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Did you know... Are You in Position to Take Advantage of the New Federal Defend Trade Secrets Act?

By: Veronica M. Gray
01/19/17

Recently, President Obama signed into law the Defend Trade Secrets Act of 2016 (DTSA) which amends the Economic Espionage Act of 1996, codified at 18 U.S.C. §§ 1831 et seq.   

Key benefits of the DTSA includes the option of filing trade secret misappropriation actions in federal court and provides for robust equitable relief and the ability to recover compensatory damages, punitive damages, attorneys’ fees and costs. However, in order for employers to take full advantage of the DTSA, it is critical that employers revise their confidentiality agreements and policies. 

This article will provide an overview of the DTSA and how to comply with DTSA notification requirement to enjoy the full benefits of the DTSA.

PROTECTION OF TRADE SECRETS AND THE DTSA

Trade secrets are a fundamental building block of the economy.  They help drive investment, innovation and economic growth.  The dramatic rise in employee movement between companies, coupled with the ability to effortlessly transfer large quantities of data, has made it more difficult than ever to safeguard your intellectual property and trade secrets.  This article will provide an overview of the DTSA and how it can act as a valuable tool in assessing the best litigation strategy to protect your crown jewels.

The DTSA creates for the first time a federal cause of action for trade secret misappropriation to be filed in federal court.  The DTSA significantly mirrors the Uniform Trade Secrets Act (UTSA).  California, like 47 other states, has adopted its own derivative form of the UTSA; i.e., the California Trade Secrets Act (CTSA).1  

Prior to the DTSA, trade secret claims, unlike other types of intellectual property, were primarily governed by state law.  In addition to creating a uniform standard, the DTSA now allows employers access to Federal courts but does not preempt state law.  This affords companies the options to decide whether to file (1) federal or state claims and (2) in federal or state court.  

The DTSA uses a definition of trade secrets, has a three-year statute of limitations, and authorizes remedies similar to those found in California as well as other states.  However, the DTSA is different from the UTSA and the CTSA in that it does not preempt related tort claims arising from the same nucleus of facts.  Additionally, the DTSA limits actions to “owners” of misappropriated trade secrets related to products or services used in, or intended for use in, interstate or foreign commerce.  Standing issues may arise regarding ownership (an undefined term in the DTSA) and whether the products/services moved through interstate commerce.  

Notably, the DTSA creates an ex parte seizure procedure for use in extraordinary circumstances where the party against whom the seizure is ordered “would destroy, move, hide, or otherwise make such matter inaccessible to the court, if the applicant were to proceed on notice to such person….”  While the seizure may be carried out immediately, there are strict standards to meet2 and the DTSA provides that the court shall set a hearing not less than seven days after the issuance of the order.  

Also of significance, the DTSA (1) omits any requirement that a trade secret plaintiff describe its trade secrets with particularity before conducting discovery (which generally favors defendants) which California (like other states) requires; and (2) prohibits injunctive relief based on the inevitable disclosure doctrine, which is consistent with California law.3  This means that a court will not prevent a person from entering into an employment relationship, and will place conditions on the employment relationship only upon a showing of threatened misappropriation, and not merely on the information the person knows.  In addition, injunctive relief will not conflict with applicable state law governing non-compete agreements. 

WHISTLEBLOWER PROTECTION

The DTSA also protects whistleblowers from retaliatory accusations of trade secret misappropriation, so long as the whistleblowers disclose trade secret information to government or court officials in confidence for the purpose of reporting or investigating a suspected violation of law, or that is made in a complaint or other document filed in a lawsuit or other proceeding, if the filing is made under seal.  

Key to the DTSA is that an employer has an affirmative obligation to provide notice of the immunity provision in any contract or agreement with an employee, defined to include contractors and consultants, that governs the use of a trade secret or other confidential information.  If an employer does not comply with this notice requirement, the employer is not barred from bringing a claim of misappropriation but may not be awarded exemplary damages or attorneys’ fees (which would otherwise be available) in an action against an employee to whom notice was not provided.  The notice provision applies to contracts and agreements entered into or updated after May 11, 2016 – the date the section was enacted.  
The DTSA states an “employer shall provide notice of the immunity set forth in [the statute] in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.”  The DTSA also provides that employers shall be considered to be in compliance with the notice requirement if they provide “a cross-reference to a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law.”  

Employer Best Practices Regarding the DTSA:

  • Update your employment and confidentiality agreements to disclose the whistleblower immunity provisions in the DTSA to ensure eligibility to recover exemplary damages and/or attorneys’ fees in trade secret litigation.
  • Audit your company’s trade secrets and evaluate the safeguards in place to protect the confidentiality of your trade secrets. 
  • Maintain proper on-boarding and off-boarding procedures, including by counseling and training your employees on the handling and protection of your company’s confidential and trade secret information.
  • Develop and implement a response plan for suspected misappropriation and for receiving a seizure order.
  • Update and implement effective data security policies and practices.
  • Implement effective exit strategies to minimize former employees misappropriating your confidential and trade secret information.

The DTSA provides an alternative effective tool to protect your trade secrets.  However, you need to be proactive to ensure you will have as much protection as the law provides. 

How Nossaman Can Help

Nossaman's Employment Practice Group is well positioned to assist you.  We filed on behalf of a client one of the first DTSA cases in the country and obtained injunctive relief under the DTSA.  We can also assist in ensuring your agreements and policies are compliant to take full advantage of the benefits of the DTSA.  
Nossaman provides client-focused, high caliber legal services that exceed our clients’ expectations within their legal budgets. Our employment attorneys provide litigation, counseling, advice, and training services to private and public companies and public entities throughout California, as well as meeting their out-of-state-needs. The scope of our representation runs the full gamut from prosecuting misappropriation of trade secrets to defending wrongful termination claims (discrimination/harassment/public policy) and wage and hour class actions. We also have been on the front line of e-discovery, privacy rights, cybersecurity, data breach and workplace violence. We stay on top of emerging employment issues and are well prepared to counsel our clients on how to address and control related issues.  

1 The DTSA’s scope and application are similar to that of the UTSA.  California courts have interpreted the CTSA to require that a trade secret be “(a) information (b) which is valuable because unknown to others and (c) which the owner has attempted to keep secret.”

2 The court must make specific findings in the seizure order indicating that the order is necessary to prevent dissemination of a trade secret, including that (1) a temporary restraining order or another form of equitable relief is inadequate, (2) an immediate and irreparable injury will occur if the seizure is not ordered, and (3) the person against whom seizure would be ordered has actual possession of the trade secret and any property to be seized.  If a seizure order is issued, the court must take custody of and secure seized materials and hold a seizure hearing within seven days.  An interested party may file a motion to encrypt seized material and a party harmed by a wrongful or excessive seizure may move to dissolve or modify the order and may also seek relief against the party that applied for the seizure order.  An ex parte seizure filed without appropriate evidence could expose a party to wrongful seizure claims and damages.

In 2002, the California Court of Appeals in Whyte v. Schlage Lock Co., 101 Cal.App.4th 1443 (2002) rejected the inevitable disclosure doctrine which presumes that an employee will inevitably use or disclose his or her former employer’s known trade secrets if the employee performs similar duties in a new position with a competing employer. 

California prohibits non-compete agreements except in very limited circumstances.  

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