Federal Trade Secrets Law Requires Changes to Employment Agreements

 

The federal Defend Trade Secrets Act of 2016 (“DTSA”), which came into effect on May 11, 2016 as Public Law No. 114-153, amended the federal criminal code to create a private civil cause of action for trade secret misappropriation.  Specifically, a trade secret owner may file a civil action in a U.S. district court seeking relief for trade secret misappropriation related to a product or service in interstate or foreign commerce (18 U.S.C.A. § 1836(b)(1)). The DTSA established remedies including injunctive relief, compensatory damages, and attorney’s fees, and set a three-year statute of limitation from the date of discovery of the misappropriation (18 U.S.C.A. § 1836(b)(3)).  The DTSA does not preempt state law, which means that trade secret owners may continue to pursue remedies in state courts while taking advantage of the provisions in the DTSA.

Under the DTSA (18 U.S.C.A. § 1836(b)(2)), a trade secret owner may apply for and a court may grant, in extraordinary circumstances, an ex parte seizure order (i.e.,, seizure without prior notice to the person against whom seizure is ordered), such as an employee whom an employer suspects may be prepared to leave the U.S. with the employer’s valuable trade secrets) to prevent dissemination of a trade secret if the court makes specific findings, including that: (1) a temporary restraining order or another form of equitable relief is inadequate, (2) an immediate and irreparable injury will occur if seizure is not ordered, and (3) the person against whom seizure would be ordered has actual possession of the trade secret and any property to be seized.  A court must take custody of and secure seized materials and hold a seizure hearing within seven days. An interested party may file a motion to encrypt seized material.  It should be noted, however, that the DTSA allows individuals or companies who believe they have been subjected to wrongful or excessive seizure to pursue a cause of action for damages including lost profits, costs of materials, loss of goodwill and punitive damages if the seizure was sought in bad faith.

The DTSA amended certain definitions in 18 U.S.C.A. § 1839 and added the following definitions of “misappropriation” and “improper means”:

“(5) the term ‘misappropriation’ means—

“(A) 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; or

“(B) disclosure or use of a trade secret of another without express or implied consent by a person who—

“(i) used improper means to acquire knowledge of the trade secret;

“(ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was—

“(I) derived from or through a person who had used improper means to acquire the trade secret;

“(II) acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or

“(III) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or

“(iii) before a material change of the position of the person, knew or had reason to know that—

“(I) the trade secret was a trade secret; and

“(II) knowledge of the trade secret had been acquired by accident or mistake;

“(6) the term ‘improper means’—

“(A) includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means; and

“(B) does not include reverse engineering, independent derivation, or any other lawful means of acquisition”

The DTSA provides immunity from civil and criminal liability for an individual who discloses a trade secret: (1) to a government official or attorney in confidence to report or investigate a violation of law, or (2) in a legal complaint or filing under seal.  See 18 U.S.C.A. § 1833(b).  It is important for employers to be aware that they are required to provide notice of the DTSA immunity in any contract or agreement with an employee that governs the use of a trade secret or other confidential information, which notice requirement may be satisfied by providing a cross-reference to a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law.  Failure to comply with the notice requirement will prevent employers from be awarding certain exemplary damages or attorney fees under 18 U.S.C.A. § 1836(b)(3).  The notice requirements apply to contracts and agreements entered into or updated after the effective date of the DTSA (May 11, 2016).  It is recommended that notice language track the statute, such as the following:

“Notwithstanding the foregoing nondisclosure obligations, 18 USC § 1833(b)(1) added by the U.S. Defend Trade Secrets Act of 2016 (“DTSA”) provides that an individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that is made: (1) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney, and solely for the purpose of reporting or investigating a suspected violation of law; or (2) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.  In addition, the DTSA provides that an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual (1) files any document containing the trade secret under seal; and (2) does not disclose the trade secret, except pursuant to court order.”

For examples of how the notice should be placed into a full agreement, see the chapter on Employee Confidentiality and Innovations Assignment Agreements (§§167:1 et seq.) in Business Transaction Solutions on Westlaw.

 

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