Moments ago, President Obama signed into law the Defend Trade Secrets Act (DTSA), which the Senate and House passed with overwhelming bipartisan support. The DTSA will fill a large hole in the law of trade secrets. In the past, U.S. companies that were victimized by a theft of trade secrets and confidential information were relegated to seeking relief under state laws. The new law now provides a federal civil remedy for trade secret misappropriation. However, two of the key federal remedies available under this law against employees who steal their employer’s trade secrets – exemplary (double) damages and attorneys’ fees – require employers to modify their employee policies and their employee and independent contractor agreements.
The DTSA is not limited to misappropriation of trade secrets and confidential information by employees. The impetus for the bipartisan support for the law has been trade secret theft by foreign and domestic interests in the form of economic espionage. As noted in the Report on the DTSA issued by the Committee on the Judiciary of the House of Representatives (the House Committee Report), the Department of Defense found that every year, “an amount of intellectual property larger than that contained in the Library of Congress is stolen from networks maintained by U.S. businesses, universities, and government departments and agencies.” The report estimated that “U.S. companies lose $250 billion per year due to the theft of their intellectual property.”
What protections does the DTSA provide for employers?
DTSA protection covers trade secrets that are related to a product or service used or intended to be used in interstate or foreign commerce. Because most companies operate across state lines or internationally, it is expected that only the most local of businesses will not be able to make use of the DTSA to protect their trade secrets and confidential information (collectively referred to as “trade secrets”) from misappropriation.
Here’s what the DTSA can do for employers that have been victimized by or are threatened with misappropriation of their trade secrets by their employees and competitors:
- provide a federal court forum for seeking relief;
- facilitate discovery from third parties in other states who may be in receipt of misappropriated trade secrets;
- obtain actual damages or restitution of unjust enrichment (i.e., disgorgement of ill-gotten gains) occasioned by misappropriation of trade secrets;
- add “exemplary” damages of up to twice the amount of actual damages or restitution in the case of willful and malicious misappropriation;
- provide a full range of injunctive relief, including enjoining actual or threatened misappropriation and ordering affirmative acts to protect a trade secret;
- require the misappropriating party or parties to pay a royalty in lieu of an injunction where circumstances would render an injunction inequitable;
- recover attorneys’ fees if the misappropriation was willful and malicious;
- obtain a civil seizure order on an ex parte basis in extraordinary circumstances to preserve evidence or prevent dissemination of the trade secret;
- impose penalties for a criminal violation of the Economic Espionage Act to the greater of $5 million or three times the value of the misappropriated trade secrets; and
- allow for additional remedies that may be available under an applicable state trade secrets law.
What the special immunity provision of the DTSA means for employers
The DTSA provides for immunity from liability for the confidential disclosure of a trade secret to the government or an attorney. Recognizing that the mere reporting to a third party of a trade secret could violate the rights of the trade secret owner, Congress added a new provision that provides for criminal and civil immunity for anyone who discloses a trade secret under two circumstances: disclosures in confidence to a federal, state, or local government official, or to an attorney, for the purpose of reporting or investigating a suspected violation of the law. The immunity covers disclosure of the trade secret in a court complaint or other document filed under seal in a judicial proceeding.
This immunity also extends to an employee who files a lawsuit against an employer for retaliation for reporting a suspected violation of the law. Such a worker may disclose the trade secret to his or her lawyer for use in the legal proceeding, provided the court document is filed under seal and does not disclose the actual trade secret other than pursuant to a court order.
Congressional lawmakers wanted to make sure that employees learned about this immunity. Congress put the onus on employers by requiring them to give notice of the immunity to their workers in any contract with an employee that addresses the use of trade secrets. This may well include standard, unilateral confidentiality agreements that employers typically require employees to sign. The notice requirements apply prospectively only, covering contracts entered into or updated after the date of enactment of DTSA. Employers may also satisfy the notice requirement in an alternative, less burdensome manner. The House Committee Report states that “an employer may choose to provide such notice by reference to a policy document setting forth the employer’s reporting policy for a suspected violation of the law that provides notice of the immunity.”
To induce employers to provide this “immunity notice” and encourage the reporting of trade secret misappropriation, an employer that does not provide the required notice loses the right to two of the most useful remedies in the new law: exemplary damages and attorneys’ fees against an employee who was not provided with such notice. It is plainly well worth the effort for an employer to fulfill the “immunity notice” requirement in the DTSA.
One final word about the special immunity provision. The term “employee” is defined to include a contractor or consultant who performs work for an employer. Businesses will be wise to include the immunity notice in all new and updated contractor and consultant agreements with their independent contractors. This provision may be of particular significance to government contractor firms that regularly use consultants and routinely update their independent contractor agreements from project to project.
Other key features and nuances of the DTSA of special interest to employers
Despite the breadth of federal remedies available under the DTSA, one key form of relief available under most state laws has been carved out of the new federal law: injunctive relief restraining an employee from working for a competitor. The House Committee Report notes that while a court may grant an injunction to prevent any actual or threatened misappropriation, “an order [may] not prevent a person from entering into an employment relationship . . . .”
The DTSA also recognizes the importance of not interfering with state laws imposing restraints on trade (for example, the California Business and Professional Code, Section 16600, which has traditionally prohibited the use of non-competes). As the House Committee Report states, injunctions may not be issued by a federal court that “otherwise conflict with applicable State laws prohibiting restraints on trade.”
In drafting the DTSA, Congress intentionally skirted the “inevitable disclosure” doctrine, which has been adopted by a few courts that have imposed injunctions on employment based on the theory that an employee’s knowledge of trade secrets would inevitably lead to their improper use at his or her new job. To that end, the House Committee Report on the DTSA states: “Any conditions placed by a court on employment must be based on evidence of threatened misappropriation, and not merely on information a person knows.” The Report continues: “These limitations on injunctive relief were included to protect employee mobility, as some have expressed concern that the injunctive relief authorized under the bill could override State-law limitations that safeguard employee mobility and thus could be a substantial departure from existing law in those states.”
While Congress made it clear that the DTSA does not provide for non-compete injunctions, the new federal law does not override state laws that permit injunctive relief to remedy trade secret misappropriation. As the House Committee Report states, consistent with the overall intent of the DTSA, which provides that “the bill does not ‘preempt any other provision of law,’ the remedies provided in [the act] are intended to coexist with, and not preempt, influence, or modify applicable state law [as to] when an injunction should issue in a trade secret misappropriation matter.”
The DTSA is modeled to a certain degree on the Uniform Trade Secrets Act (UTSA), which has been adopted with certain modifications in 48 states (the exceptions being New York and Massachusetts). The DTSA essentially incorporates certain of the UTSA definitions, including “misappropriation.” In addition, with regard to the definition of “trade secret,” the House Committee Report states that “the Committee does not intend for the definition of a trade secret to be meaningfully different from the scope of that definition as understood by courts in States that have adopted the UTSA.”
Under the DTSA, the statute of limitations is three years from the date when the misappropriation was discovered or would have been discovered by the exercise of reasonable diligence, as is the case with the UTSA. This extended limitations period is particularly useful for businesses that have been damaged by trade secret misappropriation and choose not to seek injunctive relief, instead seeking actual damages or restitution for unjust enrichment over a three-year period. This extended limitations period may be especially useful for businesses if they can show that the misappropriation was willful and malicious. As noted above, this is the criteria for exemplary damages and attorneys’ fees.
What steps should employers take to protect their trade secrets?
First, to take advantage of the exemplary damages and attorneys’ fees provisions, businesses should immediately add the special “immunity notice” clause to all employee and independent contractor agreements dealing with confidential information as well as their employee policies on trade secrets.
In taking the above steps, prudent employers may wish to review their confidentiality agreements to make sure they are drafted in a state-of-the-art manner, preferably in plain English, short and to the point. Ideally, such agreements should be broadly worded but not overbroad. Confidentiality provisions that are overly expansive or improperly worded run the risk of being scrutinized by federal agencies such as the NLRB and SEC.
Second, employers should consider implementing a comprehensive “corporate protection program.” Such a program should include documentation that not only includes the basic confidentiality, non-competition, and non-solicitation clauses, but more importantly an array of special protections such as contractual clauses and policies dealing with treatment of electronically stored information upon an employee’s departure, certifications and reaffirmations of compliance, and disclosure obligations on the part of employees. These types of provisions enable employers to better ensure that current and departing employees comply with their legal and contractual obligations.
All agreements should be drafted with an eye on varied and changing state laws governing non-competes and customer restrictions, with the purpose of achieving the maximum level of success if such clauses ever need to be enforced in court.
Employee policies should complement these types of agreements. They should include electronic communications and handling and tracking of sensitive and valuable corporate information by employees as well as independent contractors and vendors. Policies also should prevent employees from using social media to transmit confidential information in contravention of the DTSA and other laws protecting trade secrets.
In addition, such a program should include procedures for exiting departing employees, including random or reasonable suspicion checking of departing employees’ use of company electronic systems, including company email.
Third, employers should review their onboarding procedures, especially when hiring employees from competitors, respecting the enforceable terms of any employment agreements and such employees’ common law obligations.
Fourth, review the steps your company takes to protect your trade secrets. Ensure that your business has taken reasonable measures to maintain the confidentiality of trade secrets. The DTSA and state laws protecting confidential information and trade secrets are generally only available where they are the subject of efforts that are reasonable under the circumstances to maintain their secrecy.