Since its enactment in 2016, the Defend Trade Secrets Act (DTSA) has become the most important trade secrets statute in the world. Here’s the proof. DTSA filings have steadily increased, doubling from 2016’s 476 filings to 2020’s 1,008 filings. According to Lex Machina’s 2021 Trade Secret Litigation Report, 72.9% of all trade secret cases in 2020 and 72.5% in 2019 included a claim under the DTSA. And as other nations recognize the importance of trade secrets and develop their own trade secret laws (see the EU’s Trade Secret Directive and China’s recent amendments to its trade secret law), those nations will likely look to the DTSA for inspiration. When you throw in the increasing reliance on trade secret law and perceived erosion of patent protection, it’s hard to dispute the DTSA’s growing importance.
But the DTSA is far from perfect. Like the Uniform Trade Secrets Act on which it was based, the DTSA can be improved as trade secret law evolves. To that end, I would humbly propose the following two amendments to the DTSA: (1) a “safe harbor” provision for penitent defendants who have agreed to an injunction and are cooperating in a litigation; and (2) a trade secret identification requirement similar to the Model Local Rule suggested by the Sedona Conference’s Trade Secrets Working Group (described below).
Why these changes? It’s important to remember the forces that led to the DTSA in 2016. In the lead up to its enactment, U.S. businesses expressed concern over the protection of their trade secrets in the U.S. and overseas. As a result, two of the DTSA’s principal purposes were largely pro-plaintiff/pro-trade secret owner: (1) providing a federal forum for trade secret owners establishing their trade secrets as a federal intellectual property right; and (2) providing those companies with tools to protect their trade secrets overseas.
However, since 2016, the pendulum has swung in favor of two equally important employee interests: (1) employee mobility and (2) deterring the abuse of restrictive covenants and NDAs. Just look at the FTC’s recent efforts to ban noncompetes and overly broad NDAs. Legislative activity at both the state and federal level further demonstrates the growing pressure from these forces.
To continue to be a viable protection, trade secret law needs to adapt to these forces. As Jim Pooley so aptly put it in a recent blog post, trade secret law is, at its core, a balancing of many competing interests. So these two amendments to the DTSA would provide greater balance by protecting employees and others accused of trade secret misappropriation. These proposed amendments would also remedy two recurring problems in trade secret litigation.
Proposed Amendment No. 1: A Safe Harbor Provision for Penitent Defendants. Lots of individuals and small companies get ensnared in trade secret disputes and immediately regret the actions that provoked the lawsuit.
Here is the unfortunate script: (a) a former employee makes a poor decision, without the benefit of counsel, and downloads or transfers information from his/her former employer’s system to his/her personal devices; (b) that individual gets sued and realizes the mess they have created by taking that information; and (c) the employee promptly retains counsel and that lawyer immediately advises the employer and its counsel that the former employee doesn’t want the information, that they will cooperate in deleting the information, and that they will agree to an injunction forbidding the use/disclosure of any trade secrets.
Unfortunately, that olive branch rarely ends the litigation. The employer decides to continue to prosecute the case. It may do that because it is angry or perceives that it has the upper hand because it can outspend the employee. Or because it hopes to recover its attorneys’ fees. Or it wants to continue the litigation to retaliate against the competitor that hired that employee in the hope of dissuading other employees from leaving to join that competitor.
As you can probably tell, I have represented employees in these types of cases. They frequently evolve into disputes over recovering attorneys’ fees, and the original goal of the litigation–protecting the information that was taken–fades into the background.
To address these cases, I would propose the following safe harbor rule to encourage employees to abide by their obligations and discourage employers from needlessly running up costs:
- Upon the receipt of a complaint or a request for an injunction, a defendant would be provided with an opportunity (say 5 days) to (A) agree to an injunction forbidding that defendant from using or sharing that information and (B) agreeing to reasonably and fully cooperate so that the trade secret owner can verify that the information is no longer being used (deposition, forensic review of devices, etc.).
- In exchange for that proffer, that defendant would be immunized from a claim for damages or attorneys’ fees. Those fees and damages would presumably be minimal or non-existent at that early stage of the dispute.
Because the unreasonable employer in my fact pattern will overreach, the safe harbor rule will require a mechanism to keep that employer in check. To prevent that outcome, I would suggest a provision similar to Federal Rule of Civil Procedure 68. For those not familiar with that rule, it provides a defendant with the ability to minimize its costs (and potential exposure for attorneys’ fees of the plaintiff in some situations) by making a proffer to the plaintiff; if a verdict is less than the defendant’s proffer, the plaintiff is liable for those costs and, in some courts, the plaintiff is also precluded from getting its attorneys’ fees later. Under my safe harbor rule, the defendant would have that same opportunity. By offering to enter into a reasonable injunction, cooperating in discovery to confirming they are no longer using the information, and deleting the information, the defendant would be protected from further exposure for the plaintiff’s fees or damages.
Of course, the parameters of this safe harbor rule would still need to be worked out. When I brainstormed with Russell Beck over this proposed amendment, Russell noted the need for serious consequences for the inevitable “bad boy” employee who makes this proffer but misrepresents what he/she did. In addition, there may be situations where the penitent employee has already disclosed or used some or all of the information. For example, what if the defendant has already shared the information with a new employer? Or has incorporated that information into a product or invention? In these situations, there might need to be some cost-shifting, but with the benefit of sharper minds than mine, these situations could be addressed.
To summarize, the benefits of a safe harbor rule are clear: it would prevent the unnecessary escalation of trade secret cases at an early stage, a worthy goal as these emotional disputes now would have a built-in feature to short-circuit that emotion. A safe harbor rule would also encourage pre-lawsuit settlement efforts, enabling employers to avoid the unnecessary expense of litigation if they can get adequate protections and assurances from employee and his/her new employer.
Proposed Amendment No. 2: Requiring Early Trade Secret Identification. This proposed amendment should be low hanging fruit because, as explained below, many federal courts have already begun to implement it. However, several other federal courts have rejected early trade secret identification, so a need for uniformity and clarity remains.
Several policy reasons have been advanced for the early identification of trade secrets in a litigation. They include rationales like deterring meritless trade secret cases or preventing unscrupulous companies from using discovery to conduct fishing expeditions of their competitors’ trade secrets. But to me, the most important justification is one of fundamental fairness: a defendant that stands accused of stealing something should have the right to know exactly what it is they are accused of stealing. (For those interested in finding out more about the issue, I would recommend Charles Tait George and Brian D. Range’s seminal article, “Identification of Trade Secret Claims in Litigation: Solutions for a Ubiquitous Dispute”, published in The Northwestern Journal of Technology and Intellectual Property).
California, a hotbed of trade secret litigation, has long required trade secret owners to identify their trade secrets before discovery begins (see Section 2019.210 of California’s Code of Civil Procedure). Other federal courts began to follow suit and it is probably safe to say that the majority of federal courts have granted requests for early trade secret identification when requested by a defendant (for an excellent summary of these cases, see Willenken LLP’s Emilia Sargent’s article for Law360; Emilia was the first to advocate for this amendment to the DTSA).
Further momentum in support of trade secret identification followed in 2021 when the Sedona Conference’s Working Group for Trade Secrets published its Commentary on the Proper Identification of Asserted Trade Secrets in Misappropriation Cases. The Sedona Commentary thoroughly considered the pros and cons of trade secret identification, ultimately concluding the benefits of early identification outweighed its costs. And the Commentary even supplied a proposed Model Local Rule for courts to apply.
But the need for uniformity remains. Compare the reasoning in Quintara Biosciences, Inc. v. Ruifeng Biztech, Inc., 2021 U.S. Dist. LEXIS 48399 (N.D. Cal. March 13, 2021), where the U.S. District Court for the Northern District of California found that the descriptions of trade secrets were insufficient with the holding in DIRTT Envtl. Sols. v. Henderson, 2021 U.S. Dist. LEXIS 13813 (D. Utah Jan. 25, 2021), where the U.S. District Court for Utah permitted discovery to proceed despite the defendant’s objections that the plaintiff had failed to identify its trade secrets. Uniformity would also ease the burden on appellate courts. (See the U.S. Court of Appeals for the Federal Circuit’s reversal of a $22 million verdict in Olaplex Inc. v. L-Oreal USA, Inc., because the plaintiff had failed to adequately identify the trade secrets at issue).
At the end of the day, these two amendments would help avoid and potentially streamline cases under the DTSA. Congress, take it from here!