Employers Should Immediately Revise Confidentiality Agreements to Comply

The Defend Trade Secrets Act, signed into law by President Obama last week and effective immediately, provides a new federal remedy for trade secret misappropriation and a uniform law under which to pursue such claims. For private employers, immediate action should be taken to add to all confidentiality and non-disclosure agreements language informing the employee of their “whistleblower” rights.

The DTSA means that private employers can now file a lawsuit in federal court against former employees who have misappropriated trade secrets. Before the DTSA’s enactment, the laws protecting trade secrets were potentially different in each state. While many states (including California) have adopted versions of the Uniform Trade Secrets Act, those laws routinely differ in their scope and available remedies. The DTSA provides a national law under which employers can protect their trade secrets, making it particularly helpful to companies with operations throughout the country. The DTSA does not preempt or displace the still-existing state laws, but provides employers with an additional and alternative theory.

The DTSA includes several notable provisions, including an early seizure remedy. Under this provision, an employer can request from the court a quick recovery of the allegedly stolen trade secrets. The DTSA authorizes this to be done on an ex parte basis, meaning that the defendant (the individual possessing the secret) would have no advance notice of the seizure. The “extraordinary circumstances” under which such relief will be granted remain to be seen, but this has the potential to be a powerful remedy not available under current California law.

Another noteworthy provision of the DTSA allows the issuance of an injunction to “prevent any actual or threatened misappropriation,” which could be used to prevent former employees from using company secrets in connection with new employment. This provision, however, will have questionable application in California. Given California’s demonstrated commitment to free competition and employee mobility, it would be difficult to obtain any injunctive relief prohibiting a former employee from working for a competitor under the DTSA or otherwise.

What does the DTSA mean for California employers? Employers should continue to take measures to protect their confidential information. Whether information will qualify as a “trade secret” (under California’s statutes or the DTSA) depends on what measures were taken to safeguard the information. These steps can include requiring employees to sign confidentiality agreements, limiting distribution of information, marking the information as “private” or “confidential,” and storing information on a secure system.

The DTSA also provides whistleblower immunity to employees who disclose trade secrets to government officials in connection with a suspected violation of law. For companies that require employees to sign trade secret protections, the DTSA imposes a new notice requirement applicable to new agreements. If employees are required to sign a specific non-disclosure agreement or an employment agreement that includes such protections, then employers are required to provide notice of the whistleblower immunity. If an employer fails to provide this notice, then punitive damages and attorney’s fees are not available to the employer in a lawsuit under the DTSA. For this reason, any confidentiality or non-disclosure agreement with employees (or independent contractors) should be revised to give this notice.

As for California’s public employers, given the public nature of government functions and the laws requiring public disclosure of information (including the federal Freedom of Information Act and the California Public Records Act), it is not likely that public employers would file any claims under the DTSA. Since the DTSA does not preempt any state laws, public entities cannot incur any liability under the DTSA if information is properly disclosed under applicable public records laws.

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