Legal Updates

Federal Trade Secrets Statute Offers New Remedies For Employers

This past May, President Obama signed into law the Defend Trade Secrets Act of 2016 (“DTSA”). This new statute provides for a broad range of claims and remedies under federal law for misappropriation of trade secrets, an area that largely had been governed solely by state law.

Background

In recent years, the topic of trade secret protection has been in the national spotlight, due in part to a number of high-profile cyber security breaches that have resulted in the theft of companies’ trade secrets. Businesses can face potential breaches on multiple fronts, as trade secrets can be stolen through highly technical or relatively simple means, and by parties ranging from huge foreign companies to single, low-level employees.

Typically, a trade secret is defined as a formula, practice, design, pattern, or compilation of information that is not generally known or reasonably ascertainable by competitors (or the public), and that has economic value due to its confidential nature. Unlike a patent, a trade secret need not be registered with any government agency in order to be protected, and the owner of a trade secret retains a legally protectable interest in it for as long as the information remains secret.

Trade secrets have historically been recognized as protectable intellectual property under the common law, and state courts have developed their own legal frameworks defining trade secrets and creating avenues for their protection. While most states have adopted legislation based on the Uniform Trade Secrets Act (“UTSA”), thereby providing some predictability in this area, prior to the enactment of the DTSA, there was no single, nationwide mechanism available for claims of misappropriation of trade secrets (apart from specialized types, such as patents).

Key Provisions Of The DTSA

Definitions.

Consistent with traditional common law definitions, the DTSA defines a trade secret as information (i) that the owner has taken “reasonable measures” to keep secret, and (ii) that “derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information . . .”

A claim for misappropriation may be brought under the DTSA on the basis of wrongful acquisition, use, or disclosure of a trade secret, including through “improper means” such as theft, bribery, espionage, misrepresentation, or breach of a duty to maintain secrecy. However, reverse engineering and independent derivation expressly do not constitute “improper means” under the statute.

Remedies.

Under the DTSA, parties seeking redress for misappropriation of trade secrets may obtain actual damages, restitution, punitive damages (up to two times the award of actual damages), and attorneys’ fees.

In addition, the DTSA provides that, in certain circumstances, a party may ask the court to issue an ex parte order directing the seizure of misappropriated trade secrets, without prior notice to the alleged offender. Given the due-process concerns raised by such seizures, the statute includes several protections designed to limit their use and scope. For example, the court may place limits on the timing of any potential seizure and may dictate whether government officials may forcibly enter locked areas to enforce a court-ordered seizure. Further, a party seeking an ex parte seizure must establish that less intrusive equitable remedies – such as a preliminary injunction – would be inadequate.

Statute Of Limitations.

A civil action may be brought under the DTSA for up to three years after the date the alleged misappropriation occurred or reasonably could have been discovered.

Protections For Employees And Whistleblowers.

The DTSA offers some protection to individuals privy to an employer’s trade secrets who are seeking employment with a new business. Under the statute, a court may not issue an injunction that entirely precludes a defendant from accepting new employment based on threatened or actual misappropriation of trade secrets. However, where evidence of threatened misappropriation is shown, a court may place appropriate limits on the new employment relationship. Any such order must rest on actual evidence of threatened misappropriation, and not on an individual’s mere possession of trade secrets. In other words, under the DTSA, a court will not limit an employment relationship based on a theory of “inevitable disclosure.”

Further, insofar as an individual discloses a trade secret to a government official or an attorney for the purpose of reporting a violation of law, the DTSA grants such whistleblowers immunity from criminal prosecution or civil liability for the disclosure.

Confidentiality Agreements.

A corollary to the DTSA’s whistleblower provision carries potentially important implications for employers. The statute provides that an employer should include a notice of the whistleblower provision in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” The directive applies to agreements entered into or amended after the statute’s effective date, and also encompasses agreements with independent contractors and consultants. If an alleged misappropriator’s agreement does not include the required whistleblower notice, the employer may still seek relief under the DTSA but will be barred from recovering punitive damages or attorneys’ fees.

No Preemption.

Potential plaintiffs in trade secret actions may still pursue claims under applicable state laws, as the DTSA does not preempt the UTSA or other state trade secrets statutes.

Recommendations For Employers

With the enactment of the DTSA, we suggest that employers take a number of steps to enhance protections for their trade secrets:

  • Conduct a trade secret audit. Each business should consider whether it has valuable, confidential information that may be entitled to trade secret protection under the DTSA and/or similar state laws. Businesses should ensure that they are adequately protecting all trade secrets, including in their technical operations and in their relationships and agreements with employees, consultants, vendors, business partners, and other third parties.
  • Be mindful of the DTSA’s whistleblower provisions. In drafting future agreements with employees and consultants relating to trade secrets, businesses should take note of the whistleblower immunity language required for punitive damages and attorneys’ fees claims under the DTSA. Such agreements may include confidentiality, non-disclosure and inventions agreements, as well as broader agreements (such as employment and severance agreements) that contain trade secret provisions. Businesses may want to discuss with legal counsel the potential advantages and disadvantages of including the immunity language in their agreements with employees and independent contractors. In some cases, businesses may decide to omit the immunity language and forego potential DTSA punitive damages and attorneys’ fees claims, concluding that other potential remedies are adequate and that it is preferable not to advise employees that disclosure of trade secrets is sometimes legally protected.
  • Contact counsel if improper disclosure of trade secrets occurs or is threatened. Finally, upon discovering any apparent misappropriation or wrongful disclosure of its trade secrets, a business should promptly confer with counsel as to the most appropriate means of addressing the matter.

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Please feel free to contact us with any questions about the DTSA or any related issues. We routinely assist employers with agreements and issues relating to trade secrets, and we would be happy to help.