On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (DTSA). The DTSA had passed with overwhelming bipartisan support in the Senate and House. It became effective upon its enactment.
In an area that has long been the province of state law, the DTSA now allows a company to bring a federal claim with federal remedies and federal jurisdiction for the misappropriation of trade secrets. Nothing in the act is intended to preempt any other provision of law. It is intended to supplement state law.
This new federal civil remedy will allow for a more uniform federal law on protecting a business’s trade secrets. Previously, companies had to rely upon various state laws for protection or the contractual remedies set forth in their employment, confidentiality/nondisclosure, or noncompetition agreements. With this uniformity also comes the ability for companies to file actions in federal court.
Remedies. The DTSA sets forth federal remedies for the misappropriation of trade secrets, which include the following.
- Ex parte seizures of the property at issue in “extraordinary circumstances” to “prevent the propagation or dissemination of the trade secret.” In any order for seizure issued, the court must set forth specific findings of fact and conclusions of law to justify the seizure. Any order for seizure must also describe the property with reasonable particularity and provide for the narrowest seizure of property necessary to achieve the purpose of the act. The court must also set a hearing no later than seven (7) days after an order issues.
- Monetary damages for actual loss and unjust enrichment caused by the misappropriation of the trade secret, or a reasonable royalty in exceptional circumstances that render an injunction inequitable.
- For willful and malicious misappropriation, a party may recover exemplary damages of up to two-times the amount of monetary damages and its attorney’s fees.
- If a claim is made in bad faith or a motion to terminate an injunction is made or opposed in bad faith, the prevailing party is entitled to its reasonable attorney’s fees.
- In an action brought for wrongful or excessive seizure of property, a party’s recovery of damages for such wrongful or excessive seizure will not be limited by the required security or bond posted with the court.
A federal court is prohibited from entering an order except where there is evidence of threatened misappropriation and not merely on the information the person knows. Thus, the inevitable disclosure doctrine recognized by some states does not apply under this federal law. The DTSA also prohibits entry of injunctions that “conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.”
Whistleblower Protections. The DTSA specifically provides a person immunity from civil and criminal liability under both federal and state trade secret law. This immunity extends to whistleblowers who disclose trade secrets “in confidence” to a federal, state or local government official, directly or indirectly, or to an attorney solely for the purpose of reporting or investigating a suspected of violation of the law. Immunity also extends to persons who file a lawsuit where the filings are made under seal and the trade secret is not disclosed except pursuant to a court order.
Notice Requirements. In addition to these whistleblower protections, the DTSA requires employers to provide notice of the immunity to an employee in any contract or agreement that governs the use of confidential or trade secret information. Alternatively, an employer may fulfill this notice requirement by cross-referencing in the contract or agreement a policy document it provided to the employee that details the employer’s reporting policy. This may include a provision in an employment handbook or some other policy document.
Of note, the DTSA broadly defines “employee” to include “any individual performing work as a contractor or consultant for an employer.” This expands those persons who are covered by these whistleblower protections. The notice requirement is prospective as it applies to “contracts and agreements that are entered into or updated after the date of enactment.”
In an effort to obtain compliance with this notice provision, the DTSA provides that if an employer fails to give the required notice to an employee, the employer may not be awarded exemplary monetary damages or attorney’s fees in an action brought against that employee. The DTSA, however, provides no guidance on the required disclosure or cross-referenced policy language.
Statute of Limitations. A private civil action under the DTSA must be brought within “three years after the date on which the misappropriation with respect to which the action would relate is discovered or by the exercise of reasonable diligence should have been discovered.”
What should businesses do in the wake of this new federal law? Companies should review their agreements that provide for confidentiality or similar trade secret provisions and amend them accordingly moving forward. These may include employment agreements, noncompetition agreements, and business agreements with independent contractors or consultants. To fully enjoy the federal remedies allowed, an immunity notice should be included in all new and updated employee agreements as well as contractor and consultant agreements with independent contractors. Employers should also review their handbooks and policies relating to protection of confidential or trade secret information so that they may also rely on a policy document for compliance.