The Defend Trade Secrets Act: Consequences for Trade Secret Litigation
Business Litigation Update
Date: July 21, 2014
Congress is now considering legislation that would establish a new federal law to allow victims of trade secret misappropriation to pursue their claims in federal district court. The Defend Trade Secrets Act of 2014 (S. 2267) (Act), introduced by Senators Christopher Coons (D–DE) and Orrin Hatch (R–UT), would provide a civil cause of action in federal court for misappropriation of trade secrets that are used in interstate commerce.
The proposed legislation largely tracks the substantive provisions of the Uniform Trade Secrets Act (UTSA), which most states have adopted in some form. The new federal law would not preempt existing state laws, thus allowing plaintiffs the choice of pursuing their claims in federal or state court. There are, however, some important provisions in the federal law that are not found in most state statutes. Most significantly, the new law would provide for the ex parte application for a court order to preserve evidence and seize property used to commit the misappropriation and to prevent irreparable harm.
If enacted, the Act would join two other federal statutes aimed (at least in part) at protecting trade secrets. The Economic Espionage Act (EEA) makes misappropriation of trade secrets a federal crime under certain circumstances, but it does not permit a civil right of action. Where misappropriation of trade secrets is perpetrated through computer hacking, the Computer Fraud and Abuse Act does provide a civil cause of action, as well as the potential for criminal liability, but there are limits on the types of damages recoverable. The Act would round out the federal statutory remedies for trade secret misappropriation by establishing a comprehensive civil cause of action that allows virtually all trade secret claims to be heard in federal court.
Key Provisions of the Defend Trade Secrets Act
- The Act would establish a civil right of action in federal court for violations of the EEA or any misappropriation of trade secrets used in interstate commerce. The definition of misappropriation is essentially identical to the UTSA definition, with the addition of language clarifying that “reverse engineering” and “independent derivation” are not considered misappropriation.
- The Act authorizes injunctive relief to prevent actual or threatened misappropriation, as well as damages measured by actual loss, unjust enrichment or a reasonable royalty, largely tracking the analogous terms of the UTSA.
- The Act permits courts to award punitive damages of up to three times the amount of the plaintiff’s actual damages (as compared to twice actual damages under the UTSA) and attorneys’ fees where a misappropriation is willful or malicious.
- Claims for misappropriation must be brought within five years of the “date on which the misappropriation is discovered or by exercise of reasonable diligence should have been discovered.” The comparable UTSA limitations period is three years.
- The Act expressly authorizes a court to issue ex parte orders if “necessary to prevent irreparable harm,” providing for preservation of evidence or seizure of property used “to commit or facilitate the commission” of an alleged misappropriation. The procedural rules governing ex parte application and seizure orders from the Trademark Act of 1946 are incorporated by reference.
Implications for Trade Secret Litigation
While the proposed legislation is not a major departure from current trade secret law, it does have the potential to affect trade secret litigation in important ways. Notably, the more generous limitations period and punitive damages award limit are likely to make federal court the venue of choice for trade secret litigation. As a result, trade secret law can be expected to become more uniform, and state law variations will begin to diminish in significance.
But perhaps most significantly, the Act’s provision authorizing ex parte orders to seize electronic and other evidence used for trade secret theft could change the ways that trade secret cases are routinely litigated. While both state and federal courts currently have the equitable authority to issue such provisional remedies, in practice they are imposed only in extraordinary circumstances. The express statutory authorization will likely increase the use of such orders and create a powerful weapon for plaintiffs in trade secret litigation. By expressly authorizing an ex parte order, the Act would enable a plaintiff to obtain an order seizing computers or other evidentiary materials before a defendant has even been served with the lawsuit. Such an order would give the plaintiff a tremendous advantage and substantial leverage over the defendant.
The bill is currently in the Senate Judiciary Committee, and the House Judiciary Committee’s Subcommittee on Courts, Intellectual Property and the Internet heard testimony relating to the bill in June 2014. We will be monitoring this legislation closely.
FOR MORE INFORMATION
For more information, please contact:
Robert F. Ware
Matthew E. Liebson
Matthew David Ridings
Jennifer S. Roach
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