By: Brad E. Bennett* and Ami J. Patel**
Yesterday, President Obama signed into law the Defend Trade Secrets Act of 2016 (“DTSA”). As the law’s name suggests, the DTSA will have a major impact upon any business that seeks to protect its confidential information from inappropriate use, disclosure, and theft.
DTSA now provides access into the federal court system for anyone desiring to bring suit on most trade secrets violations. Since trade secret violation claims are commonly paired with claims for breach of non-competition and non-solicitation agreements, those latter claims now also will land in federal court far more often. DTSA will also require all employers to rewrite their non-disclosure agreements and employee handbooks, or else they will forfeit some of the DTSA’s key protections, such as the ability to recover exemplary damages and attorneys’ fees in certain situations.
Among the DTSA’s more interesting provisions:
Whistleblower / Anti-Retaliation Immunity: DTSA provides immunity to individuals who disclose trade secrets to government officials in the course of reporting suspected violations of the law. Furthermore, individuals who file a lawsuit against their employer for retaliation (which could include discrimination/harassment) may disclose trade secrets to their attorney and the court. This right might be construed broadly enough to encompass more than mere whistleblowing, but also to include ordinary retaliation claims under the discrimination laws to the extent that they are premised upon “opposition.”
Immunity Disclosure Requirements: Employers must disclose DTSA’s immunity provision to employees in any contract or agreement that governs the use of trade secrets or other confidential information (e.g., non-solicitation, confidentiality agreements). DTSA prevents employers who fail to comply with this notice requirement from obtaining exemplary damages or attorneys’ fees. This compliance item will require employers to revise any handbook provisions on confidentiality, as well as all employee non-disclosure agreements.
Inevitable Disclosure: DTSA specifically prohibits an employer from obtaining an injunction to prevent someone from entering into an employment relationship on the basis of the information that person knows. This provision effectively nullifies the “inevitable disclosure” doctrine that some courts had developed, under which an employer could seek to enjoin a former employee from working in a job that would inevitably result in the use of trade secrets, even if no evidence of actual disclosure existed.
Definitions: DTSA specifically excludes “reverse engineering” and “independent derivation” from the definition of what it means to acquire a trade secret by improper means.
Federal Seizure Remedy: In “extraordinary circumstances,” a federal court may authorize the ex-parte seizure (without notice to the other party) of property to prevent dissemination of trade secrets. This remedy is available in extremely limited circumstances, and the employer must meet a high burden to obtain this remedy. For example, the employer must demonstrate, via a verified complaint, that a temporary restraining order would be insufficient and that the wrongful holder of the trade secrets may destroy the trade secrets if given advance notice. DTSA also creates a cause of action for damages resulting from wrongful seizures. The employer also cannot have any involvement in the seizure itself—i.e., the service of papers on the person subject to the seizure, as well as everything associated with the seizure itself, must be done by federal marshals, who “may” be assisted by local law enforcement. There are also restrictions on publicizing anything associated with the seizure, a bond mandate, and provisions for requesting encryption of anything seized.
Statute of Limitations: DTSA provides for a three-year statute of limitations, which begins to run when the party discovers, or should have discovered based on reasonable diligence, the misappropriation.
Remedies: Available remedies include injunctions, damages (potentially even “reasonable royalties”), and attorneys’ fees. Exemplary damages equaling twice actual damages may be awarded “if the trade secret is willfully and maliciously misappropriated.” Attorneys’ fees may be awarded if a claim is made in bad faith, a motion to terminate an injunction is made or opposed in bad faith, or if a trade secret is willfully and maliciously misappropriated. A reasonable royalty can be recovered “in exceptional circumstances” if a mere injunction would be “inequitable.” A reasonable royalty can also be recovered “in lieu of” damages.
Relation to State Law: DTSA specifically does not preempt state law dealing with trade secrets, and injunctions issued under DTSA cannot “conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.” Therefore, a plaintiff could potentially avoid federal court by pleading a case solely under state law.
In light of DTSA’s requirements, updating the language of existing contracts and policy documents is necessary for businesses that wish to derive all of DTSA’s benefits.
The lawyers of Zashin & Rich have decades of combined experience in drafting non-disclosure agreements, workplace confidentiality policies, and similar documents. If you have questions about DTSA, trade secrets, or other employment policy concerns, please contact either Ami J. Patel (ajp@zrlaw.com) in Z&R’s Cleveland office (216.696.4441), or Brad E. Bennett (beb@zrlaw.com) in Z&R’s Columbus office (614-224-4411).
*Brad E. Bennett, an OSBA Certified Specialist in Labor and Employment Law, practices at the firm’s Columbus office. He is well versed in all areas of labor and employment law including trade secrets misappropriation and enforcement of post-employment restrictive covenants.
**Ami J. Patel practices in all areas of labor and employment law. She has extensive experience counseling employers on trade secrets misappropriation and enforcement of post-employment restrictive covenants.
