Coming to terms with the US introduction of DTSA

Q: What’s the relevant background to the US promulgating the Defend Trade Secrets Act of 2016 (DTSA)?
A: The trade secret is the proprietary information of commercial value. In today’s era of information technology, the trade secret is becoming an important competitiveness factor for enterprises, but it also faces an increasingly urgent need for protection. In view of this, countries have been trying to explore how to strengthen protection of trade secrets. On 11 May 2016, US President Barack Obama signed the Defend Trade Secrets Act of 2016, meaning trade secrets will now receive the same official protection as patent, trademark and copyright by US federal legislation.

For a long time, states in the US protected trade secrets mainly through the common law. Since there is a great difference concerning determination of trade secrets, allocation of the burden of proof etc., among the states, trade secret owners often face many problems when protecting their legal rights. In 1979, the Uniform Law Commission (ULC) published the Uniform Trade Secrets Act (UTSA) in an effort to unify the legal provisions concerning protection of trade secrets among the states. This endeavour achieved a lot, but because it was implemented by the states independently, the above-mentioned drawbacks have not been fundamentally resolved.

In 1996, in an effort to further unify the regulation on misappropriation of trade secrets, the US Congress passed the Economic Espionage Act (EEA) and tried to make misappropriation of a trade secret a federal crime. However, the solution offered by criminal legislation is very limited and cannot give various civil remedies required by trade secret owners. The US Congress has been trying to pass a bill that further strengthens the protection of trade secrets, to make up for deficiencies in the legislation. So the adoption of the DTSA is in favour with the general public.

Q: What are the highlights or controversial points of the DTSA?
A: The DTSA reflects the essence of the UTSA, but it also contains a lot of positive changes from the perspective of strengthening the protection of trade secrets.

For example, it adopts and strengthens various remedies including punitive damages offered by state courts; it adopts a similar definition of trade secret with the UTSA, but also specifies the legitimacy of obtaining relevant information through “reverse engineering”, “independent research” and the like; it creates the procedure of ex parte seizures, thereby increasing the deterrence of trade secret litigation; and it explicitly denies the unconditional application of “inevitable disclosure doctrine”, thus reasonably protecting the legitimate movement of employees.

There are also many controversial points in the DTSA, and it’s worth continual observation on its implementations. For example, for the newly created procedure of ex parte seizures, some commentators strongly criticize that it may bring additional burdens to the enterprise accused of misappropriating trade secrets, and ultimately suppress innovation and encumber the establishment of healthy competition.

Furthermore, the DTSA specifically provides that the protection system of trade secrets in existing state laws will not be replaced. Some commentators believe that such a “double regulation” system may not standardize the protection system of trade secrets and, on the contrary, may stimulate forum shopping, causing the exact opposite of the final result and original intention of the DTSA.

Q: What are the new requirements raised by the DTSA to Chinese companies?
A: In recent years, with the growth of economic strength of China, the proportion of Chinese enterprises that import US technology and invest in the US market has increased significantly.

But because of various biased coverage by the media for so long, it is widely believed in US society that Chinese companies covet the trade secrets of US enterprises, and therefore Chinese enterprises must pay special attention to the DTSA.

In addition to the hot topics that have been widely discussed, Chinese companies may also need to pay special attention to the following two points.

First, the DTSA provides clear protection to employees who disclose trade secrets to government authorities confidentially; the DTSA also requires employers to give special notice or disclosure to employees concerning such exemptions required by the DTSA. These provisions may induce various bona fide or malicious reporting behaviour, especially against the general background that the US government continues to strengthen the supervision on Chinese enterprises operating in the US.

Therefore, Chinese enterprises operating in the US must update various types of labour contracts and non-disclosure agreements of the company (or its subsidiaries) based on the DTSA, and take a more prudent approach in dealing with various compliance matters.

Second, another debating topic of the DTSA is whether it will give relief to the misappropriation of trade secrets that have occurred completely outside the US. The DTSA itself has made no specific amendments to the extraterritorial jurisdiction provisions under the EEA, and it seems difficult to support such a radical interpretation.

According to relevant terms of the EEA, only when US companies or citizens are suspected of misappropriation of trade secrets of US companies (wherever the behaviour occurs), or only when foreign companies or individuals are suspected of misappropriation of trade secrets of US companies, and one of the above-mentioned acts occurs in the US, will the EEA have jurisdiction.

Therefore, if all the alleged acts of misappropriation of trade secrets occurred outside the US, the American company, as the trade secret owner, might not be able to file a lawsuit to the US federal court, according to the DTSA, only because it undertook the consequences of damage.

However, how the court will handle these cases remains to be seen. Before all this becomes clear, Chinese companies whose products are mainly exported to the US, or who have technology import and export co-operation with US companies, should check their internal trade secrets and sources in a timely manner, and strengthen security measures to avoid litigation risk under the DTSA, even if they are outside the United States.

Wu Li is a senior consultant and Arthur Dong is a partner at AnJie Law Firm