In the wake of President Obama’s signing into law the Defend Trade Secrets Act (“DTSA”) on May 11, 2016, companies will want to revisit their practices for protecting their trade secrets, especially in the employee/HR context. The DTSA expands the body of trade secrets law, an area that has traditionally been the subject only of state law, by creating a federal civil cause of action for trade secret misappropriation. The Act provides for injunctive relief and compensatory damages, and, if a trade secret is “willfully and maliciously misappropriated,” exemplary damages and attorney’s fees. The legislation enables trade secret owners to protect their innovations by seeking redress in federal court, in the same way that owners of other forms of intellectual property, including copyrights, patents, and trademarks, can seek remedies in federal court for violations of their rights.
(For some general background about the DTSA, please refer to our alert memo here.)
The equitable relief available under the DTSA is drawn directly from the Uniform Trade Secrets Act, which forms the basis of trade secrets law in almost every state. However, the DTSA imposes additional conditions on the grant of injunctive relief in the employment context. A court may grant an injunction to prevent any actual or threatened misappropriation on such terms as the court deems reasonable, provided that the order does not prevent a person from entering into an employment relationship or otherwise conflict with applicable state laws prohibiting restraints on trade and that the conditions placed on such employment are based on evidence of threatened misappropriation and not merely on the information the person knows. The latter condition seemingly signifies a rejection of the “inevitable disclosure” doctrine, which has been embraced by many states to enjoin an employee from working in a similar position at a competing firm on the basis that the individual’s new employment will inevitably lead him to divulge the former employer’s trade secrets.
According to the legislative history, these limitations on injunctive relief were “included to protect employee mobility, as some have expressed concern that the injunctive relief authorized under the bill could override state-law limitations that safeguard employee mobility and thus could be a substantial departure from existing law in those states.” However, since the DTSA does not preempt state law, employers may still be able to enjoin former employees from joining their competitors, for example, under the inevitable disclosure doctrine if the particular state accepts it. We will monitor whether any state legislatures or courts follow the DTSA’s lead and add similar conditions for obtaining injunctive relief.
Employers should also consider the impact the DTSA has on whistleblower provisions contained in employment contracts. We addressed this topic previously in April 2015 in response to the SEC’s first enforcement action against a company for requiring employees to sign confidentiality agreements containing language that allegedly impeded whistleblowing in violation of Rule 21F-17, enacted under the Dodd-Frank Act.
(Read our blog post here in which we advised companies to review and update standard forms of confidentiality, release, separation and employment agreements for provisions that may restrict an employee’s right to engage in whistleblowing activity.)
The DTSA provides immunity from civil and criminal liability under any federal or state trade secret law for an individual who discloses a trade secret: (1) to a government official or attorney in confidence to report or investigate a violation of law, or (2) in a legal complaint or filing under seal. The DTSA requires employers to provide notice of the immunity in any contract with an employee, independent contractor or consultant governing the use of trade secrets or other confidential information. The notice may be provided either directly in the contract or, alternatively, by reference to the employer’s whistleblowing policy. The only apparent consequence under the DTSA of not providing such notice is that the employer cannot be awarded exemplary damages (which could be up to two times the amount of actual damages for losses, including any unjust enrichment not reflected in the employer’s losses) or attorney’s fees in a suit against an individual to whom the notice was not provided. Though unclear, we note that it may be possible for employers to be awarded exemplary damages pursuant to state court actions.
The notice requirement applies to all contracts entered into or updated after May 11, 2016 and does not require revising existing agreements. As for contracts that are subject to automatic renewal, neither the statutory language nor the legislative history addresses whether this requirement will apply. For any new or amended and restated contracts, however, employers should consider inserting language similar to the following which incorporates language to address both the concerns raised by the 2015 SEC enforcement action (the first sentence) and the DTSA immunity notice (the second sentence):
Notwithstanding anything herein to the contrary, nothing in this agreement shall (x) prohibit Employee from making reports of possible violations of federal law or regulation to any governmental agency or entity in accordance with the provisions of and rules promulgated under Section 21F of the Securities Exchange Act of 1934, as amended, or Section 806 of the Sarbanes-Oxley Act of 2002, or of any other whistleblower protection provisions of federal law or regulation, or (y) require notification or prior approval by the Company of any such report; provided that, Employee is not authorized to disclose communications with counsel that were made for the purpose of receiving legal advice or that contain legal advice or that are protected by the attorney work product or similar privilege. Furthermore, Employee shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that is made (1) in confidence to a federal, state or local government official, either directly or indirectly, or to an attorney, in each case, solely for the purpose of reporting or investigating a suspected violation of law or (2) in a complaint or other document filed in a lawsuit or proceeding, if such filings are made under seal.
For questions, you can contact our partners and counsel listed under Executive Compensation and ERISA here.