Newly Enacted Defend Trade Secrets Act Requires Employers to Revise Agreements Now to Preserve Maximum Remedies

by Wilson Sonsini Goodrich & Rosati

On May 11, 2016, we reported in a WSGR Alert that under the new Defend Trade Secrets Act (DTSA), employers seeking exemplary damages or attorneys' fees in a trade secrets misappropriation action must provide employees with notice that, in certain circumstances, the DTSA grants immunity from civil or criminal liability to individuals who confidentially disclose an employer's trade secrets. Such circumstances include instances in which an individual discloses a trade secret in a complaint or other document filed in a lawsuit, but files the trade secret(s) under seal. Similarly, immunity may exist if an individual discloses a trade secret in confidence to a government official solely for the purpose of reporting or investigating a suspected violation of law. This notice condition, however, raises issues as to how, when, and even if employers should provide this notice.

The DTSA does not technically require employers to provide the notice in question. It simply limits recovery options if no such notice is provided to employees. Therefore, employers must initially decide between: (1) providing employees notice that under certain circumstances, they can—with immunity from civil or criminal liability—confidentially disclose company trade secrets (to the government, in a court proceeding, or to an attorney); or (2) foregoing the opportunity to pursue exemplary damages and attorneys' fees under the DTSA when, for example, an employer proves an employee willfully and maliciously misappropriated its trade secrets. In making this decision, California employers should note that under the California Uniform Trade Secrets Act, these same remedies are available, whether or not the employer provides the DTSA's notice of limited immunity.

While the decision as to whether to provide notice is ultimately a business decision, it is clear that providing the notice as set forth in the DTSA affords employers greater remedy options in a trade secrets misappropriation action, and also makes suing in federal court a more viable path. As a result, most employers will likely opt to provide the notice described in the DTSA.

Employers electing to provide notice of the DTSA's limited immunity should take immediate steps to revise their agreements so as to comply with the DTSA's requirements. That is because the DTSA's notice requirements are applicable to all contracts and agreements that are entered into or updated after the date on which the DTSA became law—May 11, 2016. While employers need not modify existing agreements with their current employees or contractors (but should do so where a new agreement is entered into with such existing employees), going forward, employers should make sure that they revise any agreement used with new employees that "governs the use of a trade secret or other confidential information," including, where applicable, confidentiality or proprietary information agreements, invention assignment agreements, non-disclosure agreements, and/or employment agreements.

In addition to updating their agreements with employees, companies should be sure that their consultant/independent contractor agreements contain the DTSA limited immunity language, since the DTSA defines an employee to include "any individual performing work as a contractor or consultant for an employer." Employers should also consider whether release or separation agreements entered into with current employees should comply with the DTSA's notice provisions. This is particularly true when such agreements specifically address an employee's or consultant's need to preserve the trade secret or confidential status of company information. Finally, an employer may elect not to include the necessary language in an employee agreement if the agreement instead makes specific reference to a company policy that contains the notice language. Of course, in that event, the employer will need to modify the specific employee handbook or other stand-alone policy to include the specified notice language.

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.

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