Defend Trade Secret Act Of 2016 – New Issues and Best Practices For Trade Secret Litigation

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1.   Overview

Last month President Obama signed into law the Defend Trade Secret Act of 2016, 18 U.S.C. § 1831 et seq. (“DTSA”), which is the federal government’s attempt to bring uniformity to trade secret litigation by creating a federal private right of action for trade secret misappropriation.  Because this new law specifically states that it does not preempt state laws, it is highly questionable to what extent this new law will affect the hodge-podge of trade secret statutes that stretch across our  great nation.  This article focuses on some of the highlights of this new legislation and some of the best practices that employers should engage in now to be compliant and take advantage of this new statute.

2.   Key Provisions

•    Definition of Trade Secret:  Under the DTSA, six types of information qualify as trade secrets:  financial, business, scientific, technical, economic and engineering information, and examples of such trade secrets include patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.

•    Definition of Misappropriation:  DTSA’s definition of misappropriation is very similar to Uniform Trade Secrets Act (“UTSA”) which most states including California follow that prohibits the acquisition, use, or disclosure of a trade secret that was acquired by improper means.

•    Injunctive Relief:  While a court may grant injunctive relief to prevent actual or threatened misappropriation, such an injunction may not prevent a person from entering an employment relationship and any condition on future employment cannot be based merely on the information the person knows.

•    Ex Parte Seizure:  Unlike state laws, the DTSA provides for civil seizure of property upon an ex parte application in extraordinary circumstances when necessary to prevent the propagation or dissemination of a trade secret.

•    Whistleblower Immunity Protections:  If certain enumerated conditions are met, then someone can disclose trade secrets to a government official or attorney for purpose of reporting or investigating a suspected violation of law.

•    Notice Requirements for Employers:  To obtain punitive damages and/or attorney’s fees under this statute, an employer must provide notice of the whistleblower immunities in any contract or agreement created after May 11, 2016, that governs the use of trade secrets or confidential information.  Notice must be given not only to employees but also to contractors and consultants.

•    Statute of Limitations:  Statute of limitations under the DTSA is three years after the date the misappropriation is discovered or should have been discovered with the exercise of reasonable diligence.

•    International Scope:  A U.S. corporation can be held liable for theft of trade secrets regardless of whether the misappropriation occurred in the United States or abroad.

3.   Employer To Do List

Companies must first inventory competitive data, information, and materials to determine what likely falls within the definition of a trade secret.  Once this determination is made, the companies must confirm that they are adequately protecting their trade secrets by making sure that they have adequate security controls over their trade secrets.  This process should include ensuring documents containing trade secrets are labeled as confidential, making sure distribution of said documents is limited, maintaining said documents in secure areas like locked cabinets, and training individuals who are privy to such secrets on the nature of that information and how to safeguard it.  Furthermore, in today’s digital age companies must ensure that access to computer files containing trade secrets is restricted, and those with access must be trained on the computer files confidentiality.  Taking these aforementioned steps will not only limit the risk of inappropriate disclosures, but also will help establish that the information is in fact trade secrets.

To take advantage of the attorney’s fee provision and punitive damage provisions of the DTSA, employers not only must change employment agreements, offer letters, employment applications that contain contractual language, compensation agreements, bring your own device agreements, and severance agreements entered into after May 11, 2016, that contain confidentiality provisions, but also they must revise non-disclosure agreements, as well as whistleblower and confidentiality policies found in handbooks and elsewhere to include notice of the whistleblower immunities under the DTSA.  One way to do this is to add language to these agreements directly from the statute at 18 U.S.C. § 1833(b), but that provision is wordy and would make many of the aforementioned documents cumbersome.  Alternatively, the company could cross reference to a company policy document that includes a discussion of the immunity.  A third option is that employers could add language to the aforementioned documents similar to the following:

“I understand that despite the foregoing, nothing in this Agreement  prohibits me from reporting to any governmental agency or governmental entity information concerning possible violations of law or regulation and that I may disclose trade secret information to a government official or to an attorney and use it in certain court proceedings without fear of prosecution or liability provided I do so consistent with 18 U.S.C. § 1833.  To make such a report, you can call the California State Attorney General’s Whistleblower Hotline at 1-800-952-5225.”

4.   Conclusion

The DTSA provides a long-awaited federal forum and remedies to enforce and protect trade secret rights.  The advantages of nationwide subpoena power, uniform rules and application of law, and more sophisticated federal jurist make powerful tools for employers to utilize.  To fully benefit from this new law, employers will need to revise agreements and policies to give notice of the whistleblower immunity provisions to employees, contractors, and consultants.

The DTSA also raises issues regarding forum selection.  California Code of Civil Procedure § 2019.210 requires a trade secret plaintiff to identify its claimed trade secrets with reasonable particularity before commencing discovery.  The DTSA does not have a corresponding provision; therefore, plaintiffs may find it advantageous to file in federal court.  Further, the California UTSA provides for preemption of civil causes of action based upon misappropriation of trade secrets, which often results in state courts dismissing attendant tort claims like business interference, conversion, and negligence that arise from the same set of factual allegations as a state trade secret claim.  Because there is no preemption provision in the DTSA, plaintiffs have a viable claim that attendant tort claims filed in federal court should not be dismissed.  Thus, it remains to be seen if these advantages cause federal court to become plaintiffs’ new forum of choice