On May 11, President Obama signed the Defend Trade Secrets Act of 2016, which provides a federal civil cause of action for trade secret misappropriation and has broad-reaching implications for employers, as well as any owners seeking to assert their intellectual property rights.
The Act allows trade secret owners to file private civil lawsuits asserting misappropriation in federal courts. Prior to enactment of the Act, companies were generally only able to assert their rights in state courts, which were governed by a patchwork of trade secret laws varying from state-to-state. By creating a single federal statute governing trade secret laws, the Act will develop predictable nationwide case law and provide clarity to litigants on each side of a trade secret dispute. Further, given the technological complexity of many trade secret cases, owners seeking to assert their intellectual property rights will benefit from federal district and appellate judges’ experience with patent and copyright cases involving similar technical disputes.
The Act will not preempt existing state laws, but is intended to co-exist with each state’s trade secret laws. In general, intellectual property owners will now be able to assert both federal and state trade secret causes of action. One new remedy available to trade secret owners under the Act is the right of federal courts to issue emergency ex parte seizure orders to immediately seize property in order to prevent the dissemination of a trade secret. This provision is akin to a temporary restraining order, and is available under extraordinary circumstances to protect owners’ intellectual property rights at the outset of litigation.
In addition to the seizure provision, the Act provides uniformity to the remedies available to litigants, including monetary damages for actual loss, unjust enrichment, attorneys’ fees, and in case of willful and malicious misappropriation, the potential for the damages amount to be doubled. Alternatively, trade secret owners may seek injunctive relief, although the Act does include provisions to protect employee mobility.
The Act also requires employers to add an explicit, written “notice of the immunity” provision for certain types of lawful trade secret disclosures (namely, whistleblowing) to every “contract or agreement with an employee [defined to include contractors and consultants] that governs the use of a trade secret or other confidential information.” Specifically, the immunity provision provides that individuals cannot be held criminally or civilly liable under any federal or state trade secret law for disclosing a trade secret (a) to federal, state, or local government officials, to their attorneys, or in a sealed court document, “solely” for the purpose of reporting or investigating a “suspected violation of the law”; or (b) to their attorneys or in a sealed court document in connection with a lawsuit for retaliation by an employer for reporting a suspected violation of the law. To be in compliance, the notice of immunity must be provided either directly in the contract itself or through a cross-reference in the contract to a “policy document provided to the employee, [contractor, or consultant] that sets forth the employer’s reporting policy for a suspected violation of the law.”
While the Act does not require employers to amend or update such agreements that were entered into before the Act was signed into law, this notice to employees must be included in any new or updated contract or agreement that is entered into on or after May 12, 2016. Employers who fail to comply with the new notice requirement will forfeit the ability to recover “exemplary damages” (up to double damages) or attorneys’ fees under the Act for trade secret misappropriation against an employee, contractor, or consultant to whom no notice was provided.
Accordingly, in order to preserve the right to obtain the full benefits under the new law, employers should consider promptly reviewing and revising their employment agreements, noncompetition agreements, and stand-alone confidentiality and/or nondisclosure agreements to include the notice provision, as well as any policies or handbooks that address procedures for employee reporting of suspected illegal activity; and ensure that, on a going forward basis, any noncompetition and/or confidentiality agreements signed by an employee contain the required notice provision. Furthermore, given the broad definition of employee to include contractors and consultants, businesses should review and revise any independent contractor and consulting agreements restricting the use of company information and also consider reviewing contracts with vendors, distributors, and the like, who might also be deemed “contractors” or “consultants” under the new law. Lastly, businesses should also consider using this opportunity to evaluate whether they are adequately protecting their intellectual property (including trade secrets, patents, trademarks, and copyrights), particularly in light of the changing landscape and the greater federal protections now available for companies’ trade secrets.