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The Defend Trade Secrets Act & Startups

President Obama signed the Defend Trade Secrets Act (the “DTSA”) into law on May 11, 2016, and established the first federal cause of action for trade secret theft. The DTSA provides protection of trade secrets by enabling companies to bring suit in federal courts without needing diversity jurisdiction, as well as by providing a mechanism through which plaintiffs can retrieve stolen trade secrets. Startups often heavily employ trade secrets and other intellectual property, so they should take particular care to familiarize themselves with the provisions of the DTSA.

 

What the DTSA Does

To be clear, the DTSA does not substitute for or alter the trade secret laws already in place at the state level. It allows companies to bring trade secret suits in federal courts more easily than before, as diversity is no longer needed between the parties. This can become a bargaining chip for companies who want to resolve disputes more quickly with defendants who would prefer not to go to trial in federal court.

The DTSA also provides ex parte seizure of allegedly stolen trade secrets, where the company can retrieve the stolen property without any notice to the alleged trade secret thief. Because this is an extraordinary measure, the companies (the plaintiffs) must meet a high bar and show extraordinary circumstances for the court to grant ex parte seizure. This mechanism allows startups to quickly halt dissemination of trade secrets when an employee leaves for another company, and begins using the trade secrets she acquired from her original company at her new one. Startups are particularly susceptible to trade secret breaches, as employee turnover or poaching tends to be higher than in more established companies or industries. For instance, in Mission Capital Advisors LLC v. Romaka, the court ordered the seizure of contact lists and other electronically-stored information that was allegedly stolen by a former employee of the plaintiff company. The data-driven modern era enables employees to steal huge amounts of data with little effort, so the DTSA provides one welcome method with which to reign in trade secret theft.

The DTSA also provides whistleblowers with immunity when they disclose trade secrets to government or law officials, as long as they do so in relation to furthering an investigation or a lawsuit.

 

The Notice Requirement

The DTSA requires employers to include a notice of whistleblower immunity in all of its contracts with employees, contractors, or consultants if the contracts restrict the use or disclosure of trade secrets. As noted above, this provides protections to whistleblowers who reveal trade secrets to federal, state, or local government officials when the whistleblowers are assisting in investigations or lawsuits.

All startups that possess and deal with trade secrets should include these notices in their contracts with employees, in order to comply with the DTSA. It may also be helpful for startups to provide training for their employees regarding the companies’ trade secret policies, as well as on federal and state trade secret laws.

 

The DTSA Descriptions of Trade Secrets

One potential roadblock for plaintiffs in DTSA claims is the extent with which to identify the trade secret alleged to have been stolen. The court in Mission Measurement Corp. v. Blackbaud, Inc. articulates this issue, noting that trade secret allegations, if too detailed, may constitute an “unwitting disclosure of the trade secret to the public.” In its complaint, Mission Measurement described the allegedly stolen trade secret broadly as a software program, and identified it with dates of its use and agreements or meetings made in relation to it. The Defendants argued that the allegations lacked sufficient particularity and were thereby inadequate, because the complaint failed to identify with enough specificity the trade secrets at issue in the lawsuit. The court rejected this argument, and concluded that “such allegations were adequate in instances where the information and the efforts to maintain its confidentiality are described in general terms. The court in Aggreko, LLC v. Barreto clarifies this notion, ruling that allegations of trade secret theft must still describe the trade secrets to the extent the defense “would be put on notice as to the nature of the claim.”

When bringing DTSA claims, startups should therefore be mindful to maintain the confidentiality of their trade secrets by not revealing too much in their complaint, but to also plead with enough detail so defendants cannot reasonably argue that they cannot pinpoint the specific trade secrets that were allegedly stolen.

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