The Defend Trade Secrets Act and Its Impact on Employers

by Janet Moreira | Jul 7, 2016 | Transactional / Contracts

On April 27, 2016, the House of Representatives voted 410-2 to pass the Defend Trade Secrets Act of 2016 (DTSA). That vote followed the Senate’s unanimous vote approving the bill on April 4, 2016. On May 11, 2016, President Obama signed the historic DTSA into law, creating a private cause of action for civil trade secret misappropriation under federal law. The new law supplements, but does not preempt or eliminate, the existing patchwork of state law remedies for trade secret misappropriation. The DTSA became effective immediately, but only applies to misappropriation which occurs on or after the law’s effective date.

What Should Employers Do In Response to the DTSA?

The DTSA became effective on May 11, 2016. Employers can bring a claim under the DTSA for any misappropriation of a trade secret occurring on or after that date. The DTSA claim can be combined with any applicable state law claims under statutes or common law (including for misappropriation of trade secrets, breach of a confidentiality or non-competition agreement, or unfair competition). If the employer chooses, the DTSA provides a clear path to proceed in federal court instead of state court. It is virtually certain that the number of trade secret misappropriation lawsuits filed in federal court will increase dramatically. In addition to claims originally brought in federal court, employers also may seek removal of lawsuits brought in state court which assert claims under the DTSA.

There are several steps employers should take to maximize the protections afforded by the DTSA.

1. Review and Revise Agreements Regarding Trade Secrets and Confidential Information
To position themselves to take advantage of all of the DTSA’s remedies, employers should review any new or updated agreements with employees, consultants, and independent contractors that contain confidentiality provisions and ensure that the provisions do not discourage or prevent the individual from reporting violations under the DTSA. The agreements may include:

Employment agreements.
Independent contractor agreements.
Consulting agreements.
Separation and release of claims agreements.
Severance agreements.
Non-compete and non-solicitation agreements.
Confidentiality and proprietary rights agreements.

To preserve the potential recovery of exemplary damages and attorneys’ fees under the DTSA, employers should add language to their agreements along the following lines:

You are hereby notified in accordance with the Defend Trade Secrets Act of 2016 that you will 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 that is filed under seal in a lawsuit or other proceeding.

You are further notified that if you file a lawsuit for retaliation by an employer for reporting a suspected violation of law, you may disclose the employer’s trade secrets to your attorney and use the trade secret information in the court proceeding if you: (a) file any document containing the trade secret under seal; and (b) do not disclose the trade secret, except pursuant to court order.

Alternatively, employers can cross-reference to another policy provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law, with language such as:

Notwithstanding any provisions of this Agreement, you may be entitled to immunity under the Defend Trade Secrets Act of 2016 for disclosing a trade secret under certain limited circumstances, as set forth in the [NAME OF EMPLOYER’S REPORTING POLICY].

2. Revise and Cross-Reference to Confidentiality Policies
When updating confidentiality policies that are generally applicable to their workforce, employers should also include similar notice language in those policies. Doing so, and cross-referencing the revised confidentiality policies in any new or updated agreements with specific individuals, puts the employers in compliance with the DTSA. This notice language applies to information that is considered a trade secret under the DTSA, but does not necessarily apply to all confidential information covered by a broader agreement.

Although failing to provide the immunity notice disqualifies an employer from recovering exemplary damages and attorneys’ fees under the DTSA, those remedies may still be available to the employer under the UTSA, if the employer also asserts an applicable state law UTSA claim.

3. Consider Revising Forum Selection Clauses
When revising or updating agreements and policies, employers also should consider any forum selection clause. If the choice of forum was restricted to a particular state’s state courts, the employer generally should broaden the clause to include federal courts within that particular state. A choice of law clause specifying that a particular state’s laws are applicable probably need not be revised, as federal law applies in all the
states.

4. Be Aware of the Applicable Statute of Limitations
Employers should also be aware that the DTSA contains a statute of limitations. DTSA claims must be brought within three years after the date on which the misappropriation is discovered or by reasonable diligence should have been discovered. A continuing misappropriation constitutes a single claim of
misappropriation.

5. Reconsider Computer Fraud and Abuse Act Claims
One consequence of the DTSA is that there will probably be fewer claims under the federal Computer Fraud and Abuse Act (CFAA). Some federal courts have held that the CFAA provides a federal cause of action (and therefore original federal court jurisdiction) when employees exceed their authorized access to their employer’s computer system, such as when they misappropriate trade secrets from it. Other federal courts have more narrowly construed the CFAA as only applying to hacking cases by outsiders. Because of the limited remedies available under the CFAA and the circuit split over its scope, employers may no longer feel compelled to assert CFAA claims in misappropriation cases.

If you need further assistance to ensure that your agreements comply with the DTSA, please do not hesitate to contact us at janet@maveniplaw.com or 305.967.7450.

What Are the Key Provisions of the DTSA?

The DTSA amends the Economic Espionage Act of 1996 (18 U.S.C. § 1831, et seq.), which allows prosecutors to bring criminal charges relating to trade secret theft. The DTSA empowers private companies to bring civil suits to protect their trade secrets and provides that:

An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.

(18 U.S.C. § 1836(b).)

The DTSA allows employers to protect their trade secrets by seeking redress in federal court, bringing their rights into alignment with those long enjoyed by owners of other forms of intellectual property, such as copyrights, patents, and trademarks. The DTSA adopts many of the provisions of the Uniform Trade Secrets Act (UTSA), including:

A similar definition of “trade secret.”
An identical definition of “misappropriation.”
Similar available remedies, namely:
- injunctive relief to prevent actual or threatened misappropriation;
- actual damages; and
- exemplary damages and attorneys’ fees for willful and malicious misappropriation.

However, unlike the UTSA, the DTSA:

Grants litigants access to federal courts in any case involving alleged theft of trade secrets, irrespective
of the amount in controversy.
Authorizes ex parte seizure orders where it is clearly shown that injunctive relief would be inadequate.
Authorizes limited employment restrictions based on evidence of threatened misappropriation, if those restrictions do not interfere with applicable state law.
Grants immunity from civil and criminal liability to whistleblowers who disclose trade secrets to governmental authorities in certain circumstances.
Mandates notice about whistleblower immunity in any new or updated employment agreement that governs the use of a trade secret or other confidential information.

How Are Trade Secrets Different From Other Types of Confidential and Proprietary Information?

The DTSA uses the definition of trade secret already contained in the Economic Espionage Act. Under that definition, a trade secret is business or scientific information that:

- - Derives independent economic value from not being generally known to or readily accessible by the
    public through proper means.
  - The owner has taken reasonable measures to keep secret.

(18 U.S.C. § 1839(3).)

However, information can be confidential without qualifying as a trade secret under either the DTSA or UTSA. For example, a customer list might be kept confidential, but if it can be easily replicated through publicly available sources, it may not qualify as a trade secret. Similarly, a list showing expiration dates for customer contracts may be very valuable to a business, but does not necessarily qualify as a trade secret if the business did not take reasonable steps to protect its confidentiality.

What Remedies Are Available to Employers Under the DTSA?

The remedies under the DTSA are similar to those under the UTSA. Available remedies include:

- - An injunction to preserve evidence and prevent trade secret disclosure, provided that it does not:
    - prevent a person from entering into an employment relationship, and that any conditions placed on the employment relationship are based on evidence of threatened misappropriation and not merely on the information the person knows; or
    - otherwise conflict with an applicable state law prohibiting restraints on the practice of a lawful profession, trade, or business.
  - Compensatory damages measured by:
    - actual loss and unjust enrichment, to the extent not accounted for in the actual loss calculation; or
    - a reasonable royalty for the unauthorized disclosure or use of the trade secret.
  - Exemplary damages up to two times the amount of the damages for willful and malicious misappropriation.
  - Reasonable attorneys’ fees for the prevailing party if:
    - a misappropriation claim is made in bad faith;
    - a motion to terminate an injunction is made or opposed in bad faith; or
    - a trade secret was willfully and maliciously misappropriated.

Unlike the UTSA, the DTSA also includes the extraordinary remedy of an ex parte seizure order. The DTSA includes protections designed to prevent abuse of this powerful remedy, and therefore only allows an ex parte seizure order if:

- - An injunction or restraining order is inadequate because the party to which the order would be issued
    will evade, avoid, or otherwise violate that order.
  - Immediate and irreparable injury will occur if seizure is not ordered.
  - The harm to the applicant in denying the seizure order outweighs the harm to the legitimate interests of
    the person against whom seizure is ordered.
  - The applicant is likely to succeed on the merits of the misappropriation claim.
  - The person against whom seizure would be ordered has actual possession of the trade secret and any
    property to be seized.
  - The application:
    - describes with reasonable particularity the matter to be seized; and
    - identifies where the matter to be seized is located, if known.
  - The person against whom the seizure is ordered, or persons acting in concert, would destroy, move, hide or otherwise make the materials to be seized inaccessible to the court, if the person had advance notice of the application.
  - The applicant has not publicized the requested seizure.

Does the DTSA Include Any Protections for Whistleblowers?

The DTSA includes protections for whistleblowers who disclose trade secrets under certain circumstances. Specifically, the DTSA amends 18 U.S.C. § 1833(b) to provide criminal and civil immunity under any federal or state trade secret law for the disclosure of a trade secret that either is made:

- - In confidence solely for the purpose of reporting or investigating a suspected violation of law to:
    - a federal, state, or local government official; or
    - an attorney.
  - In a complaint or other document filed under seal in a lawsuit or other proceeding (see Practice Note, Filing Documents Under Seal in Federal Court).

Employers must give employees, contractors, and consultants notice of this potential immunity in any contract or agreement entered into or amended after the effective date of the DTSA that governs the use of a trade secret or other confidential information. An employer may comply with this requirement by cross-referencing a policy document that contains the employer’s reporting policy for a suspected violation of law.

An employer that does not provide the required notice is precluded from recovering exemplary damages or attorneys’ fees under the DTSA in an action against an employee to whom notice was not provided.

How Does the DTSA Affect Existing State Non-Compete Laws?

Until the DTSA was enacted, employers had to rely on state law protections when facing actual or threatened trade secret misappropriation.

The new federal law supplements, but does not preempt or eliminate, the existing patchwork of state law remedies, including state non-compete laws. The DTSA does not limit an employer’s ability to enforce a non-compete agreement that would prohibit a former employee from working for a competitor. Similarly, the DTSA does not preempt state law injunctions that would prevent a former employee from working for a competitor to preclude the inevitable disclosure of trade secrets. For more on the inevitable disclosure doctrine, see Practice Note, Trade Secrets Litigation: Inevitable Disclosure Doctrine and Non-Compete Laws: State Q&A: Question 17.

In fact, DTSA expressly authorizes injunctions that place conditions on a former employee’s new employment relationships, if:

- - The injunction does not prevent the former employee from entering into the new employment
    relationship.
  - The conditions are based on evidence of threatened misappropriation, and not merely on information the person knows.
  - The injunction does not conflict with an applicable state law prohibiting restraints on the practice of a lawful profession, trade, or business, such as the California Business and Professions Code (Cal. Bus. & Prof. Code §§ 16600 – 16607).

Employers are likely to bring claims for trade secret misappropriation under both:

- - The DTSA.
  - Any applicable state version of the UTSA (which has been adopted in some form in 48 states) or state
    common law.

Although duplicative remedies are not permitted, there are sufficient differences between the DTSA and the UTSA that there may be strategic advantages to bringing a claim under each statute, and no clear disadvantage to doing so.

What Should Employers Do In Response to the DTSA?

There are several steps employers should take to maximize the protections afforded by the DTSA.

6. Review and Revise Agreements Regarding Trade Secrets and Confidential Information
To position themselves to take advantage of all of the DTSA’s remedies, employers should review any new or updated agreements with employees, consultants, and independent contractors that contain confidentiality provisions and ensure that the provisions do not discourage or prevent the individual from reporting violations under the DTSA. The agreements may include:

- - Employment agreements.
  - Independent contractor agreements.
  - Consulting agreements.
  - Separation and release of claims agreements.
  - Severance agreements.
  - Non-compete and non-solicitation agreements.
  - Confidentiality and proprietary rights agreements.

To preserve the potential recovery of exemplary damages and attorneys’ fees under the DTSA, employers should add language to their agreements along the following lines:

Alternatively, employers can cross-reference to another policy provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law, with language such as:

7. Revise and Cross-Reference to Confidentiality Policies
When updating confidentiality policies that are generally applicable to their workforce, employers should also include similar notice language in those policies. Doing so, and cross-referencing the revised confidentiality policies in any new or updated agreements with specific individuals, puts the employers in compliance with the DTSA. This notice language applies to information that is considered a trade secret under the DTSA, but does not necessarily apply to all confidential information covered by a broader agreement.

8. Consider Revising Forum Selection Clauses
When revising or updating agreements and policies, employers also should consider any forum selection clause. If the choice of forum was restricted to a particular state’s state courts, the employer generally should broaden the clause to include federal courts within that particular state. A choice of law clause specifying that a particular state’s laws are applicable probably need not be revised, as federal law applies in all the states.

9. Be Aware of the Applicable Statute of Limitations
Employers should also be aware that the DTSA contains a statute of limitations. DTSA claims must be brought within three years after the date on which the misappropriation is discovered or by reasonable diligence should have been discovered. A continuing misappropriation constitutes a single claim of
misappropriation.

10. Reconsider Computer Fraud and Abuse Act Claims

One consequence of the DTSA is that there will probably be fewer claims under the federal Computer Fraud and Abuse Act (CFAA). Some federal courts have held that the CFAA provides a federal cause of action (and therefore original federal court jurisdiction) when employees exceed their authorized access to their employer’s computer system, such as when they misappropriate trade secrets from it. Other federal courts have more narrowly construed the CFAA as only applying to hacking cases by outsiders. Because of the limited remedies available under the CFAA and the circuit split over its scope, employers may no longer feel compelled to assert CFAA claims in misappropriation cases.

If you need further assistance to ensure that your agreements comply with the DTSA, please do not hesitate to contact us at janet@maveniplaw.com or 305.967.7450.