Defend Trade Secrets Act: Summary and Considerations for EmployersMay 2016
On May 11, President Obama signed the Defend Trade Secrets Act [S.1890], which for the first time creates powerful federal civil equitable and monetary remedies for trade secret misappropriation involving interstate commerce.
The Act does not preempt state trade secret laws, which would include the Uniform Trade Secrets Act, but does provide a federal court option that would not otherwise be available in many cases brought under state laws.
The biggest immediate impact is on employers, who are now required to notify their employees and independent contractors of new whistleblower immunity provisions by written agreement or by providing them with a reference to an amended policy document. Failure to provide such notice will preclude an employer from recovering enhanced damages and legal fees otherwise available under the Act.
The following summarizes the key provisions of the Act, particularly ones that directly impact employers seeking enhanced trade secret protection:
Ex Parte Seizures:
- An ex parte (without notice) civil seizure order may be sought in “extraordinary situations” with respect to “property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” This could include, for example, computers, network hardware and digital storage media that were or could still be used by a defendant. The procedures are similar to an emergency temporary restraining order and can only be used where other equitable relief would be inadequate because it would be avoided or evaded by a defendant.
- A seizure order can only be issued upon proof of “immediate and irreparable injury” with equities balanced in favor of the plaintiff. The plaintiff must also establish a likelihood of success on the merits of the misappropriation claim. The statute provides for a fast track hearing date within seven days, and a bonding requirement to secure the defendant for losses should the plaintiff end up losing.
- The Act contains detailed provisions to maintain the confidentiality of seized property and any related trade secrets in issue.
- Injunctive relief is available, but it cannot prevent a person “from entering into an employment relationship.” Any conditions placed on such employment must be based on actual evidence of threatened misappropriation and not merely on what the person knows. This therefor appears to bar injunctive relief based solely on a departed employee’s knowledge and “inevitable disclosure” of that knowledge in a new job position.
Damages and Attorney’s Fees:
- An action for damages can be brought. Damages are available in the form of actual losses to the plaintiff, the value of any separate unjust enrichment on the part of a defendant, or in lieu of such actual an imputed reasonable royalty. Enhanced damages of two-times those basic awards are available for willful and malicious trade secret misappropriation.
- Legal fees may be awarded to a prevailing party where a claim for misappropriation is made in bad faith, a motion for injunctive relief is opposed in bad faith, or the trade secret was “willfully and maliciously misappropriated.”
- There is a statute of limitations of three years from the discovery of the misappropriation or from the time it should have been discovered by the exercise of reasonable diligence.
New Whistleblower Protection:
- New whistleblower immunity is granted to anyone who discloses a trade secret to any federal, state or local government official or agency, or to any attorney, solely for the purpose of reporting or investigating a suspected violation of law, or who discloses it in litigation filed under seal. In addition, anyone who files an action based on employer retaliation for reporting a suspected violation of law may also disclose the trade secret to that person’s attorney and use it in court provided such filings are made under seal.
- Significantly, all employers are now required to provide notice of this immunity in all contracts and agreements with “employees” concerning trade secrets and confidential information. The term “employee” is defined broadly to include both traditional employees and independent contractors.
- The notice requirement may also be met by the employer providing the employee with a cross-reference to a policy document that sets forth the employer’s reporting policy for a suspected violation of law. Failure to include such notice bars the employer from seeking exemplary damages and legal fees in an action against the employee to whom notice was not provided, but the Act does not otherwise penalize the employer for not providing such notice.
© 2016 Herrick, Feinstein LLP. This alert is published by Herrick, Feinstein LLP for informational purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.