Mountain Law: New act federalizes trade secrets law for first time (column) | SummitDaily.com

Mountain Law: New act federalizes trade secrets law for first time (column)

Noah Klug
Mountain Law

"Trade secrets" don't have to be technical or complicated. They can include such things as customer lists, marketing information, unpatented inventions, formulas and recipes in addition to other types of information that could provide a company with a business edge. Indeed, they can be almost any type of information from which a company derives economic value by virtue of it not being publicly known or reasonably ascertainable by others — as long as reasonable efforts have been taken to maintain its secrecy.

While it's possible for one company to misappropriate trade secrets from another company — e.g. by reverse-engineering a product — employers are also concerned about their own employees, or former employees, misappropriating trade secrets. This is often addressed by making employees sign non-disclosure agreements (NDAs).

Misappropriating trade secrets is a federal crime under the Economic Espionage Act of 1996. However, until this year, there was no ability to file a civil lawsuit in federal court for misappropriation of trade secrets. Instead, trade-secrets law was handled entirely at the state level.

There was an effort to make the law uniform by encouraging states to adopt similar laws. For instance, Colorado is one of 48 states that have adopted the Uniform Trade Secrets Act (UTSA), which provides a framework for companies to protect their trade secrets. But, even in the case of a uniform law such as UTSA, state court decisions interpreted the statute differently. For larger companies that operate across state lines, this meant there was a patchwork of inconsistent case law to contend with.

For several years, there was a bipartisan effort in Congress to effectively federalize trade secret law. This culminated in President Obama recently signing into law the Defend Trade Secrets Act of 2016 (DTSA). The DTSA essentially adopts much of the framework from the UTSA and makes it possible to file an enforcement action in federal court rather than state court. Theoretically, the DTSA will be applied uniformly nationwide, bringing greater consistency to trade-secrets law. There are also reasons to believe that enforcement in federal court will be faster and more efficient for litigants.

While the DTSA is not an abrupt departure from trade-secrets law as it currently exists in most states, there are differences.

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One difference is the DTSA's civil-seizure provision, which is not available under the UTSA. This provision allows a federal court, following application by a party asserting theft of trade secrets, to order law-enforcement officials to enter land and seize property as needed to prevent the propagation or dissemination of the trade secrets. Such seizures can occur through an "ex parte" process under which they would be authorized and executed without notice to the relevant property owners. Some commentators have raised concerns that such seizure process violates due process and the Fourth Amendment (which prevents "unreasonable searches and seizures"), while others have pointed out that similar processes exist — and have been found constitutional — in the contexts of counterfeit goods and copyright infringement.

The DTSA also provides significant whistleblower protections that did not exist under the UTSA. Specifically, it immunizes from civil and criminal liability under both state and federal law whistleblowers who make a limited disclosure of trade secrets to the government for the purpose of reporting or investigating a suspected violation of the law. It also allows whistleblowers to make a limited disclosure of trade secrets in suits asserting retaliation by an employer for reporting a suspected violation of the law. It does not allow whistleblowers to simply make trade secrets public, even if they do so to expose perceived wrongdoing. Notably, employers should revise their NDAs to provide disclosure of whistleblower rights in order to preserve certain remedies that they might have against wrongful whistleblowers.

In sum, trade secrets law has been federalized under the DTSA, and the true impact remains to be seen.

Noah Klug is owner of The Klug Law Firm, LLC, in Summit County, Colorado. He may be reached at 970-468-4953 or Noah@TheKlugLawFirm.com.