What Small Business Owners Need to Know About the New Trade Secret Law

On May 11, 2016 President Obama signed into law the Defend Trade Secrets Act (“DTSA”), ushering in a new era in trade secret protection. The DTSA, which can be found in federal statutes at 18 U.S.C. § 1836, gives small business owners plenty to use on offense for protecting their valuable trade secrets, but also gives them plenty to be aware of that could put them on the defensive, particularly in relation to employees. Here are the most salient provisions of the DTSA from both an offensive and defensive perspective.

DTSA Provisions Putting Trade Secret Owners on Offense

The DTSA provides trade secret plaintiffs some newfound strategic flexibility for bringing cases, and both old and new remedial options.

Choice of Forum and Supplemental Jurisdiction: Strategically, plaintiffs now have a choice of forum between federal and state courts to consider when bringing trade secrets cases. The fact that a federal forum may be chosen also gives plaintiffs a “best of both worlds” option because state causes of action related to, for example, employee non-competition or non-solicitation, may be eligible for supplemental federal jurisdiction.

Ex Parte Seizure Orders: As far as remedies go, the DTSA adds a powerful new remedy, an ex parte seizure order, to a plaintiff’s remedial tool box. The DTSA’s seizure process allow plaintiffs to seek a court order instructing law enforcement officials to seize stolen trade secrets without the need for notice or an opportunity for the defendant to appear in court.

However, seizure orders can only be obtained after satisfying eight elements:

(i) another form of equitable relief would be inadequate because the party to be enjoined would evade, avoid, or otherwise not comply;

(ii) immediate and irreparable injury will occur if such seizure is not ordered;

(iii) the harm to the applicant outweighs the interests of the party to be enjoined and substantially outweighs potential harm to third parties;

(iv) the applicant is likely to succeed on the merits;

(v) the party to be enjoined has actual possession of the trade secret;

(vi) the application describes the matter to be seized with reasonable particularity;

(vii) the party to be enjoined would destroy, move, hide, or otherwise make such matter inaccessible to the court; and

(viii) the applicant has not publicized the requested seizure.

Other Remedies: The DTSA also provides for traditional trade secret remedies based on the Uniform Trade Secrets Act (UTSA), like injunctive relief, damages caused by misappropriation, and exemplary (double) damages and attorney’s fees for willful and malicious misappropriation.

DTSA Provisions Putting Trade Secret Owners on Defense

Immunity for Disclosures and Whistleblower Privilege: Disclosure of trade secrets is warranted in two narrow circumstances under the DTSA, a fact which should not give law-abiding small business owners pause. First, under the DTSA an individual shall not be held criminally or civilly liable under any federal or state trade secret law for disclosures made in confidence to any government official or to an attorney solely for the propose of reporting or investigating a suspected violation of law, or for certain disclosures related to a lawsuit or other proceeding.

Second, disclosures that satisfy all of the following elements can be asserted as a defense by an employee in a DTSA misappropriation action (the so-called “whistleblower privilege”):

  • the employee must have reported a suspected violation of law implicating the trade secret;
  • the use of the trade secret must be limited to disclosure to an attorney and use in the anti-retaliation lawsuit;
  • the trade secret must be filed under seal; and
  • the employee cannot otherwise disclose the trade secret, except pursuant to court order.

Immunity Notice Requirement for Employee Disclosure of Trade Secrets: In order to qualify for exemplary damages or attorneys’ fees in a misappropriation action against an employee, employers must give prior notice that immunity from civil and criminal liability may apply for disclosures in certain circumstances (see above). Notice of immunity can be given in either a contract or agreement with an employee governing trade secrets, or in a cross-referenced employer policy document that the employee is given access to. The notice requirement only applies to agreements entered into after the law went into effect, and may implicate such documents as NDAs (non-disclosure agreements), employment agreements, employee settlement agreements, and offer letters.

No Injunctions vs. Former Employees Barring Employment: The DTSA bars injunctions that block former employees from working at competing businesses in situations of potential misappropriations of trade secrets. However, injunctions that place conditions on such employment relationships may be warranted so long as they are “based on evidence of threatened misappropriation and not merely on the information the person knows” and do not conflict with state laws prohibiting restraints on trade.

This requirement not only limits employers’ remedial options in misappropriation situations, but also raises the stakes on such lawsuits because if a claim of misappropriation is made in bad faith or based on evidence of nothing more than a former employee’s trade secret knowledge, attorneys’ fees may be available to the former employee.

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