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What Employers Need to Know About the New Defend Trade Secrets Act

On Behalf of | May 11, 2016 | Business Litigation, Employment & Labor Law

Trade secret issues arise daily in the workplace with nearly every employment decision, from employee hiring and firing, to every contract that contains a non-disclosure or confidentiality provision. President Obama today signed the Defend Trade Secrets Act (“DTSA” or the “Act”), with huge implications for employers, companies, and other trade secret owners. For the first time, the Act offers trade secret owners greater access to federal court, as well as broadly impacts employee whistleblower rights. The law is designed to go into effect on the day it is enacted and will apply to any misappropriation that occurs on or after that date. Since this new law is right around the corner, it is important to be aware of its various key provisions.Access to Federal CourtFirst, the DTSA extends the current Economic Espionage Act, which criminalizes certain trade secret misappropriations, to create a private civil cause of action. Trade secret owners now have the option to bring trade secret lawsuits in federal court, whereas before trade secret misappropriation was purely a matter of state law. While the DTSA does not preempt the various state trade secret rights, it provides an additional layer of protection to help safeguard companies’ unique formulas and know-how. Because of the DTSA and state law overlap, employers need to understand and conform their practices to both the new and existing laws.

Whistleblower Immunity

Second, the Act gives new immunity to certain whistleblowers who turn trade secrets over to the government to investigate potentially illegal activity. This provision grants both criminal and civil immunity to those whistleblowers under both federal and state trade secrets laws. The DTSA also requires employers to notify workers in any contract that is related to trade secrets or confidential information of their rights to turn over confidential information or trade secrets to the government if illegal conduct is suspected.

Employers should especially keep this notice provision in mind if they are planning to pursue trade secret theft. Employers will not be able to obtain either punitive damages or attorneys’ fees if such notice was not given to employees. Besides whistleblowers, employers will also need to advise employees going forward that they may turn over confidential information to their attorneys or a court in a retaliation suit, provided the disclosure is filed under seal. In light of the DTSA’s new requirements and potential consequences, employers should review their policies for handling confidential information and whistleblowers that are provided to employees.

Civil Seizure Clause

Third, the DTSA also contains a novel seizure provision that in “extraordinary circumstances” allows plaintiffs to ask courts to order the seizure of any property “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action” without a hearing or answer from the defendant. While this provision will be beneficial in providing employers with a forceful method to recover trade secrets from misappropriators, it should be used with caution. If a seizure is later found to be wrongful, the individual who was the subject of the seizure can seek damages such as lost profits.

Injunctive Relief against Former Employees

Lastly, while the DTSA does allow for injunctive relief, the Act makes clear that former employees cannot be restrained from working for a competitor unless it is clearly needed to protect the trade secret, and that the DTSA does not circumvent state law on restrictive covenants. One of the concerns raised against early versions of the Act was that it would empower employers to prevent employee competition. Specifically, the Act provides that injunctive relief that would “prevent (or place conditions on) a person from entering into an employment relationship” must be “based on evidence of threatened misappropriation and not merely on the information the person knows.” In addition, the injunctive relief cannot “otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade or business.”

While it is yet to be seen how the law will be interpreted, the DTSA has major implications for employers who possess and protect trade secrets. As such, employers should be mindful of the need to develop an approved process for handling the various provisions under the DTSA.

Sara Dajani is an Attorney with Berenzweig Leonard, LLP. She can be reached at [email protected]