The US Congress passed the Defend Trade Secrets Act of 2016 on Wednesday, April 27th. President Obama has stated that he will sign the bill.

This bill creates a new civil action to protect trade secrets. Previously, the only federal-law protection of trade secrets was found in federal criminal law (the Economic Espionage Act). And civil lawsuits were brought under the authority of state law. And almost all states have adopted some form of the Uniform Trade Secrets Act, except New York, Massachusetts, and North Carolina. But despite many states passing some version of the Uniform Trade Secrets Act, each state has a unique body of law with meaningful differences. Thus there was no uniform legal standard applied to trade-secret cases throughout the country, until now.

Because this uniform body of law will apply to interstate or foreign commerce transactions, this should reduce the unpredictability of what trade-secret law will apply in cases involving parties in different states. But the new law will not preempt existing state laws; rather, the new law provides additional legal protection for trade secrets. So trade-secret owners should stay mindful of the differences that exist between the trade-secret laws of various jurisdictions.

Here are some additional highlights:

• Restraints on competition: The DTSA allows a court to put restraints on employees going to a competitor, if needed to protect a trade secret; but the DTSA makes it clear that any injunctive relief cannot run afoul of state law on restrictive covenants, something of particular importance in California.
• Damages & Relief: A party can get the following damages and relief: (1) injunction to prevent actual or threatened trade-secret misappropriation; (2) damages, including (i) actual loss and (ii) damages for unjust enrichment that is not duplicative of actual-loss damages, or (iii) in lieu of other damages, a reasonable royalty; (3) exemplary damages (not more than two-times the amount of damages awarded) for willful and malicious misappropriation; and (4) attorney’s fees for a bad faith trade-dress assertion, a bad faith motion to terminate an injunction, and a willful and malicious trade-secret misappropriation.
• Immunity: Employees will be immune for disclosures to government officials for purposes of “reporting or investigating a suspected violation of law” or disclosures in documents filed in court, if the disclosures are made under seal. If an employer does not give an employee (including contractors or consultants) notice of this immunity, the employer cannot get exemplary damages or attorney’s fees for a DTSA action against that employee.
• Seizures: Trade-secret owner can have the court seize “property necessary to prevent” disclosure of the trade secret “upon ex parte application but only in extraordinary circumstances.” And the court must “take appropriate action to protect the person against whom an order . . . is directed from publicity.” The seizures are enforced by federal law enforcement, who may allow state and local officers to help. Victims of wrongful seizures will have their own cause of action, if the party that moved for seizure cannot support his or her original seizure application at a seizure hearing.
• Statute of limitations: 3 years after the misappropriation of the trade secret is discovered or by the “exercise of reasonable diligence would have been discovered.”
• Effective date: Only covers misappropriation that occurs on or after the date of enactment.
• TRIPs & EU Trade-Secrets Directive: It is interesting to note that the DTSA will “not be construed to be a law pertaining to intellectual property for purposes of any other Act of Congress.” Similarly, the new EU Parliament describes trade-secret protection under the new EU Trade-Secrets Directive as “[a]nother means of appropriating the results of innovation,” in addition to intellectual-property rights. But both the United States and the EU member states have signed the Trade-Related Aspects of Intellectual Property Rights (TRIPs) that defines trade secrets as a form of intellectual-property rights. Hence there is a hesitancy to squarely define and protect trade secrets as intellectual property, despite previous international-treaty obligations. It will be interesting to see how this new attitude impacts future treaty negotiations.

Until recently, some federal district courts adopted a doctrine called international or foreign patent exhaustion. The Federal Circuit has now clarified that this doctrine does not exist in patent law in Lexmark International, Inc. v. Impression Products, Inc.

What is patent exhaustion?

Patent exhaustion prevents a patent owner from demanding payment for use of its invention in a product. But a patent is exhausted only if the patent owner unconditionally authorized the first sale of that product. Federal courts created the theory, so a patent owner is not compensated again after unconditionally allowing the first sale of a product using its patent.

But that first sale must be in the United States. An authorized foreign sale of that product cannot exhaust the U.S. patent right. That is true even if the patent owner makes the sale. In 2005, the Federal Circuit—the court that hears all patent appeals—reaffirmed this: “foreign sales can never occur under a United States patent because the United States patent system does not provide for extraterritorial effect.”

This territorial limitation is beneficial for at least two reasons. First, it provides U.S. businesses with more control over how their patented inventions enter the U.S. market. This ensures that businesses investing in intellectual property can control the quality of their brand and participate in the revenue generated by selling their inventions in the United States.

Second, patent owners can put their invention in the hands of the world’s poor without jeopardizing the return on investment they need to innovate and improve millions of lives. For example, pharmaceutical companies can sell patented drugs in developing countries for a lower price than in the United States without exhausting their U.S. patent rights. If the territorial limitation didn’t exist, anyone could exhaust a U.S. patent by purchasing a large amount of licensed drugs at a lower price in a developing country. That person could then undercut the patent owner’s prices in the United States.

Some lower courts ignore the territorial limitation

Some lower court decisions put this territorial limitation at risk. In June 2014, the Northern District of California found that Round Rock Research exhausted its patent rights because Round Rock’s licensee— Toshiba—sold memory chips to SanDisk in Japan under a worldwide license; that license included all of Round Rock’s patents from the United States and other countries.

It distinguished the cases requiring a U.S. sale by explaining that Round Rock already received compensation for its U.S. patent when it licensed the patent to Toshiba before the Japanese sale. It also relied on a 2011 Federal Circuit case—Tessera, Inc. v. International Trade Commission—that applied the doctrine of exhaustion to licensed, foreign sales.

But the Northern District got it wrong. The license to Toshiba cannot exhaust the patent because the use of the patent by Toshiba is conditional—it depends on the license’s terms and conditions. Because the license is not unconditional, it cannot exhaust the patent.

Also, the sale by Toshiba to SanDisk in Japan is not a sale under a United States patent because—even though Toshiba is a licensee of the U.S. patent—that patent has no effect in Japan. Hence, no sale can occur under it.

Further, there is a legal principle that someone cannot sell more than he or she owns. And the Northern District recognized that if Round Rock itself sold the memory chips to SanDisk in Japan, the patent would not be exhausted. Therefore, Round Rock cannot sell the right to exhaust its patent by a foreign sale to anyone, including Toshiba. The court did not address this issue.

Moreover, the court read too much into the Federal Circuit applying exhaustion to foreign sales under a worldwide license in Tessera in 2011. In Tessera, the patent owner waived its argument that foreign sales under a worldwide license did not exhaust its patent. Exhaustion was applied because of a procedural mishap: the patent owner lost its right to raise the territorial limitation. In fact, the Federal Circuit upheld the territorial limitation as recently as 2012 in Ninestar Tech. Co. v. International Trade Commission.

By applying international patent exhaustion, lower courts—like the Northern District of California—put our technology sector and affordable drugs for the world’s poor at risk.

The Federal Circuit adds clarity but questions still remain

The Federal Circuit corrected this erosion of patent exhaustion’s territorial limitation in Lexmark. In Lexmark, the Federal Circuit held that “there is no legal rule that U.S. [patent] rights are waived, either conclusively or presumptively, simply by virtue of a foreign sale, either made or authorized by a U.S. patentee.”  The Federal Circuit did hold open the possibility that in future cases there may be express- or implied-license defenses available in these types of situations. The facts that will support those kind of defenses will be developed through attorney argument and case law.

– by Gunnar Gundersen