Lining up the Massachusetts Senate and House Noncompete | UTSA Bills

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IMG_0017As of last night, Massachusetts has two competing versions of noncompete and trade secrets law reform bills. The House version (H.4434) is described here, and the Senate version (S.2418) (which does not yet reflect the amendments) is described here, with last night’s two amendments summarized here.

This post will compare the two bills.

In addition, I have compared the two bills in track changes here. (I will have a final (cleaned up) comparison after the Senate incorporates the amendments into its bill.)

First the UTSA:  The House version adopts the UTSA submitted by Steve Chow on behalf of the Uniform Law Commissioners, with the the handful of changes that I had suggested. The Senate version is closer to earlier submitted versions. The most significant change is that the Senate version retains the requirement that, in order to pursue a trade secret claim, the trade secret owner must arguably continue to take measures to protect the trade secret’s secrecy – even after the secret has been disclosed and lost all value.

The balance of the bill is the proposal to reform Massachusetts noncompete law.

Both proposals follow the same basic structure and incorporate much of the text proposed early on by Representative Lori Ehrlich and now-Senator Will Brownsberger, when we first started working on it in 2008/09, and as it later evolved.

However, a lot has changed over the years, and the final bills include several provisions that have taken divergent approaches and will now need to be reconciled presumably by the end of the legislative session on July 31.

The key differences needing to be reconciled are as follows:

      •  Effective Date

The House version would become effective on October 1, and apply prospectively.

The Senate version would become effective immediately upon becoming law.

      •  Maximum duration of the restriction

The House version limits noncompetes to 1 year, with the ability to extend to two years in the event of misconduct by the employee.

The Senate version limits noncompetes to 3 months, with the same ability to extend to two years for employee misconduct.

      •  Garden leave

The House version requires that the employee must be paid at the rate of 50 percent of his or her salary during the period he or she is subject to the restriction. This requirement does not apply to any extension based on the employee’s misconduct. In addition, the House version permits the parties to negotiate – in advance – “other mutually-agreed upon consideration” in lieu of the 1/2 salary requirement, and does not require any specific consideration.

The Senate version ups the percentage to 100 percent, uses “earnings” as the base (instead of “salary”), and, while it does permit “other mutually-agreed upon consideration,” it requires that that consideration equal or exceed what would be paid under the 100 percent of earnings test. In addition, it must be negotiated after the fact (i.e., at the end of the employment relationship), not when the noncompete is agreed upon.

      •  Effect of overly-board restrictions

The House version retains current Massachusetts law, permitting a court to revise (“reform”) an overly-broad noncompete.

The Senate version replaces the reformation approach with the red pencil approach, which invalidates an overly-broad noncompete. (Note that it does not invalidate the entirety of the agreement – just the noncompete restriction.)

      •  Exemptions

The House version includes several exemptions (categories of people who cannot be bound by noncompetes). They are:

1.  Nonexempt employees under the Fair Labor Standards Act

2.  Undergraduate or graduate students engaged in short-term employment

3.  Employees who have been terminated without cause or laid off

4.  Employees who are 18 years old or younger

The Senate version adopts the same four exemptions and adds:

1.  Employees whose average weekly earnings are less than twice the Massachusetts average

2.  Independent contractors

      •  Definition of Employee

The House version adds “independent contractors” to the statutory definition of employees.

The Senate version removes the reference, and relies only on the statutory definition of employee (which is quite broad).

      •  Periodic Review

The Senate version adds a requirement (not in the House bill) that the noncompetition agreement be reviewed every three years.

      •  Notice of Intent to Enforce

The Senate version adds a requirement (not in the House bill) that, within 10 days following the termination of the employment relationship, the employer must notify the employee in writing of its intent to enforce the agreement. This requirement does not apply, however, in the event of employee misconduct.

      •  Jurisdiction and Venue

The House version requires that any action be brought in the county in which the employee resides or (by agreement) Suffolk County. Further, if brought in Suffolk County, then the Superior Court (including the BLS, i.e., the Business Litigation Session) has exclusive jurisdiction. (The exclusive jurisdiction provision, on its face, would prohibit the filing in federal court; albeit such a provision is very likely ineffective.)

The Senate version removes the exclusivity requirement.

 

Stay tuned!

 

Massachusetts Senate Votes for Tough Noncompete Bill and Adoption of Uniform Trade Secrets Act

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IMG_0017The Massachusetts Senate voted tonight on Massachusetts trade secrets law and noncompete law reform.

Senators proposed multiple amendments to the version of the bill that Senator Mark Montigny, on behalf of the Massachusetts Senate Committee on Rules, recommended on Tuesday.

The details of the Rules Committee’s version are in Tuesday’s post: Massachusetts Noncompete Bill Enhanced By Senate.

No surprise, the Senate passed the Rules Committee’s version of the bill, with only a few material changes. Those changes are as follows:

(1) The bill now requires that “To remain valid and enforceable, the employer shall review a noncompetition agreement with the employee not less than once every three years.” (In the prior bill, it was once every five years.)

(2)  The garden leave was revised to make clear that it is intended to require the payments on a pro rata basis for the duration of the restriction, rather than having to pay a full year’s salary.

The bill now goes to committee. That process will need to be completed quickly, as the legislative session ends on July 31.

Stay tuned!

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

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

(My apologies to those who received an email update with a draft of this post.)

Also, note that the Changing Trade Secrets | Noncompete Laws has been updated, and is regularly updated.

Federal (9th Circuit):  One of the most-watched decisions involving the Computer Fraud and Abuse Act may have finally come to an end with a recent 9th Circuit decision issued on July 5. See Ninth Circuit Affirms Nosal Computer Crime Conviction in Key CFAA Ruling

Federal (8th Circuit):  On July 6, the 8th Circuit overturned the Western District of Missouri’s decision in Symphony Diagnostic Services No. 1 Inc. v. Greenbaum and held that a noncompete – despite arguments that it is a personal services contract and therefore cannot be assigned without the employee’s approval – could be assigned. The rationale for the ruling was essentially that the noncompete prohibits the employee from acting, as opposed to requiring the employee to act (which is the basis for not allowing the automatic assignment of personal services contracts). See Noncompete Agreements Can Pass From One Company to Next

Federal (California):  The first case to issue an injunction under the Economic Espionage Act’s new private right of action was on June 10 in the Northern District of California in Henry Schein, Inc. v. Cook.

Federal (New York, Criminal):  On June 14, Xu Jiaqiang, a Chinese national, had been arrested last year in a sting operation, was indicted for espionage on by stealing source code (presumably from IBM) on behalf of the People’s Republic of China. See Former IBM software developer accused of espionage

California: A particularly interesting (perhaps only to me) area of trade secrets law involves the intersection of trade secrets law with lawyer ethical obligations. That issue will likely be playing out in a case in Adelson, Testan, Brundo, Novell & Jimenez v. Misa Stefen Koller Ward LLP, No. 30201600850385CUBTCJC, Superior Court of California, County of Orange. See Lawyers Who Departed Call Trade Secret Lawsuit by Former Firm “Vindictive” and “Baseless” and Ask Court to Throw Out All ClaimsFirm Accuses Ex-Partners of Stealing Clients, Trade Secrets

California:  Alphabet has been sued in Federal Court in San Jose for allegedly stealing the idea to use weather balloons to provide wireless service to rural areas. Google accused of stealing idea for Project Loon

California:  California’s drought problems are no secret, but how much water is used by any individual is. There is now a bill that would change that (for businesses). Bill targets secrecy in California water data

Illinois:  Not to be outdone by New York Attorney General Eric Schneiderman‘s investigation of Jimmy John’s (see below), Illinois Attorney General Lisa Madigan filed a lawsuit against Jimmy John’s on June 8. See The Illinois AG’s Suit Against Jimmy John’s On Non-Competes – What It Means For EmployersAttorney General Madigan Sues Jimmy John’s over Non-Compete Agreements.

Illinois:  On June 29, a bill (the Illinois Freedom to Work Actto ban the use of noncompete agreements for low wage workers (i.e., those earning less than $13.50/hour) was sent to Governor Rauner on June 29.

Illinois:  On April 7, in Allied Waste Services of North America, LLC v. Tibble (Ill. N.D. April 7, 2016), another judge joined the majority of federal case law in Illinois rejecting the requirement established in Fifield v. Premier Dealer Services, Inc., 993 N.E.2d 938 (Ill. App. Ct. 2013), that absent other consideration, an employee noncompete must be supported by at least two years of employment. (Thanks to Thadford A. Felton of Greensfelder Hemker & Gale for identifying the case.) 

Massachusetts:  On June 30, the Massachusetts House of Representatives passed a revised version of the noncompete bill reported out of the the Joint Committee on Labor and Workforce Development. The current bill still 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, but includes significant additions to the version of the bill recently reported out by the Joint Committee on Labor and Workforce Development.

An interesting commentary by Michael Gilleran, author of the bible on 93A, argues that the UTSA (assuming it is ultimately signed into law in its present form) will preempt G.L. c. 93A (the Massachusetts unfair competition statute), insofar as 93A applies to the misappropriation of trade secrets. See Will 93A continue to apply to trade secrets — and should it? (paid subscription). (Mike focuses on Peggy Lawton Kitchens v. Hogan, 18 Mass. App. Ct. 937 (1984) and its progeny, though its application is not without question when it comes to misappropriation by former employees (which, as a group, are the greatest risk factor for misappropriation). See Massachusetts Trade Secret Protections Are Given Big Boost.) In making his argument that 93A is preempted, Mike relies, in part, on the extensive comments that accompanied the version of the Uniform Trade Secrets Act submitted by Steve Chow on behalf of the Uniform Law Commissioners.

However, although the text of the Steve’s version of the UTSA (with my handful of changes) was passed by the House, the comments (while very helpful generally – and definitely worth a read) were not included. Accordingly, their impact is of questionable significance.

Regardless, as Mike also notes, the practical impact when it comes to the availability of treble damages is likely quite limited. Noting the requirements of “willful and malicious” in the UTSA (as opposed to only “willful” or “knowing” in 93A), Mike states:

[T]he term “malicious” in the Massachusetts UTSA is to be interpreted as it would be under Massachusetts law, which has a longstanding history of equating the term malicious with the term willful: “Whatever is done wilfully and purposely, if it be at the same time wrong and unlawful, and that known to the party, is in legal contemplation malicious.” Wills v. Noyes, 29 Mass. 324, 327-328 (1832), cited in Chervin v. The Travelers Ins. Co., 448 Mass. 95, 109 (2006).

Therefore, because the term malicious under Massachusetts law is legally equivalent to the term willful, the “willful and malicious” test for triple damages under the UTSA should be the same as the “willful and knowing” test for triple damages under 93A.

Mike also notes that the same “willful and malicious” standard applies to an award of attorneys’ fees under the UTSA and that it will “make an award of attorneys’ fees under the UTSA only somewhat harder to obtain than under 93A.”

In a separate post discussing the bill, Mark Muro of the Brookings Institution takes the position that Massachusetts should limit noncompete pacts to spur growth. In a similar vein, see the June 28 article by Steven Lohr of the New York Times, To Compete Better, States Are Trying to Curb Noncompete Pacts

New York:  On June 22, New York Attorney General Eric Schneiderman concluded his year and a half  investigation of Jimmy John’s sandwich shops’ use of noncompetes with an announcement of a settlement. As a result, Jimmy John’s will no longer include sample noncompetes in the hiring packets it sends to its franchisees.

New York:  On June 15, New York Attorney General announced a settlement with Law360 (a subsidiary of LexisNexis), as a result of which, Law360 will no longer use noncompetes for its editorial employees, with the exception of top executives.  See New York Blows Up Company’s Non-Compete Policy in Warning to Employers.

Ohio:  On June 28, Abercrombie & Fitch sued a former marketing executive, Craig Brommers, who took a marketing job at the Gap. Claiming that part of Brommer’s job at Abercrombie was to differentiate its products from those of the Gap and that Brommers received confidential information to do so, Abercrombie seeks to enforce his 12-month noncompete. See Abercrombie Says Gap Poached Its Executive.

Wisconsin:  Wisconsin, one of the handful of red pencil states, is know for being generally hostile to noncompetes. Yet, maybe the tide is turning. Proposed legislation to replace the red pencil rule with the reformation rule (and other changes) aside (see Changing Trade Secrets | Noncompete Laws), a recent judicial decision took a surprisingly permissive approach in Schetter v. Newcomer Funeral Service Group, Inc. In addition to not invalidating a the arguably-overbroad noncompete (that was the surprising part), the court also found that a $1,000 payment for the noncompete was good consideration for a noncompete. For a good discussion of the case, see Fisher PhillipsJoseph Shelton‘s discussion, Wisconsin Court Throws Out Choice-of-Law Provision, Then Enforces a Non-Compete Anyway

Other Noteworthy News…

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

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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

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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…)

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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

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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.

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