The New Federal Defend Trade Secrets Act

Speaking of trade secrets, there’s a new civil law on the books.

Two weeks ago, with a stroke of the President’s pen, Congress enacted a law that allows you to sue (or be sued) in federal court for the theft of trade secrets. The new law amended a criminal statute that we alluded to in last week’s post.

The amended statute defines a trade secret as any information you own that you’ve taken reasonable steps to keep secret and that derives economic value from not being known to, nor readily ascertainable by, another person who could derive value from it. The law provides federal jurisdiction for civil claims if the trade secret has sufficient nexus to interstate or foreign commerce. It doesn’t preempt any state laws.

If you’ve got a claim, you must bring it within three years of the date you discovered the theft or should’ve discovered it through reasonable diligence.

If you win, you can get injunctions to protect your trade secret as well as recover damages for your actual losses, their unjust gains, or your reasonable royalties. If you prove that the other side acted in bad faith, you can get punitive damages up to double your other damages, along with reasonable attorneys’ fees.

Plus, at the outset, not only can you sue (or be sued), you can apply for an emergency restraining order to freeze or seize property you need to preserve your trade secret, without notice to the other side.

The courts won’t just dole these orders out, though, because the law reserves them for “extraordinary circumstances.” To get one, you must clearly allege specific facts to show, among other things, that the bad guys stole your trade secret and would hide or destroy the property or evidence if they were given notice. And you have to put up security in advance to cover their damages if it turns out you were wrong or went too far.

If you do get a restraining order, the law requires that the seizure be carried out in a way that minimizes harm to any legitimate business operations. The court will schedule a hearing within seven days of the order, and there, you’ll have to prove up the underlying facts or the court will dissolve or modify its order.

If it turns out you were wrong or went too far, anyone harmed by your seizure can sue you for their damages, including lost profits, cost of materials, loss of good will, punitive damages if you acted in bad faith, and reasonable attorneys’ fees in most cases.

Finally, the law protects whistleblowers who disclose trade secrets in the course of reporting a violation of law, as well as parties to litigation who disclose trade secrets in a court filing, as long as they file it under seal and abide by any subsequent court orders.

For the full text of the statute, see here.

What Are Your Intentions?

In most white-collar cases, the main driver at sentencing is the dollar amount of the victim’s loss, and in federal cases, the rule is that you’re responsible for either the actual loss or your intended loss, whichever is greater. We touched on the difference between actual and intended loss in this post from last spring.

But recently, an influential federal court of appeals had to decide a case in which the defendant stole his employers’ trade secrets but didn’t actually cause or intend any loss.

How so?

The defendant was a young financial analyst who, over a two-year period, worked for two securities firms. Both firms had created computer software to engage in high-frequency trading, where a computer trades at lightning-fast speed in response to market events. Each firm had invested time and money to develop the algorithms behind its software.

The defendant pleaded guilty to copying their computer programs for his own use, but he didn’t sell them, publish them, or take them to a competitor.

Instead, he used them to start making computerized trades himself, and he lost $40,000 in the process. There was no evidence he had any bigger plans for them than that. He got caught when the second firm grew suspicious of the activity on his work computer, which led to his being indicted for wire fraud, computer hacking, and theft of trade secrets.

At sentencing, everyone agreed that the two firms had suffered no actual loss, and there was no evidence the guy intended to cause them any loss at all.

The trial court, however, found that he intended to cause a loss of $12 million because that was the total labor cost that the firms incurred in developing their software.

That number made a big difference. Under the federal sentencing guidelines, it jacked up the guy’s suggested sentence from probation, which may have included some time in home detention or a halfway house, to a sentence of seven to nine years in prison. Based on that, the court sentenced him to three years in prison.

And yet, there was no evidence that the guy intended to cause the victims any loss, let alone a loss that equaled their internal cost of development. Although the trial court could consider such costs under the sentencing guidelines, it could not base its loss estimate on those costs alone without any proof of the defendant’s intent.

So the court of appeals sent the case back for resentencing.

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