Defend Trade Secrets Act: Are Your Employment Agreements Up to Date?

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Until recently, almost all trade secret law was furnished by state law, not federal law. Absent federal diversity jurisdiction, lawsuits for misappropriation of trade secrets had to be brought in state court. Even though the vast majority of states (including Indiana) have adopted the Uniform Trade Secrets Act (“UTSA”), there are nonetheless variations in trade secret law from one state to another. However, in May 2016 President Obama signed the Defend Trade Secrets Act (or “DTSA”), creating at 18 U.S.C. § 1836 a new federal civil cause of action for misappropriation of trade secrets.  Even so, the federal statute does not pre-empt state law, and state causes of action under the UTSA remain viable.

Definitions of Trade Secret and Misappropriation

Two crucial components of trade secret law are the definitions of trade secret and misappropriation.  The DTSA definitions, found at 18 U.S.C. § 1839, are not identical to the familiar UTSA definitions, but there are no major surprises. At least for the most part, information that is a trade secret under the UTSA is also a trade secret under the DTSA, and vice versa.  Similarly, there are likely very few acts that qualify as misappropriation under one statute but not the other.

Remedies

Although most remedies for misappropriation of trade secrets provided by Section 1836(b)(3) of the DTSA–injunctive relief, damages for financial loss and unjust enrichment, and in some cases exemplary damages and recovery of attorneys’ fees–are not drastically different from those available under the UTSA, the federal statute also provides a new remedy.  Under some extraordinary circumstances, the owner of misappropriated trade secrets may be entitled to a court order, even a court order issued ex parte, for the seizure of property of the misappropriating person.

Immunity and Requirement for Notice to Employees and Contractors

Section 1833 of the DTSA provides whistleblower protection in the form of immunity against criminal or civil liability under state or federal trade secret laws for an individual who discloses trade secrets:

  1. In confidence to a federal, state, or local official, or to an attorney, but only if the disclosure is solely for the purpose of investigating or reporting a violation of the law; or
  2. In a complaint or other document in a lawsuit, if the document is filed under seal.

In addition, in a lawsuit against an individual’s employer for retaliation for reporting a suspected violation of the law, the individual may disclose trade secrets to the individual’s attorney and use the information in a court proceeding if any court documents containing the information are filed under seal and the information is not disclosed except by court order.

The DTSA has a new notice requirement for agreements with employees that include confidentiality provisions, and, for these purposes, “employee” is defined very broadly to include contractors and consultants. The contract must include a notice of the immunity described above or, alternatively, a reference to policy document furnished to the employee or independent contractor that contains the notice. The only penalty for failing to give the notice is that the employer is not entitled to exemplary damages or attorneys’ fees under Section 1836(b)(3) in a lawsuit against an employee who did not receive the required notice.  Although we do not know of any case law addressing the point, there is nothing in the statute to indicate that failure to give the notice affects any right to exemplary damages or attorneys’ fees that may be available under state law.

Because the notice provision applies only to contracts entered into after the DTSA was enacted (May 11, 2016), there is no need to amend contacts that were in place before then.  However, companies should revise their forms and templates for any employee or independent contractor agreements that include confidentiality obligations (and any contracts entered into after the DTSA was enacted) to ensure compliance with the DTSA notice provisions.

A cautionary note for prospective whistleblowers:  The immunity applies only to certain disclosures of trade secrets.  It does not apply to the acquisition of trade secrets by improper means, even if the improper acquisition is for the purpose of investigating possible violations of the law.

Implications for Contractual Confidentiality Obligations

Frequently, unauthorized disclosure and improper use of trade secrets are subject to two distinct causes of action:  misappropriation under the applicable trade secret statute and breach of a contractual confidentiality obligation.  The whistleblower provisions of the DTSA provide immunity from civil and criminal liability under trade secret statutes, but they do not mention immunity from liability for breach of contract. Although we are not aware of any court case addressing the issue yet, it seems likely that federal courts will hold that any contractual prohibition of a disclosure that is subject to the DTSA’s whistleblower protection will be void against public policy. Companies should consider expanding the exceptions to contractual confidentiality provisions to include the disclosures for which the DTSA provides immunity.