On April 27, 2016, the House of Representatives approved the Defend Trade Secrets Act (DTSA), which provides companies with a federal remedy and federal court jurisdiction for misappropriation of their trade secrets. Already approved by the Senate, the DTSA amends the Economic Espionage Act, which formerly did not provide a private right of action for trade secret misappropriation, to include provisions that largely track the trade secret misappropriation provisions of the Uniform Trade Secrets Act (including, for example, definitions of “misappropriation” and “improper means”). Most states have, to some degree, adopted the Uniform Trade Secrets Act.
As summarized below, the DTSA also includes more novel provisions that (1) permit ex parte (i.e., without notice) seizures of materials containing misappropriated trade secrets “in extraordinary circumstances”; (2) provide protections (i.e., “immunity”) from federal or state civil or criminal liability in certain circumstances for whistleblowers who disclose trade secrets in certain situations; and (3) require companies to notify workers of such “immunities” in any agreement governing use of trade secrets or confidential information.
The DTSA is intended in part to enhance consistency in the rules governing trade secrets through development of a more uniform body of federal law. To date, such rules have been the province of state law and have therefore been subject to jurisdiction-by-jurisdiction variations. Moreover, the DTSA will give companies access to federal court for trade secret misappropriation claims without having to first establish independent federal court jurisdiction, by tacking on an additional federal claim or showing diversity of citizenship. A private civil action for trade secret misappropriation under the DTSA must be commenced within “three years after the date on which the misappropriation with respect to which the action would relate is discovered or by the exercise of reasonable diligence should have been discovered.”
Available remedies generally track Uniform Trade Secret Act provisions, and include injunctions (with certain limitations) for actual or threatened misappropriation; monetary damages for actual loss and unjust enrichment, or a reasonable royalty; and, in the cases of willful and malicious misappropriation, exemplary damages of up to two times the amount of monetary damages and reasonable attorney’s fees. The plaintiff also can be required to pay the defendant’s reasonable attorney’s fees if the defendant proves that the plaintiff filed a DTSA claim or resisted a motion to terminate an injunction in bad faith.
Although the DTSA, which was passed unanimously in the Senate and with just two dissenting votes in the House of Representatives, will likely lead to additional consistency in trade secret law, it will not eliminate all state-level idiosyncrasies. The DTSA expressly states that it is not intended to supersede state laws on the topic. Furthermore, it prohibits a federal court from entering an order to “prevent a person from entering into an employment relationship,” and requires that “conditions placed on such employment [presumably to regulate trade secret acquisition, use, or disclosure] shall be based on evidence of threatened misappropriation and not merely on the information the person knows.” Significantly, the DTSA also prohibits a federal court’s entry of injunctions that “conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.” Presumably, this latter provision would, for example, preserve in California the effect of the California Business and Professions Code § 16600, which (unlike the trade secrets laws of some other states) generally prohibits covenants, including nondisclosure clauses, that limit an employee’s competitive activities beyond regulating the acquisition, use and disclosure of trade secrets.
In addition to creating a federal right of action, the DTSA also gives companies another (albeit limited) tool to protect their trade secrets: it permits parties to request, and courts to order, the seizure by the court (via law enforcement officials) of any property required “to prevent the propagation or dissemination of the trade secret” ex parte (that is, without a hearing or response from the opposing party). Importantly, the law specifies that an ex parte seizure may only be granted “in extraordinary circumstances” and upon a showing of “specific facts” justifying the seizure and “describ[ing] with reasonable particularity the matter to be seized,” including without limitation a showing under oath that a mere injunction against trade secret use or disclosure would not suffice because “the party to which the order would be issued would evade, avoid or otherwise not comply with such an order.” It also includes various other procedural safeguards, including provision for a prompt hearing upon notice (typically within seven days) on any seizure, restrictions on publicity and monetary relief imposed on the moving party for any “person who suffers damage by reason of a wrongful or excessive seizure.”
The DTSA also includes an important carve-out to the protection it provides for trade secrets. It “immunizes” from civil and criminal liability under both federal and state “trade secret law” whistleblowers who disclose trade secrets “in confidence” to a federal, state or local government official, “either directly or indirectly, or to an attorney” where such disclosure is “solely for the purpose of reporting or investigating a suspected violation of law.” It also provides immunity for disclosures made in a “lawsuit or other proceeding,” so long as that filing is made under seal, and it provides that,
“[a]n individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual (A) files any document containing the trade secret under seal; and (B) does not disclose the trade secret, except pursuant to court order.”
It does not allow a whistleblower to simply make trade secrets public, even if he or she does so to expose perceived wrongdoing. While the full scope and applications of these provisions remain to be seen, they provide significant protections for whistleblowers who disclose to the government or their attorney and potentially use trade secrets in a confidential manner in furtherance of their whistleblowing efforts, even in purely state-law misappropriation cases brought in state court or, likely, in arbitration.
Notably, in addition to providing whistleblowers with immunity, the DTSA also requires employers to provide notice to employees—which is defined for such purposes to include individuals who are consultants or independent contractors—of their right to disclose and potentially use trade secrets in the limited circumstances described above. Employers must provide such notice to such individuals “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” Alternatively, an “employer shall be considered to be in compliance with the notice requirement . . . 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.” This requirement applies “to contracts and agreements that are entered into or updated after the date of enactment of this subsection,” and thus presumably does not require immediate amendment of preexisting agreements. The DTSA does not specify the precise content of the required disclosure, particularly in a cross-referenced policy. Non-compliance with the disclosure requirements bars an employer-plaintiff from recovering any exemplary damages or attorney’s fees that it might otherwise be entitled to receive under the DTSA. Failure to give such notification also could be viewed with disfavor by regulators and governmental entities (such as the Securities and Exchange Commission [SEC]) that investigate suspected legal violations and that are increasingly scrutinizing contracts and other actions by employers that could chill whistleblowing.
In light of the notice requirements of the DTSA’s whistleblower provisions, companies may wish to review agreements and policy documents likely to include confidentiality or similar provisions—for example, employment contracts, employee handbooks, business protection and non-competition agreements, or separation agreements. Companies may also consider reviewing general policies pertaining to protection of confidential information to fully utilize the new federal protection the DTSA provides for trade secrets.
Sidley lawyers recently published a blog post on this topic as it relates to cyber intrusions. To view the post, click here.