Companies Must Account for New Law Protecting Confidential Information

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 effective immediately.

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:

  1. it creates a new private right of action for those seeking civil relief in connection with the misappropriation of trade secrets;
  2. in limited circumstances, it allows for the ex parte seizure of property that contains the misappropriated trade secret; and
  3. it provides civil and criminal immunity to whistleblowers (such as employees) who disclose trade secrets to report illegal conduct under certain circumstances.

Key Definitions

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 information.

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 following:

  1. 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 order.”
  2. The owner would suffer “immediate and irreparable harm” if an ex parte seizure was not granted.
  3. 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 third party.
  4. 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.
  5. 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.
  6. 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.

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12.01.2016  |  PUBLICATION: Employment Notes  |  TOPICS: Cybersecurity and Data Privacy, Employment

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