The Defend Trade Secrets Act of 2016 was recently signed into law by President Obama. The Act gives employers new weapons to use against disloyal employees who take trade secret information to a competitor. For the first time, there is now a federal cause of action for trade secret misappropriation.
In addition to providing some fairly extraordinary initial remedies when a misappropriation claim is filed, such as the seizure by federal marshals of property necessary to prevent the dissemination of trade secret information, the Act also permits a civil action for damages and injunctive relief to be filed by the aggrieved party. The plaintiff is entitled to seek an injunction preventing the actual or threatened misappropriation of trade secrets although the Court is prohibited from preventing the former employee from working for a competitor if such a prohibition would be unlawful under applicable State law. In other words, the former employer cannot use the Act as a means of obtaining a non-compete when non-competes are unenforceable.
In addition to injunctive relief, the Court is empowered to award damages for the actual losses caused by the misappropriation. Damages are also available for "unjust enrichment," meaning that the former employer can bring a claim against the new employer for the benefits the new employer reaped from the former employee's misappropriation of trade secrets. If there has been a willful and malicious misappropriation, the Court is empowered to award punitive damages in an amount up to 2 times the amount of actual damages and attorneys' fees. On the flip side, however, if a misappropriation claim is made in bad faith, the Court is empowered to award reasonable attorneys' fees to the defendant.
Any claim under the Act can now be brought in Federal court regardless of where the parties live. So, if you want to avoid litigating a claim in the local court where the former employee or new employer resides and may be well-connected, you can now instead bring an action in Federal court which is generally perceived to be fairer to the out-of-state party.
There are, however, some hidden traps. The Act provides that persons may not be held liable under any trade secret statute if they disclose the secret in confidence to a government official or attorney solely for the purpose of reporting or investigating suspected unlawful conduct. Most importantly, the Act contains a mandatory notification requirement which is triggered by any contract or agreement that governs the use of a trade secret or other confidential information. The notification requirement is required not just with employees, but with independent contractors too. The failure to provide the mandatory notice prohibits the employer from being awarded punitive damages or attorneys' fees in a civil action against the former employee or contractor to whom notice was not provided. The notification requirement applies to contracts and agreements that are entered into or updated after the date the Act became effective.
So, what does this mean for you? Most employment agreements, whether with an employee or independent contractor, contain language protecting trade secret information. Agreements of this type now need to contain the mandatory "whistleblower" language mandated by the Act.
While there is no requirement to amend existing agreements, if those agreements are renegotiated or updated in some other fashion, and all new agreements, need to be reviewed and modified to comply with the Act. Failure to do so results in the waiver of important potential remedies available to you if your trade secrets are stolen.
By the same token, these new remedies can have serious consequences if you are employing a new employee or independent contractor who had access to trade secrets of his or her former employer. The remedies and damages available to the former employer are now significant. You must be careful to instruct any new hire that use of a former employer's trade secret information is prohibited. Otherwise, you run the risk that the sort of damages available under the Act could be imposed on you.