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Bar News - June 15, 2016

Intellectual Property Law: New Federal Trade Secret Law: Ten Things You Should Know


1. Federal courts have original jurisdiction over claims

The Defend Trade Secret Act (DTSA) was signed into law by President Barack Obama on May 11, 2016. With the DTSA, all forms of intellectual property claims may be brought in federal court. The federal courts have original federal jurisdiction over claims brought, so long as the trade secrets (TS) at issue are “related to a product or service used in, or intended for use in, interstate or foreign commerce.”

2. The DTSA is not retroactive

If the misappropriation of trade secrets is “related to a product or service used in, or intended for use in, interstate or foreign commerce” and the misappropriation occurred after May 11, 2016, the case can be heard in federal court.

3. The DTSA does not preempt state law.

Existing state laws on trade secrets are not pre-empted by the DTSA, so you can choose between federal or state court, and federal or state law, for claims involving misappropriation of trade secrets. Because the DTSA was enacted pursuant to Congress’s Commerce Clause power, it does not confer federal jurisdiction over purely intrastate activities (occurred only within New Hampshire, for example). An important note regarding preemption is that the DTSA cannot weaken “tougher” state laws; this is particularly important in a non-compete context where some states are very pro-employee.

4. The definition of “trade secrect” has changed with DTSA

The definition of a “trade secret” has been amended with the DTSA. Previously, a trade secret was defined, in part, as information deriving independent economic value from not being generally known to (or readily ascertainable through proper means by) the public. Now, it is important to note that (a) the owner thereof must have taken reasonable measures to keep such information secret; and (b) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.” “Improper means” includes “theft, bribery, misrepresentation, breach or inducement of breach of a duty to maintain secrecy, or espionage through electronic or other means.” This definition does not include “reverse engineering, independent derivation, or any other lawful means of acquisition.”

5. Trade secrets need to be identified and protected

Trade secrets get their value from being kept secret. It is important to have policies in place that catalog and protect these valued assets. Internal audits should be conducted periodically to maintain trade secret status and to address any issues. New employees should be provided with an employee handbook that describes policies and procedures for TS protection. Procedures such as “need to know” should be employed wherever possible. Exiting employees should have an exit interview where TS information is captured, cataloged, and the policy is reiterated to remove any confusion. Login information for a former employee should be terminated immediately.

It is advisable to require confidentiality agreements as a condition of employment (or of continued employment) and as a condition of engagement of any contractors or consultants. It is also important to make sure any contracts or confidentiality agreements with employees, contractors or consultants that govern the use of a trade secret or other confidential information contain notice of whistleblower immunity.

6. There is a whistleblower “carve out”

There is a whistleblower immunity provision to protect individuals from criminal or civil liability for disclosing a trade secret if it is made in confidence to a government official, directly or indirectly, or to an attorney, and it is made for the purpose of reporting a violation of law.

7. Must give notice of safe harbor

The whistleblower immunity provision places an affirmative duty on employers to provide employees notice of the new provision in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” This notice provision applies to contracts and agreements that are entered into or updated after May 11, 2016.

Employers are required to include notice of the whistleblower immunity. If an employer does not provide the above notice, the employer may not be awarded exemplary damages or attorney’s fees in a federal trade secret litigation against such persons. Notice obligations may be satisfied by cross-referencing a separate policy document.

8. Ex parte seizure rules

The DTSA contains an important remedy that is not normally granted under state trade secret laws. It allows for seizures of property in “extraordinary circumstances” to prevent the propagation or dissemination of a trade secret. A party seeking a seizure order must be able to establish that other equitable remedies, like a preliminary injunction, are inadequate. A determination of whether there are “extraordinary circumstances” to warrant the seizure requires analysis of several factors. There are several safeguards in the act as well, to prevent abuse of the seizure provision.

9. Statute of limitations

The statute of limitations is three years. A civil action may not be commenced later than three years after the date on which the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.

10. Damages

The DTSA provides for actual damages, restitution, injunctive relief, exemplary relief, and attorney’s fees. A plaintiff may claim actual damages plus any unjust enrichment, or damages measured by a reasonable royalty. In cases of willful or malicious misappropriation, exemplary damages are available up to twice the amount of actual/reasonable royalty damages. Attorney’s fees are available, but only if a claim is brought in bad faith.

Injunctive relief for actual or threatened misappropriation of trade secrets is available; however, a court will not ordinarily enjoin a person from entering into an employment relationship. In other words, the DTSA does not follow the “inevitable disclosure” doctrine.

Kim Peaslee

Kim Peaslee is an intellectual property attorney at Upton & Hatfield in Concord. Her practice focuses on all forms of IP, including patents, trademarks, copyright and trade secrets.

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