Trade secret law goes federal

When President Barack Obama signed the Defend Trade Secrets Act into law earlier this month, the reactions were all over the map.

Some of the DTSA’s advocates hailed the law as a long-overdue recognition that trade secret owners ought to enjoy the same sort of civil protections under federal law as the owners of other forms of intellectual property such as trademark, copyright and patent.

Critics, on the other hand, cast the DTSA as an unnecessary and problematic power grab by big corporations who will use the law as cudgel to effectively stifle startups and impede competition. They also expressed concerns about the DTSA’s most controversial feature — a provision of the law that permits a trade secret owner to obtain an emergency civil seizure order, without any notification to the defendant, to recover a pilfered trade secret.

But despite that diversity of perspectives on the DTSA, there is a broad consensus on one point: Until the federal jurisprudence has time to develop, the new law will mean plenty of work for lawyers — and not just those attorneys with an intellectual property practice.

“I think this is as much a whistleblower statute as it is a trade secret statute and that’s my perspective as an employment law attorney,” said V. John Ella of the Minneapolis firm of Trepanier MacGillis Battina P.A.

According to Ella, that’s because the DTSA confers both civil and criminal immunity to employees who take trade secrets in connection with a whistleblower claim or retaliation claim.

Critically, Ella said, the DTSA requires that employers provide notice of those immunity provisions, which is something may employers “aren’t going to be real enthusiastic about.”

From state to federal

While the DTSA stipulates that trade secrets are supposed to be filed under seal and not used for other purposes, Ella explained, the notice “provides a roadmap” for employees for how to avoid being sued (or criminally charged) with misappropriation of a trade secret.

“Ultimately, I think that could result in an increase in whistleblower claims because the act carves out this immunity,” Ella ventured.

That said, Ella is still urging his corporate clients to add the notice requirement to the template of all confidentiality agreements.

“It says ‘shall,’ it’s a federal law, and confidentiality agreements are very common,” Ella explained, adding that the employers who fail to include the notice risk losing two remedies available to the prevailing parties under the DTSA: double damages and attorney fees.

The whistleblower provision, which was amended into the DTSA in the months before passage, is one of the better features of the law in the view of Sharon Sandeen, a professor at Mitchell Hamline School of Law.

Nonetheless, Sandeen, who penned a recent law review article entitled, “The DTSA: The Litigator’s Full-Employment Act,” predicted that even those immunity provisions will spur a blizzard of litigation.

“There are some good things in the DTSA but, overall, I question why it was needed,” said Sandeen.

While the DTSA was originally sold as a tool to combat international cyber-espionage, according to Sandeen, advocates later changed their tune and said it was needed to provide more uniformity in trade secret law. But Sandeen said that argument failed too because the DTSA does not abrogate the state laws on trade secrets; the vast majority of the states — 47 — have adopted the Uniform Trade Secrets Act.

“This is what drove me crazy [about the uniformity debate],” said Sandeen, who testified before Congress in opposition to the DTSA. “Trade secret law has been developed in the states under common law since 1837. Now we’re going to have a federal law where there’s not one once of federal jurisprudence, so every little issue is going to be fought.”

In the end, she said, even DTSA’s advocates conceded that the argument in favor of the DTSA essentially boiled down to advocates’ preference for the “procedural benefits of federal court over state court.”

Dialogue and compromise

Randall Kahnke, a partner at Faegre Baker Daniels who litigates intellectual property disputes, offered a more sanguine take on the new law.

“There are few people who are perfectly pleased with the legislation that resulted but at least everyone’s interests were represented and there was great dialogue, analysis and compromise,” said Kahnke. In his view, the DTSA strikes a reasonable balance between the interest of trade secret owners and the rights of employees.

That said, Kahnke said it also raises some intriguing constitutional questions that will take some time – and plenty of lawyering — to answer.

“What is the extent of federal jurisdiction?” Kahnke said. “Do all trade secrets touch interstate commerce or only some of them? That’s a very interesting area that we’ll see developed going forward.”

Because the DTSA doesn’t preempt state law, he added, the DTSA introduces another layer of analysis for plaintiffs’ lawyers, as they weigh the merits of pursuing claims in either a state or federal venue.

And what about that controversial ex parte civil seizure provision? Will it be invoked often?

Kerry Bundy, Kahnke’s fellow litigator at Faegre, has a wait-and-see attitude.

“One factor will be how courts interpret ‘extraordinary circumstances,’” Bundy offered. “It also will depend on how aggressive the plaintiffs are and where the trade secret may be going. For instance, is the defendant really about to get on a plane and take the trade secrets to a foreign country?”

In response to criticisms, Bundy noted, the DTSA ultimately incorporated some safeguards to limit the potential for abuses, including a provision that allows for damages against trade secret owners who bring improper actions.

That said, Bundy thinks it civil seizure could be a valuable tool for trade secret owners.

“If the right circumstances and facts exist, then it definitely should be used,” she added.