Gottschlich & Portune, LLP

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1 Defense of Trade Secrets Act of 2016 Martin A. Foos June 9, 2017 Gottschlich & Portune, LLP 1

2 Defense of Trade Secrets Act of 2016 Effective May 11, 2016 Previous attempts to pass the Act in 2013, 2014, and 2015 Amends and expands the Economic Espionage Act Largely tracks the Uniform Trade Secrets Act, with some key differences 2

3 Why a federal trade secrets law? Greater uniformity (choice of law is usually the state where the misappropriation occurred) Potentially strengthens the available remedies Nationwide subpoena power and nationwide enforcement International trade agreements 3

4 Federal Civil Action An owner of a trade secret that is misappropriated may bring a civil action under this subsection 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) 4

5 Federal Question Jurisdiction No need for diversity Potential for federal jurisdiction in many breach of contract, employee disputes, and non-compete cases 5

6 No Preemption of State Law DTSA does not preempt state law (including the UTSA) Nothing in the amendments made by this section shall be construed to... preempt any other provision of law. 6

7 State or Federal Court Trade secret owners have alternative options to protect their IP (1) bring trade secret action in federal court under DTSA (where the trade secret owner could also potentially bring state law claims in federal court) or (2) bring state law trade secret claims in state court 7

8 Definition of Trade Secret All forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, 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 (similar to Ohio Rev. Code (D)) 8

9 Definition of Misappropriation (A) Acquiring a trade secret that was knowingly acquired through improper means, or (B) Disclosing or using a trade secret, without consent, knowing either (1) that it is a trade secret (even if acquired by mistake), or (2) that it was acquired through improper means. ( Knowing includes should have known ) 18 U.S.C (nearly identical to Ohio Rev. Code (B)) 9

10 Improper Means Includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means. Does not include reverse engineering, independent derivation, or any other lawful means of acquisition. 18 U.S.C (first part is the same as Ohio Rev. Code (A); second part is from the comments to the Uniform Act) 10

11 Remedies Civil Seizure Injunctions Compensatory Damages Exemplary Damages Attorney s Fees 11

12 Civil Seizure DTSA permits a court to enter an ex parte order providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret Powerful, but stringent requirements 18 U.S.C. 1836(b) 12

Requirements Affidavit or verified complaint Extraordinary circumstances Rule 65 injunction would be inadequate Immediate and irreparable harm Balance of harms between parties and third parties

13 Requirements Affidavit or verified complaint Extraordinary circumstances Rule 65 injunction would be inadequate Immediate and irreparable harm Balance of harms between parties and third parties Likelihood of success on the merits Person possesses the trade secret to be seized Application describes with particularity the items to be seized Person would destroy, move, hide, or otherwise make matter inaccessible to the court if the applicant were to proceed with notice Applicant has not publicized the requested seizure 13

14 Elements of Order Findings of fact and conclusions of law Narrowest seizure of property necessary with least disruption to others Prohibition of access to seized property by applicant and misappropriator Prohibition of copies of trade secret 14

15 Elements of Order, continued Guidance to law enforcement regarding scope of authority, including: hours when seizure may be executed whether force may be used to access locked areas Notice of seizure hearing (within 7 days) Bond Protections from publicity 15

16 Execution of Seizure Order Seizure must be made by federal law enforcement officer Court may allow state or local law enforcement to participate At the request of law enforcement, court may allow independent technical expert to participate Applicant or agent of the applicant may not participate 16

17 Materials in Custody of Court Court retains custody of all materials seized Seized material not to be connected to a network or the Internet without both parties consent Court must protect the confidentiality of unrelated matter Court may appoint special master to sort between trade secret and unrelated matter and to return unrelated matter Interested party may file motion to have seized materials encrypted 17

18 Seizure Hearing Must be held within 7 days Applicant bears the burden of proof Others may move to modify or dissolve seizure order Court may expedite discovery 18

19 Wrongful Seizure Person who suffers damage from wrongful or excessive seizure has a cause of action against the applicant Entitled to recover damages as may be appropriate, including damages for lost profits, cost of materials, loss of good will, and punitive damages in instances where the seizure was sought in bad faith, and,... a reasonable attorney's fee, plus prejudgment interest Bond posted is not an upper limit on damages 19

20 Injunction To prevent actual or threatened misappropriation If deemed appropriate by the court, to require affirmative actions to be taken to protect the trade secret In exceptional cases that render an injunction inequitable, to condition future use of the trade secret upon payment of a reasonable royalty 20

21 Different from Ohio Trade Secret Act OTSA states when the injunction will terminate When trade secret ceases to exist Reasonable additional time to eliminate commercial advantage to misappropriator DTSA prohibits injunctions that: Prevent a person from taking a new job (Any conditions on employment must be based on evidence of threatened misappropriation not merely on information person knows) Conflict with state law prohibiting restraints on the practice of a lawful profession, trade, or business 21

22 Compensatory Damages Damages for actual loss caused by the misappropriation; and Damages for unjust enrichment to the extent that it is not addressed in computing damages for actual loss OR Reasonable royalty 22

23 Different from Ohio Trade Secrets Act Ohio includes and exception to damages to the extent that a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation renders a monetary recovery inequitable Ohio requires any royalty award to be equitable under the circumstances considering the loss to the complainant, the benefit to the misappropriator, or both Ohio Rev. Code (A) 23

24 Exemplary Damages For willful and malicious misappropriation Not more than two times the amount of compensatory damages 18 U.S.C. 1836(b) (Ohio Rev. Code puts limit at three times compensatory damages) 24

25 Attorney s Fees Bad faith or willful misappropriation Prevailing party 18 U.S.C. 1836(b) (nearly identical to Ohio Rev. Code ) 25

26 Statute of Limitations Three years from date of discovery or date when should have been discovered Continuing misappropriation is a single claim of misappropriation Ohio has four year statute of limitations (Ohio Rev. Code ) 26

27 Whistle Blower Immunity Immunity from liability for confidential disclosure of a trade secret to: a. the Government or b. in a Court Filing (made under seal) 18 U.S.C

28 Employee Notice of Whistle Blower Immunity "An employer shall provide notice of the immunity set forth in this subsection in any contract or agreement with an employee that governs the use of a trade secret or other confidential information." 28

29 Effective Date The notice must be given as part of all "contracts and agreements that are entered into or updated after" May 11,

30 Definition of employee Includes "contractors" and "consultants" 30

31 No exception for small employers 31

32 Penalty for Not Including the Notice The company will not be able to assert claims for exemplary damages or seek attorney's fees on any federal trade secret claim it would bring against the employee. 32

33 Early precedents 33

34 Questions and Discussion Martin A. Foos Gottschlich & Portune, LLP 201 E. Sixth Street Dayton, Ohio

Trade Secrets Acts Compared to the UTSA

Trade Secrets Acts Compared to the UTSA UTSA Version Adopted 1985 version 1985 Federal 18 U.S.C. 1831-1839 Economic Espionage Act / Defend Trade Secrets Act Preamble As used in this [Act], unless the context requires otherwise: 1839. Definitions