Category Archives: Inevitable Disclosure Doctrine

Massachusetts Noncompete and Trade Secret Reform Returns

IMG_0017After years of trying (8, to be precise – the first bills were filed, virtually simultaneously as it turned out, by Representative Lori Ehrlich and then-Representative (now Senator) Will Brownsberger for the legislative session starting January 2009), a new noncompete bill was filed on Friday, January 20:  An Act relative to the judicial enforcement of noncompetition agreements (Senate Docket No. 1578).

The new bill – covering both noncompetes and the related issue of trade secrets – picks up where the House and Senate left off last legislative session, albeit with a few tweaks and clean-ups. (Please contact me if you would like a redline.)

From a big picture standpoint, the bill:

  • Limits noncompetes (generally) to 12 months.
  • Requires advance notice.
  • Requires consideration beyond continued employment for post-hire noncompetes.
  • Includes express legislative authorization for a springing noncompete.
  • Requires the red pencil approach to an overly-broad noncompete, although it tempers that approach by permitting reformation if the agreement is written to comply with the safe-harbors set out in the statute.
  • In substance, tracks the Uniform Trade Secrets Act, with tweaks previously submitted by Steve Chow on behalf of the Uniform Law Commissioners and a handful of changes that I had made a few years ago as well as for this latest version. Most substantively, this latest version clarifies that the “threatened misappropriation” that can be enjoined “upon principles of equity” is intended to reflect the inevitable disclosure doctrine. (There has been a significant amount of discussion around when the inevitable disclosure doctrine would apply; general consensus is that the doctrine is a very narrow one, intended to prevent wrongful conduct, rather than mere innocent misappropriation.)

Other important aspects of the noncompete section of the bill (in the order they appear in the bill):

  • It applies only to employee noncompetes. It does not apply to other types restrictive covenants, including, most significantly, nonsolicitation agreements, anti-piracy/no-raid agreements, noncompetes made in connection with the sale of business, confidentiality agreements, or noncompetes that are part of a severance agreement provided that the employee “is expressly given 7 business days to remind acceptance . . . .”
  • The agreement must be in writing, signed by both parties.
  • The agreement must “expressly state that the employee has the right to consult with counsel prior to signing.”
  • The advance notice requirement (for noncompetes entered into in connection with the commencement of employment) is “the earlier of a formal written offer of employment or two weeks before the commencement of the employee’s employment; provided, however, that an employee may waive this two-week requirement if the employer and the employee plan for the employee to commence employment in less than two weeks from the date of the formal written offer of employment and the waiver is expressly stated in the noncompetition agreement.”
  • For noncompetes entered into after the commencement of employment, notice must be given at least 10 days before the agreement becomes effective and the noncompete must “be supported by consideration independent from the continuation of employment . . . .”
  • The employer must review the noncompete with the employee at least once every three years.
  • Legitimate business interests are the employer’s: (i) trade secrets; (ii) confidential information; and (iii) goodwill. (This is not a change from existing common law, except insofar as existing law may permit other interests to be protected.)
  • A noncompete “may be presumed necessary where” other restrictive covenants are insufficient, including “because the employee breached” one of those agreements. It may also be presumed necessary where the employee took property of the employer or breached a fiduciary duty to the employer.
  • Noncompetes are limited to (and presumptively reasonable if they are no more than) 12 months – unless the employee has breached his or her fiduciary duties or has taken property, in which case, the term is limited to two years.
  • The noncompete must be reasonable in geographic scope. (This is the same as existing common law.) If the geographic reach is limited to only the “areas in which the employee, during any time within the last 2 years of employment, provided services or had a material presence or influence” it will be presumptively reasonable.
  • The agreement must “be reasonable in the scope of proscribed activities in relation to the interests protected. (This is the same as existing common law.) A restriction on activities that protects a legitimate business interest and is limited to only the specific types of services provided by the employee at any time during the last 2 years of employment is presumptively reasonable.”
  • The employer has 10 days following the end of the employee’s employment to notify the employee in writing by certified mail that the employer intends to enforce the noncompetition agreement. This requirement does not apply if the employee has unlawfully taken property or already breached the noncompete, a nonsolicit, an anti-piracy/no-raid covenant, a confidentiality agreement, or a fiduciary duty.
  • The agreement must be consonant with public policy. (This is the same as existing common law.)
  • The agreement will not apply to:
    • employees who are not exempt under the Fair Labor Standards Act, 29 U.S.C. sections 201-209;
    • undergraduate or graduate students engaged in short-term employment;
    • employees terminated without cause or laid off;
    • employees who are 18 or under; and
    • non-employees who perform services for less than one year.
  •  An overly-broad noncompete is subject to invalidation under the red pencil approach (which applies only to the noncompete, not the rest of any agreement that may include the noncompete). However, if the agreement is written to comply with the safe-harbors set out in the statute, a court may reform the agreement. (That concept is to force companies to draft noncompetes narrowly, while not imposing the same penalty on a company that attempted to draft narrowly. This modified red-pencil approach was dubbed the “purple pencil” by former Senator Wolf.)
  • The court may impose a noncompete as a remedy for the violation of another restrictive covenant or a statutory or common law duty. (This is called a “springing noncompete” – it was an idea that I created for some clients who preferred to not use noncompetes except when an employee has acted unlawfully; accordingly, it imposes less restrictions on the employee unless and until the employee engages in unlawful behavior, thus demonstrating that the employee cannot be trusted to comply with the less onerous restrictions.)
  • Massachusetts law will apply if the employee is a resident of, or has been working in, Massachusetts for at least 30 days.
  • Jurisdiction lies in the county of the employee’s residence or Suffolk county (if the agreement so provides).

What should you be doing now to prepare? Nothing. Changes are still a long way off. However, you do need to understand the changes when they happen, and will need to be prepared to help you consider changes to your agreements.


President Obama Signs the DTSA (really…)

I posted yesterday that President Obama had signed the Defend Trade Secrets Act, including a lengthy summary of the bill, it’s history, what it does, and what (I think) it will mean for companies.

But, for those who have been following it and working on it for the past several years, I figured you (like me) would want to see the actual signing. So here it is. Enjoy!

Defend Trade Secrets Act and What It Means

iStock_000046188094_FullAfter 5 years in the making, the Defend Trade Secrets Act of 2016 (the “DTSA”) was signed into law today by President Obama (following a unanimous vote by the Senate (87-0) and nearly unanimous vote by the House (410-2)).

The DTSA amends the Economic Espionage Act of 1996 (the “EEA”) in fundamental ways, as described below. (The text of the EEA, as amended by the DTSA, is available here and, if you would like it in track changes (reflecting how the EEA will change), that is available here.)


At a very high level, the DTSA creates a federal private right of action for companies seeking to protect their trade secrets; gives automatic access to federal courts; provides a (very limited) right to seize property “necessary to prevent the propagation or dissemination of the trade secret”; permits the recovery of treble damages and attorney’s fees; and (to obtain those enhanced damages) requires companies to provide notice that employees have the right to confidentially disclose trade secrets (to government authorities and attorneys) for the purpose of reporting or investigating a suspected violation of law or in a sealed complaint or other sealed court (or other proceeding) filing.

From a timing standpoint, the most critical aspect of the DTSA is that to obtain the enhanced damages and attorney’s fees available in a trade secrets case under the EEA, companies should provide the required notice (discussed below) to their employees “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” (Note that this requirement applies only to contracts or agreements entered into after the DTSA’s enactment.)


The Economic Espionage Act of 1996, 18 U.S.C. §§ 1831-1839, was enacted in 1996 to criminalize the misappropriation of trade secrets. It has two operative sections: Section 1831(a), covering “economic espionage” (i.e., theft of trade to benefit a foreign power), and section 1832(a), covering “theft of trade secrets” (i.e., the theft of trade secrets to benefit someone other than the owner of the secrets).

Although the EEA provided for necessary criminal penalties and a civil remedy if brought by the United States Attorney General, missing from the EEA was a private civil right of action. Long-time readers of this blog will recall that an effort to create such a private right of action has been kicking around since at least as early as 2011. (Earlier bills included Representative Herbert Kohl’s (D-WI) Protecting American Trade Secrets and Innovation Act of 2012, Representative Zoe Lufgren’s (D-CA) Private Right of Action Against Theft of Trade Secrets Act of 2013, Representative George Holding’s (R-NC) Trade Secrets Protection Act of 2014, and Jeff Flake’s (R-AZ) Future of American Innovation and Research Act of 2013 (which took a different approach, seeking to establish an entirely new trade secrets framework independent of the EEA).)

While those efforts progressed slowly, two other amendments to the EEA sailed through.

Theft of Trade Secrets Clarification Act of 2012

First, adopted on December 28, 2012, the Theft of Trade Secrets Clarification Act of 2012, amended the EEA in response to the headline-grabbing case, US v. Aleynikov, 676 F.3d 71 (2nd Cir. 2012), in which a Goldman Sachs programmer’s conviction under the EEA was reversed based on a narrow interpretation of the EEA’s then-existing language.

The Theft of Trade Secrets Clarification Act expanded the reach of the EEA by deleting the old language (section 1832(a)) that protected only trade secrets “related to or included in a product that is produced for or placed in interstate or foreign commerce” and replacing it with language expanding the scope of trade secrets covered by the EEA to those “related to a product or serviced used in or intended for use in interstate or foreign commerce.”

The new language reads as follows (deleted language is crossed out, added language is bolded):

Whoever, with intent to convert a trade secret, that is related to or included in a product that is produced for or placed in a product or service used in or intended for use in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will, injure any owner of that trade secret, knowingly

The bill was to designed to, and did at least in part, address the Second Circuit’s decision in US v. Aleynikov, 676 F.3d 71 (2nd Cir. 2012). However, by deleting the phrase “or included in” from the current statute, the bill may have created its own ambiguity insofar as it can be viewed as attempting to somehow limit the scope of the prior language. (This issue is for another day.)

Foreign and Economic Espionage Penalty Enhancement Act of 2012

The second amendment to the EEA was the Foreign and Economic Espionage Penalty Enhancement Act of 2012, signed by President Obama on January 14, 2013. In addition to requiring a review of sentencing guidelines, the Act increased fines for foreign espionage under section 1831.

The DTSA’s Amendments to the EEA

Federal Private Right of Action (Section 1836(b))

Perhaps the single most significant aspect of the DTSA is that it creates a federal private right of action for owners of trade secrets seeking to protect their trade secrets. This is potentially a game-changer, putting trade secrets (the largely ignored, but fastest-growing category of intellectual property) on equal footing with patents, copyrights, and trademarks, at least insofar as there is now federal private protection. (While there still is no federal registration, one might wonder whether there will be one in time – even if only to establish timing of ownership or notice of the existence of the secret (without of course disclosing it publicly). A controversial concept, I know!)

Federal Court Access (Section 1836(c))

Concomitant of the federal private right of action is the right to bring a trade secret misappropriation case in federal court. It bears noting, however, that jurisdiction does not lie exclusively in the federal courts; state courts have concurrent jurisdiction. (While the original EEA provided for exclusive original federal court jurisdiction, the DTSA eliminated that language and replaced it with language providing for only “original jurisdiction” in the federal courts.)

If the goal is to file in state court and stay out of federal court (assuming no diversity of citizenship or other federal cause of action), a trade secret owner will need to forgo the rights and remedies of the EEA, and bring the action exclusively under state trade secrets laws (and other state laws).Bringing an EEA claim will otherwise run the risk of having the case removed to federal court on the eve of a hearing on an emergency motion.

Ex Parte Seizure Orders (Section 1836(b)(2))

Hands down, the most controversial aspect of the DTSA and its predecessors has been the ex parte seizure provisions.

Under the amended EEA, not only may owners (including licensees) of a trade secret bring a civil action, but “in extraordinary circumstances,” they can obtain an “order providing of the [ex parte] seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.”

To establish the right to the order, the trade secret owner must meet significant stringent requirements, including establishing that the injunctive relief otherwise available is insufficient, describing “with reasonable particularity the matter to be seized” and its location, and proving that if notice were provided, the person against whom the order would issue “would destroy, move, hide, or otherwise make such matter inaccessible to the court . . . .” In addition, the trade secret owner cannot publicize the requested seizure and the court’s order will need to protect against publicity relating to the order.

In addition to other safeguards, if an order is issued, a hearing must follow as soon as possible, and, in any event, within seven days of the order. If the court determines that the order was wrongfully obtained or excessive, the injured party “shall be entitled” to the relief provided for under the Trademark Act of 1946, 15 U.S.C. 1116(d)(11), which provides:

A person who suffers damage by reason of wrongful seizure under this subsection has a cause of action against the applicant for the order under which such seizure was made, and shall be entitled to recover such relief as may be appropriate, including damages for lost profits, cost of materials, loss of goodwill, and punitive damages in instances where the seizure was sought in bad faith, and, unless the court finds extenuating circumstances, to recover a reasonable attorney’s fee. The court in its discretion may award prejudgment interest on relief recovered under this paragraph, at an annual interest rate established under section 6621(a)(2) of the Internal Revenue Code of 1986, commencing on the date of service of the claimant’s pleading setting forth the claim under this paragraph and ending on the date such recovery is granted, or for such shorter time as the court deems appropriate.

The concern about the seizure provision is two-fold: (1) it can be abused; and (2) although designed for the federal courts, the provision can be used in the state courts as well, where some people feel that the quality or experience of the bench may not be suitable.

Remedies (Section 1836(b)(3))

Like the Uniform Trade Secrets Act from which the EEA derives much of its relevant language, the EEA provides not only for injunctive relief (see below), but for the recovery of “actual loss” (what people generally think of as, primarily, lost profits), unjust enrichment damages that is not included in actual loss, and in lieu of the above, a reasonably royalty. (See UTSA, § 3.)

Also like the UTSA, the EEA provides for exemplary damages (double the damages award, for a total of treble damages) for willful and malicious misappropriation.

Again taking its cue from the USTA, the EEA permits an award to the trade secret owner when the misappropriation was willful and malicious, and to either side when the other litigates in bad faith.

Immunity and Related Notice Requirement (Section 1833(b))

The DTSA was amended late in the game to make it clear that an employee (defined to include an independent contractor) has the right to disclose trade secrets and other confidential information in limited circumstances related to the reporting or investigation of suspected illegal conduct or in confidential filings (i.e., filings under seal) in a lawsuit or other proceeding. Specifically, as to the latter, any disclosure must be made (1) in confidence (2) to a federal, state, or local government official, or to an attorney (3) “solely for the purpose of reporting or investigating a suspected violation of law . . . .”

For an employer to qualify for recovery of the EEA’s enhanced damages (exemplary damages and attorney’s fees), it must provide notice of the immunity “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” Such agreements may include the obvious (like nondisclosure agreements, confidentiality agreements, and noncompetes) and the not-so-obvious (like severance and separation agreements that contain confidentiality provisions).

The notice can be in the agreements themselves or simply reference the employers’ reporting policy (in, for example, an employee handbook).

It is important to know that the notice requirement applies only to agreements entered into after the DTSA’s enactment. Accordingly, existing agreements are not subject to the notice requirement.

Impact on the Inevitable Disclosure Doctrine (1836(b)(3))

As noted above, the DTSA (like the UTSA (section 2)) authorizes the issuance of injunctions to prevent any “actual or threatened misappropriation . . . .”

This language (as it appears in the UTSA) has been interpreted by some courts to permit (albeit in limited circumstances (a discussion for another day)) a court – even in the absence of a noncompetition agreement – to prevent an employee from working for a competitor in a job in which the employee’s work would inevitably lead to the use or disclosure of the former employer’s trade secrets (because, in theory, at least, the secrets are remembered by the employee). The doctrine, known as the “inevitable disclosure doctrine,” originated in PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995).

Given the similarity of the language, to prevent the EEA from being used to create a de facto noncompete (where the employee merely remembers trade secret information from a prior employer), the DTSA expressly states that an injunction may not “prevent a person from entering into an employment relationship” and any “conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows . . . .”

The actual impact of this language remains to be seen. For example, the inevitable disclosure doctrine typically applies only when there an employee engages in wrongful conduct (not where the employee merely remembers information). Accordingly, the doctrine is not applied quite as expansive as the limiting language in the EEA would suggest. In addition, the EEA’s language does not appear to preclude reliance on the inevitable disclosure doctrine under state trade secret laws. Time will tell how this will all shake out.

Exceptions to Misappropriation (Section 1839(5))

The conduct that constitutes misappropriation of trade secrets will be familiar to lawyers who practice in this area; it is the same conduct defined in the UTSA (section 1(2)): acquisition through improper means (as defined in the UTSA)) and wrongful disclosure or use of a trade secret (as defined in the UTSA). (Each of those is detailed in the statute.)

While the UTSA (in the comments) identifies exceptions to conduct that might otherwise constitute misappropriation (most notably, reverse engineering and “independent invention”), the DTSA includes reverse engineering and “independent derivation” as exceptions (in text). The fact that the exceptions appear in the body of the statute is of no moment. What is significant, however, is the difference in the language: “independent derivation” arguably suggests that the misappropriator can cleanse his or her conduct by modifying a stolen trade secret and then using only the modified secret. In contrast, “independent invention” presumes that the invention did not start with (i.e., derive from) a misappropriated trade secret.

Additional Changes Not Included in the Amended EEA

In addition to the amendments to the text of the EEA, the DTSA makes several other changes to existing law.

First, the DTSA makes the violation of the EEA a predicate offense under RICO.

Second, the DTSA requires that within the first year after the DTSA’s enactment (and then biannually thereafter), the United States Attorney General (in consultation with the Intellectual Property Enforcement Coordinator, the Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office, and the “heads of other appropriate agencies”) submit to the Committees on the Judiciary of the House of Representatives and the Senate – and make publicly available – a report the status and impact of trade secrets laws domestically and internationally, together with a recommendation for reducing the threat, educating and providing assistance to US companies, and providing a mechanism for US companies to confidentially or anonymously report international trade secrets theft.

Third, Congress expressly states its perception (among other things) that the Economic Espionage Act “applies broadly to protect trade secrets from theft . . . .” Accordingly, expect to see an expansive reading of the language, given that the statute seems designed to temper the rule of lenity (i.e., the canon of construction that requires a narrow interpretation of statutes that are both criminal and civil, when the intent of the legislature is not otherwise clear).

Fourth, recognizing that the seizure rules need “to balance the need to prevent or remedy misappropriation with the need to avoid interrupting the (A) business of third parties; and (B) legitimate interests of the party accused of wrongdoing,” the DTSA requires the Federal Judicial Center, within two years of enactment (with occasional updates), to develop recommended best practices for “the seizure of information and media storing the information” and “the securing of the information and media once seized.” As with the Attorney General’s report, this report is to be provided to the Committees on the Judiciary of both the House of Representatives and the Senate.

Where are we headed?

The actual impact of the DTSA remains to be seen. I do not believe that there will be significant use of the much-feared ex parte seizure procedure. I do, however, believe that there will be a significant increase in trade secrets litigation in the federal courts.

I also believe that, with the UTSA-like standards now part of a federal private civil cause of action, the two remaining states, Massachusetts and New York, are more likely to adopt the Uniform Trade Secrets Act, at least in some form. (Note that technically North Carolina has not adopted the UTSA; however, given that the North Carolina Trade Secrets Act (adopted in 1981, after the original version of the UTSA, but before the current 1985 version) tracks significant concepts, if not language, from the UTSA, I view it as a distinction without a difference.)

As a related matter, people tend (appropriately) to couple legislative efforts to adopt stronger trade secrets laws (like the EEA) with efforts to reform noncompete law (designed in large part to protect trade secrets). Putting aside the wisdom of giving with one hand (enhancing pure trade secrets laws) while taking with the other (cutting back on noncompete protections), the issues are related and have very different approaches and implications. (As noted in Changing Noncompete | Trade Secrets Laws, many states – and even the federal government and others – are looking into modifying noncompete laws (many to restrict their use, while some have gone or are going in the other direction).)

Given the enactment of the DTSA, if the Obama Administration’s goal is to enhance trade secrets protections (which it has stated is the case), it will be very interesting to see where the Administration goes following its report on Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses

In that report, relying in part on my 50 State Noncompete Laws chart and survey of the growth of noncompete and trade secrets cases, as well as the work of Evan Starr, Norman BisharaJJ PrescottMatt Marx, Deborah Strumsky, and Lee Fleming, the Obama Administration concludes as follows:

In some cases, non-compete agreements can play an important role in protecting businesses and promoting innovation. They can also encourage employers to invest in training for their employees. However, as detailed in this report, non-competes can impose substantial costs on workers, consumers, and the economy more generally. This report informs future discussions and potential recommendations for reform by providing an overview of the research on the prevalence of non-competes, evidence of their effects, and examples of actions states are taking to limit the use and enforcement of unnecessary non-competes.

There is more work to be done. The Administration will identify key areas where implementation and enforcement of non-competes may present issues, examine promising practices in states, and identify the best approaches for policy reform. Researchers must continue to assess and identify promising policy reforms and the potential impact of those reforms including unintended consequences. Ultimately, most of the power is in the hands of State legislators and policymakers in their ability to adopt institutional reforms that promote the use and enforcement of non-competes in instances that appropriately weigh their costs and benefits in ways that provide workers appropriate transparency about their rights.

In light of all of this, I think we will see continued and escalating efforts to find the appropriate balance between the use and enforcement of noncompetes and the mobility of employees.

Defend Trade Secrets Act to Be Law Tomorrow

Hand WritingThis is a very quick post, with details to follow tomorrow.

We’ve all been waiting for it, and it’s happening tomorrow:  President Obama is scheduled to sign the Defend Trade Secrets Act (aka the DTSA) tomorrow afternoon.

Stay tuned for details.

Trade Secret | Noncompete – Issues and Cases in the News – May

extras_03Below are the latest issues and cases making trade secrets | noncompete news since our last update …

Federal:  The president has until Saturday to sign or veto the DTSA. “[D]escribed as the ‘most significant expansion of federal law in intellectual property since the Lanham Act in 1946,’” see Congress May Be About to Shake Up Trade Secret Law: Is That a Good Thing?the DTSA will provide federal court access without diversity of citizenship and the express ability to obtain ex parte seizure orders (albeit only in extraordinary circumstances) to protect trade secrets. For more, see Jim Pooley‘s guest post on PatentlyO: What you need to know about the amended defend trade secrets act.

Federal:  On March 31, 2016, the United States Department of the Treasury issued a report entitled, “Non-compete Contracts: Economic Effects and Policy Implications.” As the Treasury Department explains, the “report seeks to begin a discussion of potential reforms in the usage of non-compete agreements.” The report is a substantial effort and worth a read (and not just because it relies in part on my 50 State Noncompete Survey!).

6th Circuit:  It’s a common theme: employees secretly competing through a company they created and worked for while employed by their “real” employer. In a recent case in Michigan, the two defendants formed a competing company using their wives’ names. (I’ve seen the same consciousness of guilt result in the competing company ostensibly owned by the employee’s son.) See Sixth Circuit Affirms $3.7 Million Award And Permanent Injunction In Trade Secret/Breach Of Duty Of Loyalty Case.

9th Circuit: Forum selection clauses have received a lot of attention since the Supreme Court’s 2013 decision in Atlantic Marine Construction Company, Inc. v. United States District Court for the Western District of Texas, 134 S.Ct. 568 (2013), discussed here. In a 2016 decision by the 9th Circuit in In re Orange, S.A. v. United States District Court for the Northern District of California, San Francisco, the court held that a nondisclosure agreement’s forum selection clause did “not cover trade secret misappropriation and related claims that are not based on the agreement.” See 9th Circuit: Claims proceed in California despite French forum selection clause.

Connecticut:  On April 27, 2016, the Connecticut Senate passed a bill (S.B. No. 351) to restrict the duration, geographic reach, and scope of physician noncompetes. The vote was 35-1. The bill has now progressed to the House. Thank you to Jeffers Cowherd for noting the vote.

North Carolina:  As Caitlin M. Goforth of Poyner Spruill reports, in a recent case in North Carolina, Beverage Sys. Of the Carolinas, LLC v. Associated Beverage Repair, LLC, the North Carolina Supreme Court rejected the efforts of two companies to expressly authorize the court to reform their noncompete, rather than rely only North Carolina’s blue-pencil approach. (Note that the case was not the employment context, but rather in the B2B context, where courts tend to be more permissive of the parties’ noncompete agreements.)

Rhode Island:  Rhode Island (unlike a handful of states including in particular Delaware, Massachusetts, and Illinios) does not have a statutory exemption to its noncompete laws for physicians. In an unusual move, despite the fact that the legislature has not declared physician noncompetes unenforceable, a Rhode Island state Superior Court judge refused to enforce a noncompete against a physician on public policy grounds (under the injunction standards, which consider injury to the public). The case is Medicine and Long Term Care Associates, LLC v. Khurshid, 2016 WL 1294194 (R.I. Super. Ct. Mar. 29, 2016).

Other Noteworthy News…

Don’t forget to check Changing Trade Secrets | Noncompete Laws for coverage of all major developments nationally and internationally. 

Defend Trade Secrets Act – Awaiting President’s Signature

extras_03With trade secret theft growing and showing no sign of stopping, it’s no surprise that there has been bipartisan support for Defend Trade Secrets Act of 2016 (DTSA) – the act that amends the Economic Espionage Act of 1996 to create a federal private right of action for trade secrets misappropriation.

Today, Wednesday, April 27, 2016, true to expectations, the United States House of Representatives joined the Senate in voting in favor of the DTSA.

For a detailed report on the bill produced by the House Judiciary Committee, see here.

With the Senate vote and House votes complete, all that remains is Presidential signature. The prevailing view among commentators (myself included) is that President Obama will sign the bill, given that he has already indicated his support and, for several years, has been focusing on the need to increase measures to protect trade secrets. 

We’ll know within 10 days – and I understand likely less than that. 

What will this mean for you? More options (federal court access without diversity of citizenship) and enhanced tools (ex parte seizure orders – albeit in very limited circumstances) to protect your trade secrets. If you are a would-be defendant, however, the ex parte seizure order could mean substantial intrusion and disruption.

Note that still unknown at this point: the actual impact (if any) on the inevitable disclosure doctrine. (More on that later.)

Trade Secrets Law – A Primer

World MapIntroduction

Trade secrets are frequently the “forgotten” intellectual property. (The indisputably-recognized types of intellectual property are patents, copyrights, and trademarks.)

According to some commentators, trade secrets were protected as far back as Roman times through a claim known as “actio servi corrupti” (interpreted roughly as an “action of a corrupted slave”). The existence of a claim for trade secrets during Roman times is not without its detractors; according to University of Georgia Law School professor Alan Watson (in “Trade Secrets and the Roman Law: The Actio Servi Corrupti,” 30 Colum. L. Rev. 837 (1930)), while the claim existed, it was not used to protect trade secrets.

Despite this dispute and whether trade secret law in fact traces back to Roman times, the Renaissance (see Mark A. Lemley, “The Surprising Virtues of Treating Trade Secrets as IP Rights,” 61 Stan. L. Rev. 311, 315 n.8 (2008)), or some other time, there is general agreement that trade secrets law as we know it made its first appearance in England in 1817 in Newberry v. James, 35 Eng. Rep. 1011, 1013 (Ch. 1817) and in the United States in 1837 in Vickery v. Welch, 36 Mass. (19 Pick.) 523, 527 (1837). See Lemley, at 315 & n.6.

For over a 100 years following its first appearance in the United States, trade secrets law evolved as a hodgepodge of state laws. Since then, two key sources of law have emerged: Restatement (First) of Torts and the Uniform Trade Secrets Act (the “UTSA”). Each is summarized below.

(On the federal side, the Economic Espionage Act of 1996, 18 U.S.C. §§ 1831-39, provides for criminal prosecution and civil claims made by the United States Attorney General; it does not yet provide for a private right of action, but check back at our Changing Trade Secrets | Noncompete Laws page. In addition, the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, provides protection against the wrongful access to electronically-stored information, regardless of whether or not such information qualifies as a trade secret.)

Restatement (First) of Torts

In 1939, the American Law Institute issued the Restatement (First) of Torts, containing a summary of trade secrets law as it then existed. The summary (sections 757-759) served as the primary resource for most states until the latter part of the century.

Section 757, the key section, provides as follows:

One who discloses or uses another’s trade secret, without a privilege to do so, is liable to the other if

(a) he discovered the secret by improper means, or

(b) his disclosure or use constitutes a breach of confidence reposed in him by the other in disclosing the secret to him, or

(c) he learned the secret from a third person with notice of the facts that it was a secret and that the third person discovered it by improper means or that the third person’s disclosure of it was otherwise a breach of his fiduciary duty to the other, or

(d) he learned the secret with notice of the facts that it was secret and that its disclosure was made to him by mistake.

What is a trade secret?

Although not defined in the text of the section itself, the term “trade secret” is defined by the Restatement in comment b to section 757. Specifically, expressly noting that “[a]n exact definition of a trade secret is not possible,” comment b provides as follows:

A trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers. It differs from other secret information in a business (see § 759) in that it is not simply information as to single or ephemeral events in the conduct of the business, as, for example, the amount of other terms of a secret bid for a contract or the salary of certain employees, or the security investments made or contemplated, or the date fixed for the announcement of a new policy or for bringing out a new model or the like. A trade secret is a process or device for continuous use in the operation of business. Generally it relates to the production of goods, as, for example, a machine or formula for the production of an article. It may, however, relate to the sale of goods or to other operations in business, such as a code for determining discounts, rebates or other concessions in a price list or catalogue, or a list of specialized customers, or a method of bookkeeping or other office management.

The definition can be summed up as information used in business, which is not generally known to others, and provides a competitive advantage. (The requirement of a commercial advantage is rarely an issue; as Judge Hillman has explained, the “information need not provide competitors with a substantial advantage; any advantage, however small or ephemeral, is sufficient to satisfy these requirements.” Advanced Micro Devices, Inc., No. 13-40007-TSH, slip op. at 16 (citing Optos, Inc. v. Topcon Med. Sys., Inc., 777 F. Supp. 2d 217, 238 (D. Mass. 2011)).)

The distinguishing element of this formulation in comparison to certain others, most notably the Uniform Trade Secrets Act (see below) and the Restatement (Third) of Unfair Competition, is that it limits trade secrets to information that is currently in use. Accordingly, so-called negative information — or information about what not to do (think the first 39 formulation of WD-40) — does not qualify as a trade secret under this formulation. Nor does information concerning a single, ephemeral event. Such information is simply considered confidential business information and is addressed separately in Restatement (First) of Torts § 759, which, for all intents and purposes, has the same effect as Section 757. See Restatement (First) of Torts § 759 cmt. c.

Regardless of what type of information may qualify, the sine qua non of a trade secret is secrecy. While the Restatement does not address the secrecy requirement in the text of the section, that requirement is instead addressed in comment b as follows:

The subject matter of a trade secret must be secret. Matters of public knowledge or of general knowledge in an industry cannot be appropriated by one as his secret. Matters which are completely disclosed by the goods which one markets cannot be his secret. Substantially, a trade secret is known only in the particular business in which it is used. It is not requisite that only the proprietor of the business know it. He may, without losing his protection, communicate it to employees involved in its use. He may likewise communicate it to others pledged to secrecy. Others may also know of it independently, as, for example, when they have discovered the process of formula by independent invention and are keeping it secret. Nevertheless, a substantial element of secrecy must exist, so that, except for the use of improper means, there would be difficulty in acquiring the information.

To assist in determining whether particular information qualifies as a trade secret, comment b provides the following guidance:

Some factors to be considered in determining whether given information is one’s trade secret are: (1) the extent to which the information is known outside of his business; (2) the extent to which it is known by employees and others involved in his business; (3) the extent of measures taken by him to guard the secrecy of the information; (4) the value of the information to him and to his competitors; (5) the amount of effort or money expended by him in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

It is this portion of Section 757, inclusive of the comments, that serves as the core analysis in trade secret cases following the Restatement.


The Restatement (First) of Torts § 757, by its express terms (set out above), proscribes the use and disclosure of trade secrets under certain specified circumstances. It does not, however, proscribe the mere acquisition of a trade secret. Nevertheless, courts have avoided this limitation by focusing on the subsequent violation of the restrictions imposed on the appropriator by the owner of the trade secret. Even in advance of an actual use or disclosure, the fact that the trade secret has been improperly acquired can give rise to an inference that the appropriator of the trade secret is likely to use or disclose the trade secret. See Restatement (Third) of Unfair Competition § 40 cmt. b (“A defendant’s willingness to resort to improper means in order to acquire a trade secret is itself evidence of a substantial risk of subsequent use or disclosure.”).

As a separate matter, nothing in the Restatement focuses on the actor’s purpose. To the contrary, liability “is not based on the actor’s purpose to discover another’s trade secret but on the nature of the conduct by which the discovery is made.” Restatement (First) of Torts § 757 cmts. g, o. Thus, reverse engineering or independently discovering a trade secret are both entirely permissible.

In contrast, receiving a trade secret with knowledge (or reason to know) that the trade secret was acquired or disclosed in breach of a duty subjects the recipient of the trade secret to liability. Restatement (First) of Torts § 757(c), (d) cmts. l–o. The reason for liability under such circumstances is not that the recipient had the purpose to obtain the trade secret, but rather, that the conduct by which it was acquired in the first place was improper and taints all that flows from it.

Consistent with this dichotomy, liability would not exist for the recipient’s use or disclosure of the trade secret prior to the time the recipient knew or had reason to know of the wrongful conduct; it does exist, however, from that moment forward, “unless prior thereto he has in good faith paid value for the secret or has so changed his position that to subject him to liability would be inequitable.” See Restatement (First) of Torts § 758; see also Restatement (First) of Torts § 757(c), (d) cmts. l–o.

As to the nature of the conduct to discover a trade secret, the Restatement explains that “[a] complete catalogue of improper means is not possible. In general they are means which fall below the generally accepted standards of commercial morality and reasonable conduct.” Restatement (First) of Torts § 757 cmt. g. The comment provides the following nonexhaustive list of examples: taking by physical force, “fraudulent misrepresentations to induce disclosure, tapping of telephone wires, eavesdropping or other espionage.” Restatement (First) of Torts § 757 cmt. g.

Uniform Trade Secrets Act

In 1979, the National Conference of Commissioners on Uniform State Laws issued the Uniform Trade Secrets Act (UTSA). The UTSA was later revised in 1985 to its current form today. As of today, all but two states (Massachusetts and New York) have adopted some version of the Uniform Trade Secrets Act. (Technically, North Carolina has not officially adopted the UTSA, though it certainly has adopted language that parallels the UTSA.)

The UTSA’s structure and terms are as follows:

Section 1—Definitions of Improper Means, Misappropriation, Person, and Trade Secret

“Improper means” is defined only as “include[ing] theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.” Recognizing, as the Restatement before it did, that “[a] complete catalogue of improper means is not possible,” the definition is intentionally not exhaustive. It does, however, provide the other end of the spectrum by identifying a nonexhaustive list of “proper means.” Specifically, the comments provide as follows:

Proper means include: 1. Discovery by independent invention; 2. Discovery by ‘reverse engineering’, that is, by starting with the known product and working backward to find the method by which it was developed. The acquisition of the known product must, of course, also be by a fair and honest means, such as purchase of the item on the open market for reverse engineering to be lawful; 3. Discovery under a license from the owner of the trade secret; 4. Observation of the item in public use or on public display; 5. Obtaining the trade secret from published literature.

“Misappropriation” is defined as follows:

(i)   acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or

(ii)  disclosure or use of a trade secret of another without express or implied consent by a person who

(A)  used improper means to acquire knowledge of the trade secret; or

(B)  at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was

(I)   derived from or through a person who had utilized improper means to acquire it;

(II)  acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or

(III) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or

(C)  before a material change of his [or her] position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.

The definition of “trade secret” is

information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

This definition was intended to expand the definition in the Restatement. Specifically, the definition

extends protection to a plaintiff who has not yet had an opportunity or acquired the means to put a trade secret to use. The definition includes information that has commercial value from a negative viewpoint, for example the results of lengthy and expensive research which proves that a certain process will not work could be of great value to a competitor.

UTSA § 1 cmt. Further, use of the terms “method” and “technique” were intended to capture the concept of “know-how.” UTSA § 1 cmt.

Section 2—Injunctive Relief

Under Section 2, injunctive relief may be used to prevent an “[a]ctual or threatened misappropriation.”

It is this section that courts have relied upon to enjoin a former employee (who is not bound by a noncompetition agreement) from working at a competitor where the employee’s new employment would inevitably lead to the use or disclosure of the former employer’s trade secrets. See PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995).

Section 3—Damages

Under Section 3, damages include exemplary damages up to two times the actual damages. As such, treble damages are recoverable under the UTSA, although only for misappropriations that are “willful and malicious.” No damages are available, however, where the recipient of the trade secret “material[ly] and prejudicial[ly] changed its position prior to acquiring knowledge or reason to know of a misappropriation” such that an award of damages would be inequitable.

Section 4—Attorney Fees

Under Section 4, attorney fees must be paid to the prevailing party where the other party acted in bad faith or where the misappropriation was willful and malicious.

Remaining Sections

The balance of the UTSA addresses preservation of secrecy during an action (Section 5), three-year statute of limitations (Section 6), preemption of “conflicting” laws (Section 7), uniformity of application and construction (Section 8), and other miscellaneous matters.