The Potential Impact of the Defend Trade Secrets Act

By Samantha Peaslee

Every business has trade secrets. Trade secrets include customer lists, formulas, procedures, recipes, pricing schemes, business forecasts, and much more. Until now, trade secrets has been the unloved child of intellectual property. Its siblings, patent, trademark, and copyright, all fall under either federal jurisdiction or dual federal-state jurisdiction. Trade secrets was left to the discretion of the states. Despite efforts such as the Uniform Trade Secrets Act (a model act that states could choose to use), law involving trade secrets remained fairly un-uniform from state to state, leading to inconsistent judgments regarding trade secrets. These differences included points such as which party has the burden of establishing that the trade secret in question is actually a trade secret and even what information qualifies as a trade secret. While the Economic Espionage Act of 1996 created a criminal offense for the misappropriation of a trade secret, private causes of action have remained firmly within state law.

On April 4, 2016, the U.S. Senate unanimously passed the Defend Trade Secrets Act. This Act, if passed by the House of Representatives and signed into law by President Obama, would create a private cause of action in federal court for the misappropriation of trade secrets. It would also create a relatively uniform set of standards and definitions that would make trade secret law consistent from state to state. It would also create federal protections for employees, including the prohibition of injunctions that limit the ability of employees to change employers and whistle-blower protections. This Act applies to interstate or foreign misappropriation of trade secrets, not intrastate provisions. Oddly enough, the Act does not create federal preemption (overriding previous state law), but is meant to coexist with additional state law. This actually prevents the Act from being truly uniform, as states will be able to authorize additional remedies for the misappropriation of trade secrets in their states, which could lead to forum-shopping.

Why is the Defend Trade Secrets Act important? Besides creating more uniformity (and therefore certainty) among trade secret law, the Act is necessary for the United States to meet the current trade secret standard in the Trans-Pacific Partnership. The TPP currently requires that each member state “ensure that natural and legal persons have the legal means to prevent trade secrets lawfully in their control from being disclosed to, acquired by, or used by others (including state commercial enterprises) without their consent in a manner contrary to honest commercial practices.” While state laws generally covered this, without a federal cause of action, the United States is not compliant with this provision.

The Act is also important for trade secret holders and their employees. The Act requires employers to limit conditions based on new employment, basing them on evidence of threatened misappropriation rather than mere possession of knowledge. Additionally, employment contracts that govern the use of trade secrets must be updated to include a notice of the whistleblower immunity provisions in the Defend Trade Secrets Act – in short, that if a trade secret disclosure is made in confidence or under seal for the purpose of reporting a suspected violation of the law, the whistleblower has criminal and civil immunity for disclosing the trade secret. Based on these provisions, if the Act becomes law, employment documents, handbooks, and policies will need updating to reflect the new provisions.

If the Act passes, trade secrets will no longer be the unloved intellectual property child, but will be brought into the fold – and it’s about time.

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