On May 11, 2016, President Obama signed the Defend Trade Secrets Act of 2016 (DTSA) into law, thereby creating a new federal civil cause of action for trade secret misappropriation. Before the DTSA, trade secret misappropriation claims were made under state laws that largely follow the Uniform Trade Secrets Act (UTSA). The DTSA does not displace those state laws, but creates new obligations and federal remedies for businesses seeking to protect their trade secrets.

By providing the option to bring trade secret misappropriation claims in a federal court, the DTSA gives employers and other trade secret owners immediate access to a federal court, broad federal discovery (such as nationwide subpoena power), the availability of an array of federal remedies, and the opportunity for federal enforcement of judgments.

One potentially significant remedy under the DTSA, which is typically not available under state trade secret misappropriation laws, is the "ex parte" seizure remedy. A federal judge may order the seizure of property by law enforcement officials, without advance notice to the property owner, when necessary "to prevent the propagation or dissemination of the trade secret." To obtain this remedy, the trade secret owner must satisfy a long list of requirements, including establishing that a preliminary injunction or temporary restraining order would be inadequate to prevent the distribution of the trade secret and that if notice were to be provided, the defendant would destroy, move, or hide the property. While ex parte seizure orders are a powerful new weapon in the fight against misappropriation of trade secrets, caution should be exercised in seeking an order because if a court later determines that a seizure or attempted seizure was wrongful or excessive, compensatory damages, punitive damages, and attorney’s fees can be awarded against the party seeking the seizure.

The DTSA also reflects a policy of favoring submissions under seal – for example, by requiring any disclosure of the trade secret by the defendant to be made under seal and by prohibiting the court from directing the disclosure of any alleged trade secret unless the trade secret owner is first allowed to challenge the potential disclosure (under seal). Under the DTSA, trade secret owners can also apply to have any material seized protected by encryption.

Finally, like the UTSA, the DTSA allows trade secret owners to apply for injunctive relief and compensatory damages. In addition, in the event of willful and malicious misappropriation of trade secrets, punitive damages (up to two times compensatory damages) and reasonable attorney’s fees can be awarded.

Whistleblower immunity

The DTSA also provides new protections for whistleblowers. Specifically, the new law provides immunity to whistleblowers from civil and criminal liability for making limited disclosures of trade secrets in confidence to government officials, or to an attorney, for the purpose of reporting or investigating a suspected violation of law. This immunity does not permit an individual from disclosing trade secrets publicly.

The whistleblower may use the trade secret in court proceedings so long as any filing containing the trade secret is made under seal and the individual does not disclose the trade secret without a court order. In the case of an employee alleging employer retaliation for reporting a suspected violation of law, the employee may also disclose the trade secret to his/her attorney and use the trade secret in the court proceedings under seal in accordance with the court order.

What employers should do now

While the DTSA provides additional rights and remedies to trade secret owners, it also imposes new obligations on employers who wish to take advantage of the statute’s full range of remedies. The statute requires employers to provide notice of the whistleblower immunities in any contract or agreement with an employee, contractor, or consultant, entered into or updated after May 11, 2016, that addresses the use of trade secrets or "other confidential information." Employers who do not provide the notice will not be eligible to recover punitive damages and attorney's fees that would otherwise have been available under the DTSA.

All employers should review and revise their template agreements relating to trade secrets or confidential information, including employment agreements, consulting agreements, contractor engagement agreements, non-disclosure agreements, severance and separation agreements, and invention assignment agreements – to comply with the whistleblower immunity notification requirement. Employers should also identify existing contracts that will be renewed or updated to ensure that they will also incorporate the whistleblower immunity notice provisions.

Housekeeping in California – why Senate Bill No. 1241 may mean you need to clean up your employment contracts

In September 2016, California Governor Jerry Brown signed a bill updating section 925(a) of California’s Labor Code. As a result, employers must carefully evaluate whether they can require California-based employees to agree to another state’s or jurisdiction’s choice of law and forum selection as a condition of entering into employment. This new law applies to employment contracts entered into, modified, or extended on or after January 1, 2017 with employees who primarily work and reside in California.

This new law targets two types of contract provisions that may now require housekeeping. The first is a forum selection clause: any contract provision that requires an employee to adjudicate claims that arise within California outside of the state. Amended Section 925(a) defines "adjudication" to include arbitration and litigation.

The second contract provision targeted by the new law is a choice of law clause: any provision that deprives an employee of substantive protection of California law with respect to a controversy arising in California by mandating the application of another jurisdiction’s law to the controversy.

As from January 2017, if an employment contract with an employee who primarily resides and works in California contains one or more of the targeted adjudication or choice of law provisions, the employee may void the targeted provision at his or her election. The statute further authorizes an employee to obtain injunctive relief, attorneys' fees and "other remedies" in an action to void such clauses, although what that means practically is far from clear.

What this law means for you

Your existing and future employment, confidentiality, arbitration, and non-competition contracts may be implicated. If you have employees who primarily reside and work in California, you may need to do some housekeeping on your form contracts to the extent they contain adjudication or choice of law provisions that require the resolution of disputes outside of California or using a foreign body of law. This includes arbitration and non-competition agreements and provisions.
The adjudication and choice of law provisions are not automatically void; they are merely voidable at the election of an employee. But consult with counsel regarding the impact of the new law; if an employee elects to void one or more such provisions, California law supposedly will govern and the matter may need to be adjudicated in California.

It is not clear if the new law outright prohibits foreign choice of law and forum selection clauses, or merely makes them voidable. If the former, employees may be able to recover for the violation of the statute itself, including injunctive relief, the award of reasonable attorneys' fees, and other remedies.

Specific Applications

  • This law applies only to contracts entered into, modified or extended on or after January 1, 2017. It does not apply to pre-January 1, 2017 contracts where no modification or extension will take place after that date. It does, however, apply to pre-January 1, 2017 contracts that are modified on or extended after that date.
  • The new law exempts from its scope employees who are represented individually by legal counsel in negotiating the terms of an agreement to designate the venue in which a controversy arising from the employment contract may be litigated or the choice of law to be applied.

Check to see if your employment contracts include either of these adjudication or choice of law provisions. If so, it is time to sweep away the dust by consulting employment counsel to clean up your employment contracts.