Congress Moves Another Step Closer To Enacting Federal Trade Secrets Legislation

For several years, Congress has been debating legislation creating a federal civil cause of action for misappropriation of trade secrets – and it now appears that the legislation is close to enactment.

The Defend Trade Secrets Act, S. 1890, was introduced by Senators Hatch and Coons in the summer of 2015, with Senators Baldwin, Durbin, Flake and Tillis co-sponsoring. On April 4, 2016, the Senate unanimously passed the DTSA by a vote of 87-0. On April 20, 2016, the House Judiciary Committee approved the DTSA by voice vote. Following passage by the House, which should occur relatively soon considering the speed with which the Judiciary Committee acted, the proposed legislation will be delivered to President Barack Obama for consideration. In light of his previously expressed support of the proposed legislation, the DTSA is likely to be signed into law this year.

The DTSA is intended to create effective and efficient remedies for trade secret owners and to provide a uniform national standard for trade secret misappropriation cases. In the absence of federal legislation, victims of trade secret misappropriation seeking civil remedies must rely on state law (although the cases currently may be litigated in federal court based upon diversity or supplemental jurisdiction).

The Uniform Trade Secrets Act has been adopted by 48 states; however, despite being a “uniform” law, meaningful differences do exist from jurisdiction to jurisdiction. To foster uniformity, the DTSA creates a private civil cause of action for trade secret owners, permitting them to file an action in federal district court for trade secret misappropriation. Trade secret owners will be able to seek familiar remedies such as injunctions, damages (including enhanced damages for willful and malicious misappropriation) and attorneys’ fees. The DTSA adopts much of the UTSA’s framework, so it is unlikely that the federal statute will be a significant departure from existing state trade secrets law — except for a few notable features of the proposed law.

Chief among these notable features is a provision in the proposed legislation authorizing trade secret owners to obtain ex parte seizure orders, “but only in extraordinary circumstances” and when necessary to prevent dissemination of the misappropriated trade secrets. To obtain this ex parte relief, movants will need to establish that other equitable remedies – such as a preliminary injunction obtained pursuant to Rule 65 – are inadequate. Given the obvious Constitutional concerns raised by such a remedy, the DTSA incorporates a number of procedural safeguards that are analogous to the traditional requirements for obtaining preliminary injunctions under Fed. R. Civ. P. 65 (such as a balancing of the hardships; scheduling an adversarial proceeding as soon as practicable after the seizure is effected; requiring the posting of bond by the party requesting the seizure). It also incorporates remedies for those harmed by the entry of an ex parte seizure order if it is ultimately determined that the seizure was “wrongful or excessive.”

While the DTSA largely adopts definitions of misappropriation similar to those found in the UTSA, one important difference includes expressly excluding “reverse engineering, independent derivation, or any other lawful means of acquisition” from the term “improper means.” While this exclusion is currently found in several states’ versions of the UTSA (such as California), it is conspicuously absent from others’ (such as Virginia). The exclusion of reverse engineering from the definition of “improper means” appears to be a Congressional acknowledgment of the realities of today’s high tech business world, where such practices are commonplace and seen by many as a legitimate form of competition.

The DTSA does not preempt existing state law, and envisions that state and federal courts will have concurrent jurisdiction over civil trade secret misappropriation cases. It is not difficult to imagine that, if the DTSA becomes law, courts will be confronted by a number of interesting jurisdictional questions. Moreover, because existing state law is not preempted in the proposed legislation, it will remain to be seen whether adoption of the DTSA truly creates the uniformity backers of the law have cited as major benefit.

Of the four kinds of intellectual property rights – copyrights, trademarks, patents, and trade secrets — only trade secrets currently lack the perceived protections that come from allowing owners to file civil actions in the federal courts without having to establish diversity or supplemental jurisdiction. With the Senate’s unanimous passage of the DTSA and the House’s passage expected, Congress is a step closer to enacting federal trade secret legislation making it much easier for trade secret owners to go to federal court to protect this valuable form of intellectual property.