June 13, 2016
The newly adopted Defend Trade Secrets Act (DTSA) opens federal courthouse doors to companies seeking to protect their trade secrets “related to a product or service used in, or intended for use in, interstate or foreign commerce.” The DTSA amends the Economic Espionage Act to create a federal private civil claim for trade secret misappropriation. Among other remedies, the DTSA provides for injunctive relief, compensatory and exemplary damages, recovery of attorneys’ fees for willful misappropriation, and ex parte seizures under extraordinary circumstances.
Before enactment of the DTSA, companies almost always had to sue under state law to protect their trade secrets, and could do so only in state courts unless they asserted other related federal claims, or all of the defendants were from a different state. By creating a new independent federal civil claim for trade secret misappropriation, the DTSA provides an additional potential forum for companies to protect their trade secrets. Because the DTSA does not preempt state trade secret laws, suing under state statutes remains an option, and the DTSA will operate as an additional layer of potential trade secret protection.
Immediate Action Step: Provide Notice of Whistleblower Immunity Provisions
As a tradeoff for creating federal remedies for trade secret misappropriation, the DTSA provides criminal and civil immunity to employees who disclose trade secrets to federal, state or local government or law enforcement officials, or to an attorney, for the purpose of reporting or investigating suspected illegal conduct, or in a court filing made under seal in an employee suit alleging retaliation for reporting suspected illegal conduct. The DTSA requires employers to provide notice of this whistleblower immunity in any agreement governing the use or disclosure of the employer’s confidential information or trade secrets entered into or updated after enactment of the DTSA. This broad notice requirement applies to nondisclosure, confidentiality, non-solicitation, non-competition, invention and other similar agreements.
The DTSA does not expressly state the content of the required notice. One possible way to comply with the notice requirement is to reference the statute in applicable agreements or to cross-reference the employer’s written policies, which should be updated to reflect and provide notice of the DTSA’s whistleblower immunity provisions. Failure to provide the required notice may preclude recovery of exemplary damages or attorneys’ fees in any action under the DTSA. Employers should immediately review and update their agreements with employees and update or implement employment policies to comply with the DTSA’s whistleblower immunity notice provisions.
Broad Range of Available Remedies: In addition to providing a federal forum for trade secret protection, the practical advantage the DTSA provides companies is the breadth of relief it affords. Once misappropriation is found, the DTSA permits courts to grant “reasonable” injunctive relief. If “exceptional circumstances” make injunctive relief “inequitable,” courts may order a reasonable royalty for a misappropriator’s continued use of a trade secret. In addition to injunctive relief, the DTSA allows courts to award monetary damages for either (i): “actual loss of the trade secret” and, in addition, “any unjust enrichment” not already compensated by actual loss; or (ii) a reasonable royalty for trade secret use. Willful misappropriation permits an award of exemplary damages up to double the amount of monetary damages. The DTSA also includes a legal fee shifting provision in cases involving willful misappropriation or claims asserted in bad faith.
As a preventative measure, under “extraordinary circumstances” the DTSA provides the ability to obtain an ex parte civil seizure order from the court to be enforced by federal, state, and/or local law enforcement. There are strict requirements to obtain such relief, including posting an adequate bond or other security to protect the target of a seizure order that is later determined to have been improperly granted.
Post-Employment Restraint of Former Employees: Many trade secret cases involve former employees moving to a competitor. To avoid limits on competition in the absence of an enforceable non-compete agreement, the DTSA requires any injunctive relief that would “prevent [or place conditions on] a person from entering into an employment relationship” to be “based on evidence of threatened misappropriation and not merely on the information the person knows.” This requirement does not necessarily mean the employee expressly threatened misappropriation, but more likely will be based on circumstantial evidence regarding the likelihood of misappropriation or “inevitable disclosure” in the former employee’s new position. In addition, any injunction preventing or limiting employment cannot “otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.” This provision gives deference to state law non-competition limits and creates tension between the DTSA and certain state employment laws granting employee rights.
Conclusion
The DTSA provides a welcome federal forum and remedies for trade secret misappropriation that will have far-reaching consequences. Companies should evaluate their agreements, policies and litigation options in light of the new law and immediately update nondisclosure and confidentiality agreements to provide the required notice of the DTSA’s whistleblower immunity provisions.
For More Information
If you would like guidance, please contact the Stevens & Lee attorney with whom you normally work or Jeffrey D. Bukowski at 610.478.2215.
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Jeffrey D. Bukowski
This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.