What Does the New Defend Trade Secrets Act Mean for California Employers?

The Defend Trade Secrets Act (DTSA) allows companies for the first time to file civil lawsuits for trade secrets theft under federal law if the trade secret is “related to a product or service used in, or intended for use in, interstate or foreign commerce.”

The DTSA does not pre-empt existing state laws; 48 states, including California, have codified versions of the Uniform Trade Secret Act (UTSA), a model statute. Rather, the new federal scheme provides all trade-secret plaintiffs direct access to federal courts.

Aspects of the DTSA that are new to California employers include:

• Ex parte civil seizure procedures, which allow enforcement officials to enter land and seize property “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action” without notice;
• Whistleblower immunity for employees who turn trade secrets over to the government to investigate potentially illegal activity or disclose trade secret information when prosecuting a whistleblower retaliation claim; and
• Notice requirement for employers, who must provide notice of whistleblower immunity going forward to employees who enter into any form of non-disclosure agreements.

Brief History

In May 2013, the Commission on the Theft of American Intellectual Property, an independent and bipartisan group, recommended that Congress amend the Economic Espionage Act of 1996 to provide a federal private right of action for trade secret theft.

The DTSA was introduced in the Senate on July 29, 2015, as S. 1890 and concurrently in the House as HR 3326. Following amendment, S. 1890 passed the Senate on April 4, 2016. It was quickly—and almost unanimously—approved by the House on April 27. Its enactment stemmed from a bipartisan belief that U.S. businesses are experiencing unprecedented and unsustainable levels of trade secret thefts by foreign governments and foreign competitors, and that state laws protecting trade secrets have proved unable to ensure fair competition.

Potential Impact on California Employers

The DTSA tracks many of the provisions of the California UTSA (CUTSA) and relevant case law (e.g., a three-year statute of limitations; rejection of the inevitable disclosure doctrine; fee shifting if a claim is made or opposed in bad faith). There are, however, differences between the state and federal statute. Some of these differences include:

Civil Seizures Without Notice to Opposing Party Under the DTSA

The most controversial provision of the DTSA is its ex parte civil seizures order provision:

"Based on an affidavit or verified complaint satisfying the requirements of this paragraph, the court may, upon ex parte application but only in extraordinary circumstances, issue an order providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action."

Critics of the DTSA expressed concern that civil seizures might be abused and misused for anti-competitive ends such as gaining access to a competitors’ trade secret by making sham claims or strangling nascent companies by shutting down their operations as a result of the seizure. To address some of these concerns, the bill was revised to include certain safeguards. As a result, to obtain such extraordinary relief, the applicant must show, among other things, that the person against whom the order is sought “has actual possession” of the trade secret and “would destroy, move, hide, or otherwise make such matter inaccessible to the court, if the applicant were to proceed on notice to such person.”

The seizure order must also be narrowly tailored to minimize any adverse impact on third parties and on “the legitimate business operations of the person accused of misappropriating the trade secret.” Although the plaintiff must provide security in an amount deemed adequate by the court to cover damages for a wrongful or excessive seizure, the defendant may recover its full damages, including lost profits and punitive damages, even if they exceed the required security. The seized property must be held in the custody of the court and cannot be accessed by the plaintiff except by court order under limited circumstances. A hearing must be set no later than seven days after the seizure order issues to determine whether the order should be dissolved or modified.

Situational Immunity for Whistleblowers

The DTSA provides immunity to individuals who disclose trade secrets to the federal, state or local governments “solely for the purpose of reporting or investigating a suspected violation of law” or who file their complaint under seal. Employees suing their employer for retaliation for reporting a suspected violation of law are also immune provided that any document disclosing the trade secret is filed under seal.

Notice to Employees of Immunity

To recover attorneys’ fees and punitive damages against a former employee for trade secret theft, an employer must provide notice to its employees of the immunity provisions of the DTSA. Notice may be accomplished by including in the contract or agreement a cross-reference to a document provided to the employee setting forth the employer’s reporting policy for a suspected violation of law. 

Preservation of State Laws Limiting Enforcement of Noncompete Agreements

The DTSA expressly prohibits any injunction that conflicts with a state’s laws prohibiting the enforcement of noncompete agreements or state laws prohibiting any restraint on the practice of a lawful profession, trade or business (such as California’s Business & Professions Code 16600 et seq.).

Mandatory Licenses in “Exceptional Circumstances”

The DTSA expressly provides for the mandatory issuance of a license to the defendant, conditioned upon the payment of a reasonable royalty in “exceptional circumstances that render an injunction inequitable.” Thus, a plaintiff worried that its claim is exceptional might not want to assert a DTSA violation.

Federal or State Court?

Employers need to carefully weigh the pros and cons of proceeding in federal or state court.

State court may remain a preferred forum in certain jurisdictions where an ex parte TRO may be obtained upon 24 hours’ notice, since some federal courts decide ex parte applications on the briefs and not for many days after filing.

On the other hand, while the CUTSA preempts other related state tort law claims, no such preemption exists within the DTSA scheme, so employers may pursue additional legal theories under the DTSA if they do not allege a CUTSA claim. Furthermore, a federal forum makes it easier to serve discovery on nonparty witnesses and provides nationwide service of process.

The ins and outs of asserting claims under the DTSA will be addressed comprehensively in the fourth edition of Trade Secrets: Law and Practice, scheduled for hard-copy and online publication by LexisNexis in July. Co-authored by DWT partners David Quinto and Carla McCauley and Boies, Schiller & Flexner partner Stuart Singer, the book is a national, in-depth guide to all things trade secret—from reducing the risk of misappropriation when an employee takes a job with a competitor or an employer hires its competitor’s employee, to investigating suspected misappropriations, prosecuting or defending misappropriation claims in state and federal courts on a state-by-state basis, pursuing claims in the International Trade Commission, conducting discovery in the U.S. for use in foreign misappropriation proceedings, and more.