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Paul Zimmerman

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New Federal Trade Secret Law: Key Takeaways for Employers

Congress recently passed the Defend Trade Secrets Act (DTSA) which, for the first time, allows companies to file civil lawsuits for theft of trade secrets under federal law. On Wednesday, May 11, President Barrack Obama signed the legislation into law. The DTSA does not pre-empt existing state laws, including California, which previously codified the Uniform Trade Secret Act (UTSA), a model statute. The new federal legislation does, however, provide plaintiffs with a federal private right of action for trade secret claims, enabling companies to sue in federal court for damages related to theft of trade secrets. The DTSA is also significant to California employers in that it imposes specific rules and regulations with regard to whistleblower immunity. In light of these significant requirements, employers should review their agreements, handbooks and procedures to ensure compliance with this pending legislation.

New Avenue Available for Protecting Trade Secrets

The new law will apply to trade secrets related to a product or service used in, or intended for use in, interstate or foreign commerce. Notable features of the new law include a provision for civil seizure early in the action, without notice to the defendant, as well as the ability to restrict a former employee from joining a competitor in certain circumstances. Employers can seek an injunction to prevent actual or threatened misappropriation of a trade secret by an employee, as long as it does not prevent a person from entering into an employment relationship or circumvent state laws regarding “non-compete” agreements. An injunction will not be granted based “merely on the information the person knows” but rather, must be based on evidence of threatened misappropriation of trade secrets. Further, while the DTSA provides for original jurisdiction of trade secret cases in federal court, it does not mandate exclusive jurisdiction, therefore a plaintiff would still be able to bring a claim in state court.

Whistleblower Immunity

Under the DTSA, whistleblowers are granted civil and criminal immunity if they disclose a trade secret in confidence to a federal, state, or local government official, or to an attorney, solely for the purpose of reporting or investigating a suspected legal violation, or as part of a proceeding in which the disclosure is made under seal. Notably, “employee” is defined under the whistleblower immunity provision of the DTSA to include “any individual performing work as a contractor or consultant for an employer,” which is a rather broad definition that could cover a variety of third-party relationships. While the full scope of this whistleblower exception remains to be seen, it provides significant protections for employees who disclose trade secrets in a confidential manner in furtherance of their whistleblowing efforts

Safe Harbor for Retaliation Claims

The new law also protects limited disclosure of trade secrets when an employee files a retaliation claim based on reporting a suspected violation of law against an employer. Employees suing their employer for retaliation are granted situational immunity only where the alleged trade secret is filed under seal. Further, the alleged trade secret may not be disclosed except pursuant to court order.

Notice Requirement

The DTSA also requires that employers provide notice of whistleblower immunity to employees who enter into any form of non-disclosure agreement. Failure to do so would result in the employer being prevented from recovering attorneys’ fees and punitive damages against a former employee for trade secret theft. Notice may be accomplished by including relevant language in the contract or agreement or, alternatively, by means of a cross-reference to a document provided to the employee setting forth the employer’s reporting policy for a suspected violation of law. However, the DTSA does not specify the precise language of the required disclosure, particularly in a cross-referenced policy. Employers should work with qualified employment counsel to ensure that contractual language complies with the Act's notice requirement.

Venue Considerations

Due to the considerable overlap of state and federal law, plaintiffs may choose whether to bring a trade secret misappropriation claim in state or federal court, depending on which law offers the most protection, favorable discovery and motion practice, and greater potential damages recovery. Toward that end, employers may want to consider expanding any venue provisions in their agreements to ensure that they do not foreclose the potential of pursuing enforcement of the agreement in federal court. Employers will need to carefully consider the pros and cons of bringing a trade secret claim in federal court, evaluating such issues as timeliness, ability to subpoena non-party witnesses, and the potential for adjudicating related state law claims in a federal forum.

In light of the whistleblower and retaliation exceptions to the DTSA, as well as the strict notice requirement, employers may wish to review agreements or policies related to confidentiality, including for example, employment contracts, employee handbooks, non-competition agreements, or termination agreements. Employers may also wish to revise pertinent language so as to fully utilize the new federal protection the DTSA provides for trade secrets. Lastly, while the DTSA extends new options to companies bringing trade secret claims in federal court, employers should act now to ensure that all policies, procedures and written instruments fully comply with the statute’s carefully crafted safe harbor exceptions.

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.