The Defend Trade Secrets Act of 2016 (DTSA) created a uniform federal trade secret law on May 11, 2016, in addition to the existing state trade secret laws. The DTSA is important for non US companies because it provides a stronger enforcement mechanism, is applicable against foreign companies, and offers additional options in seizing competitors’ products on an expedited basis.
What Qualifies as Trade Secret under the Act
To bring an action for misappropriation under the Act, the information allegedly misappropriated must qualify as trade secrets. Trade secrets include confidential, protected information that has economic value. They are specifically defined as “all forms and types of financial, business, scientific, technical, economic, or engineering information … if (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value … from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.” 18 U.S.C. § 1839 (emphasis added).
Misappropriation of trade secrets, however, does not include information obtained from “reverse engineering, independent derivation, or any other lawful means of acquisition.” Id. Therefore, if a competitor independently develops a technology similar to your company’s trade secret, there is no misappropriation. Indeed, if that competitor also obtains a patent for the technology, it could sue your company for patent infringement for using the same technology. Accordingly, companies should develop a comprehensive strategy to manage both trade secrets and patents depending on various considerations, such as the technology at issue, how easily it can be developed or reverse-engineered, and the value and life span of the technology.
International Reach of the Act
Under the DTSA, “an owner of a trade secret that is misappropriated may bring a civil action … if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” 18 U.S.C. § 1836(b)(1). Thus, it is possible to bring an action for acts of trade secret misappropriation that occur outside the United States. For acts occurring outside the United States, an owner of the trade secret may sue under the DTSA only if (1) “the offender is … a citizen or permanent resident alien of the United States, or an organization organized under the laws of the United States or a State or political subdivision thereof” or (2) “an act in furtherance of the offense was committed in the United States.” 18 U.S.C. § 1837 (emphasis added).
Part (1) focuses on who is the offender. Under this part, a plaintiff may sue an offender if the offense occurred outside of the United States, but only if the offender “is a citizen or permanent resident alien of the United States” or the offending company is “organized under the laws of the United States or a State or political subdivision thereof.” Id.
But part (2) focuses on the offense, and under this part, a foreigner or foreign company, who would not have been liable under part (1), can be liable, if the foreigner or foreign company acted “in furtherance of the offense” in the United States. For example, if a foreign company sold products containing stolen trade secrets to a U.S. company, and the foreign company knows or has reason to know the trade secret was stolen, then the foreign company can be sued in the U.S. under the DTSA. 18 U.S.C. § 1839 (5)(A).
Under the DTSA, a non-US company can sue in the U.S. for trade secret misappropriation against any person or company that stole its trade secrets, even if the perpetrators are not based in the U.S., so long as the perpetrators sold products to the U.S. incorporating the stolen trade secrets, or committed any other acts in the U.S. to use or disclose the trade secret.
However, the DTSA’s international reach is not unlimited, because, as with every other legal action in the U.S., the court must have personal jurisdiction over the offender. Under the U.S. Constitution, a federal district court has personal jurisdiction over a defendant only if he or she has “sufficient minimum contacts” with the forum state where the complaint arises, such that the exercise of jurisdiction “will not offend traditional notions of fair play and substantial justice.” In other words, the defendant has to have certain contacts with the forum state, and such contacts can include, for example, selling products into the state, conducting business in the state, having agents or employees in the state, or directing sales and marketing activities to residents of the state.
III. Claims that Arise under the Patent Law and the DTSA can be Brought Together in a Federal Court
Trade secret actions at times accompany patent infringement actions. Before the DTSA was enacted, without diversity jurisdiction (e.g., when two foreign companies both are incorporated in the same state, often in California), in order to bring both patent infringement and trade secret misappropriation claims in a federal court, a plaintiff needed to show that the trade secret and the patent claims “derive from a common nucleus of fact.”
Under the DTSA, however, a plaintiff can bring both trade secret and patent claims in a single suit in a federal court without the need of showing the claims “derive from a common nucleus of fact.” Thus, the DTSA benefits plaintiffs who could not have met the “common nucleus of fact” requirement and allows them to bring both causes of action in the same case. This can help reduce the cost of litigating the different causes of action in different courts.
Bringing both patent and trade secret claims in the same court has an additional benefit—making it more difficult for a defendant to stay court proceedings in favor of an inter partes review (IPR) proceeding. IPRs are an often-used proceeding to challenge the validity of a patent at the United States Patent and Trademark Office (USPTO). A defendant may ask the court to stay an ongoing litigation pending the outcome of an IPR proceeding. By bringing a suit including both trade secret and patent infringement claims, a court is less likely to stay the litigation in favor of an IPR proceeding because the issues arising from the trade secret claims likely will not be affected by the IPR proceeding.
Ex Parte Seizure
An important aspect of the Act is that it makes ex parte seizures available “to prevent the propagation or dissemination of the trade secret,” but only in extraordinary circumstances. 18 U.S.C. § 1836. The plaintiff bears the burden of showing eight factual and legal requirements before the court can issue an ex parte seizure order. Id. In particular, the court must find the following: (1) another form of equitable relief would be inadequate; (2) an immediate and irreparable injury will occur if such seizure is not ordered; (3) the harm to the plaintiff outweighs the harm to the person whose property would be seized and substantially outweighs the harm to any third parties who may be harmed by such seizure; (4) the plaintiff is likely to succeed on the merits; (5) the person against whom seizure would be ordered has actual possession of the trade secret and the property to be seized; (6) the plaintiff describes the property to be seized with reasonable particularity; (7) the person against whom seizure would be ordered would destroy, move, hide, or otherwise make such matter inaccessible to the court, if the plaintiff were to proceed on notice to such person; and (8) the plaintiff has not publicized the requested seizure. See 18 U.S.C. § 1836. Because of these extensive requirements, many of which will be difficult to prove except in extreme cases of misappropriation, an ex parte seizure is unlikely to be ordered frequently.
In summary, the DTSA has potentially broad reach to foreign companies and persons, but the exact scope and effectiveness are yet to be tested. The Act can be beneficial to plaintiffs who otherwise could not have brought trade secret misappropriation claims in federal courts before, particularly when patent infringement claims are involved or if the defendants are companies outside of the U.S. At the same time, it may increase the risk that foreign companies will be called into courts in the United States, to defend themselves against allegations of trade secret misappropriation.
Therefore, as plaintiffs, non-US companies need to protect their proprietary and confidential information in a way that makes the DSTA a strong mechanism for enforcement when the need of protecting itself, protecting its customers, or deterring competitors’ misappropriation, arises. As possible defendants, non-US companies also need to be aware of such risks in hiring new employees, avoiding the use of confidential information of another party in developing technologies, and in formulating its patent and trade secret strategies.
Gary C. Ma and Howard Herr, Ph.D. – copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article was originally published in Commercial Times on September 13, 2016