Federal Trade Secrets Act Now Law: What Companies Should Know
May 16, 2016 | By: Harris S. Freier, Esq.
On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act (“DTSA”).[i] The measure had previously been passed by the U.S. House of Representatives 410-2 on April 27, 2016, quickly following the U.S. Senate’s unanimous passage of the bill on April 4, 2016.[ii] The DTSA amends the Economic Espionage Act of 1996 to create a federal private right of action for trade secret misappropriation. Its passage represents a major overhaul of intellectual property law in the United States, as companies were previously left to seek redress for trade secret misappropriation under a patchwork of state laws, the majority of which were adoptions of the Uniform Trade Secrets Act (“UTSA”).[iii] While the DTSA mirrors many of the provisions and remedies found in the UTSA, which New Jersey and Pennsylvania have versions of, it does not do away with those state law protections, but rather provides additional tools for companies to utilize in protecting their intellectual property. Here are some beneficial takeaways for companies: A. DTSA Definition of a Trade Secret The DTSA creates a broad, universal definition for the term “trade secret,” encompassing “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing” provided that:
- The company has taken reasonable measures to keep the information secret, and
- The information derives independent economic value to the company from not generally being known and not being readily ascertainable by others.
- When a trade secret has been acquired by someone who knew or should have known that the trade secret was obtained through “improper means,” or
- When a trade secret has been disclosed or utilized, without consent of its owner, by someone who knew or had reason to know either that (a) it is a trade secret or (b) it was obtained through “improper means.”
- Early Seizure: Under extraordinary circumstances, a trade secret holder may apply ex parte to a court to seize the property that encompasses the trade secret “to prevent [its] propagation or dissemination.” This provision—certainly the DTSA’s most controversial—gives trade secret holders a remedy akin to a preliminary injunction by which they can prevent dissemination of a trade secret early in a case. Such an application will be granted when a trade secret holder can show that immediate and irreparable harm will occur if a seizure is not ordered, that the harm to the alleged individual who misappropriated the trade secret is less than the harm to the holder, and that the holder is likely to succeed in their case on the merits.
- Remedies Against Former Employees: The DTSA makes clear that any injunction granted by a court with respect to trade secret misappropriation shall not be entered where it “prevent[s] a person from entering into an employment relationship,” or “otherwise conflict[s] with an applicable State law prohibiting restraints on the practice of a lawful profession, trade or business.” Moreover, the DTSA states that any “conditions placed on such [new] employment shall be based on evidence of threatened misappropriation” and not simply “information the person knows.” These provisions address a frequent criticism often levied at restrictive covenants that prevent former employees from working for competitors in a certain geographic area for a certain time period—that they are preventing someone from earning a living. The same rationale is the reason why non-solicitation agreements are more likely to be enforced by some courts as opposed to non-competition agreements, which restrict a former employee from working for a competitor.
- Whistleblower Immunity: The DTSA provides a safe harbor for employees who make a disclosure of a trade secret to the government “for the purpose of reporting or investigating a suspected violation of law,” as well as for employees who confidentially disclose a trade secret in an anti-retaliation action against their employer. Importantly, the DTSA provides that notice of this immunity must be provided by employers in any contract or agreement with an employee that governs the use of a trade secret or other confidential information. This may be accomplished by cross-referencing a separate policy document. A failure to do so could result in exemplary damages and attorneys’ fees should the employee win on his or her anti-retaliation action. Employers should immediately add this immunity language to all new or updated restrictive covenant agreements, non-solicitation agreements, and confidentiality agreements going forward from May 11, 2016, in order to ensure conformity with the DTSA.