One part of executive compensation is the application and enforcement of restrictive covenants in employment agreements, severance agreements, incentive plan award agreements, and elsewhere. Employers received a helping hand in May when President Barack Obama signed into law the bi-partisan Defend Trade Secrets Act (DTSA). The DTSA federalizes trade secrets law, thereby providing employers a clearer path to enforce their trade secret rights in federal court. The DTSA applies to contracts entered into or amended after May 11, 2016.
The DTSA would amend the federal Economic Espionage Act of 1996 to create, for the first time, a federal civil remedy for the misappropriation of trade secrets. The DTSA is significant because if signed into law, employers will have a clear path to enforce their trade secret rights in federal court. This federalization of trade secrets law will also presumably lead to more uniformity and predictability in applicable standards. The DTSA would not preempt existing state laws governing trade secret enforcement, rather the DTSA would co-exist with state trade secrets laws.
Previously, employers seeking civil remedies for misappropriation of their trade secrets were generally limited to state law enforcement. Although 48 states have adopted the Uniform Trade Secrets Act (UTSA) in some form, there are significant differences among the states in the application of the UTSA. Moreover, companies are often limited to litigating in state court, except in cases where federal diversity jurisdiction exists.
Definition of Trade Secrets
Under the DTSA, “Trade Secret” includes: “All forms and types of financial, business, scientific, technical, economic, or engineering information…whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if:
- The owner thereof has taken reasonable steps to keep such information secret; and
- The information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”
The DTSA also defines “employee” broadly.
Remedies Under DTSA
Available remedies under the DTSA include injunctive relief, double damages in the case of willful and malicious misappropriation, and attorney’s fees. However, the DTSA also creates a civil seizure procedure – available only in extraordinary circumstances – whereby an aggrieved plaintiff can obtain an ex parte order, subject to several conditions, providing for the seizure of property necessary to prevent the propagation of dissemination of the trade secret that is at issue in the litigation. The statute of limitations would be three years from the date the misappropriation was discovered or should have been discovered. The DTSA provides exemplary damages for willful and malicious misappropriation. The DTSA also permits the recovery of attorney’s fees for willful and malicious misappropriation, but also for bad faith claims.
DTSA Action Items
To gain the benefits of the DTSA, employers must take certain actions. First, employers should consider auditing their existing trade secret protections. Employers should audit their procedures and documents. The employer’s restrictive covenants currently in place, standing alone, are unlikely to be good enough under DTSA.
Second, an employer should evaluate whether its existing agreements require amendment. Employers should consider including notice provision in employment agreements, restrictive covenant, and other contracts going forward. In order to take advantage of potential exemplary damages and attorneys’ fees, employers must notify employees of whistleblower immunity in trade secrets or confidentiality agreements. The DTSA permits the employer to provide this notice by cross-reference to a policy document.
Next, employers should consider developing response plan for threatened and actual misappropriation of trade secrets.
Finally, employers may need to include a notice in their employment and other agreements, that the restriction on disclosure of trade secrets does not apply to disclosures made “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 violation of law.”
For more information on the Defend Trade Secrets Act, view our Labor & Employment Practice briefing.