What IP Attorneys Need to Know About Overlap Between the Defend Trade Secrets Act and State Trade Secrets Laws

By Kevin Hylton

When the Defend Trade Secrets Act of 2016 (DTSA) was signed by President Obama on May 11, 2016, it codified into federal law the right of an owner of a trade secret to sue in federal court when its trade secrets have been misappropriated. The law also provided legal immunity to corporate whistleblowers of trade secrets theft.

The law was quickly hailed by Forbes magazine as “the biggest IP development in years” and was soon relied upon to secure a temporary restraining order against an ex-employee seeking to solicit customers from his former employer, a multimillion-dollar jury award for misappropriation of trade secrets, and other private causes of action for trade secret theft.

While the DTSA truly was a landmark piece of legislation, there is a surprising amount of overlap between state and federal law in the evolving area of trade secrets protection.

“Trade secrets have traditionally been regulated by state law, but the DTSA for the first time created a private cause of action for trade secret misappropriation,” explained Eric Bensen, a Texas-based intellectual property attorney, consultant and expert witness. “Interestingly, since the DTSA borrows heavily from the language in the Uniform Trade Secrets Act (UTSA) that 47 states use as the basis for their own laws, courts have typically looked to state law to understand what the definitions and elements in the DTSA really mean. In fact, when most courts issue opinions on DTSA lawsuits, they often lump state and federal law together in deciding the merits of the case and don’t really distinguish between them.”

Bensen has advised clients throughout the U.S., Japan and Europe on the DTSA and other IP issues arising in litigation, licensing and transactional matters.

“In theory, because the DTSA is a federal law, a federal district court is not bound to follow the UTSA decision of any particular state,” Bensen said. “However, as a practical matter, a court would likely look to the UTSA decisions of the state in which it sits to construe the DTSA.”

Bensen points out that the DTSA is distinct from the UTSA in three key respects, in a practice note published exclusively by LexisNexis Practical Guidance:

1. Federal question jurisdiction. Federal district courts have original jurisdiction to hear trade secret misappropriation claims so long as the DTSA's interstate commerce requirement is met. Under the UTSA, a trade secret plaintiff that seeks to bring its claim in federal court must establish an independent basis for federal jurisdiction, such as diversity jurisdiction.
2. Ex parte seizure. The DTSA provides for ex parte seizures of property when necessary to prevent the dissemination of a misappropriated trade secret, though only in extraordinary circumstances. The UTSA does not contain a similar provision.
3. Whistleblower immunity. The DTSA immunizes individuals from civil or criminal liability, under both federal and state law, for certain confidential disclosures of trade secret information (and requires employers to provide employees, contractors, and consultants notice of such immunities). The UTSA does not.

“There are circumstances where these two acts will always be different and there are some circumstances where their differences may be very limited, dependent on the specific state involved,” Bensen explained.

Bensen pointed out that this overlap can lead to confusing and even sometimes conflicting applications of trade secret law. He shared an example in which a company is required to disclose confidential information to a state or federal agency. The protection they might be provided by the relevant agency is that the disclosed information will be treated with strict confidence, and it will not be released upon any Freedom of Information Act requests.

“A few years ago, the state of Nevada amended their UTSA law to say that drug pricing information provided by pharmaceutical companies to the state health agency would not be protectable as a trade secret,” said Bensen. “However, the state subsequently promulgated a rule that stipulated this confidential information provided by pharma companies would indeed be protected as trade secrets under the federal DTSA. This rule was challenged in court but was ultimately upheld by the Nevada Supreme Court. So now you have a situation where drug pricing information is not protected as a trade secret under state law, but it is protected under federal law.”

Bensen noted that IP litigators are learning an important lesson from these sorts of confusing overlaps in state and federal law: If you have a trade secret claim, bring it under both the DTSA and the relevant state-specific trade secret law any time you possibly can. However, there are important nuances to the nature of interstate commerce law that make it essential for litigators to understand the requirements they must be able to fulfill with the federal courts under DTSA actions.

Bensen is a prolific author who has contributed a wide range of expert materials for LexisNexis, including treatise materials for various Matthew Bender publications. His comprehensive practice note on the DTSA, “Defend Trade Secrets Act (DTSA) Fundamentals,” is available to subscribers of LexisNexis Practical Guidance.

I had the privilege of interviewing Bensen for a recent episode of our “Practical Guidance Podcast,” where we invite experts to provide insights on timely issues for legal practitioners. Listen now or download the episode regarding trade secrets law and the current status of the Defend Trade Secrets Act.