The Defend Trade Secrets Act: What the New Federal Trade ‎Secrets Law Means for Franchisors and Other Businesses

05/10/2016 / Ryan E. Strom

Franchisors will soon have a new way to protect their confidential information.  The Defend Trade Secrets Act of 2016 (the “DTSA”), passed by the Senate in March and by the House in April, is expected to be signed into law soon.  Once enacted, the DTSA will provide a private right of action under federal law for theft of trade secrets.

Unlike claims for infringement of patents, trademarks and copyrights (which have long been enforceable by companies at the federal level), civil claims based on trade secrets have been handled exclusively at the state level.[1]  As a result, companies trying to prevent trade secrets from being disclosed or seeking damages due to unauthorized disclosure have had to contend with a varied landscape of state trade secrets law.  For example, the statute of limitations for commencing a lawsuit, the type of evidence required to prove a violation and the availability of injunctive relief, attorneys’ fees and certain defenses may differ state-by-state.  As a result, trade secrets law has been a source of uncertainty for businesses and their employees.

One of the primary objectives of the DTSA is to reduce this uncertainty by establishing a single body of federal law.  The central provision of the DTSA, which will be codified as 18 U.S.C. § 1836(b), reads:
An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.

For franchisors that manage a multi-state network of franchisees, this will provide the ability to protect trade secrets under a predictable and uniform set of laws rather than using the current patchwork of state laws.  Other important provisions of the DTSA include:

Standardized definitions of “trade secret” and “misappropriation”;

A mechanism for effecting the seizure of property without providing prior notice to the accused trade secret thief;

Remedies in the form of (i) injunctive relief or a reasonably royalty (with an apparent presumption in favor of injunctive relief); (ii) compensatory damages; (iii) exemplary damages for wilful or malicious conduct (up to 2x the compensatory damages award); and (iv) attorneys’ fees;

Limitations on the ability to enjoin former employees from entering into new employment relationships; and

Obligations to notify workers of various immunities available under the DTSA.


The DTSA will not displace state trade secrets law, however.  Companies will still be able to utilize a particular state’s body of trade secret law just as they have in the past.  In this respect, the DTSA can be seen as adding an additional layer or protection rather than implementing wholesale change.         

Based on the definition of “trade secrets,” the DTSA should largely apply to the same types of activities covered by state trade secrets law.  This includes product formulations, manufacturing processes, sales history and projections, lists of suppliers and clients, consumer profiles and preferences, distribution methods, and a variety of other data.

In addition, the DTSA requires the owners of trade secrets to take reasonable measures to keep the information secret.  Franchisors should therefore include strong language in their franchise agreements as to ownership of information and trade secrets and restrictions on their use, but also remain proactive in developing, implementing, and maintaining processes designed to keep proprietary information confidential.  This includes, whenever possible, restricting the types of media on which trade secrets are maintained, storing trade secrets information in inoperable components and limiting the number of individuals given with access to trade secrets or to whom trade secrets are disclosed.


 


[1] Theft of trade secrets is already a federal crime under the U.S. Economic Espionage Act of 1996.