UPDATE: Federal Defend Trade Secrets Act Signed Into Law; Employers May Need to Notify Employees

After overwhelming passage in both the House and Senate, President Obama signed the Defend Trade Secrets Act into law on April 11, 2016. The Act provides a truly uniform, nationwide set of standards for protecting trade secrets, plus a private right of action to sue in federal court. By creating a private right of action in federal court, the Act seeks to harmonize the varied state-by-state implementations of the Uniform Trade Secrets Act and other state laws currently governing trade secret disputes. Sutherland previously reported on significant features of the Act. 

Whistleblower Provision Warrants Attention

Importantly, a whistleblower immunity notice provision in the Act requires companies to take action now, if they desire to preserve maximum recoveries for misappropriation against an employee. The Act protects an employee’s limited disclosure of a trade secret when reporting a suspected violation of the law, if the disclosure:  

(A) is made (i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

Notice of this provision must be given “in any employee contracts or policy documents governing the use of trade secrets entered into or updated after” enactment. Failure to do so precludes recovery of exemplary damages or attorneys’ fees for wrongful trade secret disclosure “against an employee to whom notice was not provided.”  

For these provisions, an employee includes “any individual performing work as a contractor or consultant for an employer.”

Compliance with the notice provision can be made by “cross-reference to a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected violation of the law.”

Employers: Next Steps

The whistleblower notice provision protects only individuals who meet the definition of “employee.” It does not apply to business entities. And the only sanction for failing to give the whistleblower notice is the inability to obtain punitive damages or attorneys’ fees “against an employee to whom notice was not provided.” 

Based on these facts, employers can choose not to give their employees, individual independent contractors and individual consultants notice of the whistleblower protections. Employers must decide what they value more highly: avoiding the current burden and organizational impact of providing affirmative notice of the whistleblower provision, or preserving the value of a possible future court judgment against an employee that includes punitive damages and attorneys’ fees that are likely uncollectible.  

Employers that decide to provide notice should review all contract or policy documents pertaining to an employee, contractor or consultant’s use of the employer’s trade secrets and disclosure of protected company information. Those company documents may include handbook policies, codes of conduct, form separation agreements, and nondisclosure agreements or related restrictive covenants. Employers should consider conforming those documents to the Act’s whistleblower notice provisions promptly, or plan for future updates to contain the relevant protections. Employers should also ensure that any new contract or policy documents pertaining to the use of the employer’s trade secrets contain the required notice provision.

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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Eversheds Sutherland (US) LLP

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