Provisions of the New Federal Trade Secret Legislation Your Business Should Know About

Trade secrets are vital.  As a business owner, chances are, you own some sort of trade secret that gives your business an advantage over competitors.  Whether it’s a manufacturing process, a secret recipe, a piece of computer code, a chemical formula, or any other proprietary information, the secret adds value to your business and it must be protected.

How important are trade secrets?  Just take a look at Coca-Cola.  Although Coca-Cola’s extraordinary marketing efforts have made it a household name, Coca-Cola’s success wouldn’t be without the protection of the “secret formula.”  Had competitors learned Coke’s secret formula, Coke wouldn’t have the advantage it does today.

Defend Trade Secrets Act of 2016

Fortunately, all fifty states and the District of Columbia provide statutory trade secret protection, and as of May 11, 2016, the Defend Trade Secrets Act of 2016 (DTSA), provides a federal trade secret cause of action and other helpful protections.  Before the DTSA, trade secret law was a product of state legislatures, and although most state trade secret laws are very similar, some states have their own unique twists.  Because many trade secrets are used across state lines, complying with the trade secret laws of multiple states can be difficult and expensive.  In addition, suing to protect your trade secrets in state court will result in delayed relief while competitors exploit your trade secrets.

Now, with a federal right of action, confusion has subsided and businesses can avail themselves of the expeditious federal courts for protection.  Although there are other important provisions in the DTSA that I will not cover in this post, here are 5 important points that businesses should be aware of:

  1. Effective Date

First, the DTSA provides a right of action for any misappropriation of a trade secret that occurred on or after May 11, 2016, the date of the DTSA’s enactment.  If the misappropriation occurred prior to May 11, 2016, you must resort to state law, but because most misappropriation is ongoing, it has likely occurred after May 11th.

  1. Federal Right of Action

Second, the DTSA provides trade secret owners a federal right of action.  This means trade secret owners may pursue civil remedies under federal law in federal court.  Importantly, the DTSA for the most part does not preempt state trade secret law, so trade secret owners may choose to enforce their trade secrets under state or federal law.  To sue under the new law, the misappropriation in your case must merely involve a trade secret that is related to a product or service used in, or intended for use in, interstate or foreign commerce.  This limitation is minimal, as the Supreme Court has advised us over the years that it doesn’t take much to engage in interstate commerce.

  1. Ex Parte Seizure Order

Third, the DTSA provides trade secret owners with a means to effectively protect the dissemination of their trade secrets at the outset of litigation.  A trade secret owner can now request a short-term ex parte seizure order to seize property necessary to prevent the propagation or dissemination of misappropriated trade secrets upon a showing of extraordinary circumstances.

  1. Attorneys’ Fees and Exemplary Damages for Willful and Malicious Prosecution

Fourth, the DTSA also allows a court to award attorneys’ fees and exemplary damages when the court finds the defendant has willfully and maliciously misappropriated your trade secret.  In this case, exemplary damages are limited to twice the compensatory damages awarded.

 

However, plaintiffs beware, as the DTSA also provides for attorneys’ fees if the court finds a claim of misappropriation was made in bad faith.  The DTSA similarly provides for attorneys’ fees if the court finds a motion to terminate an injunction was made or opposed in bad faith.

  1. Whistleblower Protection and Notice Requirement

Fifth, the DTSA provides whistleblower immunity to employees, contractors, and consultants who disclose trade secrets under two specific circumstances.  First, the DTSA immunizes employees (also contractors/consultants) from liability when they disclose a trade secret “in confidence” to federal, state, and local officials, or to a lawyer, and “solely for the purpose of reporting or investigating a suspected violation of law.”  Second, the DTSA immunizes employees who disclose trade secrets when filing a document in court under seal.  

More importantly, the DTSA requires employers to provide notice of the immunity in any contract or agreement with an employee that governs the use of trade secrets or other confidential information.  This notice requirement applies to contracts which have been entered into or updated after May 11, 2016.  If an employer does not provide the required notice, the employer may not be awarded exemplary damages or attorneys’ fees under the DTSA in an action against an employee who was never provided notice.  

Failure to include this notice could severely limit your recovery in an action against an employee under the DTSA.  Therefore, it is recommended that companies revise their boilerplate employment agreements, NDAs, subcontractor agreements, and any other related contracts to include the proper notice.  Although this requirement does not apply to current contracts, if the contract is renewed or updated, you must include the notice provision.  

Conclusion

The DTSA provides new tools for business owners to protect their trade secrets, while leaving existing state trade secret law intact.  Some of these provisions include collecting exemplary damages and attorneys’ fees, but if you want to use these tools, make sure the misappropriation is actionable under the DTSA and that you are aware of the DTSA’s notice provisions.   Regardless of the additional protections, the mere existence of a federal right of action alone creates a uniform enforcement mechanism for those acting across state lines, benefitting trade secrets owners.