To Obtain All Benefits of New Law, Companies Must Incorporate Notice of the Act’s Whistleblower Immunity Provision in Employee Confidentiality or Severance Contracts That Concern Trade Secrets Entered into or Updated After May 11, 2016

SUMMARY

The Defend Trade Secrets Act of 2016 (the “Act”) creates for the first time a federal civil cause of action for theft of trade secrets of U.S.-based individuals and companies, which may be of value to companies who were previously limited to state courts for protection. The Act authorizes federal district courts to award damages, injunctive relief and attorneys’ fees to private plaintiffs proving theft of trade secrets and, in extraordinary circumstances, to order ex parte seizure of property where necessary to prevent the dissemination of trade secrets. The Act also provides protection to whistleblowers who disclose information containing trade secrets to a governmental entity for the purpose of reporting a suspected violation of law and to individuals who disclose information containing trade secrets in a court filing, under seal, in a lawsuit alleging employer retaliation for reporting a suspected violation of law. In order to be entitled to full damages and attorneys’ fees under the Act, employers must include in any agreement with employees, contractors or consultants containing provisions concerning trade secrets a description of the Act’s immunity provision. The notice requirement applies to agreements that are entered into or updated after the date of the enactment of the Act – May 11, 2016. Accordingly, employers wishing to use the new statute should incorporate these provisions in new agreements and any amendments to existing agreements that govern the use of trade secrets or other confidential information.

THE DEFEND TRADE SECRETS ACT OF 2016

New Federal Civil Cause of Action

The Act, signed into law by President Obama and effective May 11, 2016, amends Chapter 90 of Title 18 of the United States Code, known as the Economic Espionage Act of 1996. (Pub. L. ____ (May 11, 2016).) The Act creates a new federal civil cause of action entitling companies to obtain damages and injunctive relief for a theft of trade secrets occurring on or after May 11, 2016. Until now, only state laws provided civil liability for trade secret misappropriation. The Act applies broadly to protect any trade secrets that are “related to a product or service used in, or intended for use in, interstate or foreign commerce” by a U.S.-based individual or company. Id. at § 1836(b)(1). Under the Act, a trade secret owner is entitled to damages for losses caused by theft of the secrets, awards to remedy unjust enrichment arising from such a theft, and, if the trade secret was “willfully and maliciously misappropriated,” exemplary damages of up to two times the amount of all other damages, and reasonable attorneys’ fees. Id. Additionally, the Act empowers federal courts, “upon ex parte application but only in extraordinary circumstances” to seize property “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action” if “an immediate and irreparable injury” would result from public disclosure. Id. at § 1836(b)(2). Other than its immunity provisions, the Act does not preempt state trade secret law. Id. at § 1836(f). Companies may thus choose to pursue claims in state court if state law is more favorable. Any civil action brought under the Act must be brought within three years after the date on which the misappropriation was discovered or should reasonably have been discovered. Id. at § 1836(d). Notably, a “continuing misappropriation constitutes a single claim of misappropriation,” id., which may be interpreted by courts to mean that an initial misappropriation triggers the limitations period for all subsequent related acts. The Act incorporates the extraterritoriality provision of Section 1837 of the Economic Espionage Act, which sets forth the circumstances in which its protections apply to conduct outside the United States. 18 U.S.C. § 1837.

Whistleblower Provision and Employer Notice Requirement

The Act grants immunity from criminal and civil charges “under any Federal or State trade secret law” to individuals who disclose trade secrets in two circumstances: (1) whistleblowers who disclose information containing trade secrets to a federal, state, or local government for the purpose of reporting a suspected violation of the law, id. at § 1833(b)(1); and (2) individuals who “file a lawsuit for retaliation by an employer for reporting a suspected violation of law” provided that the document containing the trade secret is filed under seal. Id. at § 1833(b)(2).

To obtain the full benefits of the law, employers must include specific notice of the Act’s immunity provision in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” Id. at § 1833(b)(3)(A). “Employee” is defined to “include[] any individual performing work as a contractor or consultant for an employer.” Id. at § 1833(b)(4). An employer’s compliance with the notice requirement is satisfied “if the employer provides a cross-reference to a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law.” Id. at § 1833(b)(3)(B). Thus, it appears that the provision in the employee agreement can be quite brief, provided the employer adopts a policy in its handbook to which it could refer. If an employer does not comply with the notice requirement, it may not recover exemplary damages or attorney fees in an action against an employee to whom notice was not provided, but may still recover other damages the Act authorizes. Id. at § 1833(b)(3)(C). The notice provision applies to “contracts and agreements that are entered into or updated after the date of the enactment of” the Act – thus, after May 11, 2016. Id. at § 1833(b)(3)(D).

IMPLICATIONS

The Act may usher in more uniform protection for owners of trade secrets.

The federal cause of action to pursue civil claims for theft of trade secrets offers companies an alternative to state-level enforcement, the only previously available option. The federal jurisdictional requirement that the trade secrets be intended for use in interstate commerce is relatively lenient and should not present a significant burden. The Act’s injunctive mechanism is also important because such relief generally is unavailable under state law.

Companies should consider incorporating notice of the Act’s immunity provisions in relevant employment contracts and vendor agreements.

To be entitled to the strongest remedies available under the Act, employers should consider incorporating into policies, employment contracts and other relevant agreements with contractors and consultants notice of the Act’s immunity protection. The Act does not require retroactive revisions to contracts or agreements dated prior to May 11, 2016, unless they are amended after that date. Although the statute does not impose financial penalties for failing to provide notice, companies that are not in compliance will be unable to collect exemplary double-damages or attorney fees in an action against individuals to whom notice was not provided.