The New ‘Defend Trade Secrets Act’ Is The Biggest IP Development In Years (Forbes Cross-Post)

Last week, Congress passed the Defend Trade Secrets Act (the DTSA), which President Obama will sign soon. The Defend Trade Secrets Act extends the current Economic Espionage Act of 1996, which criminalizes certain trade secret misappropriations, to allow civil lawsuits. This gives trade secret owners a new and powerful option to bring trade secret lawsuits using federal law, whereas before only state law authorized their lawsuits. While creating a new federal trade secret claim to complement existing state law may sound more procedural than substantive, the DTSA actually has major consequences for intellectual property law and for our economy. This post highlights six implications.

1) The DTSA affects everyone. Many businesses regard trade secrets as their most important intellectual property assets, so any change to trade secret law is a big deal. But the DTSA has an unusually broad reach, and you are likely to encounter the law many times each day. Trade secret issues arise with every employee hiring and firing, in every business contract containing a non-disclosure or confidentiality clause, and every time an employee discusses the company’s business with a business partner, the public or friends and family. The DTSA now governs all of these activities. Because of this broad reach, I rank the DTSA as the single most important intellectual property development since Congress enacted the America Invents Act (AIA) in 2011.

2) The DTSA won’t achieve its stated goals. Congress enacted the DTSA largely due to its anxieties about Chinese corporate espionage and online corporate hacking by cyber-criminals. However, the DTSA does virtually nothing to address either concern. Numerous laws–criminal and civil, and federal and state–already ban such criminal behavior, and the DTSA does not provide any meaningful new relief for victims or deterrents to already-illegal behavior. If Congress hoped the DTSA would stick it to the Chinese government or Eastern European cyber-criminals, it will be disappointed.

The DTSA also was intended to establish a uniform national law of trade secrets to fix the complexities and costs created by the alleged patchwork quilt of state trade secret laws. However, perplexingly, the DTSA leaves all state trade secret laws in place and simply layers a new federal law on top of them. So instead of creating a uniform national law, the DTSA adds more law (and more chaos) to any existing doctrinal messiness in state law.

3) Legal costs will go up. Because of the DTSA/state law overlap, companies will need to understand and conform their practices to both the new and existing law, which increases legal costs for all companies. For example, most trade secret plaintiffs will bring both state and federal trade secret claims in a lawsuit, so the litigants will incur extra costs to research and argue both sets of law. Trade secret litigation is already extremely expensive; according to the AIPLA Report of the Economic Survey 2015, the median cost for a trade secret lawsuit with $1M-$10M at risk is $925k (yes, you read that right–a trade secret lawsuit seeking $1M costs nearly $1M to litigate). Adding the DTSA to the mix will almost certainly increase those costs.

4) Trade secret owners will win more cases. Substantively, the DTSA mostly tracks the Uniform Trade Secret Act. However, because there are some differences, plaintiffs are likely to encounter situations where they can win under one law but not the other. This creates gaming opportunities for plaintiffs. Depending on what choices plaintiffs think gives them the best chance of winning, plaintiffs might bring both state and federal claims (and note the plaintiff wins the lawsuit if either claim succeeds), or they might strategically choose to bring only state or only federal claims. Similarly, plaintiffs can strategically decide if they want to be in federal or state court depending on which increases their chances of winning.

By giving plaintiffs another way to win cases in addition to their existing options, plaintiffs will win more cases. Unfortunately, the increased odds of success will spur more litigation brought for illegitimate or anti-competitive reasons. And because litigation costs will rise, we can expect more “trolling” lawsuits brought solely to extract a settlement that’s cheaper than the high cost of litigation. (If some behavior seems implausible, recall that every NDA and confidentiality clause creates a breeding ground for such claims).

5) The law should alleviate pressure on the Computer Fraud & Abuse Act (but won’t). A number of other laws overlap with trade secret laws, such as the Computer Fraud and Abuse Act (CFAA), which restricts the unauthorized downloading of information from computers. In the last decade, employment litigators have increasingly claimed that ex-employees violated the CFAA by emailing company information to themselves (or third parties) or downloading the information to a flash drive. Courts are not always receptive to these claims, but trade secret litigators still bring CFAA claims because (among other things) it helps the plaintiff get into federal court rather than state court. The DTSA now guarantees that trade secret plaintiffs can sue in federal court whenever they want, so plaintiffs won’t need the CFAA as a ticket into federal court. Yet, having already embraced the law, trade secret owners almost certainly will continue to assert CFAA claims against ex-employees on the “might help, can’t hurt” theory. This is another reason Congress should reform the CFAA.

6) No one knows what the ex parte seizure provision will mean. The DTSA contains an unusual provision that lets trade secret owners seek, on an ex parte basis (i.e., without telling defendants), an order to seize allegedly stolen trade secret items in the defendants’ possession. This lengthy provision is a novel experiment; no existing state or federal trade secret law has anything like it. Unfortunately, it creates substantial opportunity for competitive abuse. A trade secret owner might be able to convince a judge to seize a competitor’s key assets and functionally shut down the competitor until the seized assets are released. The ex parte seizure provision contains numerous safeguards to avoid such abuses, but any ex parte procedure is more error-prone than an adversarial proceeding where the targeted party gets to tell its side of the story.

Still, it remains unclear how often plaintiffs will seek ex parte seizures, how often judges will grant the requests, and what consequences will attach to a faulty seizure request. Depending on the answers to those questions, ex parte seizures may become a routine part of every trade secret litigation, or the prolix provision may be completely irrelevant.

BONUS: I’m adding a seventh implication that I should have noted in my original post. The law contains a whistleblower immunity for reporting legal violations to the government, and employers must tell their employees about this immunity “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” Because the notice requirement will ultimately appear in tens of millions of contracts, it’s another example of the law’s broad impact.

My other writings about the DTSA include a lengthy deconstruction of the ex parte seizure provision, an essay questioning why we needed a federal trade secret law at all, and a letter to Congress from over 40 law professors opposing the law.