A new tool for employers in the trade secret toolkit – Defend Trade Secrets Act of 2016

Employers are appropriately concerned about the potential damage that can result from the theft or misappropriation of their trade secrets. Sometimes it’s hard to put the genie back in the bottle after secret information has been disclosed, and by the time the misappropriation of trade secrets has been discovered, it’s too late. The trick is to find a way to prevent the disclosure and misappropriation before the damage is done. Remedies now available under new federal legislation may help temper, or at least provide remedies for, any such illegal disclosure.

Congress has enacted the Defend Trade Secrets Act of 2016 (DTSA or Act), which was signed into law by the President on May 11, 2016. The vote in the House was 410 to 2, and the Senate unanimously passed the Act. Under this new federal statute, employers and others have new remedies available in federal court. The remedies are limited in number, but are potentially far-reaching in effect. Protection of trade secrets has long been the purview of states and state courts under common law and the Uniform Trade Secret Act. But now, Congress has entered the arena, and made federal courts available to hear trade secret cases.

The Act benefits employers, but also imposes new obligations on employers. DTSA requires employers to provide a notice of whistleblower immunity to employees, independent contractors or consultants in any contract or agreement with such persons that governs the use of a trade secret or other confidential information. The failure to include such a notice may result in the loss of potentially significant remedies or damages. Going forward, employers should include the applicable notice in all agreements which restrict disclosure of trade secrets, including employment agreements, independent contractor agreements, consulting agreements, separation and release agreements, severance agreements, non-compete and non-solicitation agreements, and confidentiality and proprietary rights agreements.

Under DTSA, federal courts may grant injunctions that limit threatened misappropriation of trade secrets by employees, so long as an employee is not prohibited from entering into an employment relationship, and any limitations are based on evidence of threatened misappropriation, and not merely the knowledge retained by the employee. The Act also acknowledges that federal courts may not issue an injunction that is in conflict with state non-competition law. Double damages and an award of attorney’s fees are available if the misappropriation was willful. If the notice of immunity described above is not given to an employee, the employer may not recover these exemplary damages for willful misappropriation.

Under the DTSA, and regardless of the citizenship of the parties, trade secret cases may now be brought directly in federal court, so long as the trade secret is related to a product or service used, or intended to be used, in interstate commerce. The litigants may enjoy all of the benefits of pleading their case to a federal court judge. Trade secrets are a form of intellectual property, and the Act now brings trade secrets into conformity with the misuse of other forms of intellectual property, including patents, trademarks, and copyrights. Contractual forum selection clauses should be reviewed to confirm that the chosen forum is not limited to state court.

Much of DTSA is focused on remedies. In addition to granting injunctions, under appropriate circumstances, and if the court is persuaded that irreparable harm will result, a federal court may order seizure of property necessary to prevent the misappropriation of trade secrets. The order may be granted without a hearing and without notice to the defendant. The procedure essentially follows state and federal law for seizure of any other assets without notice and a hearing on the basis that irreparable harm is likely to result from the failure to act, or in situations where notice would give a defendant an opportunity to hide or otherwise handle the assets associated with the trade secrets in a harmful manner.

State court remedies are also still available, but employers and others now have the ability to file in federal court, and seek powerful remedies that may stop, or at last impede, the act of misuse or misappropriation of trade secrets.

A new tool for employers in the trade secret toolkit—Defend Trade Secrets Act of 2016

Employers are appropriately concerned about the potential damage that can result from the theft or misappropriation of their trade secrets. Sometimes it’s hard to put the genie back in the bottle after secret information has been disclosed, and by the time the misappropriation of trade secrets has been discovered, it’s too late. The trick is to find a way to prevent the disclosure and misappropriation before the damage is done. Remedies now available under new federal legislation may help temper, or at least provide remedies for, any such illegal disclosure.

Congress has enacted the Defend Trade Secrets Act of 2016 (DTSA or Act), which was signed into law by the President on May 11, 2016. The vote in the House was 410 to 2, and the Senate unanimously passed the Act. Under this new federal statute, employers and others have new remedies available in federal court. The remedies are limited in number, but are potentially far-reaching in effect. Protection of trade secrets has long been the purview of states and state courts under common law and the Uniform Trade Secret Act. But now, Congress has entered the arena, and made federal courts available to hear trade secret cases.

The Act benefits employers, but also imposes new obligations on employers. DTSA requires employers to provide a notice of whistleblower immunity to employees, independent contractors or consultants in any contract or agreement with such persons that governs the use of a trade secret or other confidential information. The failure to include such a notice may result in the loss of potentially significant remedies or damages. Going forward, employers should include the applicable notice in all agreements which restrict disclosure of trade secrets, including employment agreements, independent contractor agreements, consulting agreements, separation and release agreements, severance agreements, non-compete and non-solicitation agreements, and confidentiality and proprietary rights agreements.

Under DTSA, federal courts may grant injunctions that limit threatened misappropriation of trade secrets by employees, so long as an employee is not prohibited from entering into an employment relationship, and any limitations are based on evidence of threatened misappropriation, and not merely the knowledge retained by the employee. The Act also acknowledges that federal courts may not issue an injunction that is in conflict with state non-competition law. Double damages and an award of attorney’s fees are available if the misappropriation was willful. If the notice of immunity described above is not given to an employee, the employer may not recover these exemplary damages for willful misappropriation.

Under the DTSA, and regardless of the citizenship of the parties, trade secret cases may now be brought directly in federal court, so long as the trade secret is related to a product or service used, or intended to be used, in interstate commerce. The litigants may enjoy all of the benefits of pleading their case to a federal court judge. Trade secrets are a form of intellectual property, and the Act now brings trade secrets into conformity with the misuse of other forms of intellectual property, including patents, trademarks, and copyrights. Contractual forum selection clauses should be reviewed to confirm that the chosen forum is not limited to state court.

Much of DTSA is focused on remedies. In addition to granting injunctions, under appropriate circumstances, and if the court is persuaded that irreparable harm will result, a federal court may order seizure of property necessary to prevent the misappropriation of trade secrets. The order may be granted without a hearing and without notice to the defendant. The procedure essentially follows state and federal law for seizure of any other assets without notice and a hearing on the basis that irreparable harm is likely to result from the failure to act, or in situations where notice would give a defendant an opportunity to hide or otherwise handle the assets associated with the trade secrets in a harmful manner.

State court remedies are also still available, but employers and others now have the ability to file in federal court, and seek powerful remedies that may stop, or at last impede, the act of misuse or misappropriation of trade secrets.