With the enactment of the federal Defend Trade Secrets Act of 2016 (DTSA), owners of trade secrets now have the ability to bring a cause of action for misappropriation of trade secrets in federal court. Previously, employers had to rely primarily upon state laws in pursuing such claims against former employees. Employers can still protect trade secrets through applicable state law but now have the added protection of federal law, which has certain advantages. To take full advantage of the DTSA, however, employers must include certain notice provisions in all agreements with employees, contractors and consultants governing the use of trade secrets or other confidential information. These requirements are discussed below.
State Law Protections
In all but two states, New York and Massachusetts, the law governing trade secret protection is set forth in a state statute that follows the language of the Uniform Trade Secrets Act (UTSA), which was published by the Uniform Law Commission in 1979 and amended in 1985. The purpose of the UTSA was to provide a unified legal framework that states could adopt to protect trade secrets. South Carolina adopted the UTSA and created the South Carolina Uniform Trade Secrets Act. North Carolina enacted the North Carolina Trade Secrets Protection Act, which protects trade secrets but does not follow all the language of the UTSA. Thirty-six years after publication of the UTSA, it is evident that a uniform application of trade secret protection across all states has not been achieved.
One downside to relying on state law is that, despite some uniformity provided by the UTSA, the state laws vary, and each state judicial system is autonomous. This has resulted in differing interpretations of what information constitutes trade secrets, what action constitutes misappropriation and what the overall requirements are for protection of trade secrets. Another downside to relying on state law is that litigants are limited to seeking relief in state court if there are no federal claims and no diversity jurisdiction to open the door to litigating in federal court. With the enactment of the DTSA, employers now have a new and seemingly more advantageous avenue for protecting trade secrets from misappropriation.
Uniformity Under Federal Law
The DTSA is an amendment to the Economic Espionage Act of 1996, which, until now, was limited to trade secrets related to products and services used in, or intended for, foreign commerce; it provided only for criminal sanctions. The DTSA expands this law to cover goods and services used in, or intended for, interstate commerce and provides for various civil remedies.
The civil remedies set forth in the DTSA include a) an injunction to prevent the actual or threatened misappropriation; b) an award of damages for the actual loss caused by the misappropriation and for the unjust enrichment gained by the misappropriating party, or, in lieu of damages measured by these methods, damages in the amount of a reasonable royalty for the misappropriating party’s disclosure or use of the trade secret; and c) an award of exemplary damages in an amount of not more than two times the amount of actual damages where the trade secret is willfully and maliciously misappropriated. The DTSA also allows for an award of reasonable attorneys’ fees to the prevailing party if the court finds that the trade secret was willfully or maliciously misappropriated.
In extraordinary circumstances, the DTSA allows seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the lawsuit. The moving party must show that it will suffer immediate and irreparable injury without the seizure and that Rule 65 of the Federal Rules of Civil Procedure, which provides for injunctive relief, is inadequate because the other party would evade, avoid or otherwise not comply with the injunction. Any goods that are seized are taken into the custody of the court pending a determination as to the misappropriation.
The DTSA requires that an employer provide notice of the immunity provision set forth in the act in any contract or agreement with an employee that governs the use of a trade secret or other confidential information. The term “employee” is defined to include “any individual performing work as a contractor or consultant for an employer.” The immunity provision states:
- 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.
The notice requirement applies to contracts and agreements that are entered into or updated after May 11, 2016, the date the DTSA went into effect. The DTSA allows employers to satisfy the notice requirement by cross-referencing a policy document containing the immunity provision that is given to the employee, provided the document sets forth the reporting policy for a suspected violation of the law. If an employer does not comply with the notice requirement, it will not be able to obtain an award of exemplary damages or attorneys’ fees under the DTSA in an action against an employee, contractor or consultant to whom notice was not provided.
Take-Away for Employers
Employers are advised to include language satisfying the DTSA notice requirement in all agreements with employees, contractors and consultants that contain provisions protecting trade secrets and confidential information. With regard to existing agreements, employers should consider updating these with an amendment signed by the employer and the employee in order to comply with the notice requirements. The employer may choose to include the specific language of the immunity provision in the agreement or cross-reference a policy containing the required language. While either avenue will comply with the DTSA, there are benefits to having a policy that is distributed to employees and cross-referenced in agreements, one of which is that the language is drafted only once – in the policy – rather than numerous times in separate agreements, opening the possibility of mistakes and inadvertent omissions. Keep in mind that if a policy is referenced, employees need to acknowledge its receipt. Regardless of how notice is provided, doing so now will allow employers to take advantage of all aspects of this new federal law if they need to protect a trade secret against misappropriation.