On May 11, 2016, President Obama signed the Defend Trade Secrets Act (DTSA), creating a federal civil remedy for trade secrets theft, in addition to preexisting criminal penalties. This Act amends the Economic Espionage Act of 1996, which was later amended in 2012. Under these older statutes, even though both criminal and civil causes of action were available, only the U.S. Attorney General’s Office could bring those actions. The new law allows the injured party to bring a civil cause of action.
Preemption of State Law for Whistleblower Protection
Until now, trade secrets theft has largely been handled at the state level through lawsuits filed under the Uniform Trade Secrets Act that many states had passed. The DTSA does not preempt state laws in this area but rather is intended to supplement existing state law. However, employers should be aware that the DTSA does create a whistleblower immunity that does preempt any conflicting state laws. This provision protects a whistleblower from any criminal or civil liability “for the disclosure of a trade secret that (A)(i) is made 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.” This provision also allows for disclosure of trade secrets in an anti-retaliation lawsuit against an employer so long as the employee makes the disclosure only to the employee’s attorney and so long as any court filing keeps the trade secrets under seal .
Notice Requirement for Employers
The DTSA requires employers to provide notice of this immunity in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” Providing cross-reference to an employer’s policy document that explains the immunity provision is sufficient to meet the notice requirement. For purposes of this provision, an employee is defined as “any individual performing work as a contractor or consultant for an employer.” An employer who fails to comply with the notice requirement may not be awarded exemplary damages or attorneys’ fees in an action against an employee to whom notice was not provided. This requirement will apply to all contracts created or revised after May 11, 2016, the date the DTSA was signed into law. Accordingly, employers are not required to revise or amend existing confidentiality and non-disclosure agreements entered into prior to May 11, 2016. However, moving forward these contracts must include the immunity provision or reference to an employer policy that explains the immunity provision to be in compliance with the Act.
Difference between the DTSA and State Trade Secrets Theft Laws
The main difference between the DTSA and state trade secrets theft laws is that the DTSA allows courts to issue ex parte seizure orders to prevent the dissemination of trade secrets, which relief generally is not permitted under state laws. In federal court, an injured party is permitted to request the courts to order a seizure of property in “extraordinary circumstances” if “necessary to prevent the propagation or dissemination of the trade secret.” However, this remedy will only be used in extreme situations where severe harm cannot otherwise be prevented by an injunction. The DTSA also grants a cause of action to a person who suffers damage from wrongful or excessive seizure. Injured parties will be entitled to the same relief as provided in Section 34(d)(11) of the Trademark Act of 1946 (15 U.S.C. 1116(d)(11)), commonly referred to as the Lanham Act.
In addition to seizure orders, the DTSA provides for damages for actual loss or unjust enrichment, exemplary damages for willful or malicious appropriation, a reasonable royalty for unauthorized use or disclosure of trade secrets as an alternative to damages, attorneys’ fees for bad faith misappropriations, and injunctive relief.
From an employer’s perspective, every instance of trade secrets theft should be considered on a case-by-case basis. In some cases, the employer may prefer to pursue a case in state court due to convenience or greater remedies being available under state law. In other cases an employer may prefer to pursue the case in federal court due to the seizure order remedy or because the employer is having issues in multiple states. Employers may understandably be reluctant to provide notice of the immunity provision to employees for fear that their employees will freely disclose trade secrets under the guise of reporting an alleged violation. Employers certainly have the option not to advise employees of the immunity provision in confidentiality and non-disclosure agreements, with the understanding that exemplary damages and attorneys’ fees will not be awarded to the employer if successful in those cases in federal court. There is not a uniform approach to this issue that can be applied to every employer, but employers should be aware of the provisions of this new federal law and the potential ramifications for failure to comply.