Background: On May 11, 2016, President Barack Obama enacted the Defend Trade Secrets Act of 2016 representing the most significant trade secret reform legislation in several decades. The primary objective of the DTSA is to modernize and strengthen trade secret law in the United States.
While the act became immediately effective upon its passage, its provisions only apply to trade secret misappropriation occurring on or after the date of its enactment. For employers and business owners, the DTSA adds to the protections afforded to valuable trade secrets.
However, there also are several provisions of the act related to whistleblower protections and employee notification requirements that necessitate immediate action on the part of employers to ensure their businesses comply with this new legislation.
Strengthening of trade secret protections
Trade secrets, as one form of intellectual property, provide great economic value. It is estimated nearly 80 percent of companies’ assets are intangible, with the majority in the form of trade secrets. Trade secrets include everything from financial information and client lists to formulas, designs, procedures and computer code. Trade secrets are worth around $5 trillion to publicly listed American companies alone. As a result, these extremely valuable assets are frequently targeted for theft or misappropriation and need to be protected.
Before the DTSA was enacted, trade secret owners were limited to civil action under state law, which varies significantly from state to state, and which provides inadequate protection against trade secret misappropriation spanning multiple jurisdictions. Additionally, the federally enacted Economic Espionage Act of 1996 only provides for criminal penalties for trade secret theft. Therefore, one of the most important features of the DTSA is it allows private companies to pursue a new civil cause of action under federal law to remedy trade secret misappropriation, providing trade secret owners the option to seek remedies in either federal or state court.
Remedies for trade secret misappropriation
The DTSA provides for several types of potential remedies for the victims of trade secret misappropriation. For instance, a court may grant an injunction to prevent any actual or threatened misappropriation from occurring. However, such injunctive relief may not prevent a former employee from entering into another employment relationship or conflict with state law regarding restraints on trade.
The DTSA also authorizes damage awards for any actual loss or unjust enrichment caused by trade secret misappropriation, which is the primary means to compensate a trade secret owner.
Finally, at the court’s discretion, an award of attorney’s fees and punitive damages may be warranted when the misappropriation is found to be willful and malicious, was made in bad faith, or if a motion to terminate an injunction was made or opposed in bad faith. These stronger damage provisions provide added relief in cases of theft or misappropriation, and will help to guard against such action.
Reasonable measures to protect trade secrets
It is important to note that, in order to obtain the protections and remedies offered under the DTSA, trade secret owners must take “reasonable measures” to protect their trade secrets. Because the commercial value of trade secrets depends on their confidentiality, owners must take an inventory of their trade secrets to assess whether sufficient safeguards are in place. Such failure may foreclose remedies under the DTSA, as a court will assume that such unprotected information was not meant to qualify as a “trade secret.” The types of reasonable measures that apply in each case will depend on the trade secret at issue but could include the digital encryption of the asset to ensure that only certain trusted individuals have password access to the information contained therein. Thus, it is vital trade secret owners examine the adequacy of the reasonable measures used to protect their secrets and periodically review those measures to ensure they will be able to take advantage of the DTSA’s protections in the event of theft or misappropriation.
Whistleblower protections and employer notification requirements
Finally, and of particular importance for employers and business owners, the DTSA provides for specific protection and immunity to employees who disclose trade secrets in certain situations. First, employees are exempt from liability under the act if they disclosed a trade secret “in confidence” directly or indirectly to federal, state or local government officials, or to a lawyer, solely for the purpose of reporting or investigating a suspected violation of law. Second, an employee may disclose a trade secret in a complaint or other document filed during a lawsuit or other court proceeding, as long as such filing is made under court seal. Finally, if an employee files an anti-retaliation lawsuit against an employer, the individual may disclose a trade secret to an attorney, and may use the trade secret in related court proceedings.
To ensure that employees are aware of these new immunity protections, the DTSA includes an important new employee notification requirement. The law mandates that an employer provide notice of the act’s immunity protections in any contract or agreement with an employee that governs the use of a trade secret or other confidential business information. This notification applies to all such contracts entered into or updated after May 11, 2016, and includes employment agreements, noncompete agreements, confidentiality agreements and other contracts commonly used by businesses. An employer that fails to comply with this notice requirement may be barred from receiving punitive damages or attorney fees in an action against an employee to whom notice was not provided.
Therefore, all employers need to ensure that any new or recently updated employment agreements adhere to this significant change in the law by including a standard notification clause regarding these whistleblower protections. The most direct way of providing the required notice is to incorporate the specific language provided in the DTSA legislation in all employment documents entered into or revised after May 11, 2016. Alternatively, employers can merely insert a cross-reference in all employment agreements to a company policy that includes the employer’s procedures for reporting a suspected violation of law, as long as such policy includes the information contained in the applicable DTSA provisions.
Carnahan, Evans, Cantwell & Brown PC attorneys Joseph “Chip” Sheppard can be reached at jsheppard@cecb.com and Andrew Peebles can be reached at apeebles@cecb.com.
