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Proposed U.S. and EU trade secret laws could create more tools to protect your valuable information

Proposed U.S. and EU trade secret laws could create more tools to protect your valuable information

Important changes to trade secret law are brewing, potentially giving corporate clients more options than ever before to protect their information

Both at home and abroad, important changes to trade secret law are brewing, potentially giving corporate clients more options than ever before to protect their valuable confidential and proprietary information.

In the United States, the Defend Trade Secrets Act of 2014 represents the closest Congress has ever come to passing a federal trade secrets law, which would supplement the various state versions of the Uniform Trade Secrets Act (currently applicable in 48 of the 50 states), provide some powerful new remedies not included under state law, and give non-diversity plaintiffs the strategic option of filing in federal court.

Meanwhile, across the Atlantic, the European Union is in the process of adopting rules to establish broad safeguards for corporate trade secrets and explicit penalties for trade secret theft for the very first time. The move by the European Commission, the EU’s executive body, to harmonize and toughen its member-countries’ trade secret laws comes after decades of lax protection and mounting frustration on the part of companies doing business in Europe.

Accordingly, inside and outside counsel should keep tabs on the progress of both these important developments to trade secret law as they craft strategy to protect their clients’ trade secret information both domestically and internationally, and as they prosecute specific instances of theft in court.

Proposed federal trade secret law could provide potent new weapons

The proposed federal Defend Trade Secrets Act (DTSA), introduced in the Senate in April by Senators Chris Coons (D-Del.) and Orrin Hatch (R-Utah), may finally succeed where past attempts at a federal trade secret law have failed. For the first time, the legislation has garnered bipartisan support, as well as strong backing from major U.S. corporations. Microsoft Corp., General Electric Co., DuPont Co. and the U.S. Chamber of Commerce all have come out strongly in favor of the bill.

DTSA would amend the 1996 Economic Espionage Act, which has been a powerful tool in curbing foreign theft of U.S. trade secrets but currently only provides for criminal trade secret cases filed by prosecutors. Under the DTSA statute, companies would have a private right of action under federal law. Most of DTSA’s statutory language closely tracks that of the Uniform Trade Secrets Act (UTSA), providing nearly identical definitions of “trade secret” and “misappropriation” and also offering similar remedies of injunctive relief, actual damages, unjust enrichment, reasonable royalties, punitive damages and attorneys’ fees.

In addition to opening up an independent avenue to federal court, the DTSA also would offer some distinct advantages to the state-level UTSA. First, the most exciting aspect of DTSA — something the UTSA statutes do not provide — is that a plaintiff under the proposed law would be able to seek an ex parte order for “seizure of any property used, in any manner or part, to facilitate the commission of a violation” of the new federal trade secret law. This section of the DTSA statute mirrors the provision for injunctive relief in the Lanham Act to seize counterfeit goods. Under the seizure order provision, a plaintiff would ostensibly be able to seize a defendant’s computer, external hardware or other devices that a defendant has allegedly used to misappropriate a plaintiff’s trade secrets. Under DTSA, the materials would be in the custody of the court, and a hearing would be set no later than 15 days after the seizure to determine whether the seizure order was proper and should remain in effect.

The parameters of the DTSA statute’s seizure mechanism, if adopted, must be further fleshed out through regulations and the court system in order to better gauge its effectiveness. At first blush, however, this tool looks much more potent than the typical state-level UTSA remedy of a preliminary injunction or temporary restraining order. While plaintiffs typically face a difficult hurdle convincing a state court to grant the type of proactive mandatory injunction necessary to prevent irreparable harm from theft of trade secrets, a seizure under DTSA may provide an easier route to relief.

Additionally, while DTSA and UTSA both provide for punitive damages for the most egregious cases of trade secret theft, the DTSA statute would actually allow for treble damages and attorney’s fees in cases of “willful or malicious” misappropriation, whereas the state-level UTSA statutes typically provide only two times actual damages. Furthermore, where the statutes of limitations under UTSA state laws typically run out after two or three years, the proposed DTSA statute of limitations would run a full five years from the date of discovery of the alleged misappropriation. Finally, while many state courts have held that UTSA state laws bar any other common law or statutory claims, the proposed law under DTSA explicitly states that it does not displace or preempt any state common law claims.

Clients should be cautioned that federal jurisdiction under DTSA would not be automatic. Under DTSA, a plaintiff would need to show that the alleged misappropriation relates to a product used in, or that was intended for use in, interstate or foreign commerce, or was for the benefit of a foreign government or agent. While many modern-day companies’ products do cross state borders, smaller, more localized U.S. businesses would not be able to take advantage of federal jurisdiction under DTSA.

Proposed EU trade secret law would harmonize and strengthen traditionally weak European rules

While Congress may be beefing up U.S. trade secret law, European politicians are currently confronting similar issues as they craft for the first time uniform trade secret regulations across the European Union. In place of the weak and porous country-by-country patchwork of trade secret laws, the new EU directive would create uniform guidelines across the 28 member-nations, allowing each country to write its own conforming regulations. The current laws vary widely, from the relatively tough trade secrets law in Germany to the lax rules and spotty enforcement found in Belgium and Bulgaria. As a threshold matter, the 28 member-states have dozens of different definitions of the term “trade secret.”

The proposed EU regulations would now define a trade secret as something that is confidential, has commercial value because of its confidentiality, and has been the subject of “reasonable efforts . . . to keep the information confidential by the person lawfully in control of it.” Under the regulations, an “infringer” would be in violation of the proposed regulations for any “acquisition, use or disclosure” of the trade secret without the holder’s consent.

Sanctions under the proposed regulations could include “recurring penalty payments in case of non-compliance” or royalties in “appropriate cases.” The proposed regulations further state that, when a court finds “unlawful acquisition, use or disclosure of a trade secret,” the aggrieved party can seek remedies including recall, seizure or destruction of copied goods and destruction of any documents or digital files containing the misappropriated trade secrets.

A plaintiff under the proposed regulations could seek a preliminary injunction to protect its misappropriated trade secrets, and in cases where the alleged misappropriation is allowed to continue pending a decision on the merits, the courts are obligated to ensure that the trade secret holder “is protected by a guarantee of compensation should infringement later be held to have occurred.” To protect defendants, the proposed regulations also include language that allows a court to impose sanctions on a plaintiff that raises a trade secret claim in bad faith, “for the purpose of unfairly delaying or restricting” a defendant’s access to the market, or in order to intimidate or harass.

Both European and American industrial, chemical and engineering companies have been lobbying for years for stronger protections in Europe, similar to what the UTSA provides in the United States. The push for tougher EU regulations, however, got added impetus in recent months due to bilateral trade talks between the United States and the EU, as well as increased concerns over state-sponsored spying in wake of recent revelations over U.S. and Chinese data espionage practices.

The proposed EU trade secret regulations still are very much a work in progress, with parliamentary work on the regulatory language only beginning in earnest this summer after the European parliamentary elections. The language of the proposed regulations has already been amended to lengthen the relevant statute of limitations from two years to five years.

In whatever form the final language takes, a tougher, more harmonized trade secret regime across the European Union would greatly empower and reassure American companies sharing their trade secret information with business partners in Europe.

If passed, the DTSA statute and EU regulations could give corporate victims of trade secret theft unprecedented global resources to protect their confidential information and assets via the court system. Practitioners should stay apprised of the progress of both these pieces of legislation and take them into consideration when formulating litigation strategy and deciding how best to prosecute their trade secret actions.

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Elizabeth Herrington

Elizabeth Herrington is an equity partner in the Chicago office of McDermott Will & Emery. She has represented many U.S. and international companies in significant,...

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Thomas McCann

Thomas A. McCann is a Chicago-based associate in the trial practice group of McDermott Will & Emery.

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