Trade Secret Litigation Trends and 7 Tips for Employers in the Post-DTSA World | Fisher Phillips

More than five years ago, the Defend Trade Secrets Act (DTSA) was signed into law, passing with broad bipartisan support and signaling a new frontier for employers seeking to protect their trade secrets. Since its passage, the DTSA has changed the landscape of trade secret litigation, giving trade secret owners a private right of action and the ability to sue in federal court when their trade secrets have been misappropriated. Prior to the law’s enactment, employers were generally limited to bringing suit in state courts, where the laws and available remedies differ widely from state to state. Employers with operations in multiple states may have found this lack of consistency particularly challenging. But the enactment of the DTSA changed those circumstances, providing a uniform set of standards and remedies available, and bringing more and more cases involving trade secret claims to federal courts. This overview will review the current state of trade secret litigation in light of federal law and provide employers with seven tips on how to navigate sometimes turbulent waters.

Federal trade secret litigation is on the rise

Now that more than five years have passed since the law was enacted, the trend of filing trade secret disputes in federal court remains strong. 7,732 lawsuits involving trade secret claims have been filed in federal court since the DTSA’s effective date of May 11, 2016. In 2021 alone, 1,253 new lawsuits were filed. And in the past two months alone — since the start of 2022 — at least 139 new trade secret disputes have made their way through the federal court system.

As surprising as these numbers may seem, perhaps more incredible is the amount of damages that have been awarded in these cases. While these actions are often resolved before trial, at least 118 damages have been awarded in federal trade secrets cases over the past five and a half years, or nearly $1 billion awarded to plaintiffs.

In light of the potential harm to a company whose trade secrets have been misappropriated and the potential avenue the DTSA may provide, consistent with the current trend of bringing such disputes to federal courts, employers should familiarize themselves with the provisions of the DTSA and take a close look at how they manage and protect their own trade secrets.

Back to basics

With the ever-increasing number of trade secret lawsuits being filed in federal court, reviewing the basics of the DTSA is a useful first step for an employer to consider in assessing whether they have properly protected their trade secrets.

What is a trade secret under the DTSA?

The DTSA’s definition of a “trade secret” is broad and includes all forms and types of financial, commercial, scientific, technical, economic or engineering information, including models, plans, compilations, devices of program, formulas, designs, prototypes, methods, techniques, processes, procedures, programs or codes, whether tangible or intangible, and whether or how stored, compiled or memorized physically, electronically, graphically, photographically or in writing if :

  1. the owner of it has taken reasonable measures to keep this information secret; and
  2. the information derives independent economic value, actual or potential, from the fact that it is not generally known to another person who can obtain economic value from the disclosure or use of the information and that it is not easily verifiable by appropriate means.

What constitutes diversion under the DTSA?

“Diversion” is defined as:

  1. acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by illegal means; Where
  2. the disclosure or use of a trade secret of another without the express or implied consent of any person who –
  • used inappropriate means to acquire knowledge of the trade secret;
  • at the time of disclosure or use, knew or had reason to know that knowledge of the trade secret was –
    • from or through a person who used improper means to acquire the trade secret;
    • acquired in circumstances giving rise to an obligation to maintain the trade secret or to limit the use of the trade secret; Where
    • from or through a person who had a duty to the person seeking relief to maintain the trade secret or limit the use of the trade secret; Where
  • before a significant change in the position of the person, knew or had reason to know that –
    • the trade secret was a trade secret; and
    • knowledge of the trade secret had been acquired by accident or error.

What remedies are available under the DTSA?

The DTSA provides civil seizure in addition to equitable and pecuniary remedies for trade secret owners whose trade secrets have been misappropriated. Monetary damages include:

  • actual damage;
  • unjust enrichment “caused by the misappropriation of trade secrets which is not taken into account in the calculation of damages for actual loss;” Where
  • “instead of damages measured by any other method, damages caused by misappropriation measured by the imposition of liability for a reasonable fee for the unauthorized disclosure or use of the trade secret by the misappropriation.”

In addition, if the trade secret has been deliberately and maliciously misappropriated, the trade secret owner is also entitled to exemplary damages (twice the actual amount of damages) and reasonable attorneys’ fees.

What should employers do? 7 Tips.

When it comes to protecting a company’s information, there are seven key steps an employer should consider taking:

  1. Perform a trade secret audit. A common defense to a trade secret complaint is that the employer failed to take reasonable steps to keep its information secret, thereby destroying the trade secret status of the information. Whether or not reasonable steps were taken often depends on the facts and circumstances of each case. However, conducting a trade secret audit can go a long way in eliminating any gaps in a company’s security measures. Such an audit may include a review of any physical security, electronic data security, and protocols governing or limiting which employees can access highly confidential and proprietary information.
  2. Limit access to people with a professional need. A useful argument to prove that reasonable steps have been taken to protect confidential business information is that the company has limited access to the information only to employees who have a legitimate business reason to do so. This can include protecting databases with passwords or encrypting documents so they are not accessible to employees who do not otherwise need the information to perform their jobs.
  3. Implement policies and procedures for trade secrets. It is also important to review current employment policies to ensure that the company has properly communicated to employees the company’s expectations regarding confidential, proprietary and trade secret information. These expectations should be identified early in the recruitment/onboarding process. Employers should consider incorporating these policies into their codes of conduct, manuals, record retention procedures and IT security policies. In addition, departing employees should be reminded of their confidentiality obligations upon departure.
  4. Consider confidentiality or non-disclosure agreements. In addition to strong trade secret policies and procedures, employers should also consider requiring employees with access to confidential and proprietary business information to sign a confidentiality or nondisclosure agreement.
  5. Monitor company systems. Along with reviewing security measures and adopting appropriate policies, ongoing monitoring of company systems is also important. Implementing programs that monitor computer usage and server/cloud access can be critical in identifying potential misuse of trade secrets.
  6. Be prepared to identify trade secrets. Identifying a trade secret is essential to a DTSA claim, and some courts require the designation of specific misappropriated trade secrets at the start of a lawsuit. For some employers who only have a few trade secrets, this might be an easy task. For others who work in industries with a lot more confidential information, this project can be more daunting. A good starting point for this process is to look at what information your business has that gives it an edge over competing businesses.
  7. Monitor changes in the law. The DTSA is a relatively new statute with an ever-evolving body of case law interpreting it. Given the dynamic nature of trade secret litigation, it is important to be aware of changes in the law and what employers must do to ensure that their trade secrets are protected.

Conclusion

Advances in technology have – for better or worse – made it easier for employees to misappropriate their employer’s trade secrets to use for their own purposes. The DTSA has given employers a means to remedy such misappropriations in federal court, and since the law took effect, federal trade secret litigation continues to increase.

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