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Trade Secrets and The Defend Trade Secrets Act of 2016

Corporate & Business Law

13 minute read

Today we’re talking about the DTSA, or the Defend Trade Secrets Act. This is a federal law passed in 2016 regarding trade secrets. It’s a statute passed by Congress. This is in addition to state laws on trade secrets. So if you ever bring a trade secrets claim, you can assert both common law and state statutes and the federal statute now that’s in existence known as DTSA. and basically what DTSA says is that a person or entity can sue another person or entity who wrongfully took their trade secret. What is a trade secret? I’m going to read out the definition because it’s very precise and I want to get it correct. 

“The term “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if 1. The owner thereof has taken reasonable measures to keep such information secret; 2. The information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by another person who can obtain economic value from the disclosure or use of the information. “

There’s two parts to this. The first is taking reasonable measures to protect the TS. critical in all TS law, if you have something you claim to be a TS you have to protect it. You need to prevent others from seeing it. You need to limit who sees it. You need to have restrictions, pass codes. Secrets need to be treated like secrets. And if you don’t you fail and it is not a trade secret. Two, it had to have some economic value. I can’t say that this blank piece of paper is a TS even if i kept it secret, it has no value. Therefore it couldn’t be a TS, a TS has to have an economic value that is attributed to the tS. Just because someone calls it a TS doesn’t make it one. We often see in employment contracts employers listing what it claims to be trade secrets and claiming they are TS. That doesn’t automatically make it a TS. it has to be shown that it was in fact kept secret, the employment owned it, kept it confidential, and it had EV. if you can’t show that it falls within the definition of a TS it cannot be a TS even if it is called that in a contract. Next element is the person claiming TS has to be the owner. I cannot claim a TS that is owned by somebody else, it must be my TS. I’ll read you a term again and put it up on the screen.

“The term “owner”, with respect to a TS, means the person or entity in whom or in which rightful legal or equitable title to, or license in, the trade secret is reposed.”

You have to own it.  Next question, what does misappropriation mean? The act has a very long definition. I’ll put it up on the screen. 

“Misappropriation means A) acquisition of a TS of another by a person who knows or has reason to know that the TS was acquired by improper means, or B) disclosure or use of a TS of another without express or implied consent by a person who

i) used improper means to acquire knowledge of the trade secret;

ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the TS was 

I) derived from or through a person who had used improper means to acquire the trade secret;

II) acquired under circumstances giving rise to a duty to maintain the secrecy of the TS or limit the use of the TS; or 

III) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the TS or limit the use of the TS; or 

iii) before a material change of the position of the person, knew or had reason to know that

I) the trade secret was a trade secret; and 

II) knowledge of the trade secret had been acquired by accident or mistake.”

So what it’s saying, two things here. There are 2 people who could have the TS. It could be the person who took the TS, that’s the first person. (A) defines their misappropriation. The second one is the first person who misappropriates it and gives it to another person. Under what circumstances is that person liable for the misappropriation of trade secrets. And the act addresses that there. If they had knowledge that it was taken wrongfully or through improper means, the second person could also be liable for the misappropriation of the TS even though they were not initially involved in the misappropriation. Really you cannot benefit from the ill-gotten gains of another is the concept there. The statute gives us a definition of improper means. The term improper means

  1. “Includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means; and 
  2. Does not include reverse engineering, independent derivation, or any other lawful means of acquisition”

It’s sort of a flip side here. One, improper means if you acquired it through bribery or breach of contract or a duty to keep it secret or espionage, you’re liable unless you obtained it through reverse engineering, independent derivation, or other lawful means. So often in cases, people say “oh no, he stole it” and the other side says “no, i didn’t steal it, i went and i developed it myself. I reverse engineered it. It’s a coincidence they lined up together, but I didn't.`` That's what that’s saying here- if you came up with it, it's yours and you’re not liable for misappropriation of TSes. Can the court grant injunctive leave? Yes, that’s one of the main things the statute permits. At the beginning of the case, if you’re the plaintiff, if you have sufficient evidence and affidavits, you go to the court and you put enough evidence in, and get the court to order that the other party not use the TS, return the TS, hold it somehow so that it’s not disclosed any further. The court can also award damages and the damages can be measured in a variety of ways. One is if it was my TS, what is the loss of value to me- what was that TS’s value to me could be the measurement of it or the person who stole it, what’s the value to them? And it could be greater to them, the person who stole it can get better value to the TS than i would have had and i’m entitled to recover the value it was to them. Or it could be a royalty rate, what is the objective royalty rate, or any other objective measure of damages. The court can’t award punitive damages on this statue, but if the misappropriation was willful or malicious, the court can award double your damages. So if it’s shown that the value to me was $50,000 and the theft was malicious the court could award me 100K. And the court could also award me my attorney’s fees under those circumstances. Conversely if the court found that I brought the TS claim in bad faith and I didn't have a reasonable belief in that TS, then the court could award the defendant the cost of their attorney’s fees through the double attorney’s fees statute. You have to be careful though- when bringing the lawsuit, make sure you’re not just trying to use the law to force the other side to behave in a certain way. Make sure you have a legitimate claim or you could end up paying their attorney’s fees. Alright, that was complicated, thank you for listening, I hope that was helpful.

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