Since DuPont invented it more than 50 years ago,1 Kevlar has been used in products ranging from bicycle tires to body armor to brake pads. Kevlar is certainly ubiquitous, but its highly valuable, closely guarded trade secrets — how Kevlar is manufactured, how it is adapted for different uses, how it can be used in future applications — are anything but.
In 2015, Edward Schulz pled guilty to federal charges of conspiring to steal trade secrets related to Kevlar.2 Schulz, an engineer and 30-year employee of DuPont who was responsible for technical research and development for Kevlar, had been approached by Kolon Industries, a South Korean company seeking to create its own Kevlar-like product and thus compete with DuPont.3 Despite Schulz’s confidentiality agreement with DuPont, he retained documents containing highly sensitive information related to Kevlar after he left the company.4 When Kolon Industries hired him as a consultant and questioned him on Kevlar’s manufacture, Schulz turned over some of those documents.5 Following an FBI investigation, Schulz was sentenced to two years’ probation and a $75,000 fine,6 and Kolon Industries ultimately paid $360 million in criminal fines and restitution after pleading guilty to conspiracy to steal trade secrets.7
Unfortunately, this is not an isolated incident. Multiple reports prove that trade secret theft is a serious, wide-reaching problem.
Threats don’t originate solely from abroad. Half of the employees — including U.S. employees — surveyed for a 2013 report from IT security company Symantec admitted that they had misappropriated trade secrets from a former employer, and 40% indicated that they planned to use that information at future jobs.11
In light of the increasing amount of trade secret misappropriation in the United States — and the increasing amount of risk of it occurring — President Obama signed into law on May 11 the Defend Trade Secrets Act (“the DTSA” or “the Act”). The Act provides, for the first time, a federal civil cause of action for the misappropriation of trade secrets, as long as those trade secrets are used in or intended for use in interstate or foreign commerce.12 The Act provides federal unity, which has been needed among the patchwork of existing state laws.
Unlike previous efforts in a long history of Congressional attempts to enact federal trade secret legislation, the Act passed with broad bipartisan support in April 2016 and was quickly signed into law by the president. Trade secret theft was a federal criminal offense well before the passage of the DTSA, but there was no corresponding civil remedy available to parties seeking to protect their trade secrets.13
On at least two occasions, Congress failed to pass federal trade secret legislation providing a civil cause of action. Both the Defend Trade Secrets Act of 2014 and the Defend Trade Secrets Act of 201514 were criticized as being too friendly to employers and owners of trade secrets, and not providing sufficient protection to employees who possess trade secret information by virtue of their employment. Some pro-labor interests were concerned about certain terms of prior versions of the DTSA, in particular the expansion of the Uniform Trade Secrets Act’s statute of limitations from three to five years and the allowance of treble punitive damages instead of standard double punitive damages.15 The Act’s ex parte seizure provision, which allows a party to obtain an order to seize trade secret materials before the opposing party becomes aware of the order, was both one of the central features of the bill and one of the most hotly debated issues. After prior versions of the legislation were scaled back to include relief more in line with existing state law, the bill passed with few objections.
As of the publishing of this article, only a handful of cases have been filed under the DTSA.16 The Act is not retroactive17 — it applies only to instances of trade secret misappropriation that have occurred after May 11 — so it will likely be years before a significant body of federal trade secret case law emerges.
The DTSA contains many of the same features as existing state laws, thereby providing parties with a new avenue for federal relief in trade secret litigation. It also offers powerful new remedies for the owners of trade secrets, and it lists new notice requirements which will likely affect many new employment agreements that touch on trade secrets.
It is important to recognize not only what the DTSA is likely to do, but also what it does not do. The Act does not:
Perhaps the biggest impact the DTSA will have is the creation of a uniform body of federal common law on trade secret litigation, in the same vein as trademark or patent common law. Federal court dockets may provide more efficient litigation than a state court docket in certain circumstances, so the DTSA is a welcome avenue to federal courts, which might have previously been unavailable for trade secret litigation.
It is still too soon to tell what impact the Act will have on the misappropriation of trade secrets across international boundaries and the extent to which trade secret litigation will shift from state to federal courts, but it is already clear the DTSA will have far-ranging effects on trade secret litigation going forward.
The DTSA provides many of the same types of relief as the Uniform Trade Secrets Act, with a few important distinctions, including a new ex parte seizure provision. Most of the remedies available under the Act closely track existing state laws. Courts may grant an injunction to prevent the actual or threatened misappropriation of a trade secret under certain conditions,18 including the inevitable disclosure doctrine. The inevitable disclosure doctrine, when typically combined with a duplicitous act, may make it possible for plaintiffs to prevent a former employee from accepting work with a competitor based on the theory that the new employment would inevitably lead to the disclosure of trade secrets.19 The inevitable disclosure doctrine was rejected in a number of states, including California, but was still an available means of obtaining an injunction in certain jurisdictions.20
The Act ultimately takes the same position as California in its rejection of the inevitable disclosure doctrine. A court issuing an injunction under the Act may not do so if it would completely prevent an individual from entering into a new employment relationship.21 An injunction issued under the Act may not absolutely bar an individual from entering into an employment relationship, but it allows a court to place restrictions on that new relationship through an injunction as long as the conditions are based “on evidence of threatened misappropriation,” and not merely on the information the person knows.22 In other words, although a court cannot grant an injunction under the DTSA that forbids a former employee from accepting any new job with a competitor, it can grant an injunction that places certain conditions on that new employment if there is evidence of threatened misappropriation. For example, a former electrical engineer of Company A who is sued under the Act may not be enjoined from accepting employment at archrival Company B. However, if there is evidence that the engineer might improperly disclose trade secrets, he may be specifically enjoined from discussing at his new place of employment anything he worked on while at Company A, or from working on certain competing products at his new place of employment. These pro-employee protections apply only to injunctions granted pursuant to the DTSA, not injunctions arising from other causes of action. If a former employee is also subject to a noncompete provision that prevents future employment with a competitor, the former employer may still be able to obtain an injunction under a breach of contract claim that prevents the employee from working for the competitor.
As under state law, successful plaintiffs under the Act can recover monetary damages for actual losses and any unjust enrichment caused by trade secret misappropriation.23 In cases of “willful and malicious” misappropriation, a court may award a successful plaintiff exemplary damages up to two times the amount of actual damages.24 As under the Uniform Trade Secrets Act, the DTSA allows a court to impose a “reasonable royalty” upon the use of a trade secret in cases where damages cannot easily be measured by other methods.25 In a significant departure from state law, the Act specifically does not preempt other causes of action that arise out of the same core sets of facts.26 Simply stated, a plaintiff seeking redress under the Act can proceed under both the DTSA and existing state law.
The statute of limitations under the Act is three years from the date misappropriation is discovered — or should have been discovered — by a plaintiff exercising due diligence.27 As stated above, the Act is not retroactive, applying only to instances of misappropriation occurring after May 11. The Act specifically states, however, that continuing misappropriation constitutes a single claim for purposes of the statute of limitations,28 so if plaintiffs discover misappropriation that began on or before May 11 but is ongoing, they may still sue under the DTSA.
Critically, and following similar provisions for trademark protection under the Lanham Act, the DTSA allows the ex parte seizure of property from a party accused of trade secret misappropriation.29 Although the ex parte seizure provision is an extremely powerful tool, both the language of the statute and the legislative history of the Act make clear that the provision is available only “in extraordinary circumstances” and only under certain strict conditions.30 Employees can disseminate millions of dollars’ worth of trade secrets with nothing more than the click of a button, so the ex parte seizure application may be a critically important means of preventing misappropriated trade secrets from reaching a competitor or even the public.
Plaintiffs who want to obtain an ex parte seizure order under the Act must allege in detail the irreparable damage likely to occur in the absence of an order, as well as their likelihood of success in the case.31 These detailed showings must be made in either a verified complaint or a motion supported by affidavit.32 The application for an ex parte seizure must describe “with reasonable particularity” the materials to be seized and, if possible, where those materials are located. Furthermore, plaintiffs are required to post a bond against the costs of wrongful seizure.33 If a court enters an order granting the application, the order must provide for the narrowest seizure of property to achieve the intended protection of trade secrets, and include specific directions to law enforcement professional on what actions they can take during the seizure.34 The material in question cannot be returned immediately to plaintiffs; it must be put into the custody of the court. Sanctions are available to parties against which wrongful seizure orders have been entered.35
The DTSA’s “safe harbor” provision is particularly important for employers. The Act provides immunity to individuals that disclose trade secrets if their disclosures are made “in confidence, to a Federal, State, or local government official, either directly or indirectly, or to an attorney” and “solely for the purpose or reporting or investigating a suspected violation of law.”36 The Act also exempts from liability trade secret disclosures made in a complaint or another document in a whistleblower lawsuit, as long as the filing is done under seal.37
Under the Act, notice of immunity under the safe harbor provision is required in any contract — whether with an employee, an independent contractor or a consultant — entered into or updated after May 11 that “governs the use of a trade secret or other confidential information.”38 Employers can include that notice either as part of the agreement itself or by reference to a separate policy document.39 The DTSA does not invalidate agreements that fail to include the immunity notice, though it does state that a successful plaintiff cannot recover exemplary damages or attorneys’ fees in an action under the DTSA against an employee whose contract did not have the requisite notice (even if that case had nothing to do with alleged disclosure as part of a whistleblower lawsuit).40
A company seeking to litigate in federal court before the passage of the Act could do so only if the other parties involved were citizens of different states (i.e., not the state the company resided in), and they had to proceed under a patchwork of state laws regarding the protection of trade secrets. The DTSA represents a significant shift in civil trade secret law and will likely result in more cases being litigated in federal court.
In addition to providing a number of new remedies for companies seeking to protect trade secrets, including the ex parte seizure order, it includes some new requirements employers must bear in mind going forward. Most pressingly, any new or updated agreement after May 11, 2016 regarding the use of employment-related trade secrets needs to contain a notice of whistleblower immunity under the Act. If employers do not include such a notice in these agreements, they risk possibly losing the availability of certain remedies in a lawsuit. Employers that have not done so already should consider revising their agreements to either insert the immunity language directly or reference a separate policy document that includes the immunity language.
Companies should consider the protections and implications of the DTSA as they undertake efforts to protect their intellectual capital. The Act’s powerful tools benefit employers, but new requirements make some of these same tools available to litigants. Employers should speak with their consultants and counsel to ensure that all parties understand the Act and its terms.
Contact the authors:
Seyfarth Shaw LLP
Seyfarth Shaw LLP