How the Defend Trade Secrets Act of 2016 Affects Employers and What You Need To Do Now

Almost all employers have information that they consider confidential and/or trade secrets, such as strategic plans for their business, financial information, research and development efforts, certain customer information developed over time and often with substantial investment, and profit margins. Many employers seek to protect such information by requiring that employees safeguard and not misappropriate their confidential information and trade secrets in employment agreements, confidentiality and nondisclosure agreements (NDA) and other restrictive covenant agreements. Most start ups have (or should have) a standard employee NDA that covers trade secrets, that everyone signs when they join the company.

On May 11, 2016, the President signed the Defend Trade Secrets Act (DTSA), amending the existing Economic Espionage Act that impacts employers seeking to protect their trade secrets. While the DTSA does not substantially change the definition of trade secrets from the familiar definition under the Uniform Trade Secrets Act, it impacts employers seeking to protect their trade secrets in the following five material respects:

Whistleblower Immunity and Employer Notice Provisions

While the DTSA seeks to protect trade secrets, it specifically allows employees the ability to disclose trade secrets in limited circumstances. First, employees may disclose trade secrets -- when they are doing so solely for purposes of reporting or investigating a suspected violation of law -- in confidence to (1) a federal, state or local government official, or (2) an attorney.  Second, such disclosures may be made in a complaint or other documents as part of a lawsuit or other proceeding, such as anti-retaliation lawsuit, if such filing is made under seal.

The DTSA not only guarantees the above whistleblower provisions, but it goes further requiring employers to provide notice to its employees (including consultants) of this immunity. Specifically, employers must provide such notice “in any contract or agreement with an employee that governs the use of a trade secret or confidential information.”

An employer may meet this DTSA notice obligation by providing a “cross-reference to a policy document to the employee that sets forth the employer’s reporting policy for a suspected violation of law.” This means that the agreement need not specify all of the particulars of the employees’ immunity for disclosing information to the government or an attorney when reporting potential wrongdoing, so long as the referenced document includes that information.

Employers who fail to comply with the DTSA notice provision may not be awarded the exemplary damages or attorney fees otherwise permitted under the law and discussed below.

Federal, Private Right of Action

The DTSA also provides employers with a federal, private right of action for trade secrets misappropriation. Most states (all but New York and Massachusetts) have adopted the Uniform Trade Secrets Act; however, the state courts have developed unique jurisprudence such that there are inconsistencies across the United States.

With these differing laws, absent diversity jurisdiction or some other federal claim (like a violation of the Computer Fraud and Abuse Act), employers have been required to pursue misappropriation of trade secrets claims in state courts. The state courts, with their varying versions of the Uniform Trade Secrets Act, unique jurisprudence, different procedures, and varying evidentiary standards, often left employers facing inconsistent decisions and in some cases waiting months for decisions despite requests for emergency relief.

The DTSA changes this framework because it enables employers to pursue claims for misappropriation in federal court. In addition, once in federal court via a claim under the DTSA, employers may pursue the other remedies that were previously available to them under the applicable state laws, such as violation of the state Uniform Trade Secrets Act, breach of contract, unfair competition, tortious interference with contract, etc.

More Uniformity

The DTSA will provide greater uniformity for employers across the United States. With globalization of the economy and companies frequently operating across numerous states, the DTSA will allow employers to seek relief under uniform federal procedural and substantive law regardless of where the misconduct occurs.

Like the Uniform Trade Secrets Act, the DTSA defines trade secrets more broadly than just technical information. It includes “all forms of and types of financial, business, scientific, technical, economic, or engineering information” regardless of whether or how it is stored or compiled so long as two conditions are met.

The first DTSA condition for information to qualify as a “trade secret” is that the employer owner of the trade secrets must take reasonable measures to keep such information secret. This condition means that employers must have measures in place to make sure that trade secrets are protected within their company and not shared externally.

The second DTSA condition is that the information “derives independent economic value, actual or potential, from not being generally known or readily ascertainable through proper means by another person who can obtain economic value from the disclosure or use of the information.” This condition means that employers should assess their valuable and unique information, seeking to quantify its value as well as its impact if it was taken or were to become known in the industry.  This assessment is critical because trade secret litigation is expensive, and employers should understand the cost/benefit analysis of seeking to protect these assets.

The DTSA defines “misappropriation” in terms of both improper acquisition or improper disclosure or use. These terms are broad enough that they include the typical unlawful means of obtaining trade secrets, such as theft, misrepresentation, and breach of a contract to maintain secrecy.

Further, the DTSA allows for a uniform set of remedies across the United States. The DTSA provides for injunctive relief, monetary damages (actual damages, unjust enrichment damages, or a reasonable royalty for the disclosure or use of the trade secrets), and in cases of willful and malicious misappropriation, exemplary damages up to two (2) times the amount of monetary damages, and attorney’s fees.  The attorney’s fees, however, also may be recovered by a prevailing employee if the employer’s claim of misappropriation is made in bad faith.

Special Masters

The DTSA anticipates the need for special masters. It provides that the federal courts may appoint a special master “to locate and isolate all misappropriated trade secret information to facilitate the return of unrelated property and data to the person from whom the property was seized.”  Just as employers require their forensic experts to enter into non-disclosure agreements because they are receiving access to their trade secrets, the DTSA similarly anticipates that the court-appointed special masters shall enter into court-approved non-disclosure agreements.

Law Enforcement Civil Seizure of Trade Secrets

One of the most unique features of the DTSA is that it provides for “civil seizure” of property. Based on a verified complaint or affidavit, employers may ask courts to have a law enforcement official seize property “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.”  In these extraordinary circumstances, the court may enter the order even on an ex parte basis.  Should such relief be granted, a hearing will occur as soon as practical after such seizure.

This provision provides employers with a powerful remedy to obtain the return of the trade secrets. In fact, the DTSA allows for the seizure of the property containing the trade secrets, such as the computer, email account, or cell phone.

Before filing a motion for seizure of property, the employer must have very specific evidence showing what it believes was taken and where it currently resides. Specifically, employers should be prepared to show: (1) such an extraordinary remedy is warranted, i.e., that other remedies and injunctive relief are insufficient; (2) an immediate and irreparable injury will occur if the seizure does not occur; (3) the harm to the employer in denying the seizure outweighs the harm to the legitimate interests if the former employee against whom the seizure would be ordered as well as any third parties who may be harmed by the seizure; (4) the employer is likely to succeed in showing: (a) the information at issue is a trade secret and (b) the former employee misappropriated the trade secret by improper means or conspired to use improper means to misappropriate the trade secret; (5) the former employee has actual possession of the trade secret and the property to be seized; (6) the employer describes with reasonable particularity the matter to be seized and to the extent reasonable, the location where the matter is to be seized; (7) the former employee (or those acting in concert with him or her) would make the matter inaccessible if notice was provided of the seizure; and (8) the employer has not publicized the requested seizure.

Seeking such extraordinary remedies is not without consequence. The usual requirement of having to post a bond or security (which can be hundreds of thousands of dollars) remain intact.  However, if the seizure causes harm to the person from whom the property was seized, the DTSA explicitly provides that the person (generally the former employee) can seek damages from the employer for “a wrongful or excessive seizure.”  The damages can even exceed the amount of the security.

Thus, employers should be sure the seizure is narrowly tailored and based upon specific evidence of the former employee’s wrongdoing. With the potential for employer liability if the seizure goes too far, employers must assess the necessity of the seizure given the value of the trade secrets at issue.

Action Items

Employers faced with misappropriation of trade secrets should add claims under the DTSA to the possible avenues of relief. Additionally, and as soon as possible, employers should amend their current whistleblower policies, confidentiality agreements, employment agreements, restrictive covenant agreements, handbooks, and any other agreements or policies addressing confidentiality obligations to include a reference to the DTSA notice regarding permitted disclosures.

Stay tuned for additional employment-related topics, including the new overtime rule and its effect on your pay practices.