By David Caves
The federal government has now passed the Defend Trade Secrets Act of 2016 (known as the DTSA). The DTSA provides federal protection for trade secrets and gives owners of trade secrets additional litigation tools to use against defendants accused of misappropriation. This is a new law that also requires all new or updated agreements that govern the use of trade secrets or other confidential information with employees, contractors, or consultants to give notice of whistleblower immunity for certain trade secret disclosures.
Before the DTSA was passed, trade secrets were protected primarily under state law. Most states, including Iowa, have a version of the Uniform Trade Secrets Act (UTSA). Over time, states have established a body of case law interpreting and implementing the UTSA. Trade secrets are also protected under federal criminal laws, such as the Economic Espionage Act of 1996. The DTSA extends the Economic Espionage Act to authorize a private civil cause of action in federal court for misappropriation of a trade secret. State protection of trade secrets will continue.
The primary purposes of the DTSA are two-fold. First, the DTSA opens federal courts to all plaintiffs seeking trade secret protection. Federal courts are often the preferred venue for corporations, particularly those who do business nationally. Second, the DTSA facilitates the creation of a federal body of case law. By creating a federal body of case law, trade secret protection is expected to be more nationally consistent than the existing case law interpreting the UTSA.
In many respects, the DTSA is similar to the UTSA. Both define "misappropriation" consistently and both provide similar remedies—injunctive relief, compensatory damages, exemplary damages, and the potential recovery of attorney fees in the event of willful or malicious misappropriation. Both also provide a three-year statute of limitations.
However, the DTSA provides additional protection in the form of an ex parte seizure order. This would allow a plaintiff to take proactive steps for the seizure of its trade secrets prior to giving any notice of the litigation to a defendant. Such a seizure order would be available only in "extraordinary circumstances"—but this is still beyond what a state court can do under the UTSA to proactively protect a trade secret.
There are other differences. Under the DTSA, a court will not grant injunctive relief for actual or threatened misappropriation if the injunctive relief would prevent an employee from entering into an employment relationship. A court is also limited in placing conditions on a new employment relationship unless the prior employer shows a threatened misappropriation based on more than the information the employee knows. This limits a plaintiff's ability to pursue a misappropriation claim based on an inevitable disclosure theory. The UTSA has no such limitations.
In addition, the DTSA contains an immunity provision to protect individuals from liability for certain trade secret disclosures. Employers must give notice of that immunity in any agreement with an employee, contractor, or consultant that governs the use of a trade secret or other confidential information. The following types of documents may be affected:
- Employment agreements.
- Independent contractor agreements.
- Consulting agreements.
- Non-Disclosure agreements.
- Separation or severance agreements.
- Non-compete or non-solicitation agreements.
- Confidentiality or proprietary rights agreements.
- Employee handbooks or other policies that address these issues.
Employers who fail to comply cannot recover punitive damages or attorney fees that may otherwise be available under the DTSA in trade secret litigation with an employee who did not receive notice.
Notably, the DTSA does not contain language preempting the UTSA or other causes of action. This means a plaintiff seeking to protect its trade secrets may have two (or more) tools at its disposal. The full extent to which the DTSA may preempt some aspects of the UTSA will likely be worked out by courts over time.
Many business leaders and large corporations welcome the addition of the DTSA. The DTSA elevates trade secrets to the status and federal protection enjoyed by other intellectual property rights, such as copyrights, trademarks, and patents.
It is becoming more important than ever for a business to protect its trade secrets—and other intellectual property assets—from competitors, hackers, and even employees and business partners. Every time an employee joins or leaves a business, it is important to formalize trade secret ownership and legal obligations. Similarly, every time trade secrets are shared among business partners, it is vital to understand the legal obligations and ownership of trade secrets in order to protect the trade secrets and also to avoid potential liability for misappropriation.
With the passage of the DTSA, it is imperative for businesses to reevaluate their agreements and policies with respect to trade secrets and other confidential information. At a minimum, employers must ensure their agreements with employees, contractors, and consultants give notice of the DTSA whistleblower immunity. The more vigilant a business is at proactively protecting its trade secret assets, the better positioned it will be to take advantage of a changing marketplace—and to be ahead of the curve in the event a trade secret dispute heads to litigation.