties of stealing trade secrets. 

    Maria L. Kreiter, Brian C. Spahn & Erin M. Cook

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    Thanks to a new federal law on the books, trade secrets now receive a similar level of protection to that enjoyed by other forms of intellectual property, such as patents, copyrights, and trademarks. On May 11, 2016, President Barack Obama signed into law the Defend Trade Secrets Act of 2016, one of the most important trade secret laws in decades. The Defend Trade Secrets Act (commonly referred to as the DTSA) creates a federal civil claim for trade secret misappropriation theft and gives trade secret owners the ability to request law enforcement agencies’ assistance in seizing stolen trade secrets without advance notice to the wrongdoer – an extraordinary remedy unparalleled in any other current federal law.

    State trade secret protections remain available and are not preempted by the DTSA, which includes enhanced damages provisions for willful and malicious misappropriation. Passage of the DTSA illustrates the importance Congress has placed on protecting trade secrets and is likely to result in far more federal court litigation involving high stakes and “bet the company” disputes when misappropriation of trade secrets is on the rise with an increasingly mobile workforce.

    DTSA Overview and Key Provisions

    Trade secrets have historically received protection under state law, most notably the Uniform Trade Secrets Act, a model law adopted, with some variations, by 48 states. Wisconsin is one of them. Wisconsin’s Uniform Trade Secrets Act, passed in 1985, codified the right of private litigants in Wisconsin to file state-law misappropriation of trade secret claims.1 More than 10 years later, the Economic Espionage Act of 1996 made trade secret theft a federal crime but did not allow corresponding civil claims by private parties.2

    Maria L. Kreitercom mkreiter gklaw Maria L. Kreiter, Marquette 2004, is a commercial litigator at Godfrey & Kahn S.C., Milwaukee. She chairs the litigation team’s trade secret and noncompetition practice group and also concentrates on complex financial services litigation claims.

    Brian C. Spahncom bspahn gklaw Brian C. Spahn, U.W. 2006, is with Godfrey & Kahn S.C., Milwaukee, concentrating on corporate compliance, internal investigations, and commercial litigation.

    Erin M. (Maggie) CookErin M. (Maggie) Cook, U.W. 2009, is an attorney at Godfrey & Kahn S.C., Milwaukee, where she maintains an active litigation practice, including labor and employment litigation.

    Effective May 11, 2016, the DTSA amended the Economic Espionage Act to allow a private party to bring a civil action in federal court if the trade secret relates to a product or service used, or intended to be used, in interstate or international commerce. The DTSA defines the terms “trade secret,” “misappropriation,” and “improper means” similar to the way these terms are defined in the Wisconsin Uniform Trade Secrets Act and includes the following key provisions that will help shape the future of trade secret litigation:

    Federal Civil Actions for Trade Secret Misappropriation. Before enactment of the DTSA, a private litigant could only pursue a misappropriation of trade secret claim in federal court by meeting diversity jurisdiction requirements or adding a different federal law claim, because no independent civil claim existed under federal law. The DTSA opens the door for private parties to bring a federal claim for trade secret misappropriation if “the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.”3 Trade secret owners now have the choice to file suit in federal court as long as the alleged trade secret theft occurred on or after May 11, 2016.

    Ex Parte Seizures. The DTSA allows a trade secret owner to request that law enforcement officers seize misappropriated property without advance notice to the alleged thief.4 This provision is, without question, the most controversial aspect of the DTSA. The DTSA has several safeguards meant to prevent the misapplication of the ex parte seizure provision. For instance, before a seizure order is issued, the ex parte seizure applicant must establish that an ordinary injunction would not remedy the perceived damage because of the likelihood the alleged thief will destroy or hide the property. The applicant is also required to post bond to cover any damages if the seizure is determined to be wrongful.

    The issuing court is required to schedule an adversarial hearing to assess the merits of the seizure at the earliest possible time. Should the applicant’s ex parte seizure request be granted, the court, not the applicant, will take custody of any seized property. Notably, the DTSA requires the Federal Judicial Center to develop best practices related to the ex parte seizure provision.

    No Preemption of State Law. The DTSA neither replaces nor preempts state-law trade secret misappropriation rights and remedies, such as those afforded by the Wisconsin Uniform Trade Secrets Act.5 As such, trade secret owners now have an additional source of protection and the ability to forum shop for the most attractive venue to pursue a trade secret misappropriation claim.

    Bad-faith Provision. Although the DTSA provides trade secret owners more options to pursue trade secret misappropriation claims, counsel should be aware of the DTSA’s provision allowing for the recovery of attorney fees for actions brought in bad faith.6

    Whistleblower Protection and Affirmative Notice Requirement. The DTSA also provides a whistleblower immunity provision that makes clear that employees – broadly defined to include contractors and consultants – will not be found liable for trade secret misappropriation if reporting legal violations to the government requires such trade secret disclosure. The DTSA requires employers to notify their employees about the immunity provision “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.”7

    Should an employer fail to comply with this notice requirement, it will be prevented from recovering exemplary damages or attorney fees in an action brought under the DTSA against an employee. Employers thus must assess this new affirmative duty to provide employees notice of the DTSA’s immunity provision when negotiating employee-related agreements.

    DTSA Decisions

    While a large body of case law interpreting the DTSA has not yet developed, federal courts have already issued a few decisions that provide guidance on select issues. In a Sept. 23, 2016 decision, Syntel Sterling Best Shores Mauritius Ltd. v. Trizetto Group Inc., a New York federal court allowed the defendant to amend its 2015 counterclaims to add a DTSA claim.8 The plaintiff opposed addition of the DTSA counterclaim on grounds that the alleged conduct occurred before the DTSA’s enactment, “noting that DTSA applies only to acts of misappropriation that occur ‘on or after the date of the enactment of this Act,’ May 11, 2016.”9

    The court rejected that argument and allowed the DTSA counterclaim on the grounds that “[t]he plain language of the Act defines misappropriation to include ‘disclosure or use of a trade secret without the consent of another’.”10 Because the defendants alleged that the plaintiff continued to use the defendants’ intellectual property to directly compete against the defendants, the court concluded that the allegedly wrongful act “continues to occur after the date of the enactment of DTSA” and, therefore, the DTSA counterclaim was permitted.11

    In another recent decision, Adams Arms LLC v. Unified Weapon Systems Inc., issued Sept. 27, 2016, a Florida federal court addressed the DTSA’s statute-of-limitation provision, as well as the permissibility of claims involving actions that occurred before the DTSA’s effective date.12 The defendants sought dismissal of the plaintiff’s DTSA claim on grounds that the relevant events took place before May 11, 2016.13 As the sole support for their argument, the defendants relied on the DTSA’s statute of limitation, which is adopted from the Uniform Trade Secrets Act and states that suit cannot be filed more than three years after the date on which the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.14

    The court recognized that, for DTSA statute-of-limitation purposes, a continuing misappropriation constitutes a single claim of misappropriation.15 However, that rule, which relates to accrual of a claim, did not address the key issue: “whether an owner may recover under DTSA when the misappropriation occurs both before and after the effective date, assuming the entire misappropriation is within the 3-year limitations period.”16

    Although employers are not required to amend existing contracts, the whistleblower protection notice must be provided in any contract protecting trade secrets or confidential information entered into or modified after May 11, 2016.

    To resolve that issue, the court reasoned that “when an ‘act’ occurs after the effective date, a partial recovery is available.”17 The parties would need to clarify the timing of the allegedly wrongful conduct.18 Because the defendants acquired all information before May 2016, wrongful-acquisition theories could not be pursued. The DTSA claim could proceed, however, on wrongful-disclosure theories, limited to disclosures after the DTSA effective date.19

    Finally, in Dazzle Software II LLC v. Kinney, a case currently pending in the Eastern District of Michigan, the plaintiffs sought an ex parte seizure order for computer storage devices and computers in the defendants’ possession.20 The plaintiffs argued that there was significant risk that the defendants, if given notice, would destroy, conceal, or disseminate the trade secrets at issue in the case.

    The court was not convinced, however, and so it declined the plaintiffs’ request for seizure of storage devices and computers on an ex parte basis. Instead, the court ordered the plaintiffs to serve the defendants and, upon that filing, committed to scheduling a hearing on the plaintiffs’ request for a seizure order on an expedited basis.

    On Aug. 22, 2016, the court dismissed the plaintiffs’ DTSA claim. The court said the plaintiffs could seek leave to amend the complaint and reassert a claim under the DTSA if, after conducting some discovery, the plaintiffs could allege that some of the defendants’ conduct occurred after the effective date of the DTSA.

    Implications of the DTSA

    The DTSA will likely have a substantial impact on trade secret owners in Wisconsin. Its passage recognizes the value companies place in their trade secrets and the importance of having tools available to protect such valuable assets.

    Despite its similarities to the Wisconsin Uniform Trade Secrets Act, the DTSA provides Wisconsin businesses with new tools to protect trade secrets and obtain relief from a federal court in the event of theft. The DTSA, however, does not replace or preempt the trade secret misappropriation rights and remedies afforded by the Wisconsin Uniform Trade Secrets Act, thus allowing trade secret owners the ability to choose the most favorable venue in which to file suit.

    When deciding where to bring a trade secret misappropriation lawsuit, lawyers should consider the case’s complexity; the likelihood that in the particular jurisdiction a state versus federal judge may issue an injunction; and the scope of discovery available under the Federal Rules of Civil Procedure, including nationwide subpoena power, as opposed to varying state-law discovery rules.

    Although employers are not required to amend existing contracts, the whistleblower protection notice must be provided in any contract protecting trade secrets or confidential information entered into or modified after May 11, 2016. Failure to provide the required notice does not invalidate the enforceability of the contract but will preclude the employer from obtaining exemplary damages and attorney fees available under the DTSA. Employers, therefore, must conduct a cost-benefit analysis when determining how to address the DTSA’s whistleblower-notice provisions.

    Conclusion

    While all practical effects of the DTSA are yet to be seen, one thing is certain – the DTSA will result in more federal-court trade secret misappropriation litigation. The passage of the DTSA should prompt Wisconsin businesses to assess their trade secrets and make sure adequate policies and procedures are in place to prevent their trade secrets from being improperly used, acquired, disclosed, disseminated, or stolen.

    In addition, Wisconsin businesses should review their employee onboarding and offboarding procedures and consider updating their offer letters, employment agreements, noncompetition agreements, nonsolicitation agreements, nondisclosure or confidentiality agreements, and return of property agreements, to address the whistleblower immunity notice if they want access to exemplary damages and attorney fees in the event of misappropriation.

    Meet Our Contributors

    Complete the sentence: I never leave home without ___, because ___.

    Erin M. (Maggie) CookI never leave home without my sense of humor because life is serious enough as it is. Nothing defuses tension for me better than a good laugh. As a full-time litigator and mom to three young children, my days are filled with statute books and diapers rather than exercise and meditation. So while you won’t find me training for a marathon anytime soon, you can be certain I am always up for a good joke. Okay, it doesn’t even have to be good.

    Erin M. (Maggie) Cook, Godfrey & Kahn S.C., Milwaukee.

    Who has most inspired you in your legal career?

    Maria L. KreiterThe Hon. Aaron E. Goodstein, U.S. Magistrate Judge for the Eastern District of Wisconsin. After graduating from law school, I began a two-year federal clerkship for Judge Goodstein, known then and still today as “the good Judge Goodstein.”

    Judge Goodstein lived up to his reputation. He had a steadiness and a presence about him. He was everything a judge should be and always remained calm. In hearings and in his decisions, Judge Goodstein had a simple, efficient, and practical way of cutting through nonsense and focusing on what truly mattered in order to resolve an issue. He avoided academics and acted always with grace and poise. I made it my continuing goal to do the same.

    com mkreiter gklaw Maria L. Kreiter, Godfrey & Kahn S.C., Milwaukee.

    What is on your bucket list?

    Brian C. SpahnMy bucket list is separated into three categories of experiences – sports, music, and travel. I have been fortunate over the years to check off a number of bucket list items. I have attended two Rose Bowls, two Final Fours, the Masters, and the Ryder Cup. I’ve attended countless concerts and have traveled around Europe, Costa Rica, and Australia. I have spent a week golfing in Scotland.

    While I have shared some of these experiences with my wife and two children, most of these outings have involved my dad, brother, and friends. Therefore, my remaining bucket list items include sharing experiences with my wife, daughter, and son at a Packer Super Bowl, a New Orleans jazz festival, and a trip to the Grand Canyon. Getting my wife and children to buy in to some of these goals is a different story and may require the art of persuasion, which I have worked to develop throughout my legal career.

    com bspahn gklaw Brian C. Spahn, Godfrey & Kahn S.C., Milwaukee.

    Endnotes

    1 Wis. Stat. § 134.90.

    2 18 U.S.C. §§ 1831-1836.

    3 18 U.S.C. § 1836(b)(1).

    4 18 U.S.C. § 1836(b)(2)(A).

    5 18 U.S.C. § 1836(f).

    6 18 U.S.C. § 1836(b)(3)(C).

    7 18 U.S.C. § 1833(b)(3)(A).

    8 Syntel Sterling Best Shores Mauritius Ltd. v. Trizetto Grp. Inc., No. 15-CV-211, 2016 WL 5338550, at *6 (S.D.N.Y. Sept. 23, 2016).

    9 Id.

    10 Id.

    11 Id.

    12 Adams Arms LLC v. Unified Weapon Sys. Inc., No. 8:16-CV-1503-T-33AEP, 2016 WL 5391394, at *5-7 (M.D. Fla. Sept. 27, 2016).

    13 Id. at *5.

    14 Id.at *5-6 (citing18 U.S.C. § 1836(d)).

    15 Id. at *6.

    16 Id.

    17 Id.

    18 Id.

    19 Id. at *7

    20 Dazzle Software II LLC v. Kinney, No. 16-12191 (E.D. Mich. June 14, 2016).