With its passage by the House of Representatives, the Defend Trade Secrets Act ("DTSA" or "Act") has now cleared both houses of Congress and will be sent to President Obama for his approval.  Where trade secrets were once protected at the state level, the DTSA now federalizes trade secrets protection.  This alert highlights some of the DTSA's most important provisions which will impact best practices for protecting trade secrets.

New Requirements For Confidentiality Agreements

Although not the main thrust of the DTSA, the most immediate impact for employers is the DTSA's new requirements for employment and contractor agreements affecting confidential information.

The DTSA provides civil and criminal immunity for employees and contractors who (1) disclose trade secrets in confidence to the government or their lawyers solely for the purpose of reporting or investigating a suspected violation of law, (2) disclose the trade secrets to their personal attorneys in connection with a lawsuit alleging retaliation for reporting a suspected violation of law, or (3) disclose or use the trade secret in any complaint or other document filed in a lawsuit, as long as they file the trade secret information under seal.

The DTSA provides that employers "shall" provide notice of the foregoing immunity in any contract or agreement with an employee or contractor that governs the use of a trade secret or other confidential information. Alternatively, employers may comply with this requirement by providing a cross-reference to a policy document provided to the employee or contractor that sets forth the employer's policy for a suspected violation of law.

The consequence of failing to comply with this immunity notice provision is simply that the employer will not be able to recover the full panoply of remedies available under the DTSA; specifically, exemplary damages (of up to two times actual damages) and attorneys' fees for willful or malicious violations.  To get the maximum benefits of this new law, employers will want to incorporate the immunity notice into their relevant employment agreements and policies as soon as practicable.

Federal Standard For Trade Secrets Protection

The DTSA attempts to harmonize divergent state laws by creating a single federal framework for trade secrets misappropriation lawsuits.  This will lead to a relatively uniform body of case law when bringing trade secret disputes.  The Act underscores Congress's desire to align closely with the Uniform Trade Secrets Act, which has been adopted in some form in every state, except New York and Massachusetts.

However, the DTSA explicitly provides that it does not preempt state laws already addressing trade secrets protection; instead, the federal and state standards will co-exist like wage-and-hour or antidiscrimination laws.

Greater Range Of Remedies

Another major implication of the DTSA is that it allows employers to file civil lawsuits in federal court for trade secrets misappropriation by departing employees.  Access to federal courts may lead to better outcomes in complex trade secrets cases, especially in cross-state or international concerns.  This is due in part to better resources at the federal level to hear trade secret disputes and the perception that federal judges will provide a more sophisticated review.  Further, trade secret holders will be able to rely on the broader discovery tools and nationwide subpoena power granted to federal courts.

The DTSA also gives trade secret holders greater latitude in pursuing trade secret misappropriation claims outside the United States, and trade secret victims may pursue remedies before the International Trade Commission.

Ability To Seek Ex Parte Seizures

Finally, the Act includes a provision allowing judges to issue ex parte civil seizure orders of property if an employer shows, among other things, that the order is necessary to prevent a trade secret from being destroyed, moved, hidden or otherwise made inaccessible to the court.  This authority is not found in any analogous state law.

Perhaps contemplating how controversial this provision would be, Congress included several procedural safeguards within the Act whenever this power is used.  For instance, the applicant for the ex parte order must post a bond to cover damages if the seizure is later determined to be wrongful.  Likewise, the issuing court must provide clear guidance to the officials executing the seizure delineating the scope of their authority, and the court must schedule an adversarial hearing to determine the merits of the seizure at the earliest possible time.  Furthermore, the seizure applicant will not be given access to the seized property without a court order; instead, the court will take custody of the property.  The ex parte provision also includes a limitation that allows parties who feel they are being harassed by such orders to seek damages.   

It remains unclear how often the provision will be invoked, but the Act requires that the Federal Judicial Center develop recommended best practices within the next two years related to the efficient seizure and securing of information that is the subject of an ex parte order.

Recommended Next Steps

As employers anticipate the DTSA's enactment, they should review their agreements and policies to ensure compliance with the law's provisions.