As 2016 winds down – and annual compliance “housekeeping”
rituals begin – employers and other businesses should note that
there is a new federal law to protect against the misappropriation of
confidential information. The Defend Trade Secrets Act of 2016 (“DTSA”)
provides companies with new and powerful legal tools to prevent and respond
to the unauthorized disclosure or use of their trade secrets. However,
as described below, employers and owners of sensitive information must
take action to ensure that the law’s protections may be fully utilized.
An Overview of the DTSA
By way of background, after receiving large bipartisan support, President
Obama signed the DTSA into law on May 11, 2016, with the legislation becoming
The DTSA is the first piece of federal legislation that creates a private
right to bring a lawsuit to prevent the misappropriation of trade secrets.
Prior to the adoption of the DTSA, employers and businesses relied upon
a patchwork of various state laws and contracts in order to protect their
trade secrets. The DTSA supplements, but does not preempt, state laws
and contracts governing the use of trade secrets. As a result, a lawsuit
under the DTSA can be combined with state law statutory or contract claims
– including, for example, for trade secrets misappropriation, a
breach of a confidentiality agreement, or unfair competition.
The DTSA contains three main elements:
- it creates a new private right of action for those seeking civil relief
in connection with the misappropriation of trade secrets;
- in limited circumstances, it allows for the ex parte seizure of property
that contains the misappropriated trade secret; and
- it provides civil and criminal immunity to whistleblowers (such as employees)
who disclose trade secrets to report illegal conduct under certain circumstances.
Integral to the three main elements of the DTSA is how the legislation
defines the terms “trade secret” and “misappropriation.”
Under the DTSA, a trade secret can be all forms and types of a wide variety
of information, including, plans, formulas, designs, programs or codes,
stored in a wide variety of media that the owner has taken reasonable
measures to keep secret and such information derives economic value from
being not generally known or accessible to others. Misappropriation is
defined as the “acquisition of a trade secret of another by a person
who knows or has reason to know that the trade secret was acquired by
improper means.” Misappropriation can also occur when a person discloses
a trade secret without consent and such person “used improper means
to acquire it; knew that someone else used improper means to acquire it;
or knew that the information was derived from someone with a duty to keep
it secret.” Improper means include theft and breaching a duty of
confidentiality, but do not include instances in which a person independently
derives or conducts reverse engineering to discover the content of a trade secret.
Right to Bring Private Lawsuit
The DTSA offers numerous remedies to cure the misappropriation of trade
secrets. Perhaps the most significant component of the DTSA is that it
allows plaintiffs to file a civil action in federal court against parties
who have misappropriated the plaintiff’s trade secrets. A court
may award damages or issue an injunction to prevent any actual or threatened
misappropriation of a trade secret.
If a party succeeds in showing that their trade secret has been misappropriated
a court may award damages for actual loss and for any unjust enrichment.
Upon a showing of misappropriation in a willful and malicious manner,
the court can award exemplary damages up to two times the amount of damages
awarded for actual loss and/or unjust enrichment and attorneys’
fees. In some circumstances, the court may award royalties for the use
of the trade secret that has been misappropriated. However, employers
should be aware that a prevailing employee may be entitled to attorneys’
fees if the employer’s misappropriation claim was brought in bad faith
Notably, an injunction will not be granted if the application intends to
prevent an individual from entering an employment relationship, and conditions
on that employment may not be imposed by the court simply on the basis
of that person’s knowledge without evidence of threatened misappropriation.
Moreover, injunctions under the DTSA cannot conflict with applicable state
law that might prohibit restraints on employment or trade. Thus, it is
unlikely that the DTSA will be an effective tool to enforce non-competition
and non-solicitation provisions, as opposed to protecting confidential
The DTSA’s protections apply to misappropriations that occur on or
after May 11, 2016, and the new law contains a three year statute of limitation
to bring claims.
Ex Parte Seizures
In extraordinary circumstances, an owner of a trade secret may also make
a court application seeking “seizure of property necessary to prevent
the propagation or dissemination of the trade secret that is the subject
of this action” – without the advance knowledge of the alleged
perpetrator. Any such seizure order must be based upon a showing of the
- That an injunction or a temporary restraining order would offer insufficient
relief because the party responsible for the misappropriation of the trade
secret would “evade, avoid or otherwise not comply with such an
- The owner would suffer “immediate and irreparable harm” if
an ex parte seizure was not granted.
- The harm of denying the applicant’s request outweighs the “legitimate
interests” of the person who has misappropriated the trade secret
and also substantially outweighs any harm that might be suffered by a
- The owner must show that they are likely to succeed in demonstrating that
the information is a trade secret and that the party upon whom the seizure
would be ordered has misappropriated or conspired to misappropriate the
trade secret by improper means. In addition, the applicant must show that
that the party who has misappropriated the trade secret has actual possession
of the relevant trade secret and any property to be seized.
- The request for the ex parte seizure must state with particularity the
property that must be seized and, if possible, the location of the property.
- The application must also demonstrate that, if the party against whom the
seizure is to be ordered knew about the application, they would “destroy,
move, hide or otherwise make such matter inaccessible to the court.”
Consequently, applications for ex parte seizures cannot be publicized.
If the court grants a seizure order, a hearing must be held within seven
days. At the hearing, the applicant must “prove the facts supporting
the finding of facts and conclusions of law necessary to support the order.”
If the applicant fails to do so, the court will dissolve or modify the
order. Notably, the party against whom the seizure is made has recourse
and may request relief against the applicant if they can show the seizure
was wrongful or excessive.
Whistleblower Immunity & Notice Requirements
The DTSA provides, in very specific situations, civil and criminal immunity
to individuals who disclose a trade secret. Immunity under any federal
or state trade secret law is available if the disclosure is made (i) in
confidence to a federal, state, or local government official or to an
attorney solely for purposes of reporting or investigating a suspected
violation of the law; (ii) in a document filed under seal in a lawsuit
or other proceeding; or (iii) in connection with an action alleging retaliation
for reporting a violation, provided that the employee files any document
containing the trade secret under seal and does not disclose the trade
secrets except pursuant to a court order.
Under the DTSA’s whistleblower provision, an employer must provide
express notice to its employees (to include its consultants and independent
contractors) that they have certain immunities to disclose trade secrets,
as set forth in the DTSA. Notice must be provided in any contract or agreement
governing the use of disclosure of trade secrets or other confidential
information entered into after May 11, 2016. Employers may comply with
this requirement by incorporating the specific verbiage of the DTSA in
employment related documents governing the employer’s trade secrets
or by cross-referencing to another company document that contains the
employer’s policy on immunity for whistleblowers.
Critically, an employer’s failure to provide such whistleblower immunity
notice prevents the employer from recovering exemplary damages or attorneys’
fees otherwise recoverable under the DTSA.
Impact of DTSA
The DTSA provides for enhanced trade secret security for employers and
other companies, many of which develop valuable intellectual property
that results in a competitive edge. The private right to file a lawsuit
and remedies provided under the DTSA present new and robust avenues for
maintaining the secrecy of a company’s trade secrets and swiftly
responding to unauthorized disclosures or use.
However, the DTSA requires that employers and other businesses take action
to ensure the availability of all legal remedies afforded by the law.
First, the DTSA raises the stakes for employers and businesses to ensure
that their confidential information will satisfy the legal definition
of a protectable “trade secret,” including by enacting reasonable
measures to adequately protect the information. For instance, companies
must carefully consider which individuals truly need access to the information
and any appropriate limitations on that access; whether the applicable
documents and systems are clearly marked or described as confidential;
what protocols or agreements govern the dissemination and return of confidential
information; and what security policies exist with respect to the employer’s
storage of documents and electronic information.
Moreover, businesses should be aware of the adverse consequences under
the DTSA, including the loss of critical remedies, if the employer fails
to include the required whistleblower immunity notice in their employment
related documents. Accordingly, employers should carefully review their
employment agreements, confidentiality agreements, independent contractor
agreements, handbooks, and other trade secret related documents and policies
and consider retaining legal counsel to ensure compliance with the DTSA.
For more information on the topic discussed, contact:
Joel A. Klarreich | 212-508-6747 |
email@example.com |: @staffing_lawyer
Andrew W. Singer | 212-508-6723 |
firstname.lastname@example.org |: @employer_lawyer
Stacey A. Usiak | 212-702-3158 |
email@example.com |: @law4employers
Jason B. Klimpl | 212-508-7529 |
firstname.lastname@example.org |: @HR_Attorney
L. Donald Prutzman | 212-508-6739 |
email@example.com |: @donaldprutzman
*A special thanks to Daniel Altabef for his contributions
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