The long reach of the Defend Trade Secrets Act

Not just for US companies:

The recently passed Defend Trade Secret Act in the USA has a long reach, a reach so long that the new law should be as much of a concern to British, German, Chinese or Japanese companies as it is to US companies. The new law’s reach has also been extended by tethering it with the US federal racketeering law.

Think the DTSA doesn’t apply to your non-US company? Think again.

One of the first DTSA litigations, for example, was brought against a researcher at Monsanto who was accused of stealing trade secrets to benefit his new employer in China.  Monsanto Co. v. Chen, Case No. 4:16-cv-876 (E.D. Mo.).

German, British, Canadian, and Chinese companies have thus far appeared in US courts as either defendants or plaintiffs in DTSA cases. Other non-US companies have also likely been involved but tracking trade secret cases in the US federal court database is not straightforward.

How does a non-US company get snared?

Well there are a number of ways in which a non-US company could get snared by the DTSA.

In order to understand how, it is important to first understand that filing a DTSA complaint in a US federal court requires both “subject matter jurisdiction” and “personal jurisdiction”.

Then non-US companies need to understand the concept of "extraterritorial jurisdiction". Extraterritorial jurisdiction is the legal ability of a government to exercise authority beyond its normal boundaries.

And last but not least, non-US companies need to appreciate that the DTSA's reach has also been extended by tethering it with the US federal racketeering law.

Subject matter jurisdiction:

For subject matter jurisdiction, the civil provisions of the DTSA apply to the misappropriation of trade secrets if the “interstate commerce or foreign commerce” requirement of the law is satisfied.

The provision is spelled out in 18 U.S. Code § 1832 of the former Economic Espionage Act that served as the basis for the DTSA:

(a) Whoever, with intent to convert a trade secret, that is related to a product or service used in or intended for use in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will, injure any owner of that trade secret, knowingly—

(1) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains such information;

(2) without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys such information;

(3) receives, buys, or possesses such information, knowing the same to have been stolen or appropriated, obtained, or converted without authorization;

(4) attempts to commit any offense described in paragraphs (1) through (3); or

(5) conspires with one or more other persons to commit any offense described in paragraphs (1) through (3), and one or more of such persons do any act to effect the object of the conspiracy, shall, except as provided in subsection (b), be fined under this title or imprisoned not more than 10 years, or both.

(b) Any organization that commits any offense described in subsection (a) shall be fined not more than the greater of $5,000,000 or 3 times the value of the stolen trade secret to the organization, including expenses for research and design and other costs of reproducing the trade secret that the organization has thereby avoided.

The DTSA differs from its predecessor Economic Espionage Act in that the DTSA, among other things, provides for a civil cause of action for parties harmed by a trade secret theft.

Personal jurisdiction:

Personal jurisdiction under the DTSA, for the most part, resembles personal jurisdiction under the bulk of US federal law. So, for example, personal jurisdiction against a non-US company might be established in these situations for example:

• The company sell products or services in the US and runs into a trade secret dispute there;
• The company has a business relationship with a US company (e.g., supplier, distributor, partner, subcontractor, customer, etc.), and the trade secret dispute involves the US company;
• The actual theft of the trade secret takes place in the US;
• An employee of the company leaves and goes to work for a US business, and takes the trade secret with them, or
• An employee of a US company leaves and goes to work for the non-US company, and takes the trade secret with them.

Personal jurisdiction is often a litigated factual and legal matter (as well as often requiring a constitutional analysis under cases such as the US Supreme Court’s decision in International Shoe Co. v. Washington (1945) and its progeny). So, cut and dried answers to personal jurisdiction can become complicated and require individual analysis by legal counsel.

Extraterritorial jurisdiction:

The DTSA also retains the extraterritorial jurisdiction of its predecessor Economic Espionage Act where:

• The offender is a U.S. citizen or permanent resident; or
• The offender is an organization organized under the laws of the United States or any State or political subdivision thereof; or
• An act in furtherance of the offense was committed in the United States

Civil Jurisdiction under the Racketeer Influenced and Corrupt Organizations Act:

The DTSA also amended the RICO Act by adding theft of trade secrets under DTSA sections 1831 and 1832 as a racketeering activity, also known as a “predicate act.”

RICO provides civil plaintiffs with a separate cause of action related to trade secret misappropriation with different elements and damages. In some cases, a civil RICO claim could possibly bring higher damages than a trade misappropriation claim.

Among other things, this change may allow non-US defendants to be hauled into US courts as co-conspirators in a RICO case as an alleged “criminal enterprise” based on a pattern of racketeering activity, e.g., a series of actions involving the theft of trade secrets.

So, for example, if a multinational company has the habit of nicking trade secrets from start-up companies whose products they find attractive, then the multinational might possibly find itself accused of being a criminal enterprise and facing extremely severe penalties in US federal court.

Civil RICO litigation typically depends upon whether the defendant’s predicate acts constitute a pattern. A “pattern” means that at least two predicate acts were committed, that the predicate acts were related to one another, and that the predicate acts amount to or pose a threat of continued criminal activity. The US Supreme Court in RJR Nabisco, Inc. v. The European Community affirmed that the predicate acts may be committed outside the United States, although the plaintiff must still prove a domestic US injury in order to prevail on the RICO claim.

While there is little case law yet, tying the DTSA to RICO may facilitate obtaining jurisdiction over non-US defendants who are not actually present in the US. Of course, non-US defendants with contacts in the US are likely already subject to personal jurisdiction in the US, as discussed above.

Trade secret asset management:

Think the DTSA doesn’t apply to your non US company? Think again.

So what should a non-US company being doing? Clearly trade secrets and trade secret asset management need to be taken seriously. I recommend that the following steps be taken at the very least ...

·        A trade secret policy should be created.

·        A top level trade secret process should be defined – identification; analysis; review; protection; and on-going monitoring.

·        A trade secret asset management system should be taken into use as technology can greatly help underpin the process.

·        A section on trade secrets should be added to the existing training for all employees within the company.

·        A governance structure should be put in place.

This paper is co-authored by Tom Ewing and Donal O'Connell

Donal O'Connell is the Managing Director of Chawton Innovation Services Ltd. His company helps clients with trade secret asset management and provides trade secret asset management tools. More info available on request. See Hazel

Donal is available as an expert witness as far as trade secret asset management best practice, as well as trade secret asset management processes and systems and the associated metadata in any trade secret misappropriation cases.