Aug 30 | 2016

New Federal Trade Secret Law Has Potential to Affect All Employers

Remember the old adage “knowledge is power”?  That phrase certainly applies to the valuable type of intellectual property known as trade secrets.   If you have information that creates a competitive advantage – everything from the famous Coca-Cola formula to customer lists or business processes – and you keep that information secret, then you may have a protectable trade secret.

Until recently, only state law protected trade secrets.  That changed with the enactment of the federal Defend Trade Secrets Act (“DTSA”) in May 2016.  Under the DTSA, organizations now can sue to protect their trade secrets under federal law.  The DTSA defines a trade secret as all types of financial, business, scientific, technical, economic, or engineering information that the owner has taken reasonable measures to keep confidential and that derives independent economic value from not being generally known or available to others who might exploit the information.

Under the DTSA, misappropriation of a trade secret occurs in various ways.  One way is when someone without permission discloses or uses another’s trade secret and the person who disclosed or used it knew or should have known that the trade secret was obtained from one who had a duty not to disclose it.  Another way is when one acquires a trade secret through improper means such as theft, bribery or misrepresentation, and that person knew or should have known that those means were improper.

The DTSA makes available several remedies to protect trade secret owners.  Injunctive relief and recovery of actual damages are the most common.  In extraordinary cases where the owner of the trade secret can demonstrate that a temporary restraining order or a preliminary injunction would not curtail the misappropriation, the owner can petition a federal court to issue a seizure order to stop the misappropriation. Moreover, if the misappropriation was willful, attorney’s fees and punitive damages of twice the actual damage are also available.  However, attorney’s fees and punitive damages will not be available if trade secret owners do not abide by the DTSA’s notice requirements for whistleblower protection described below.

Employers can satisfy their notice obligation in one of two ways.  One way is to incorporate the notice into all employee, consultant, and independent contractor agreements that refer or relate to the use of trade secrets or other confidential information.  All of these types of agreements entered into after May 11, 2016 (the date the DTSA became effective) should be revised to include the following:

“Pursuant to 18 USC Section 1833(b), [Employee/Consultant/Independent Contractor] 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, and 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 other proceeding, if such filing is made under seal.”

The other way to meet the notice requirement is to incorporate the above language into a formal employee reporting policy and then expressly reference that policy in employee, consultant, and independent contractor agreements.  In order to comply with the intent of the law, the reporting policy would have to apply not only employees, but also to independent contractors and consultants.

Owners are not the only ones protected by the DTSA.  Employees, independent contractors and consultants are exempt from criminal and civil liability under any federal or state trade secret law for disclosing a trade secret if: (i) the disclosure is made in confidence to a government official or to an attorney solely for the purpose of reporting or investigating a suspected violation of law, or (ii) if the disclosure is made in a complaint or other document filed under seal in a lawsuit or other proceeding.

Considering that trade secret misappropriation is most likely to be committed by someone who worked for your organization, it would be prudent to secure your trade secrets and take the necessary steps to update your agreements and company policies accordingly.

By Adam W. Sikich, Esq.