A new federal private cause of action to protect trade secrets appears imminent. Since North Carolina already allows private parties to bring a civil action to protect their trade secrets, we compare the two statutes and answer several practical questions related to the dual protection.
1. Do the statutes protect the same things?
The North Carolina Trade Secrets Protection Act (“NCTSPA”) defines a trade secret as business or technical information,including but not limited to a formula, pattern, program, device, compilation of information, method, technique, or process that derives independent actual or potential commercial value from not being generally known or readily ascertainable through independent development or reverse engineering by persons who can obtain economic value from its disclosure or use and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
The Federal Defense of Trade Secret Act (“FDTSA”) defines a trade secret as all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if the owner thereof has taken reasonable measures to keep such information secret and the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by the public.
Though the federal definition is much wordier, the two definitions are very similar. Essentially both statutes protect financial or technical information that has economic value because it is not generally known and the owner has taken reasonable steps to protect the secrecy of the information.
2. Does the same conduct constitute a misappropriation or violation of both statutes?
The Federal statute defines a misappropriation as the “acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means or disclos[es] or use[s] a trade secret of another without express or implied consent.” Improper means includes, among other things, acquisition “under circumstances giving rise to a duty to maintain the secrecy of the trade secret.” Notably, reverse engineering is not improper.
The NCTSPA defines misappropriation as “acquisition, disclosure, or use of a trade secret of another without express or implied authority or consent, unless such trade secret was arrived at by independent development, reverse engineering, or was obtained from another person with a right to disclose the trade secret.” Reverse engineering is lawful under the State statute as well.
In contrast to the FDTSA, the NCTSPA does not make knowledge or reason to know that the information is a trade secret an element of misappropriation. However, as discussed below, knowledge or reason to know significantly impacts the remedies available under the State statute.
3. Do the statutes offer the same remedies?
Damages are available under both the State and federal statutes. Under the State statute actual damages are measured by either the economic loss to the owner or unjust enrichment of the defendant. Punitive damages are available if the misappropriation was willful or malicious.
Under the FDTSA, damages are available measured by damage to the owner, unjust enrichment to the defendant, or as a reasonable royalty. If the misappropriation is willful and malicious exemplary damages are available in an amount up to three times (House version; two times in the Senate version of the Bill) the amount of compensatory damages awarded.
Both the State and federal statute provide for injunctive relief to prevent the use or disclosure of trade secrets. The State statute provides that an injunction may condition use of the trade secret on the payment of a reasonable royalty. Under the State statute, the knowledge or reason to know that the information is a trade secret has significant effects on the remedies available.
For instance, no damages are available for use prior to the time the defendant knew or had reason to know it was a trade secret. If the defendant has materially changed its position prior to knowledge then she cannot be enjoined but may be required to pay a royalty. Further, if the defendant has acquired inventory without knowledge he may dispose of the inventory without payment of a royalty.
Preservation of Secrecy: The NCTSPA explicitly allows the court to take steps to preserve the secrecy of the trade secret. Since by definition, the secret derives value from not being publicly known anything less would be self-defeating. Under the State statute, this includes:
- sealing the record
- in-camera proceedings and
- protective orders.
In addition to the means of preservation available under the NCTSPA, the federal statute also provides for “civil seizure” of the trade secret. In some cases, this may be a very important remedy but there is a heightened threshold to be met before it is available. The details of civil seizure under the FDTSA is beyond the scope of this post but will be discussed in a subsequent blog post.
4. Can the prevailing party recover attorneys’ fees?
Under the FDTSA, reasonable attorneys’ fees are available to the Plaintiff where the trade secret is willfully or maliciously misappropriated or where a motion to terminate an injunction is made in bad faith. Fees are available to the defendant when the claim of misappropriation or an opposition to a motion to terminate the injunction is made in bad faith.
Likewise, under the NCTSPA, attorneys’ fees are available to the prevailing party if the claim of misappropriation was made in bad faith or if the misappropriation was willful or malicious.
5. When must the action be brought?
A claim under the North Carolina statute must be brought within three years of the misappropriation or within three years of when it was or reasonably should have been discovered.
The Senate and House versions of the FDTSA have different statutes of limitation. The Senate version allows three years but the House would allow five years. Although a five year statute of limitations in some cases may make a difference, waiting five years to protect a valuable trade secret may impact the determination of how valuable a secret it is in the first place.