What are the chances of Congress passing bipartisan legislation in a presidential election year? If the legislation is portrayed as protecting American companies from foreign companies stealing their trade secrets, then the chances are good. Just look at the Defend Trade Secrets Act, which Congress overwhelmingly passed this past month. Now that President Obama has signed the DTSA, there are five key things Texas employers, employees, and the lawyers who represent them need to know about this federal statute.
The first thing the DTSA does is give employers a new federal cause of action for misappropriation of trade secrets. Prior to the Act, companies seeking to obtain civil remedies for misappropriation of trade secrets generally had to look to state law, such as the Texas Uniform Trade Secrets Act. Now, an employer has the option to assert a federal claim. (Note that employers must give notice of certain whistleblower rights in employee confidentiality agreements in order to recover exemplary damages or attorneys’ fees from employees.)
The second thing to know about the DTSA is that employers asserting trade secrets claims will now get to decide whether to sue in federal court or state court. The Act does not preempt state law remedies for trade secret misappropriation, but it does provide that federal district courts have original jurisdiction over claims for relief under the Act.
The third thing is that the federal definition of “trade secrets” is different than the Texas Uniform Trade Secrets Act’s definition, but the practical difference is minor. Both definitions have the same three key substantive requirements: (1) “independent economic value,” (2) not “readily ascertainable,” and (3) “reasonable” measures to keep the information secret. Both definitions broadly include “information,” followed by a non-exclusive “laundry list” of specific types of information that can be trade secrets if they meet the substantive requirements.
The federal statute has a different laundry list than the Texas statute. Notably, the Texas statute expressly includes customer lists, while the federal statute does not. But I don’t view the differences between the definitions as significant. The fact that the Texas statute refers to customer lists does not make every customer list a trade secret; conversely, the fact that the federal statute does not expressly include customer lists does not preclude them from being trade secrets. In trade secret litigation, the fight is over the three substantive requirements, not the laundry list.
The fourth thing that is important about the DTSA is that it authorizes federal courts to issue ex parte seizure orders in extraordinary cases. “Ex parte” is a Latin phrase that means “signed by opposing counsel’s best friend on a Friday at 4:00 pm without telling you.” Understandably, some commentators have raised concerns about potential abuse of this unusual remedy. I share these concerns, but the statute does have safeguards, including a cause of action for wrongful seizure, and I expect that most federal judges are going to set the bar very high for obtaining such unusual ex parte relief.
The fifth thing you need to know about the DTSA is that it was unnecessary. At least, I have yet to see anyone explain any compelling need for it (and a group of law professors argued against it). Two rationales I have seen are the need for uniformity in trade secrets law and the idea that federal courts are better suited for addressing complex trade secrets claims. Neither rationale holds up to scrutiny. 48 states have adopted some version of the Uniform Trade Secrets Act. The variations in state trade secret law, while potentially important in a particular case, are the kind of differences only lawyers who teach continuing legal education courses get excited about. For companies operating in the US, the differences in state trade secret law were no more problematic than the differences in state contract law.
The idea that federal courts are more capable of handling complex trade secrets cases is an over-generalization at best, and the assumption that trade secrets cases are more complex than other cases is suspect. People think of a shadowy foreign company smuggling sophisticated plans for the next iPhone out of the country. But the typical trade secrets lawsuit is more mundane. Given the fact that a “customer list” can be a trade secret, an employer can sue for misappropriation of trade secrets just about every time a low level sales employee leaves the company with the names and numbers of her customers on her smartphone. Are routine customer list cases now headed for federal court? We will see.
Zach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn has offices in Austin, Houston, and The Woodlands.
These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.