by Michael P. Thomas, Patrick Harper & Dixon, LLP
Those of you paying even the least bit of attention to the relationship between Congress and the President (not to mention within Congress) for the last few years will be surprised to learn that, on May 11, 2016, President Obama signed a bill that passed the Senate 87-0 and the House 410-2. It’s the “Defending Trade Secrets Act” and it contains some new tools that many lawyers who work for business and industry will find appealing in protecting our client’s intellectual property.
Before I get to that, however, most of the other write-ups I have seen on the DTSA have buried the lead, at least from an employment lawyer’s perspective. The DTSA contains significant new whistleblower protection for disclosure of trade secrets and notice requirements that must be included in employee contracts in order for employers to take full advantage of the benefits of the statute in the event of misappropriation.
The DTSA provides for complete immunity from criminal or civil prosecution for the disclosure of a trade secret either made either (1) “in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney… solely for the purpose of reporting or investigating a suspected violation of law” or (2) “in a … document filed [under seal] in a lawsuit or other proceeding….” 18 USC §1833(b). A whistleblower who files a retaliation suit is permitted to disclose the trade secret to her attorney, to use the trade secret in the proceeding, to file papers containing the trade secret under seal, and to seek and obtain a court order setting terms for disclosure of the trade secret. 18 USC §1833(c). To the extent trade secret information is related to any alleged wrongdoing by an employer, these whistleblower protections are robust.
The whistleblower protections go one step further, however, and provide a cause for immediate action by all employment attorneys. Employers who ask employees to sign any “...contract or agreement with an employee that governs the use of a trade secret or other confidential information…,” 18 USC §1833(b)(3), must now provide explicit notice of the whistleblower protections set forth in the DTSA in any such contract after May 11, 2016. Id. The notice can be in the contract or the contract can refer to the employer’s compliance policies. Id. “Employee” includes employees and independent contractors. 18 USC 1833(b)(4).
The penalty for failure to include the notice language is the inability to utilize the exemplary damages and attorney’s fee provisions of the DTSA in a suit for misappropriation – even if the defendant was not a whistleblower. 18 USC §1833(b)(3)(C).
So, at a minimum, it is time to revise any and all forms which employment lawyers use as a basis to draft non-compete, non-solicitation, confidentiality or other similar agreements with employees so that, going forward, agreements will contain such notices. You may also want to confer with your clients about revising existing agreements, though that has broader implications. A process for updating evergreen agreements that would otherwise automatically be renewed is worth discussing with your clients, too.
In substance, the DTSA provides a federal cause of action for trade secrets misappropriation claims where the products or services affect interstate commerce. The claims may be brought in state or federal court. The DTSA provides for general injunctive relief. Damages may be calculated either as actual loss plus disgorgement of unjust enrichment OR application of a reasonable royalty. Willful and malicious misappropriation justifies an award of exemplary damages up to 2 times the actual damages or royalty. Attorney’s fees are permitted to a prevailing party upon a showing of bad faith or willful and malicious action by the other party. The limitations bar is three years from actual or constructive discovery. 18 USC §1836.
The DTSA contains an elaborate provision for obtaining an ex parte order of seizure for products manufactured using misappropriated information. The procedure is analogous to the procedures for obtaining seizure of counterfeit goods or copyright infringing material. It permits a court to impound the products derived from misappropriated trade secrets based on a credible threat the products will be destroyed or hidden. Rigorous procedural and factual hurdles are set up by the statute. If you believe you might have the opportunity to put this provision to work, read the statute in detail.
The DTSA contains a precise definition of misappropriation and revises the definition of trade secret to focus on the economic value of having the secret information not be known to others who could derive economic value from knowing the information, rather than being secret from the public. 18 USC §1839.
With the exception of the immunity provision, the DTSA does not purport to preempt state law.
One final note for employment lawyers, the DTSA does not permit a judge to enjoin a person who is alleged to have misappropriated a trade secret from taking any particular employment and limits conditions which can be placed on employment in an injunction. Such limits must be based on evidence of actual threats of misappropriation and not merely on the fact that the individual knows the secret information. 18 USC §1836. Such an injunction cannot override other state or federal law limiting restraints on employment. Id. These requirements, on their face, however, do not appear to block a court from enjoining employment based on other factors, such as a non-compete agreement.
Mike Thomas is the 2015-2016 chair of NCADA's Employment Law Practice Group