Employers: What you need to know about the Defend Trade Secrets Act (DTSA)

Background

If you hired employees, consultants and contractors on or after May 12, 2016, you are required by law to make changes to a variety of agreements affected by the Defend Trade Secrets Act (DTSA). This applies, as well, to amendments to those agreements.

Which agreements could be affected?

Confidentiality and Proprietary Rights
Non-Disclosure
Non-Competition
Consulting/ Independent Contractor
Services/ Master Services/ SaaS
Employment/ Executive Compensation
Handbooks

Why you need to address this now:

The DTSA provides a federal cause of action to private companies for trade secret misappropriation. For employers, though, the “act now” part of the law is the new language ("DTSA Notice") that must appear in agreements or policies. The notice lets employees, independent contractors and consultants know that they are protected from prosecution if they disclose trade secrets to report or investigate an alleged violation of law. Failure to provide the notice results in the employer’s loss of recovering punitive damages or attorneys fees from the employee in the event of a suit against an employee under DTSA.

Please contact juliet@frameworklegal.com so that we can ensure your compliance with DTSA requirements.

Q&A with two DTSA experts

To shed light on and answer questions about DTSA, Framework Legal sat down with Catherine Pearson, Employment Attorney, and Michelle G. Breit, Intellectual Property Attorney.

FL: What are trade secrets? How are they protected? And how is trade secret protection different from patent protection?

MB: Trade secrets can be part of a business’ most valuable assets. For many businesses, trade secret protection can be more desirable and appropriate than patent protection. Unlike patent protection, trade secret protection does not expire within a set time. The protection continues as long as the information remains secret. Trade secrets can include a wide range of information including financial, technical, economic and engineering information. Examples of trade secrets include formulas, computer code, prototypes, product designs, manufacturing specifications, schematics, cost and pricing information, and prospective business opportunities.

FL: How does one determine if information should be provided trade secret protection?

MB: Information is provided trade secret protection if (a) it derives independent economic value from not being generally known, and (b) reasonable efforts are taken to protect the information. Those protection efforts can include the use of passwords, limiting access to electronic files on a need to know basis, employing nondisclosure agreements, labeling information as “confidential,” locking file cabinets and other techniques that limit access to proprietary information.

FL: Why did the federal government enact DTSA?

MB: Trade secret theft, also known as “misappropriation,” can have many serious consequences, including destroying the value of the information and undermining the competitive position of the trade secret owner. Traditionally, until Congress passed the Defend Trade Secrets Act of 2015 (DTSA), civil trade secret misappropriation has been addressed in state courts under state law. Although many similarities exist among the states laws, they can and do vary significantly, making compliance and enforcement sometimes difficult to navigate. However, state laws provide similar remedies for misappropriation, including injunctive relief, compensatory damages, and exemplary damages, as well as an award of attorneys’ fees when the misappropriation is willful or malicious.

CP: The DTSA’s primary goal was to permit trade secret owners to bring private rights of action in federal court against those misappropriating trade secrets. Federal lawsuits provide access to more sophisticated judges and the ability to bypass differences in state trade secret law.

FL: Can you drill down into the key points of the DTSA?

MB: For many years, leaders in business and other sectors have called for the institution of a federal law creating a civil cause of action for trade secret misappropriation that provides uniformity to this important area of law. In addition to uniformity, the DTSA provides other important features, including:

Access to Federal Courts. The DTSA gives companies and individuals access to federal courts for trade secret cases. The DTSA provides a private civil action in federal court for the misappropriation of a trade secret “related to a product or service used in, or intended for use in, interstate or foreign commerce.”

Seizure Orders. The DTSA includes a procedure for seizure of property to prevent imminent disclosure of a trade secret to a third party or the risk of flight to another country. Specifically, in “extraordinary circumstances,” the DTSA allows for an ex parte seizure of “property necessary to prevent the propagation or dissemination of the trade secret.” When a seizure occurs, the court maintains custody of the seized materials at least until the court holds a seizure hearing within seven days.

Stronger Trade Secret Protection During Litigation. The DTSA addresses an important concern of trade secret owners during litigation, i.e. the risk of disclosure of the trade secret information during public hearings, including trials. The new protections include the availability of stronger protective orders addressing the treatment of confidential information exchanged and used during litigation, the ability of the trade secret owner to advise the court during proceedings of its interests in protecting its trade secrets, and the availability of encryption of electronically stored materials seized under the ex parte provision.

Exemplary Damages and Notice. Under the DTSA, a plaintiff may be awarded two times its damages and attorney fees for willful or malicious misappropriates. Such recoveries, however, are limited to companies that provide notice to their employees that they may report violations of the law to government officials or an attorney without fear of criminal or legal liability.

No Preemption of State Laws. Although the DTSA gives the U.S. District Courts original jurisdiction over civil actions brought under the new law, it also allows a trade secret owner to bring its claims under state law either as part of an action brought in federal court or as traditionally brought in state court.

FL: Please provide background on the whistleblower immunity provision?

CP: As a last minute add-on, DTSA also requires employers to provide notice to employees about their right to disclose trade secret information to federal enforcement authorities if they are a whistleblower. This is known as DTSA’s whistleblower immunity provision. Employers’ compliance with DTSA’s whistleblower immunity requirements can range depending on risk tolerance.

FL: What’s the easiest way for employers to mitigate risk related to DTSA?

For employers who want to mitigate all risk, you can simply insert the language from the statute into agreements. That language states:

“Immunity from Liability for Confidential Disclosure of a Trade Secret to the Government or in a Court Filing:

(1) Immunity—An individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that—(A) is made—(i) in confidence to a federal, state or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

(2) Use of Trade Secret Information in Anti-Retaliation Lawsuit—An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual—(A) files any document containing the trade secret under seal; and (B) does not disclose the trade secret, except pursuant to court order.”

For employers who prefer a more concise approach, including all of the DTSA language may be too cumbersome. Employers who are willing to undertake some risk can paraphrase the language to fit within the style of their agreements. DTSA, however, is not clear if paraphrasing is permitted, and it will not be clear until courts begin to interpret DTSA. Courts will need to determine whether including the exact language from DTSA is required or if paraphrasing the whistleblower immunity language suffices.

FL: What should employers do right now to address DTSA in their companies?

CP: DTSA provides a reason for employers to review their nondisclosure agreements and restrictive covenants and limit them to information that truly is confidential. The language of the agreements should be as clear as possible in defining what is confidential.

MB: With the recent passage of this comprehensive federal law, now is a good time for trade secret owners to take inventory of their trade secrets and perform an audit to ensure “reasonable measures” are in place to protect the trade secrets. The type and sufficiency of measures which should be instituted and maintained will vary based on the nature of the information to be protected, e.g., whether the information is in electronic form or hard copy, whether the information might be visible on-site to visitors, and whether access to the information is needed by few employees or a large portion of the company’s workforce.

Catherine Pearson is a principal member of Pearson Law Group where she provides employment law expertise of a big firm at small firm rates since 2004. www.pearsonlg.com

Michelle Breit is a highly experienced intellectual property and commercial litigator, representing clients in complex patent, copyright and trademark infringement actions, trade secret misappropriation disputes, and other aspects of intellectual property protection and enforcement. www.breitlawgroup.com