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Federal Defend Trade Secrets Act Progresses in Congress

Joshua R. RichWinter 2016 (snippets)

The Defend Trade Secrets Act of 2015,[1] a bill to establish a federal cause of action for trade secret misappropriation, has continued its progress through Congress with a favorable hearing before the Senate Judiciary Committee on December 2, 2015, that led to unanimous committee approval of an amended version on January 28, 2016. The bill was originally introduced in identical form in both the House and the Senate, and enjoys bipartisan sponsorship and support in both bodies. Indeed, both Republican and Democratic senators and the majority of witnesses at the hearing voiced unabashed support for the bill. Thus, despite the legislative logjam created by the impending election, and the failure to pass a similar bill during the last term of Congress, there is a significant probability that the bill will pass into law.

As discussed in the Fall 2014 snippets article, “Anticipating a Federal Trade Secret Law,” unlike patents, trademarks, and copyrights, there is currently no federal protection for trade secrets. Instead, trade secret owners can gain access to the federal court system only if there is diversity or supplemental jurisdiction. That jurisdictional hurdle can prevent or complicate interstate and international enforcement of trade secret rights. Furthermore, although 47 states have enacted some form of the Uniform Trade Secrets Act (“UTSA”), the various states’ enactments and interpretations of the act has not been uniform. In addition, the economically important states of New York and Massachusetts are among those that have not enacted the UTSA. Thus, many companies and legislators have seen a need for a bill like the one before Congress.

The provisions of the current bill were written against the backdrop of the UTSA. Under the UTSA, a cause of action for trade secret misappropriation exists when a party or individual acquires trade secrets from the rightful owner by improper means or has threatened their disclosure. A “trade secret” is defined in the UTSA as any information that derives potential or actual economic value from not being generally known to other persons who can benefit economically from its use, is not readily ascertainable by other persons who can benefit economically from its use through proper means, and is the subject of reasonable efforts to maintain its secrecy.[2] A trade secret is “misappropriated” when a person acquires a trade secret with the knowledge (or reason to know) that the trade secret was obtained by improper means, or discloses a trade secret that was obtained by improper means, derived from a person who obtained it by improper means, or obtained under terms of confidentiality.[3] In addition, a person may misappropriate a trade secret if it discloses or uses a trade secret after learning that the trade secret was revealed by accident or mistake. In that context, “improper means” includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.[4]

Remedies available under the UTSA include damages, injunctive relief against actual or threatened misappropriation, and attorneys’ fees. The damages can include actual loss incurred by the trade secret owner as well as disgorgement of unjust enrichment by the misappropriating party or, alternatively, a reasonable royalty for the unauthorized disclosure or use of the trade secret. In the case of willful and malicious misappropriation, damages can be enhanced up to twice the amount of actual damages awarded. Attorneys’ fees can also be awarded for willful and malicious misappropriation, but are also available for a claim brought in bad faith or the bad faith bringing of or opposition to a motion to terminate an injunction. To obtain recovery under the UTSA, however, any claim must be brought within three years after the claim was, or could have been, discovered.

The current bill creates a federal civil action for the owner of a trade secret who is “aggrieved by a misappropriation of a trade secret that is related to a product or service used in, or intended for use in, interstate or foreign commerce.” In that context, the terms “trade secret” and “misappropriation” are intended to have the same basic definitions as the definitions that apply under the UTSA. As under the UTSA, the bill allows recovery of damages for actual loss and unjust enrichment (so long as there is no double recovery) or, instead, a reasonable royalty. If the misappropriation is willful and malicious, the bills (like the UTSA) allow for the recovery of enhanced damages, although (unlike the UTSA) the damages may be trebled, not just doubled. Attorneys’ fees are available under the same terms they are available under the UTSA. Importantly, the statute of limitations under the bills is five years, not the three years under the UTSA.

However, there are several critical differences between the procedures and remedies available under the UTSA and the current federal bill. Most importantly, the current bill establishes a procedure for civil seizure. Like the Senate bill proposed during the last term – but unlike the House bill from last term – the bill imports certain standards in the seizure process from the Lanham Trademark Act.[5] In fact, the bill provides significantly more protection to parties from whom a seizure is requested than either bill proposed last term, likely in response to criticism of those bills.

The process for a civil seizure would begin with the filing of an affidavit or verified complaint with an ex parte application for the seizure of “property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” The trade secret owner would then have to show:

  • that a traditional temporary restraining order would not be sufficient because the responding party would evade, avoid, or otherwise fail to comply with such an order;
  • that immediate and irreparable harm would occur in the absence of a seizure;
  • that the harm of denying the application outweighs the harm to the responding party’s legitimate interests;
  • that the applicant is likely to succeed on the merits;
  • that the responding party has actual possession of the trade secret and the property to be seized;
  • that the application describes the matter to be seized with reasonable particularity;
  • that the responding party would otherwise destroy, move, hide, or otherwise make the seized material inaccessible; and
  • that the applicant has not publicized the requested seizure

Upon such a showing, a court may order the seizure of property to be taken into the custody of the court. However, the order allowing the seizure would be statutorily required to provide for the narrowest seizure of property necessary to achieve its purpose, and that the seizure would be conducted in a way to minimize the disruption of business, especially for third parties. The trade secret owner would have to post a bond sufficient to compensate for a wrongful seizure, and the court would be required to set a hearing to be held within seven days after the issuance of the order to allow the responding party to contest the seizure. Importantly, if a party suffers damages from a wrongful or excessive seizure, it would be entitled to bring an action to recover for that seizure and, in doing so, would not be limited to the bond posted by the trade secret owner.

At the hearing before the Senate Judiciary Committee, six senators interrogated four witnesses about the provisions of the current bill. Five of the six senators expressed their clear support for the bill – unsurprising because four of the five are sponsors of the Senate version – whereas Senator Sheldon Whitehouse used his time to pose questions to the witnesses for written response. The witnesses included representatives of DuPont (Karen Cochran) and Corning (Tom Beall), both of whom have been aggrieved by critical trade secret thefts, a long-time practitioner (James Pooley), and a professor at Mitchell Hamline School of Law (Sharon Sandeen). Only Professor Sandeen spoke out in opposition to the bill, primarily based on the seizure provisions.

As Professor Sandeen pointed out in her testimony, the seizure order provisions of the bill are most similar to the English Anton Pillar order.[6] But unlike an Anton Pillar order, there is no prohibition on the use of force to enter a responding party’s premises and confiscate property. Further, Professor Sandeen raised questions about how electronically-stored information would be “confiscated,” especially when held in the cloud or on a third-party server. And finally, she expressed her concerns that the seizure provisions would be used to oppress smaller competitors and departing employees, who would be unable to afford to litigate the seizures or, potentially, to remain in business after a seizure.

After the hearing, the bill was amended to address some of the concerns and questions voiced by Senator Whitehouse (and Professor Sandeen). Greater protections were added for responding parties and protection was put in place for whistleblowers. With these changes, the Senate Judiciary Committee unanimously reported the bill to the full Senate. Because the bill now has 44 bipartisan cosponsors, it will likely receive favorable treatment on the Senate floor.. At that point, the parallel House bill will be considered by the House Committee on the Judiciary, where it has been referred to the Subcommittee on Courts, Intellectual Property, and the Internet. Eventually, however, the bill is likely to make its way through Congress, and then become law. At that point, trade secret owners will have another weapon in their arsenal to protect their intellectual property rights, and another choice of the procedures with which to do it.



[1] S. 1890, 114th Cong. (2015); H.R. 3326, 114th Cong. (2015).

[2] Unif. Trade Secrets Act § 1(4) (1985).

[3] Id. § 1(2).

[4] Id. § 1(1).

[5] 15 U.S.C. § 1116 (2012).

[6] So named because it was first entered in Anton Pillar K.G. v. Mfg. Processes Ltd., 1975 EWCA Civ 12, 1976 1 All ER 779 (Dec. 8, 1975).

 

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