A Federal Trade Secret Cause of Action – the Defend Trade Secrets Act of 2016

Defend Trade Secrets Act – A Federal Trade Secret Cause of Action.

The DTSA establishes a federal civil cause of action for the misappropriation of trade secrets related to a product or service used in, or intended for use in, interstate or foreign commerce.  While Illinois has the ITSA (Illinois Trade Secrets Act), the DTSA has enhanced remedies and Protections which may be useful to employers.  The Act contains a notice provision, so it is important that employers provide employees with written notice of their rights.  Without the notice, the employer losses valuable financial protections under the Act.

The DTSA provides an additional source of intellectual property protection by creating federal question jurisdiction for trade secret misappropriation. Employers may still file actions in the Illinois Circuit Courts under the ITSA.  For employers with employees in multiple states, the DTSA provides a more uniform body of law that can be applied nationwide.  In addition, federal actions have access to broader discovery rules, including the benefit of nationwide subpoena power.

DTSA actions must be commenced within three years after the date on which the misappropriation with respect to which the action would relate is discovered or by the exercise of reasonable diligence should have been discovered.  ITSA actions may be commenced within five years.  (765 ILCS 1065/7).  The misappropriation must occur on, or after, May 11, 2016.  DTSA remedies include Injunctions for actual or threatened misappropriation; ex parte seizure of property in limited circumstances; monetary damages for actual loss and unjust enrichment; and exemplary damages and attorney fees in the case of willful and malicious misappropriation. 

Plaintiff’s must exercise caution as Defendants can recover attorney fees if the suit is filed or prosecuted in bad faith. Victims of wrongful seizure – in the case of ex parte seizure of property – are entitled to damage awards, punitive damages for bad faith, and attorney fees. Ex parte seizure is only permitted where the court finds that the normal Rule 65 TRO or Preliminary Injunction will be ineffective, that irreparable injury will occur without seizure, and that the harm to the applicant in denying seizure outweighs the harm in granting a seizure. The court must also find that the applicant is likely to prevail on the misappropriation issue, that the target of the seizure order has possession of the trade secret, that the property is described with reasonable particularity, that the target will likely hide or damage the property if given notice, and that the applicant has not publicized the requested seizure. If ex parte seizure is granted, a follow-up seizure hearing will be conducted within 7 days or other agreed time.   

Limitations. The DTSA may not be used to prevent a person from entering into an employment relationship. Conditions placed upon any employment shall be based on threatened misappropriation and may not be based on information known by the person.  Finally, a court may not issue an order in conflict with state law prohibiting restraints on professions, trade or business.  The prohibition against conditions based upon a person’s knowledge is a rejection of the “inevitable disclosure doctrine” which is available under ITSA.  See, PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995).  If an action is filed in federal court, give consideration to filing a concurrent ITSA claim to address inevitable disclosures. 

Whistleblower Immunity Notice. Under the DTSA, Whistleblowers are immunized from civil and criminal liability whistleblowers who disclose trade secrets “in confidence to a federal, state or local government official” or to an attorney for the purposes of reporting or investigating a suspect violation of the law or in a court filing under seal. An employer is required to provide notice of the Whistleblower Immunity provision “in any contract or agreement” with an employee, consultant or independent contractor “that governs the use of a trade secret or other confidential information,” entered into or updated after the enactment date of the DTSA. Please be mindful that employee is defined to mean a regular employee, a contractor, and a consultant.  This means that employers must think beyond the people on their payroll.  If notice is not provided, then an employer will not be awarded exemplary damages or attorney fees in a subsequent action against a non-notified “employee.”

Commentators have suggested that the DTSA aims to promote employee mobility by limiting the court’s authority to enjoin a former employee from accepting an offer of employment to those circumstances that involve actual or threatened misappropriations.  In my opinion, this commentary should be muted by the fact that Illinois employers may bring a concurrent state ITSA action in their federal court case. 

THE PEPSICO DECISION

The Seventh Circuit’s decision in PepsiCo, Inc. v. Redmond is considered the prominent case discussing inevitable disclosure after the adoption of the UTSA. PepsiCo brought an action seeking a preliminary injunction against its employee, William Redmond, Jr. (Redmond), from accepting a position with PepsiCo’s competitor, Quaker.34 Redmond, who had been employed with PepsiCo for ten years, had access to PepsiCo’s financial goals and its strategic planning for the upcoming year; consequently, although he signed a confidentiality agreement stating he would not disclose confidential information, PepsiCo was concerned about the secrecy of its trade secrets. This was mainly due to Redmond’s lack of candor regarding accepting the position at Quaker.35  The district court granted an injunction against Redmond from assuming his position with Quaker for a period of five months, and granted a permanent injunction preventing him from using or disclosing PepsiCo’s trade secrets.36 The Seventh Circuit affirmed, determining that the Illinois Trade Secret Act provided injunctive relief for “actual or threatened misappropriation.”37 Ultimately, the court concluded “a plaintiff may prove a claim of trade secret misappropriation by demonstrating that [the] defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.”38 Additionally, the Seventh Circuit found (1) that Redmond possessed intimate knowledge of PepsiCo’s strategic goals, which were trade secrets; (2) that the respected positions were similar and therefore, the knowledge he obtained at PepsiCo would influence his position at Quaker39; and (3) that Redmond’s actions “demonstrated a lack of candor . . . and proof of willingness to misuse [PepsiCo’s] trade secrets,” i.e. bad faith.  However, the court did not expressly state that bad faith must be present before injunctive relief will be granted.  After PepsiCo, the inevitable disclosure doctrine gained popularity; however, despite a workable standard presented by the Seventh Circuit, the states’ applications of the doctrine have remained inconsistent.

Proposed Draft DTSA Whistleblower Notice. You are hereby notified in accordance with the Defend Trade Secrets Act of 2016 that you will not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that: (a) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document that is filed under seal in a lawsuit or other proceeding. You are further notified that if you file a lawsuit for retaliation by an employer for reporting a suspected violation of law, you may disclose the employer’s trade secrets to your attorney and use the trade secret information in the court proceeding if you: (a) file any document containing the trade secret under seal; and (b) do not disclose the trade secret, except pursuant to court order. PLEASE NOTE:  This information is provided as a memo and as a service to any clients or friends of the firm for educational purposes only.  It is not intended to constitute legal advice and it should not be construed or relied upon as legal advice and it may not be used or relied upon to create an attorney-client relationship.

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