NEW FEDERAL TRADE SECRETS LAW GIVES EMPLOYERS BOTH NEW FEDERAL RIGHTS AND OBLIGATIONS

On May 11, 2016, President Obama signed into law, the Defend Trade Secrets Act of 2016 (“DTSA”), which amended the federal Economic Espionage Act (“EEA”) to, among other things, allow companies to file civil lawsuits in federal court for the theft of trade secrets. However, it also imposed a new disclosure obligation regarding whistleblower immunity which must be included in all trade secret and confidentiality agreements, an obligation that employers should address immediately by redrafting those agreements. The law was unanimously passed in the Senate and passed the House by a 410-2 vote. It took effect immediately and applies to all misappropriations on or after May 11th.

Until now, protection of trade secrets fell exclusively under state law and all states have some statutory protection of them, with 48 of 50 having enacted the Uniform Trade Secrets Act (“UTSA”) in some form and the DTSA does not preempt or replace those laws. In fact, the definitions of “trade secret” and “misappropriation” in the DTSA more or less track the definitions in the UTSA. However, there are still some subtle differences between those laws from state to state and they are often applied differently. One of the goals of the DTSA was to allow for a more predictable nationwide application of the law and it gives employers seeking to protect their trade secrets some additional enforcement options.

FEDERAL QUESTION JURISDICTION

First, the law now allows employers to sue a former employee in federal court and seek injunctive relief, damages and attorney fees and, under some circumstances, imposition of royalties, punitive damages and seizure, without regard to the amount at issue since it creates a federal question and allows courts to exercise supplemental jurisdiction of related state-law claims.  As such, while it does not preempt state trade secret or non-compete laws, it allows employers to make a strategic decision about whether to sue in state or federal court.

REMEDIES

As noted, the law allows for injunctive relief and damages. However, it also contains two remedies that are not necessarily available under state law: seizure and an injunction against working for a competitor, even in the absence of a non-compete agreement. The seizure provision allows the plaintiff to seek a court order, without a hearing, to allow law enforcement to seize “any property to prevent the propagation or dissemination of a trade secret.” The law seems to require a very narrow set of circumstances where seizure will be permitted and the seizure order has many of the properties of a traditional temporary restraining order in that the plaintiff must provide adequate security for damages that may result if the seizure is later found to have been wrongful – for example a surety bond – a hearing must take place within seven days and none of the parties may have access to the seized property until the hearing takes place. It remains to be seen however, how narrowly courts will construe this provision.

As to the injunction to prevent a former employer from working for a competitor, the DTSA requires that the plaintiff demonstrate that a trade secret disclosure is actually threatened as opposed to the “inevitable disclosure doctrine” that developed in state law over the years, that allowed relief if the former employer could demonstrate that disclosure was inevitable simply because the former employee had access to a trade secret that he or she would naturally disclose to the new employer for competitive reasons. As with the seizure provision, it remains to be seen how courts will interpret the “threatened” requirement.

WHISTLEBLOWER IMMUNITY

One provision that affects all employers utilizing agreements regarding trade secret and confidentiality agreements is the law’s safe harbor provision that protects individuals who turn over trade secrets to the government to investigate alleged illegal activity. Importantly, it requires employers to include a statement, either in the agreement itself or in a handbook or other employment policies specifically cross-referenced in the agreements, that notifies the employee that they cannot be held criminally or civilly liable for disclosure of a trade secret made in confidence to a government official or to an attorney for the sole purpose of reporting or investigating a suspected legal violation. Failure to provide such notice prevents the employer from seeking exemplary damages and attorneys’ fees.

CONCLUSION

While the law should be seen as a positive by those businesses seeking to protect their trade secrets and will likely lead to more trade secrets cases being filed in federal court, it is imperative that all employers who currently utilize trade secret and/or confidentiality agreements, even if they are included in non-compete agreements, redraft those agreements as soon as is practical to include the required DTSA language.

Leave a comment

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: