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Issues for Employers Under New U.S. Trade Secrets Law

While the Defend Trade Secrets Act (“DTSA” or the “Act”), passed by Congress on April 27, 2016, has a significant impact on intellectual property management, it also impacts how U.S. employers draft and enforce confidentiality agreements with their employees.

Here’s what every employer should know about the DTSA:

  • Whistle blower immunity and notice. Confidentiality provisions in employment arrangements probably need to be revised. The DTSA provides for exemplary damages and attorneys’ fees under certain circumstances. To get the full benefit of these provisions, companies will need to provide notice to employees that they are immune from liability for disclosing trade secret material to the government, an attorney, or in a court filing made under seal when they are doing so to report suspected violations of law. Although the notice requirement only applies to “contracts and agreements that are entered into or updated after the date of enactment of this subsection,” employers that plan on updating their employment agreements from time to time should start reviewing and revising their employment arrangements (for example, employment, confidentiality, restrictive covenant and equity compensation agreements, as well as employee handbooks, company policies, and codes of ethics and the like) now so they can get the full benefit of the new law on day one. One important piece of this notice is that the definition of employee for this section includes “any individual performing work as a contractor or consultant of an employer,” and not just employees. Thus, employers will need to examine their contractor and consultant relationships as well.
  • A more reliable “hook” to sue in federal court. Companies now have a more direct line to seek relief in federal court for employee movement cases involving misappropriation of trade secrets. Several years ago the primary “hook” for employers to sue in federal court in these cases (other than based on diversity of citizenship jurisdiction) was the federal Computer Fraud and Abuse Act (“CFAA”). However, federal courts in recent years cut off this avenue in many situations. These courts have found that employers don’t have a cause of action under the CFAA when employees were allowed access to information (as opposed to, for example, getting on a computer they’re not supposed to be on) but simply used the information improperly. On the other hand, the DTSA allows a lawsuit in federal court for this very fact pattern, which will ordinarily fall squarely within the Act’s definition of misappropriation of trade secrets.Forum selection clauses providing for exclusive state court jurisdiction might present an obstacle to a company seeking relief under the DTSA in federal court. Companies, therefore, should consider revising agreements with key employees in order to provide for federal and/or state jurisdiction. Of course, employers will still want to think about whether they would rather proceed in state court, which might be able to move more quickly with a temporary restraining order or a preliminary injunction. Nonetheless, the DTSA adds to an employer’s tools for protecting its trade secrets.
  • Ex parte seizure. The Act provides courts the power to order civil seizure of property to prevent misappropriation of trade secrets if certain criteria are met. If an employer can show extraordinary circumstances — that an injunction wouldn’t be sufficient to prevent the “propagation or dissemination of the trade secret” — then a court can order the trade secret material seized. The Act even provides a court the ability to authorize law enforcement to engage independent experts to help locate and isolate trade secrets or appoint a special master to do so, which will be helpful for dealing with complex data-management systems. However, employers give up the ex parteseizure if they publicize the seizure request. It is unclear whether publication would include discussion within the company, for example, and what level of discussion would fail this prong, since the term is not defined in the Act. It remains to be seen how quick federal courts will be to order an ex parte seizure remedy in a trade secret misappropriation case. In order to make federal courts more comfortable with ordering this type of relief in employee movement cases, however, it might behoove companies to include employee acknowledgments in applicable agreements that injunctions and other equitable relief would not be adequate (one element of the showing an employer must make to entitle it to ex parte relief under the DTSA) and that the employee consents to the remedy of ex parte seizure.
  • No preemption of state law. The Act doesn’t preempt state law. To the contrary, it is intended to be used in concert with state law trade secret claims and related contract-based causes of action, such as ones arising from non-compete and non-solicit covenants. In line with this principle, the Act was amended before passage to limit the scope of available injunction remedies, so that it would not provide a company with more relief against a disloyal employee than would be available under applicable state law. The best example of this provision of the Act in practice is the inevitable disclosure doctrine. This doctrine, adopted by very few states, permits an employer to obtain injunctive relief against a former employee (and even, in some cases, the new employer) where the nature of the employee’s new job would make disclosure of trade secrets inevitable. The Act appears to make clear that employers will not be able to pursue relief under this doctrine in federal courts where it is not recognized by prevailing state law.

Overall, the additional protection for trade secrets will allow national employers to create more uniform confidentiality provisions and policies that they can be reasonably assured will be acceptable under the new federal law. However, there are myriad specific considerations that employers will want to carefully analyze before pursuing DTSA claims in addition to or instead of state law breach of contract, trade secret, and common law claims.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.