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Defend Trade Secrets Act of 2016: What Employers Need to Know
June 17, 2016
Recently, President Obama signed into law the Defend Trade Secrets Act of 2016 (DTSA). The DTSA amends the Economic Espionage Act of 1996, a criminal statute enabling prosecutors to bring charges for trade secret theft, and creates a civil private cause of action under federal law for misappropriation of trade secrets and confidential information. Previously, such claims were almost exclusively governed by state law. The DTSA does not, however, preempt or void existing state laws, which may conflict with the federal law. The following outlines the DTSA’s key provisions for employers.
The DTSA extends criminal and civil immunity under Federal and State trade secret law for the disclosure of a trade secret or confidential information that is either (1) made in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney, and solely for the purpose of reporting or investigating a suspected violation of law; or (2) made in a complaint or other document filed in a lawsuit or other proceeding, so long as such filing is made under seal. The following mandatory notice to employees provision is important.
Mandatory Notice to Employees
The DTSA states that employers must provide notice of the above-mentioned immunity in any employment contract (including contracts with independent contractors and consultants) or agreement, such as a Non-Disclosure Agreement (“NDA”), that governs the use of a trade secret or other confidential information. This applies to all such contracts entered into after May 11, 2016. Employers do not need to revise pre-existing agreements, but such agreements that are updated and/or revised after May 11 should include this language. Employers may also comply with the notice requirement by providing a cross-reference to a policy document provided to the employee (such as an employee handbook) that explains the employer's reporting policy for a suspected violation of law.
The consequences of failure to provide this notice are not entirely clear. The only explicit consequence is that employers will not be entitled to exemplary damages (not more than two times actual damages) and attorney’s fees in an action for the misappropriation of trade secrets against an employee to whom notice was not provided. Beyond that, however, the DTSA is silent. There is no indication whether failure to provide notice may or will invalidate otherwise valid and enforceable agreements, or create any other potential problem. The DTSA does not preempt existing state trade-secret statutes or common law. Therefore, claims for misappropriation of trade secrets or confidential information may allege violations of either, or both, the DTSA and state law.
State vs. Federal Law
Cases may be filed in state or federal court. Claims may be made under state and federal law. DTSA permits only the owner of the trade secret to file suit, but it defines owner very broadly. State statutes may contain different definitions or have interpretations that conflict with DTSA. In many states, a plaintiff must choose between recovery of actual damages and unjust enrichment. DTSA allows for recovery of both.
Employers should make sure that their written agreements with employees, contractors, and/or consultants include DTSA provisions governing the use of trade secrets and/or other confidential information. Employee handbooks and personnel policies should be amended to add this language. These measures will ensure the ability to take full advantage of the available statutory remedies. However, it remains unclear whether the DTSA has any additional “bite” for non-compliance. For example, it’s unclear whether a court would broadly interpret the DTSA to allow a government agency to bring stand-alone actions against employers for failing to provide the immunity notice, or otherwise produce other negative consequences for employers not specifically listed in the DTSA. On the flip side, there is also the chance that an “opportunistic” employee with plans to misappropriate trade secrets/confidential information might use the immunity notice to his/her advantage by manufacturing a phony whistleblowing issue and hiding his/her own misconduct behind it. Thus, employers should carefully evaluate the potential, and likely consequences on its workplace before deciding whether to create new agreements and/or update existing ones.
This Alert is provided for information purposes only, and does not constitute legal advice. According to Mass. SJC Rule 3:07, this material may be considered advertising. ©2016 Posternak Blankstein & Lund LLP. All rights reserved.