Did you know... Are You in Position to Take Advantage of the New Federal Defend Trade Secrets Act?

by Nossaman LLP
Contact

Nossaman LLP

Recently, President Obama signed into law the Defend Trade Secrets Act of 2016 (DTSA) which amends the Economic Espionage Act of 1996, codified at 18 U.S.C. §§ 1831 et seq.   

Key benefits of the DTSA includes the option of filing trade secret misappropriation actions in federal court and provides for robust equitable relief and the ability to recover compensatory damages, punitive damages, attorneys’ fees and costs. However, in order for employers to take full advantage of the DTSA, it is critical that employers revise their confidentiality agreements and policies. 

This article will provide an overview of the DTSA and how to comply with DTSA notification requirement to enjoy the full benefits of the DTSA.

PROTECTION OF TRADE SECRETS AND THE DTSA

Trade secrets are a fundamental building block of the economy.  They help drive investment, innovation and economic growth.  The dramatic rise in employee movement between companies, coupled with the ability to effortlessly transfer large quantities of data, has made it more difficult than ever to safeguard your intellectual property and trade secrets.  This article will provide an overview of the DTSA and how it can act as a valuable tool in assessing the best litigation strategy to protect your crown jewels.

The DTSA creates for the first time a federal cause of action for trade secret misappropriation to be filed in federal court.  The DTSA significantly mirrors the Uniform Trade Secrets Act (UTSA).  California, like 47 other states, has adopted its own derivative form of the UTSA; i.e., the California Trade Secrets Act (CTSA).1

Prior to the DTSA, trade secret claims, unlike other types of intellectual property, were primarily governed by state law.  In addition to creating a uniform standard, the DTSA now allows employers access to Federal courts but does not preempt state law.  This affords companies the options to decide whether to file (1) federal or state claims and (2) in federal or state court.  

The DTSA uses a definition of trade secrets, has a three-year statute of limitations, and authorizes remedies similar to those found in California as well as other states.  However, the DTSA is different from the UTSA and the CTSA in that it does not preempt related tort claims arising from the same nucleus of facts.  Additionally, the DTSA limits actions to “owners” of misappropriated trade secrets related to products or services used in, or intended for use in, interstate or foreign commerce.  Standing issues may arise regarding ownership (an undefined term in the DTSA) and whether the products/services moved through interstate commerce.  

Notably, the DTSA creates an ex parte seizure procedure for use in extraordinary circumstances where the party against whom the seizure is ordered “would destroy, move, hide, or otherwise make such matter inaccessible to the court, if the applicant were to proceed on notice to such person….”  While the seizure may be carried out immediately, there are strict standards to meet2 and the DTSA provides that the court shall set a hearing not less than seven days after the issuance of the order.  

Also of significance, the DTSA (1) omits any requirement that a trade secret plaintiff describe its trade secrets with particularity before conducting discovery (which generally favors defendants) which California (like other states) requires; and (2) prohibits injunctive relief based on the inevitable disclosure doctrine, which is consistent with California law.3  This means that a court will not prevent a person from entering into an employment relationship, and will place conditions on the employment relationship only upon a showing of threatened misappropriation, and not merely on the information the person knows.  In addition, injunctive relief will not conflict with applicable state law governing non-compete agreements. 

WHISTLEBLOWER PROTECTION

The DTSA also protects whistleblowers from retaliatory accusations of trade secret misappropriation, so long as the whistleblowers disclose trade secret information to government or court officials in confidence for the purpose of reporting or investigating a suspected violation of law, or that is made in a complaint or other document filed in a lawsuit or other proceeding, if the filing is made under seal.  

Key to the DTSA is that an employer has an affirmative obligation to provide notice of the immunity provision in any contract or agreement with an employee, defined to include contractors and consultants, that governs the use of a trade secret or other confidential information.  If an employer does not comply with this notice requirement, the employer is not barred from bringing a claim of misappropriation but may not be awarded exemplary damages or attorneys’ fees (which would otherwise be available) in an action against an employee to whom notice was not provided.  The notice provision applies to contracts and agreements entered into or updated after May 11, 2016 – the date the section was enacted.

The DTSA states an “employer shall provide notice of the immunity set forth in [the statute] in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.”  The DTSA also provides that employers shall be considered to be in compliance with the notice requirement if they provide “a cross-reference to a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law.”  

Employer Best Practices Regarding the DTSA:

  • Update your employment and confidentiality agreements to disclose the whistleblower immunity provisions in the DTSA to ensure eligibility to recover exemplary damages and/or attorneys’ fees in trade secret litigation.
  • Audit your company’s trade secrets and evaluate the safeguards in place to protect the confidentiality of your trade secrets. 
  • Maintain proper on-boarding and off-boarding procedures, including by counseling and training your employees on the handling and protection of your company’s confidential and trade secret information.
  • Develop and implement a response plan for suspected misappropriation and for receiving a seizure order.
  • Update and implement effective data security policies and practices.
  • Implement effective exit strategies to minimize former employees misappropriating your confidential and trade secret information.

The DTSA provides an alternative effective tool to protect your trade secrets.  However, you need to be proactive to ensure you will have as much protection as the law provides. 

1 The DTSA’s scope and application are similar to that of the UTSA.  California courts have interpreted the CTSA to require that a trade secret be “(a) information (b) which is valuable because unknown to others and (c) which the owner has attempted to keep secret.”

2 The court must make specific findings in the seizure order indicating that the order is necessary to prevent dissemination of a trade secret, including that (1) a temporary restraining order or another form of equitable relief is inadequate, (2) an immediate and irreparable injury will occur if the seizure is not ordered, and (3) the person against whom seizure would be ordered has actual possession of the trade secret and any property to be seized.  If a seizure order is issued, the court must take custody of and secure seized materials and hold a seizure hearing within seven days.  An interested party may file a motion to encrypt seized material and a party harmed by a wrongful or excessive seizure may move to dissolve or modify the order and may also seek relief against the party that applied for the seizure order.  An ex parte seizure filed without appropriate evidence could expose a party to wrongful seizure claims and damages.

In 2002, the California Court of Appeals in Whyte v. Schlage Lock Co., 101 Cal.App.4th 1443 (2002) rejected the inevitable disclosure doctrine which presumes that an employee will inevitably use or disclose his or her former employer’s known trade secrets if the employee performs similar duties in a new position with a competing employer. 

California prohibits non-compete agreements except in very limited circumstances.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Nossaman LLP | Attorney Advertising

Written by:

Nossaman LLP
Contact
more
less

Nossaman LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.