New Federal Trade Secret Act and Its Impact on Life Sciences
On May 11, 2016, a new federal trade secrets law called the Defend Trade Secrets Act (DTSA) took effect. Its primary impact is to allow the victims of trade secret misappropriation to sue in federal court. It also provides some new civil remedies that exceed what is usually available under state law. The DTSA will be slotted into the U.S. Criminal Code (chapter 90 of Title 18), which already makes industrial espionage and trade secret theft a federal crime. In terms of what companies have to do to comply, the answer is almost nothing—the sole exception being a change in future employee contracts that is discussed below. In this post I’ll describe and analyze the new law and offer some thoughts about its potential impact on the life sciences industry.
Until now, civil trade secret protection has been entirely a matter of state law. The law is very consistent from state to state, as 47 states have enacted the Uniform Trade Secrets Act (UTSA). The exceptions are New York, Massachusetts, and North Carolina, though the North Carolina statute is generally similar to UTSA. Enforcement actions must usually be brought in state court, though federal courts can take jurisdiction if the plaintiff and defendant are citizens of different states. Even then, however, the federal court must apply state law in deciding the case.
What Stays the Same and What’s Changed
One thing that the new federal law does not do is change the basic definition of what a trade secret is or what kinds of conduct constitute prohibited misappropriation. The DTSA tracks UTSA in defining a trade secret very broadly, to include any form of information or know-how that is valuable because it is not generally known or readily ascertainable, and that is the subject of reasonable efforts to maintain secrecy. The Coke formula is perhaps the most famous trade secret in this country. Under state law, misappropriation means acquiring, disclosing, or using a trade secret in violation of a duty of confidentiality, whether that duty was created expressly (a confidentiality agreement, for example) or inferred from the circumstances (for example, a meeting that everyone should have understood to be confidential), or through other improper means, such as industrial espionage. The DTSA’s definitions are a bit circuitous but amount to essentially the same thing.
The first big change made by the DTSA is to allow the filing of a trade secret misappropriation case in federal court, regardless of the state citizenship of the parties, as long as the trade secret is used in or is intended for use in interstate commerce. (Since the new federal law is intended to add to rather than displace state law, a plaintiff can file a DTSA claim in federal court and add a second claim under state trade secret law.) There are many significant differences between federal and state court litigation. Federal judges are appointed for life by the president, whereas judges are elected in many states (including North Carolina), and thus potentially more responsive to public opinion, which can be a good or bad thing, depending on the case and the perspective of the litigant. A single federal judge usually handles all aspects of a case from start to finish, while state cases can bounce around, with different judges deciding different issues. Also, federal courts have more onerous brief-writing requirements, which usually makes federal litigation more expensive but also tends to make federal judges better informed about their cases than their state counterparts. Finally—and importantly—federal judges have abundant help from law clerks (recent law school graduates) in preparing for arguments and trials, whereas state judges typically have limited assistance from clerks. These factors often make federal courts a more attractive forum for lawyers and clients filing cases involving complex technology.
The second change is the addition of an important new remedy—civil forfeiture. In state law trade secret cases, the most important remedy is often a preliminary injunction (PI). An injunction is an order that compels a defendant to do or refrain from doing something—in this context, an order to return documents, or not to use a trade secret, or not to work in a new job or make a product if the judge thinks that will result in misuse of a trade secret. Preliminary means that the injunction is granted before trial, on the basis of the judge’s assessment of preliminary evidence, and that it will be in effect only through the end of the trial. Permanent injunctions can then be granted if the plaintiff wins at trial.
A frequent problem with PIs from the plaintiff’s (victim’s) perspective is that they can be difficult to frame in an effective way. By the time the PI application is heard, a lot of the trade secret toothpaste may have been squeezed out of the tube, and it is hard to shape an order that will get it back in. The new civil seizure remedy attempts to mitigate these shortcomings. It is specifically addressed to situations where traditional injunctions would be inadequate. In extraordinary circumstances, a plaintiff can apply without giving notice to the other side. The plaintiff must persuade the judge that it is likely to prevail on its ultimate claim and that seizure is necessary to protect the trade secret. The judge can then order a federal law enforcement officer to seize (using force, if necessary) and secure tangible property and electronic media that embody the trade secret.
To protect the defendant, the seizure order must be very specific and the court must hold a hearing on the seizure within seven days after the order is issued. The defendant is entitled to protection against publicity and can seek to recover damages if it turns out that the seizure was unwarranted. Notwithstanding these protections, the threat—and reality—of a seizure order are powerful weapons in the hands of a trade secret plaintiff. In addition, the DTSA provides for double damages and attorneys’ fees against willful violators. Attorneys’ fees can also be awarded to successful defendants if the court decides that the plaintiff has acted in bad faith. Overall, these new remedies tip the balance significantly in favor of the plaintiff in federal versus state trade secret actions.
The New Notice Requirement
In terms of actions required to comply with the DTSA, the single significant thing is notifying employees (broadly defined to include consultants and contractors as well) of their rights to immunity in certain situations. The new law provides immunity for an individual who discloses a trade secret to a government official or attorney, for the purpose of reporting a violation of law, or in a court filing made under seal. Similar immunity attaches to the use of a trade secret by an employee in a suit against an employer that tries to retaliate against the employee for disclosing a suspected violation of law.
The DTSA requires companies to provide notice of this immunity “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” This requirement applies only to contracts that are entered into or updated after the DTSA took effect (May 11, 2016). Preexisting contracts are unaffected. The penalty for failure to give notice is fairly modest: the employer loses only its right to seek double damages or attorneys’ fees in a suit against the employee who did not get the notice. The employer does not lose its trade secret, and it can still seek civil seizure, an injunction, or single damages against that employee, as well as any state law remedy that might be available. The failure to give notice to a particular employee has no bearing on suits against other defendants.
Specific Implications for Life Sciences Companies
Trade secret protection has historically played a limited role in the life sciences industry. Part of the reason for this is that life sciences companies develop products and processes—drugs and other chemicals, tests, diagnostic and therapeutic methods, and even organisms—that are hard to simultaneously market and keep secret. In some cases, as with drugs, a high degree of disclosure is required by law; in others, it is simply impractical to market the product without disclosure. For example, if you sell a chemical or a test kit, the buyer will be able to study it and see what it’s made of or how it works. In theory, you could distribute it under a restrictive license rather than sell it outright (like computer software), but that’s unlikely to be acceptable to consumers in most life sciences markets, and might fail to preserve secrecy in any event.
Recognizing these realities, investors across the life sciences spectrum have insisted on patent protection. Although patents are difficult and expensive to get, they provide the highest degree of legal protection: if you make, use, or sell the patented product or method, you infringe. Proving trade secret misappropriation, by contrast, is fraught with legal ambiguity. So start-ups seeking investors are always told the same thing: you need to seek patents.
There are some limited exceptions, and they may be growing. Companies that provide testing services—rather than selling test kits—may be able to place substantial reliance on trade secret protection. A significant example that’s often in the news (and that we’ve written about) is Myriad Genetics. Before many of its patents were invalidated by the Supreme Court in 2013, Myriad enjoyed a near-monopoly position in the BRCA gene testing market. As a result, Myriad was able to accumulate a much bigger database on gene variants and associated health outcomes than anyone else, and it maintained this database as a trade secret. When it lost its patent monopoly, Myriad announced its intention to rely primarily on the value of this proprietary database, especially in Europe, where its patent protection had always been more limited. While, as we’ve reported, this strategy is very controversial in the biomedical community, it’s entirely feasible from a legal perspective.
In Myriad’s case, the trade secret is the database, together with Myriad’s accumulated expertise in interpreting variants, especially variants of unknown significance. But testing companies could apply trade secret protection to any aspect of the testing process that isn’t currently known and doesn’t have to be revealed in the marketplace. That could change, however, as the Food and Drug Administration expands its regulation of Laboratory Developed Tests and Direct to Consumer Tests, which could result in more mandatory disclosure of test details.
Life sciences companies that choose to rely on trade secret protection will not see any significant changes in the way they must protect their trade secrets, and they will gain the procedural and remedial advantages I’ve discussed. In addition, in all kinds of life sciences companies, employees are routinely asked to sign confidentiality (non-disclosure) agreements—particularly in the early stages of research and development—so companies must comply the new disclosure requirements.
Summary: Practical Pointers
Here are the main practical points for all companies, including those in the life sciences, to keep in mind as the DTSA takes effect:
• The new federal law adds a layer of protection, but does not displace or disturb existing state law.
• The definitions of trade secret and misappropriation remain essentially the same as under UTSA, as do the requirements for maintaining protection.
• If you are the victim of trade secret misappropriation, you and your lawyer should consider whether you want to sue in federal court under the DTSA—and you can still assert a state claim. The principal advantage will probably be the enhanced remedies available under the DTSA.
• Because of these enhanced remedies, companies should take greater care than ever in making sure that new technical employees will not be exposing you to the trade secrets of their former employers.
• The one affirmative step you should start taking is to give employees the required notice of immunity when you and they enter into, renew, or update confidentiality agreements.