FEDERAL TRADE SECRET LEGISLATION PROGRESSES
Last week, the Senate Judiciary Committee approved the Defend Trade Secrets Act of 2016 (S. 1890), priming the House of Representative for a vote on its companion bill, H.R. 3326. Before going to Committee, S. 1890 passed by a vote of 87-0 on the Senate floor. Senator Orrin Hatch sponsored the bill, along with 65 co-sponsors (36 Republican, 28 Democrat, and 1 Independent).
Perhaps most notably, S. 1890 provides for a private civil cause of action for misappropriation of trade secrets in federal district court. Most states have already adopted a version of the Uniform Trade Secrets Act (“UTSA”), but unless there are other grounds for federal jurisdiction, e.g., diversity, claims under the Computer Fraud and Abuse Act, etc., misappropriation claims have been confined to state court. The stated objective of S. 1890 is to authorize “a trade secret owner to file a civil action in a U.S. district court seeking relief for trade secret misappropriation related to a product or service in interstate or foreign commerce.”
In large part, S. 1890 amends 18 U.S.C. § 1831 et seq., the chapter of the U.S. Code pertaining to the protection of trade secrets. The chapter currently authorizes only the Attorney General to institute a civil action to enjoin the theft or misappropriation of trade secrets. S. 1890 amends the chapter to allow a private “owner” of a trade secret to bring a civil action for misappropriation if the trade secret is “related to a product or service used in, or intended for use in, interstate or foreign commerce.” So, as long as the product or service related to the trade secret is sold in interstate or foreign commerce, the trade secret owner can bring the misappropriation claim in federal district court.
Definitions
S. 1890 also changes the Code’s current definition of “trade secret” and adds new definitions for “misappropriation” and “improper means.” Those definitions are nearly identical to the definitions set forth under the UTSA.
The Code’s current definition of “trade secret” requires that it derive independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public. S. 1890 strikes “public” from this definition and changes it to “another person who can obtain economic value from the disclosure or use of the information.” This change aligns the definition with the UTSA.
S. 1890’s definition of trade secret will also address more types of information than the UTSA. For example, the Oklahoma UTSA covers “information, including a formula, pattern, compilation, program, device, method, technique or process.” S. 1890, however, applies to “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.” In practice, all of those types of information would likely fall under the UTSA’s definition.
S. 1890 also adds definitions of “misappropriation” and “improper means.” These new definitions are nearly identical to the definitions of those terms in the UTSA. The only significant difference is that S. 1890’s definition elaborates that “improper means” do not “include reverse engineering, independent derivation, or any other lawful means of acquisition.” Courts interpreting the UTSA’s definition of improper means are in agreement that reverse engineering a trade secret does not constitute improper means. S. 1890 makes this clear.
Remedies
The remedies available under S. 1890 are substantially similar to those available pursuant to the UTSA. They include an injunction to prevent actual or threatened misappropriation; damages for actual loss, unjust enrichment, and/or a reasonable royalty for the unauthorized disclosure or use of the trade secret. In the event of willful and malicious misappropriation, exemplary damages up to twice the amount of other damages may be awarded. These are all remedies allowed by the UTSA.
Another interesting aspect of S. 1890 is that, in the instances where claims for misappropriation are brought in bad faith, the court may award attorneys’ fees (like the UTSA), and the bill specifically allows for circumstantial evidence to establish the bad faith. Almost all UTSA jurisdictions allow for attorneys’ fees if the Court finds the claim is brought in bad faith, but do not specifically state that circumstantial evidence is allowed to prove bad faith. Finding direct evidence of bad faith has been proven to be difficult. Presumably, this will make the recovery of attorneys’ fees easier for aggrieved trade secret defendants and discourage baseless claims in federal court.
Similar to the UTSA, S. 1890 also allows for the recovery of attorneys’ fees in instances in which a motion to terminate an injunction is made or opposed in bad faith and also when willful and malicious misappropriation is found.
Emergency Relief
Perhaps the most significant difference between S. 1890 and the UTSA is the bill’s detailed procedure for applying for emergency court intervention in the instance of misappropriation. Most UTSA states have procedures outside of the trade secret statutes for obtaining temporary restraining orders, either upon notice or ex parte, to stop misappropriation, but S. 1890 lays out a very specific procedure and conditions for not only stopping the misappropriation but also for recovering the alleged trade secret. In “extraordinary circumstances,” a trade secret owner may make an ex parte application for Court intervention to issue an order “providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret.”
The bill seems to recognize that such action would be a drastic measure, so it imposes strict conditions on the availability of emergency relief. The required elements are very similar to what would be required for the issuance of a TRO or preliminary injunction, but the first condition for S. 1890’s emergency relief is that an order issued pursuant to FRCP 65, i.e., injunctions and restraining orders, or other equitable relief would be inadequate. In addition to the “traditional” injunction requirements, the applicant seeking the seizure of the subject property must also describe, with reasonable particularity, the subject matter and location of the matter to be seized; demonstrate that the person subject to ex parte application would likely “destroy, move, hide, or otherwise make inaccessible” the property to the Court if the Court were to proceed on notice to such person; and also that the applicant has not publicized the requested seizure. If those elements are shown, the Court can issue an order that the trade secret in question can be seized, but the order must be narrowly tailored to the narrowest possible seizure so as to not impede or disrupt the rights of the person or persons subject to the order. This section of the bill also requires a hearing on the application and order within seven days after the order has issued. If necessary, the Court is allowed to modify discovery time limits, e.g., expedited time limits, to ensure that the required conditions are satisfied before the issuance of an order.
A full-text version of, and more information on, S. 1890 is available at https://www.congress.gov/bill/114th-congress/senate-bill/1890/text. We will update this post as S. 1890’s companion bill moves through the House of Representatives.
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