Senior Associate

Using the Trade Secret Acts in Light of the Federal Trade Commission's Recent Ruling on Non-Competes

May 14, 2024

Businesses that rely on their competitive edge in the marketplace need to take notice of the new Federal Trade Commission ruling that non-competition clauses and agreements are void. Competitive advantage that relies on internal know-how, proprietary and confidential information, as well as trade secrets, could be in jeopardy because of the new ruling.

Insert the Defend Trade Secrets Act (DTSA) of 2016

Enacted on May 11, 2016, the DTSA provides a federal right and cause of action for the theft of trade secrets. Before the DTSA, trade secret protection was solely a matter of state law. Because non-competes have historically been in place to try to help companies protect, save, and prevent the loss of their trade secrets, companies now need to focus on the DTSA more than ever.

Trade secrets and other proprietary information are easily misappropriated. The DTSA provided an additional right to companies in the pursuit of protecting their intellectual property and providing enhanced value to shareholders.

An owner of a trade secret related to a product or service used in interstate or foreign commerce can bring a civil action in federal court under the DTSA if their trade secret is misappropriated. The owner can also still pursue state-based trade secrets and unfair competition actions.

The DTSA allows for the civil seizure of property in extraordinary circumstances to prevent the propagation or dissemination of the trade secret. A  trade secret owner can seek civil seizure which is an ex parte order issued “providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” This can allow a US company, aware of a potential misappropriation of its trade secrets, to quickly prevent further dissemination of that proprietary information during the pendency of a DTSA case. Once the seizure order is issued, the court is required to hold a seizure hearing wherein the party who obtained the seizure order has the burden to prove the facts underlying the order. Civil seizure may be ordered only in “extraordinary circumstances” and requires a showing that:

  • an order pursuant to Fed. R. Civ. P. 65 or other equitable relief would be inadequate;
  • an immediate and irreparable injury will occur if a seizure is not ordered;
  • harm to the applicant from denial of a seizure order: (1) outweighs the harm to the person against whom seizure is ordered; and (2) substantially outweighs the harm to any third parties by such seizure;
  • the applicant is likely to succeed in showing that the person against whom the order is issued misappropriated or conspired to misappropriate a trade secret through improper means;
  • the person against whom the order will be issued has possession of the trade secret and any property to be seized;
  • the application describes with reasonable particularity the property to be seized and, to the extent reasonable under the circumstances, the property’s location;
  • the person against whom seizure is ordered would destroy, move, hide, or otherwise make such property inaccessible to the court if put on notice; and
  • the applicant has not publicized the requested seizure.

Further remedies include an injunction to prevent any actual or threatened misappropriation, provided that the injunction does not “prevent a person from entering into an employment relationship,” and that any conditions placed on employment are based on “evidence of threatened misappropriation and not merely on the information the person knows.” Where appropriate, an injunction may require affirmative actions to protect the trade secret.

Additionally, in “exceptional circumstances that render an injunction inequitable,” the court may condition future use of the trade secret on the payment of a reasonable royalty.

Following a ruling of misappropriation, a court may also award damages. Where the trade secret is “willfully and maliciously misappropriated,” a court may award exemplary damages which doubles the damages amount already awarded. A court may also award attorney fees where the misappropriation or claim of misappropriation was in bad faith, or where a motion to terminate is made or opposed in bad faith.

The DTSA should be used concurrently with the Uniform Trade Secrets Act (USTA), which is a piece of legislation that defines trade secrets and describes claims related to trade secrets. The USTA has defined a trade secret as:

  • Information, including a formula, pattern, compilation, program, device, method, technique, or process that:

  • Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

  • Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Prior to the development of the UTSA, trade secret misappropriation was a common law tort where a claim was to be considered by:

  • The extent to which the information is known outside the claimant's business
  • The extent to which it is known by employees and others involved in the business
  • The extent of measures taken by the claimant to guard the secrecy of the information
  • The value of the information to the business and its competitors
  • The amount of effort or money expended by the business in developing the information
  • The ease or difficulty with which the information could be properly acquired or duplicated by others

The elements of a trade secret claim are typically:

  1. The subject matter involved must qualify for trade secret protection (see "Scope" below for more on this)
  2. The holder of the subject matter must establish that reasonable precautions were taken to prevent disclosure of the subject matter.
  3. The trade secret holder must prove that the information was misappropriated or wrongfully taken

The use of a trade secret is not misappropriation per se. It must rise to an illegal use which is where it is acquired illegally or acquired because of a breach of confidence. Trade secrets can be discovered in many ways that are legal, such as reverse engineering, inadvertent disclosure, or serendipitous development. Misappropriation of trade secrets is not only a tort but also a federal crime. It is considered an unfair competition practice and can carry hefty punishment.

Companies can protect trade secrets by:

  •       Limiting access to proprietary information to those who need to know

  •       Label all confidential and proprietary information and communications as such and direct employees on the use of the information

  •       Store the information in spaces and places that have limited access and are protected from public access

  •       Establish a trade secret policy and communicate it company-wide

Remedies vary per state. Some states have instituted fines all the way up through imprisonment. Some 47 states and the District of Columbia have adopted the UTSA. As non-competes are under fire, understanding the DTSA and the federal rights presented in light of the USTA and state claims, companies can, proactively, protect their most valuable intangible assets.

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