On May 11, 2016, President Obama signed the Defend Trade Secrets Act (“DTSA”) into law.  The new law brings trade secrets under the penumbra of federal intellectual property law, and provides employers with additional remedies against employees who misappropriate their trade secrets.  In this newsletter, we provide an overview of the new law and the steps that employers need to immediately take to update their employee agreements.

FEDERAL PROTECTION FOR TRADE SECRETS

For many employers, trade secrets are among their most valuable assets.  Trade secrets encompass any information that derives its economic value from not being publicly known.  A trade secret is protectable so long as the owner has taken reasonable measures to protect it from disclosure.  Depending on the business, trade secrets can include customer lists, economic models, recipes, processes, or any other information that the business has developed that gives the company a competitive advantage.

Trade secrets are uniquely vulnerable to misappropriation by departing employees.  Whether it is a customer list or source code, employees with access to trade secrets often recognize their value and seek to take the information with them to gain a competitive advantage at their next employer or in their own enterprise.  Trade secrets immediately lose their value if they are made public or disclosed to competitors, and employers need to act swiftly to protect their trade secrets if they suspect that a departing employee has misappropriated them.

Unlike other forms of intellectual property (trademarks, copyrights, and patents), trade secrets have not been protected by federal law until now.  Employers had been limited to state law remedies for misappropriation of trade secrets.  The new law expands trade secrets protections by providing:

  • Federal court jurisdiction. Under the DTSA, companies may bring a lawsuit against a former employee, a competitor, or any other party for misappropriation of trade secrets directly in federal court.  Prior to the enactment of this law, employers could only bring trade secrets cases in state court, unless they had separate grounds to bring the case in federal court (such as diversity or a concurrent patent claim).
  • Ex parte Employers can seek an order – ex parte – for the seizure of property (including computers, hard drives, and smart phones) to prevent the disclosure of trade secrets.
  • Expanded equitable remedies. The new law allows employers to seek injunctive relief to prevent misappropriation, including restrictions on future employment and orders requiring that affirmative actions be taken to protect the trade secret.
  • Monetary damages. Under the DTSA, employers can seek monetary damages for actual loss, unjust enrichment, or a reasonable royalty for the unlawful disclosure of a trade secret.
  • Exemplary damages. The DTSA provides double damages in cases of willful and malicious misappropriation.
  • Attorney’s fees. Employers may seek attorney’s fees in cases of willful and malicious misappropriation.

BE CAUTIOUS WHEN HIRING FROM COMPETITORS

Although the DTSA provides additional protections for employers when an employee leaves, employers should keep these protections in mind when hiring new employees from competitors.  The DTSA allows companies to seek an injunction to prevent an employee from working for a competitor “based on evidence of threatened misappropriation.”  The law also provides for monetary damages if the new employer acquires or uses trade secrets from the old employer.  Employers should take precautions when hiring employees from competitors, including asking for copies of all non-competes and non-disclosure agreements still in effect and asking new employees to certify in writing that they will not disclose trade secrets belonging to a competitor.

NEW NOTICE REQUIREMENTS FOR EMPLOYERS

While these changes will benefit employers, the new law also imposes new requirements on employers.  Employers are required to notify employees that under the DTSA, they cannot be held liable for disclosing trade secrets to government officials or an attorney for the purpose of reporting a suspected violation of the law.  “Employee” is defined broadly in the notice requirements and includes “any individual performing work as a contractor or consultant for an employer.”

This notice must be either expressly included in all trade secrets and confidentiality agreements with employees, contractors, or consultants, or included in a separate policy document that is referenced in these agreements.  The new law took effect on May 11, 2016, and all new and updated agreements entered into after this date must include the notice provision.

If an employer fails to provide this notice, they will not be able to pursue double damages or attorney’s fees against employees, contractors, or consultants who did not receive this notice.

TO DO

Employers should update all agreements and policies that address trade secrets and confidential information to include the new notice provision required under the DTSA.  At a minimum, we recommend that our clients update the following documents:

  • Handbooks
  • Intellectual property agreements, including confidentiality/non-disclosure agreements and non-competes
  • Intellectual property policies
  • Employment agreements that contain confidentiality clauses, including employment agreements, offer letters, and severance and separation agreements
  • Consulting or contracting agreements that contain confidentiality clauses
  • Any other agreement that governs trade secrets or confidential information

The notice requirement applies only to agreements entered into after May 11, 2016.  Any agreements already in effect do not need to be changed.

Please do not hesitate to contact us if you have any questions about the new law or need assistance updating your agreements and policies.