On May 11, 2016, President Obama signed into law amendments to the Economic Espionage Act, 18 USC §1832 et seq. which added a civil component to what was formerly a federal crime, i.e., the theft of trade secrets. The new law – known popularly as the “Defend Trade Secrets Act of 2016” – authorizes a federal private right of action which carries with it a big stick – or perhaps more accurately – a big hand! The Act authorizes the seizure of property consisting of misappropriated trade secrets by federal law enforcement officials under the auspices of the United States District Court. The Act defines “misappropriation” as the acquiring of a trade secret by a person who knows the trade secret was acquired by improper means, i.e, theft, bribery, misrepresentation, or electronic espionage. The Act also defines misappropriation as the disclosure or use of another’s trade secret without consent by a person who used improper means to acquire knowledge of the trade secret.
Civil Seizure – The Big Hand
The most compelling provision of the Act allows for the ex parte seizure of property to prevent the dissemination of the misappropriated trade secret. Typically, when one goes to court seeking an injunction, the court will direct that the party against whom the injunction is sought be notified of the injunction hearing in advance so as to allow that party an opportunity to present evidence to defeat the requested injunctive relief. In “extraordinary circumstances,” the Act allows the District Court to issue an order directing law enforcement to seize the subject property without notice to the other side. The Court may only due so, however, if another form of equitable relief would be inadequate where it appears that prior notice to the party in possession would result in that party attempting to evade or avoid complying with the seizure order. Also, immediate and irreparable injury must manifest without such an order, and the balance of harm for granting the order must weigh in favor of applicant. These legal standards are the ones required when seeking injunctive relief generally in state court.
The Act requires that the seizure order itself direct that the seizure process per se minimizes any interruption to the business of third parties, as well as the legitimate business operations of the one accused of misappropriation. Also, the District Court order must inform law enforcement of the hours during which the seizure may occur, as well as whether force may be used to access locked areas.
Hearing on the Seizure
Not later than 7 days after the seizure order has issued, the District Court must hold a hearing on same. The party who obtained the order has the burden of proving facts supporting the seizure. The other side may, of course, set forth arguments against the justifications for the seizure order. If it turns out the claim of misappropriation was made in bad faith, the District Court can award attorney fees to the prevailing party.
In circumstances where the reviewing court deems injunctive relief to be inequitable, the court may fashion an injunction to allow for “future use of the trade secret upon payment of a reasonable royalty” for the period of time that unlawful use could have been prescribed. Damages for actual loss may be recovered, as well as damages for unjust enrichment. Where a trade secret is willfully and maliciously misappropriated, exemplary damages of not more than two times the actual and unjust enrichment amounts may be awarded. The District Court may also award attorney’s fees to the party who justifiably seeks and obtains the seizure order.
Effect on Non-Compete Agreements
The general remedies provision of the Act provides that the District Court may grant an injunction “to prevent any actual or threatened misappropriation,” as long as the order does not “prevent a person from entering into an employment relationship[.]” This provision has been interpreted as possibly preempting state law which currently allows for post-employment restrictive covenants, such as non-compete agreements. Enforcement of such agreements is typically accomplished via the seeking of an injunction in state court which prohibits the ex-employee from working for a direct competitor for the time period specified in the non-compete agreement. The Act, however, seems not to run contrary to this traditional state law contract-enforcement mechanism for several reasons. The Act expressly recognizes that an injunction may place “conditions … on such employment…based on evidence of threatened misappropriation[.]” The nature and extent of any such conditions specified in an injunction are not defined, and clearly left to the District Court’s broad discretion. Thus, in granting an injunction under the Act, the District Court may tailor an order which delays the start of employment for a specified amount of time – such as the amount of time set forth in a non compete agreement. After all, the word “prevent” means, “stop from happening” or “make impossible.” A time-limit condition would not stop or make impossible the subject employment relationship.
Construction with Other Laws
The “Defend Trade Secrets Act of 2016” expressly follows the rule of construction under §1838 of the Economic Espionage Act, to which it is now an amendment. That section states that the Act (now a part of Chapter 90 of Title 18, §§ 1831 – 1839) “shall not be construed to preempt or displace any other remedies, whether civil or criminal, provided by …State, commonwealth … law for the misappropriation of a trade secret[.]” Moreover, the Act itself expressly declares that it is not to be construed to “preempt any other provision of law.” Thus, it seems that going to court to enforce the provisions of a non-compete agreement (which may cover confidential business information not rising to the level of a trade secret per se) via an injunction – a long recognized remedy – should not run afoul of the Act’s “employment relationship” provision.