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Federal court to be new battlefield for trade secret violation disputes

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The Defend Trade Secrets Act of 2016, which President Barack Obama signed into law earlier this month, establishes a smoother legal path for businesses pursuing trade secrets litigation by letting them take their case to federal court.

Until now, businesses in most states could file suit under the Uniform Trade Secrets Act of 1979 as amended in 1985, but had to do so only in state courts. The problem is states have adopted different versions of the law, which has resulted in complications for firms doing business in multiples states or where data has been moved out of state, experts say.

They also note there already are federal civil remedies available for other categories of intellectual property including patents, trademarks and copyrights.

While businesses still can file litigation in state courts, allowing them to turn to federal courts permits development of more consistent federal case law on which to adjudicate the growing number of thefts of trade secrets.

International intellectual property theft generates annual losses of more than $300 billion annually, according to a May 2013 report by the Commission on the Theft of American Intellectual Property.

“Trade secret violations are happening every day, and they're becoming more and more serious,” said Paul E. Starkman, a member of law firm Clark Hill P.L.C. in Chicago. Employees, contractors and those with access to companies' computer systems “are misappropriating data at an exponential rate that is growing every year.”

“With employees leaving and going to new jobs, they are taking with them not just their knowledge, to which they are entitled, but we're also seeing more and more efforts to short circuit what would normally be a startup cost and time frame” as employees bring with them their former companies' trade secrets, said Lee F. Johnston, a partner at Dorsey & Whitney L.L.P. in Denver.

The legislation the president signed won rare bipartisan congressional approval, with a 410-2 vote in the House and 87-0 in the Senate.

Previously, businesses “were required to rely on sort of a patchwork of state laws, which sometimes are consistent and sometimes aren't,” said Clifford R. Atlas, a principal at Jackson Lewis P.C. in New York.

The new law will “provide more consistency in terms of how the courts treat trade secrets, which allows companies to better model their behaviors” and provide them with “more consistent guidance,” said Steven J. Berryman, a partner at Quarles & Brady L.L.P. in Milwaukee.

A controversial part of the law is its ex parte seizure remedy, which allows courts to enter an order permitting the seizure of stolen trade secrets without having to provide a previous warning to its target. Under this provision, which is not in state laws, the company seeking the order must first demonstrate it would suffer an “immediate and irreparable harm” if the order was not issued.

“I would presume that the ex parte seizure order would be very, very rarely granted,” although the potential would increase when a suspected employee is about to leave the country, said Mark F. Saloman, a partner at Ford & Harrison L.L.P. in Berkley Heights, New Jersey. “There's no guidance right now as to what it will take to get that seizure order, and it may very well depend on the judge that you draw.”

“It gives companies a degree of comfort to know that it's not going to take months or possibly years to lock down evidence,” said Mr. Johnston, who said a court must hold a hearing on the ex parte seizure within seven days.

However, Michael P. Elkon, a partner at Fisher & Phillips L.L.P. in Atlanta, said the impact on firms at the receiving end of these orders could be “devastating” because “it can freeze an entire business.”

Experts say the law has a whistleblower provision, granting immunity to employees or contractors who reveal trade secrets while reporting a violation to an attorney or government official. The law requires employers to inform employees and independent contractors of this immunity, which experts say could require changes in employment agreements.

Most observers say they do not expect the law to significantly affect the insurance market, in large part because trade secrets are rarely insured. A trade secrets claim usually “falls outside the scope of most commercial policies,” said Mr. Salomon.