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What Employers Need to Know about the New Defend Trade Secrets Act

On May 11, President Obama signed into law the Defend Trade Secrets Act of 2016 (DTSA). The DTSA provides the first federal civil claim for misappropriation of trade secrets. Previously, employers had to rely on a patchwork of state laws to bring such claims. Now, employers will have access to the federal judiciary. Not only will this allow the federal court system to craft a more consistent body of law, it will make it easier for large companies to protect trade secrets across the nation. In addition, the DTSA provides a host of new remedies for employers to protect their trade secrets, as well as new protections for employees that employers must be aware of.

Trade Secrets

So what are trade secrets and why are they worth protecting? Put broadly, trade secrets are confidential information that provide economic value to a company. A trade secret can be a formula, process, pattern, or design - and even a customer list - that provides a company with an economic advantage over competitors. Famous examples are the Coca-Cola recipe and the formula for WD-40. Such information is of enormous significance to many companies and, in some instances, can be worth millions (or billions) of dollars.

Remedies

The DTSA is especially important because it not only provides greater recourse for employers by providing access to federal courts, but also provides significant remedies for protection of trade secrets. One common issue regarding trade secrets occurs when an employee with knowledge of a trade secret leaves a company and moves to a competitor. Employers often try to reduce the likelihood of this happening with non-compete agreements. Enforcement of non-compete agreements can be costly and time-consuming, however, and often come into play only after the trade secret has been disclosed. The DTSA, however, allows an employer to petition a federal court (without notice to the employee or possible defendant) to have the government seize property to prevent dissemination of a trade secret. Such an ex-parte seizure order is available only in “extraordinary circumstances” though, where other remedies are insufficient. Still, it does provide a new remedy for the employer.

In addition to seizure, the new law provides for injunctive relief, damages (including exemplary damages) and attorney fees in certain circumstances. Some avenues of relief for employers are narrower under the DTSA than under existing state law. For example, while the DTSA allows an employer to sue to prevent a former employee’s employment with a competitor – often allowed under state trade secret laws - to do so under the DTSA the employer must demonstrate “evidence of threatened misappropriation.” Under many state law trade secret statutes employers have been able to bring similar suits under an “inevitable disclosure claim,” arguing, that misappropriation is likely simply because of the information known by the employee. In this regard, the DTSA is friendlier towards employee mobility and limits an employer’s ability to pursue such claims.

Whistleblower Protections

Lastly, the DTSA has express protections for employee whistleblowing activities. This so-called immunity provision protects individuals from civil and criminal liability when disclosing a trade secret to an attorney or government agency in order to report a violation of law. Importantly, the statute requires employers to have posted or provided notice of the immunity provision (i.e. a whistleblower notice) before collecting exemplary damages or attorney fees under the statute in a suit against an employee for a trade secret violation under the DTSA. In other words, if an employer sues an employee for a trade secret violation under the DTSA, and notice of the statute’s immunity provision was not provided to the employee, the employer is foreclosed from seeking these remedies. The notice can be provided in any contract or agreement with an employee that governs the use of a trade secret or other confidential information (e.g. a non-compete agreement, employment contract, or employee handbook.) Further, under the immunity provision of the DTSA, the term “employee” includes contractors or consultants for an employer. Thus, the whistleblower notice should also be included in any independent contractor agreements.

This notice requirement applies to all contracts and agreements that are “entered into or updated” after the date of enactment of the DTSA – which occurred when the President signed it into law on May 11. Employers should immediately have all applicable documents and contracts reviewed by counsel to ensure compliance. Absent this provision, an employer likely will not be able to recover significant damages even if successful in an action under the DTSA.

Key Takeaways

- Employers should immediately contact counsel to review and revise any agreements which address trade secrets and confidentiality to ensure compliance with the whistleblower immunity notice requirements.

- Employers should discuss with counsel how the DTSA may impact their non-compete and independent contractor agreements and whether any substantive changes should be made.

- Employers should take this opportunity to evaluate their trade secret policies and practices to determine whether additional protocols should be implemented.

Image credit: commons.wikimedia.org

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