Tag Archives: Economic Espionage Act

Trade Secrets Laws and the UTSA – A 50 State and Federal Law Survey Chart (revised)

World MapEvery state but Massachusetts and New York has adopted the Uniform Trade Secrets Act (the UTSA) in one form or another – though some may quibble with whether Alabama or North Carolina actually adopted it. (The Uniform Law Commissioners say that Alabama has adopted it, while North Carolina has not; I view the results as largely the opposite.)

For several years, I had been planning to run a redline comparison of each state’s trade secrets laws against the Uniform Trade Secrets Act to see the full scope of the variation. The task was quite substantial, however, and I never quite felt that it would be worth the time.

In the past, there had been plenty of articles discussing the variations in UTSA formulations among the state laws purporting to adopt the Act, including Linda B. Samuels and Bryan K. Johnson‘s, The Uniform Trade Secrets Act: The States’ Response, 24 Creighton Law Rev. 49 (1990), and  Christopher Rebel J. Pace‘s, A Case for a Federal Trade Secrets Act, 8 Harvard Journal of Law & Technology 427 (1995), but no one had done an actual side-by-side comparison of how each state’s law compared to the UTSA.

More recently, Sid Leach wrote another terrific article summarizing the significant variations among state “uniform” trade secrets laws. Sid’s article highlighted for me the need to have – and the continuing interest of others in having – a comparison. It convinced me that it was time for such a chart.

So, I made it. It took well over a hundred hours of combined effort, starting with the yeoman’s work my firm’s then-summer intern, David Haber, and dozens of hours of my time organizing, revising, and problem-solving with David and with with my paralegal, Erika Hahn, who separately spent many hours working on the chart. The chart could not have been completed without their extraordinary contributions.

It is a state-by-state comparison (as close to a redline comparison as made sense) of every state’s trade secrets laws (and the Economic Espionage Act, as amended by the Defend Trade Secrets Act of 2016) to the 1985 version (i.e., the most recent version) of the Uniform Trade Secrets Act.

The chart is viewable here. (It was originally prepared on August 14, 2016, and has been updated; it is current as of today, February 4, 2017.)

It is intended both as a stand-alone resource and a companion to our 50 state survey chart of noncompete laws, which I first prepared almost seven years ago (in the summer of 2010), though I regularly update it to reflect the changing noncompete laws around the country. (It is also current as of today, February 4, 2017.)

In addition, for a comprehensive summary of recent trade secrets and noncompete legislative reforms and efforts at reform around the country, please see the page Changing Trade Secrets | Noncompete Laws. Be sure to check back from time to time, as I regularly update it to reflect new developments.

Aleynikov not-free at last!

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By Rainerzufall1234 (Own Work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)%5D, via Wikimedia Commons

Updated 1/26/2016

After years of legal wrangling, Sergey Aleynikov, the former Goldman Sachs engineer who stole high frequency trading code from Goldman Sachs and took it with him for use at Teza Technologies LLC, was finally “re-“convicted according to Bloomberg (and others).

You may recall that Aleynikov was first convicted under the Economic Espionage Act (the “EEA”), but that that decision was overturned by the Second Circuit in  US v. Aleynikov, 676 F.3d 71 (2nd Cir. 2012). (That decision precipitated the adoption on December 28, 2012, of the Theft of Trade Secrets Clarification Act of 2012, which expanded the reach of the EEA. For more, see here.)

Nevertheless, Aleynikov also faced prosecution in state court.

There, the results were the opposite: the trial court found him not guilty, and the New York Supreme Court Appellate Division reversed, observing that “[i]t would be incongruous to allow a defendant to escape criminal liability merely because he made a digital copy of the misappropriated source code instead of printing it onto a piece of paper.”

Update (1/26/2016): If you would like the read the decision (The People of the State of New York v. Sergey Aleynikov, Docket No. 4447/12 (Jan. 24, 2016)), it is available at Brooklyn Law’s Trade Secrets Institute’s website here.

Trade Secret | Noncompete – Issues and Cases in the News (May/June)

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

Federal:  The Defend Trade Secrets Act is now law of the land. The United States now (officially) has a national trade secrets law with a concomitant private civil right of action. For more, see Defend Trade Secrets Act versus the UTSADefend Trade Secrets Act and What It Means, and Dennis Crouch‘s post, Extra-Territorial Application of the Defend Trade Secrets Act.

Federal:  The Obama Administration released a report on Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses 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 StarrNorman BisharaJJ PrescottMatt MarxDeborah Strumsky, and Lee Fleming.

Federal:  As stated in”Bring on the Chain Mail: NLRB Strikes Down Another Facially Neutral Email Use Policy,”A National Labor Relations Board (NLRB) judge has struck down Caesar’s Entertainment Corporation’s policy that prohibited employees’ using the company email system to distribute “nonbusiness” information. Why, you ask? According to the judge, the policy infringes on employees’ rights to form a union.” The impact of the NLRA (as well as the DTSA and Securities Exchange Act) on confidentiality agreements and similar restrictions continues to require attention. Here is a nice summary and link to the NLRB’s guidance: If You Can’t Say Anything Nice….NLRB General Counsel Releases New Report on Employee Handbook Rules.

Florida:  No sooner was the DTSA enacted, than it was used. On May 16, the first two DTSA complaints (both in Florida) were filed. See First Round of Defend Trade Secrets Act Complaints Alleging Misappropriation Activity Both Before and After DTSA’s Enactment: Will They Stick? and Mark Romeo‘s post, Defend Trade Secrets Act Gets Early Test In Florida Suit

California:  A recent case in the Northern District of California, Gatan, Inc. v. Nion Company, focuses on a very common question: What exactly is the scope of the trade secrets exception to California’s ban on noncompetes under 16600? ! See No Microscope Needed to See Why This Non-Compete Is Unenforceable

Connecticut:  On June 2, 2016, Governor Malloy signed Public Law 16-95, An Act Concerning Matters Affecting Physicians, Health Care Facilities and Medical Foundations, into law. Thank you to Matthew Curtin of Littler for the update.

In sum, the new law – applicable only to noncompetes entered into on or after July 1, 2016 – limits physician noncompetes to one year in duration and “fifteen miles from the primary site where such physician practices,” (which is defined in the statute). In addition, any such noncompete is enforceable only if (essentially) the physician left on his/her own volition or was terminated for cause.

Illinois:  Although Illinois is a “reformation” state (i.e., Illinois law permits a court to correct an overly-broad noncompete to render it enforceable, a recent case provides a good reminder that the courts do still expect employers to make an effort to draft properly-tailored agreements. See Illinois Court Refuses to Blue Pencil Non-Compete Agreement.

Massachusetts:  Trade secret jury awards tend to be few and far between. However, in May, a Massachusetts federal court jury awarded $70 million to a plaintiff in a trade secret lawsuit against a medical device manufacturer. See Edwards unit wins $70 mln verdict in heart valve trade secrets case.

Massachusetts:  On May 16, the Joint Committee on Labor and Workforce Development, co-chaired by Senator Daniel Wolf and Representative John Scibak, favorably reported out a modified version of the noncompete bill outlined by House Speaker Robert DeLeo. Most notably, the bill includes two significant additions: (1) the requirement that all noncompetes qualify as garden leave agreements (i.e., the employee is paid a certain amount during the term of the restriction) and (2) a switch from the current reformation approach for overly-broad noncompetes to the red-pencil approach. A summary of the noncompete aspects of the bill can be found here: Bill to limit noncompete deals includes a surprise catch. See also comments by the Associated Industries of Massachsuetts (AIM).

In addition, the bill contains the version of the Uniform Trade Secrets Act submitted by Steve Chow on behalf of the Uniform Law Commission and reflecting my input revising certain aspects of the earlier draft that I thought would make trade secrets harder to protect in Massachusetts.

 New York:  IBM sued its former General Manager for Global Sales of Hybrid Cloud, Louis Attanasio, to enforce a one-year, global noncompete. Attanasio’s new position is Chief Revenue Officer at Informatica. Remember Amazon v. Powers? Amazon likely learned from its mistakes. Prior to the hearing on the motion for a preliminary injunction, the parties reached a settlement in principle and notified the Court. The case remains pending. See IBM Takes Former Hybrid Cloud Sales Head to Court Over Non-Compete and IBM Sues Former Sales Head for Cloud Computing, Seeks $500K and Injunction.

South Carolina:  Normally, noncompetition agreements entered into in connection with the sale of business are given much more latitude than noncompetes entered into in connection with an employment relationship. However, in a case in South Carolina, Palmetto Mortuary Transport, Inc. v. Knight Systems, Inc., the South Carolina Appeals Court invalidated a noncompete in the mortuary business because the 150-mile radius was too large – despite the buyer’s “tentative” intent to expand the business geographically (to over 150 miles). The Court explained,

South Carolina does not follow the “blue pencil” rule and, thus, “restrictions in a non-compete clause cannot be rewritten by a court or limited by the parties’ agreement, but must stand or fall on their own terms.” Poynter Invs., Inc. v. Century Builders of Piedmont, Inc., 387 S.C. 583, 588, 694 S.E.2d 15, 18 (2010).

Note that the court in Poynter Invs., Inc. rejected the “blue pencil” rule by name, but actually rejected the reformation approach. 

Thanks to Jonathan Crotty and Michel Vanesse of Parker Poe Adams & Bernstein LLP for identifying the case in South Carolina Court of Appeals Says 150-Mile Geographic Restriction in Non-Compete is Unreasonable.

Texas:  One of the ongoing issues for interstate litigation in noncompete cases (and, of course, many other types of cases) is choice of law. Recently, in Merritt, Hawkins & Associates, LLC v. Caporicci, the Dallas Court of Appeals refused to enforce a Texas contractual choice of law provision in a noncompete, where the employee was located in California. See Choice-of-Law Provision in Employment and Non-Compete Agreement Disregarded.

Texas:  Trade secrets trials often present a significant challenge for the court of how to balance of a defendant’s right to due process, the public’s right of access, and a plaintiff’s right to protect its trade secrets. For a nice discussion of a recent Texas case and the takeaways, see Practical Tips: Keeping Trade Secrets Safe During Litigation – Texas Supreme Court Editionand United States: Texas High Court Finds Texas Uniform Trade Secrets Act Can Exclude Opposing Party From Injunction Proceedings.

Texas:  The Texas Court of Appeals in Corpus Christi invalidated a liquidated damages clause as violating Texas’s noncompete law. See The Far-Reaching Claws of the Texas Non-Compete Statute.

Other Noteworthy News…

Half of employees who left or lost their jobs in the last 12 months kept confidential corporate data, according to a global survey from Symantec (Nasdaq: SYMC), and 40 percent plan to use it in their new jobs. The results show that everyday employees’ attitudes and beliefs about intellectual property (IP) theft are at odds with the vast majority of company policies.

Employees not only think it is acceptable to take and use IP when they leave a company, but also believe their companies do not care. Only 47 percent say their organization takes action when employees take sensitive information contrary to company policy and 68 percent say their organization does not take steps to ensure employees do not use confidential competitive information from third-parties. Organizations are failing to create an environment and culture that promotes employees’ responsibility and accountability in protecting IP.

Defend Trade Secrets Act versus the UTSA

iStock_000046188094_FullThe Defend Trade Secrets Act (DTSA) is now law of the land, and the United States now (officially) has a national trade secrets law with a concomitant private civil right of action.

Specifically, the DTSA amends the Economic Espionage Act to create a private right of action based on the Uniform Trade Secrets Act (UTSA). The UTSA has been adopted in 47 states (48, if you count North Carolina’s version) – all but Massachusetts and New York. That said, the formulations of the act as adopted vary significantly among the states that have adopted it. See Sid Leach’s Anything but Uniform: A State-By-State Comparison of the Key Differences of the Uniform Trade Secrets Act

Nevertheless, given that the new federal trade secrets law (technically, the new private right of action, as the EEA has been around since 1996) is based on the UTSA, a comparison of the key provisions is worth a look.

Accordingly, below is a side-by-side comparison of the key provisions (from slides I prepared for a few seminars/webinars I gave on the DTSA). All language changes are indicated through the key; if there is no key, there are no language changes. (Click the slides to see larger.)

 

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.)

Summary

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.)

Background

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.