Businesses often have confidential information that they want to protect from competitors or other parties that could use the information to the business’ detriment. Such “trade secrets” can include formulas, recipes, customer data, manufacturing processes and other information. Trade secret law provides a way for owners to obtain legal recourse from someone misappropriating those secrets. What constitutes a trade secret, however, is not always easy to understand. Parties must be aware of the rules, as well as how to protect their rights in the case of misappropriation.
How Are Trade Secrets Protected?
Both federal and state law protect trade secrets. On the federal side, the law is called the Defend Trade Secrets Act of 2016 (DTSA). Under the DTSA, the “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.”
Most states have adopted some version of the Uniform Trade Secrets Act (UTSA), although New York relies on common law to protect trade secrets. The requirements for bringing an action can vary from state to state. Notably, federal law does not preempt state law so a party can bring claims under both federal and state law.
What Qualifies as a Trade Secret Under the DTSA?
The DTSA defines a trade secret as “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.” In addition, to qualify as a trade secret, the owner must have taken reasonable measures to keep the information secret, the information must have an independent economic value from being not disclosed, and the information must not be readily ascertainable by someone else who can obtain economic value from disclosing or using it.
Courts look at various factors in determining whether the information is a trade secret, including whether the information is known outside of the business, its value to the owner and its competitors, the effort or money spent in developing the information, the difficulty for others to get or create the information and the actions taken to guard the secrecy of the information.
What Constitutes Misappropriation Under The DTSA?
The DTSA defines misappropriation as follows:
(A) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
(B) Disclosure or use of a trade secret of another without express or implied consent by a person who:
(i) Used improper means to acquire knowledge of the trade secret;
(ii) At the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was:
(I) Derived from or through a person who had used improper means to acquire the trade secret;
(II) Acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or
(III) Derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or
(iii) Before a material change of the position of the person, knew or had reason to know that:
(I) The trade secret was a trade secret; and
(II) Knowledge of the trade secret had been acquired by accident or mistake.
18 U.S.C. § 1839(5).
Essentially, courts examine the circumstances surrounding how the trade secret was obtained. There must have been something improper, such as fraud, theft, or other facts showing that the defendant knew or had reason to know that the information was a trade secret or that there was a duty to maintain the secrecy of the information.
Note that the DTSA also requires that the trade secret be used in interstate commerce.
Requirements for a Successful Lawsuit
To bring a successful misappropriation claim, the owner of the trade secret must allege, with sufficient facts, how the information qualifies as a trade secret. The owner of the trade secret, however, can ask the court for permission to file the complaint, setting forth these facts, “under seal” to keep its trade secret private.
What Remedies Are Available Under the DTSA?
The DTSA gives an owner a range of remedies in misappropriation cases, including monetary damages and other relief.
Owners can obtain monetary damages to compensate them for the economic harm they suffered. This includes the recovery of direct losses and any profits the defendant made from the trade secret. The owner may also obtain a reasonable royalty for the unauthorized disclosure or use of the trade secret.
If the trade secret was willfully and maliciously misappropriated, the owner may receive exemplary damages up to two times the amount of the damages.
Where appropriate, the court may also issue an injunction to prevent any actual or threatened misappropriation. A defendant may be ordered to cease further use or disclosure of the trade secret. However, there are limitations in using an injunction in the employment context to stop a former employee from revealing trade secrets to their new employer. The injunction cannot prevent the former employee from entering an employment relationship and any conditions on employment must be based on specific evidence of threatened misappropriation.
Application for a Seizure Order Without Notice to the Other Party
The DTSA allows a trade secret owner to seek an “ex parte” seizure order to prevent the propagation or dissemination of the trade secret while the case is pending. This means the trade secret owner can file an application for seizure with the court without the court seeking the input from the party who is alleged to have misappropriated the trade secret. Seizure is only permitted in “extraordinary circumstances” and ex parte seizure is not granted as a matter of course. The owner, however, may also pursue seizure using other methods if certain requirements are met.
A prevailing party may be awarded attorneys’ fees where the other party acted in bad faith in misappropriating the secret, bringing the claim of misappropriation, or making or opposing a motion to terminate an injunction.
The DTSA provides for criminal and civil immunity for employees, consultants and contractors who are whistleblowers.
Statute of Limitations
The DTSA has a statute of limitations of three years to bring a claim. It begins to run when the misappropriation is discovered or, with the exercise of reasonable diligence, should have been discovered.
Business owners have a compelling reason to protect their trade secrets, but the law can be complex. Best practice is to consult an attorney regarding what types of information constitute a trade secret and how to best protect this information.
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