aNewDomain — The Defend Trade Secrets Act, the first federal trade secret law, is shaking up the tech world. Ever since President Obama signed the Defend Trade Secrets Act on May 11th, extending trade secret law from the purview of state law to federal law, tech companies have been scrambling.
Nothing else in IP law has the drama of a good trade secrets case. As one would expect, the new law is a trim 12 pages unlike its pudgy 98-page patent law cousin. A copy of the new trade secret law is provided below the fold.
Patents in the past few years, especially software patents, have become less attractive for many tech companies. Many innovations that can be patented can also be protected as a trade secret. Unlike patents, trade secrets don’t have to be technical; they can simply be anything of commercial value that is not public. Trade secrets also have no official expiration date unlike patents.
Among its benefits, the new law includes a provision that enables an ex parte motion for the “seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action” in extraordinary circumstances.
Panera Slams Papa Johns over Trade Secrets
Dozens of companies have already used the new federal trade secret law, including Panera, the bakery-café chain that operates more than 2,000 stores in North America. In early July, Panera sued pizza chain Papa Johns having nearly 5,000 stores with theft of trade secrets. The full complaint is provided below.
Panera claimed that Mike Nettles, its former head of IT, was using the company’s trade secrets in his new job as head of IT at Papa Johns. Panera’s complaint details the lengths the company had taken to develop its IT infrastructure to facilitate small orders and catering and that Papa Johns now had access to these plans.
In August, the court granted a temporary injunction to Panera. The order prevented Nettles from working for Papa Johns, prevented Papa Johns from seeking Nettles’ advice, and instructed the parties to find a neutral expert who could inspect Nettles computer. In its arguments, Panera pointed out that Nettles had signed a confidentiality agreement that called out Papa Johns as a competitor.
The parties settled their dispute on Oct. 11 on undisclosed terms.
The new law boosted Panera’s ability to enforce its trade secrets since Panera has its headquarters in St. Louis while Papa Johns has its headquarters in Louisville. Under the previous law, Panera would have likely needed to sue Papa Johns in federal court but use Missouri state trade secret law rather than the new federal law.
The new federal law does not force plaintiffs to use federal law, and there are still many trade secret cases in state courts.
Tech Companies Scramble to Document Their Trade Secret Inventories
To protect their trade secrets under the new law, many tech companies need more formal procedures for inventorying their trade secrets. After all, it’s difficult to manage something if you haven’t written it down. IP attorney Jim Pooley who specializes in trade secrets has recommended that companies assemble a plan for protecting their trade secrets.
In the Papa Johns litigation, Panera presented the court with a confidentiality agreement signed by the defendant before he left for Papa Johns. Confidentiality agreements are fairly standard in the industry, but Panera also included in their agreement a list of all the companies that they considered head-to-head competitors. Panera also seems to have quickly identified for the court the internal work product possessed by the defendant that was considered by the company to be a trade secret.
The new law highlights the importance of trade secret management systems. Tech companies may need to acquire fairly sophisticated systems for inventorying their trade secrets as well as systems for recording the metadata related to these secrets, such as who in a company has access to a given trade secret. The new law complicates the ability of trade secret owners to identify trade secrets after they have been stolen.
In the past, trade secret litigation has sometimes had less formal rigor than patent litigation. The new federal law appears to change this for federal cases, which may eventually spill over to state cases as well. These increasingly formal requirements further suggest the value for companies of more rigorously holding their trade secrets.
The new law has encouraged tech companies to check their internal controls to ensure they are properly protecting their trade secrets. An audit of corporate assets to identify and designate trade secrets, determine who can access the trade secrets, and specify how the trade secrets are maintained may be well advised.
Companies that share their trade secrets with third parties may also want to review these agreements and place tighter controls on them, or at least impose some degree of rigor so that the company won’t be embarrassed later when trying to explain in court that something was a trade secret when it had been freely shared for years with contractors and customers.
The new federal trade secret law contains immunity and anti-retaliation provisions intended to protect persons who may need to disclose trade secrets. Section 7(b) of the law provides immunity to persons under any federal or state trade secret law for the disclosure of a trade secret that is made “(i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney for the sole purpose of reporting or investigating a suspected violation of law, or (ii) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.”
Further, if an employee files a lawsuit against his or her employer alleging retaliation for reporting a suspected violation of law, the employee may disclose the trade secret to his or her attorney. The employee may also use the trade secret information in the court proceeding, provided that the employee files any document containing the trade secret under seal and does not disclose the trade secret except pursuant to court order.
The new trade secret law requires employers to provide their employees notice of the law’s immunity provision “in any contract or agreement with an employee that governs the use of trade secret or other confidential information.” Companies can comply with this requirement by providing their employees a notice that sets forth “the employer’s reporting policy for a suspected violation of law.” If the employer fails to comply, the employer cannot be awarded exemplary damages or attorneys’ fees in an action against an employee to whom notice was not provided.
The Defend Trade Secrets Act of 2016
[scribd id=327513798 key=key-TA2Dy6ASuTsuPLOeykWl mode=scroll]
Panera LLC v Papa Johns Pizza:
[scribd id=327514777 key=key-d0e8EuNTTDTWhQ3as6TO mode=scroll]
Cover: World War II secrets poster: courtesy Wikimedia Commons, public domain; Two Children Fighting Over a Piece of Bread: by Henri-Pierre Danloux via Fine Art America, All Rights Reserved. The Eavesdropper by JohannesVermeer: EssentialVermeer.com, All Rights Reserved.