Congress Creates a New Cause of Action for Trade Secret Theft

On April 27, 2016, in a move lauded as the most significant expansion of federal intellectual property law in the last half-century, Congress passed the Defend Trade Secrets Act of 2016 (“DTSA”) and established the first civil remedy for trade secret misappropriation under federal law.   The bill was passed as an amendment to the Economic Espionage Act, 18 USCA § 1832, which currently permits the Attorney General to enjoin trade secret misappropriation, but does not provide equivalent standing to civil litigants. Following significant cross-partisan support and easy passage through Congress, the DTSA was today signed into law by President Obama.

The most ostensible feature of the DTSA is jurisdictional, as the bill forges a new road to federal court without the barriers that previously confined a great deal of trade secret litigation to state tribunals.  Since a trade secret dispute brought under the DTSA arises under federal law, litigants no longer need to worry about the state citizenships of parties to get their case into federal court for relief.  However, not every trade secret dispute will be eligible for adjudication under the DTSA. Unlike patents and copyrights, the bill is grounded in the legislature’s “commerce power,” so only trade secrets relating to a product or service intended for use in interstate commerce may qualify for federal protection.

A noteworthy aspect of the DTSA is its similarity to the current legal framework.  With few exceptions, almost all states have enacted misappropriation statutes modeled after the Uniform Trade Secrets Act (“UTSA”), albeit with some variation.   The DTSA uses strikingly similar language to the UTSA in defining what constitutes a “trade secret” and “misappropriation.”  In interpreting the federal law, courts will likely rely on the robust case law that has developed under UTSA for the past three decades.  With that said, this preexisting statutory framework across 48 states perhaps undercuts the need for uniformity in trade secret law, as touted by proponents of the bill.

Despite its continuation of this common statutory language, the DTSA does contain certain unique features.  Notably, it includes a provision for the pre-trial seizure of property related to the improper use or dissemination of a trade secret.  The bill allows a trade secret owner to present an “ex-parte” petition to the court requesting that certain property of a defendant be seized and retained by the court pending the outcome of the case.  Although such seizure should only issue in “extraordinary circumstances,” the availability of this powerful mechanism raises concerns as to its effect on the cost and complexity of trade secret lawsuits.  If trade secret litigation becomes unduly expensive, parties will be pressured to enter early settlements just to avoid the cost of defending against such actions.

Finally, the DTSA’s whistleblower provision is sure to keep human resources departments busy over the next few months. Under the bill, any agreement with an employee governing the use of trade secrets (i.e. many non-competition and non-disclosure contracts) must include a notification that an employee is immune from liability if information is disclosed to address a potential violation of law. If a contract does not contain this notification, an employer who sues an employee for trade secret misappropriation in violation of such an agreement will be unable to recover exemplary damages or attorney’s fees.  These kinds of new features ensure that the DTSA will have a big impact.

David Moon is an attorney with Washington, DC regional business law firm, Berenzweig Leonard. David can be reached at dmoon@berenzweiglaw.com.

Handling of Trade Secrets

Businesses often store proprietary information in automated systems, and it is much easier to pilfer proprietary information.  It can be done with a few keystrokes.  In a commendable burst of foresight, in 1986 Congress saw this problem looming on the horizon and enacted the Computer Fraud and Abuse Act (“CFAA”), 18 USC §1030.  The CFAA was designed principally to prevent outsiders from hacking into computer systems and not to prevent theft by employees.  However, depending on the circumstances, the CFAA can also cover theft by corporate employees.  The statue makes it a crime to intentionally access a computer “without authorization” or to “exceed authorized access” to obtain information on the computer.  The CFAA is a criminal law, and, although the general rule is that criminal laws do not create private causes of action, in the CFAA Congress expressly created a private cause of action, allowing a private party to obtain compensatory damages and injunctive relief.

Recently, the U.S. Court of Appeals for the 4th Circuit decided a case applying the CFAA in a civil action involving an employee’s alleged theft of trade secrets. WEC Carolina Energy Solutions, LLC v. Miller, et al., 4th Cir. No. 11-1201 (26 July 2012).  The defendant, Miller, was an employee of the plaintiff, WEC, and WEC authorized Miller to access WEC’s computers.  WEC alleged that Miller transferred the company’s trade secrets from the company’s computers to a competitor.  WEC alleged, inter alia, that Miller violated the CFAA.  The case presented the following issue: If a company authorizes an employee to access the company’s computers and to access the information on the computers, and if the employee, acting within the scope of his authorization, transfers information to a competitor, does the employee violate the CFAA?  The Court acknowledged that there are two conflicting decisions in other courts reaching opposite conclusions. Int’l Airport Ctrs., LLC v. Citrin, 440 F.3d 418 (7th Cir. 2006); United States v. Nosal, 676 F.3d 854 (9th Cir. 2012)(en banc).  

In WEC, the Fourth Circuit Court focused on the “plain language of the statute, seeking first and foremost to implement congressional intent,” saying that the words of the statute should be given their ordinary, contemporary and common meaning.  The Court noted that because the statute has criminal penalties the Court must strictly construe the statue applying the so-called “rule of lenity,” rejecting interpretations not strictly warranted by the text.  The Court concluded that based on the ordinary and common meaning of “authorization,” an employee is authorized access to a computer when the employer approves his admission to that computer.  Thus, an employee accesses a computer without authorization only if he gains admission to that computer without the employer’s approval.  Similarly, the Court concluded that an employee “exceeds authorized access” when he has approval to access the computer, but uses his access to obtain or alter information that falls outside the bounds of his approved access.  For example, if the employee accesses files that are outside the scope of his authorization.  According to the Fourth Circuit, the CFAA does not reach the improper use of information validly accessed.  For example if the employer authorizes the employee to access the information, and the employee then improperly uses the information by transferring the information to a competitor, the employee has not violated the CFAA.

The WEC decision does not leave employers without remedies for the theft of trade secrets.  Employers can still sue for violation of state trade secrets laws, breach of fiduciary duty, and, depending on the facts, fraud.  However, in cases like the WEC case, employers cannot sue for violation of the CFAA.

Author John Polk is Special Counsel at the D.C. regional business law firm of Berenzweig Leonard, LLP.  He can be reached at jpolk@berenzweiglaw.com.