Last December, I published an analysis of the trade secret laws in Oregon as compared to New York (two jurisdictions where I am licensed). Last week, President Barack Obama signed the Defense of Trade Secrets Act (DTSA) into law. This new law harmonizes the law between state jurisdictions and grants new powers for businesses and individuals to protect trade secrets more efficiently.
This Act (text here) allows the preliminary seizure of trade secrets and authorizes a federal action against theft of trade secrets.
Definition of Trade Secret
The definition of trade secret is not much altered by § 2(b)(1) of the Act and remains, in most cases, the definition provided by the Uniform Trade Secrets Act that has been adopted by many states, which includes:
- drawings (such as blueprints);
- cost data;
- pricing structures;
- customer lists;
- formulas (such as for a semiconductor alloy);
- compilations (such as a manual);
- programs (like software);
- processes (such as for organizing sales efforts).
The primary difference between the DTSA and most implementations of the Universal Trade Secrets Act (UTSA) in the several states is that the UTSA provides a definition that includes, as a catchall. This catchall, which is not in the new federal DTSA, would include information that your firm devoted significant time to developing, that has value to your business, and is not generally known outside your business, but that does not fall into a specific category above.
Differences from Oregon and New York Definitions
The new Act does not substantially change the definition of trade secret for Oregon other than the above; however, in New York, where there is some dispute as to whether customer lists constitute a trade secret, the federal Act would now place customer lists squarely within the definition of trade secret.
Statute of Limitations the Same As Before (Three Years)
This Act amends the federal criminal code to allow trade secret owners (individuals and companies) the ability to sue for trade secret misappropriation in federal court within five years of discovering a theft of trade secret.
The Definition of Misappropriation Remains Substantially the Same
The DTSA is in harmony with Oregon’s trade secrets law, which does not include “reverse engineering” as misappropriation. This is to reduce litigation in instances where two firms independently develop the same information. Without another element of misappropriation, such as such as bribery, misrepresentation, breach of duty, or espionage, reverse engineering alone is not enough.
As stated in my previous article, under Oregon law, continuing actions of misappropriation are treated as a single claim, whereas in New York, if the misappropriator (defendant) does not disclose the trade secret, but uses it for commercial advantage in secret, each new use is a new tort that resets the clock.
The DTSA has adopted Oregon’s approach, and states in section 2(d) “a continuing misappropriation constitutes a single claim of misappropriation.”
The Act Allows a Company to Quickly Seize Misappropriated Information
If the trade secret owner can show a likelihood to succeed by showing misappropriation (theft) and the defendant has possession of the trade secret, as well as the showing of a threat of immediate and irreparable harm, a court will issue an order to seize the trade secret and hold a hearing on the seizure within seven days. Previously, a company might have to rely upon a contractual provision regarding equitable remedies to help make the case for an injunction. This change grants a large procedural advantage to trade secret holders and a procedure by which the malfeasance can be rapidly stopped.
Abuse of the seizure power is also covered, and the Act provides that a party harmed by the order may move to dissolve or modify the order and may also seek relief against the applicant of the seizure order for wrongful or excessive seizure.
In addition, the Department of Justice will provide a biannual report on trade secret theft outside the United States to Congress.
The Defense of Trade Secrets Act Will Likely Improve The Ability of Companies to Pursue Thieves, International IP Pirates, and Disgruntled Former Employees
In general, the remedies provided by the DTSA are more focused, but more effective. Reverse engineering is specifically not misappropriation, the statute of limitations cannot be tolled by continuing misappropriation, and the catch-all definition of a trade secret is no longer available.
On the other hand, there is now a national federal remedy to provide a preliminary injunction against the misappropriation of a trade secret and a speedy hearing. Trade secret owners will benefit from the clarity of the law and greater clarity of advice from counsel. Also, in the unlikely event that counsel does not include an equitable relief or injunction provision in an employment agreement or vendor contract, the law makes the remedy available in any case.
Although legal remedies have always been available for the theft of trade secrets under common law, state law, breach of contract, and torts related to contract, this Act will make law suits easier, more effective, and more efficient for trade secret owners. Instead of having to research the applicable state law in accordance with the terms of a contract or principles of conflicts of laws between states, a single federal law will provide powerful remedies. Instead of having to rely upon contractual provisions that state that an injunction is the only way to avoid immediate an irreparable harm to a business – a high standards – a uniform federal law will now be available to allow rapid prevention of business loss through the federal courts. This Act will further protect businesses in international trade, as federal courts have jurisdiction over international disputes.