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The Federal Defend Trade Secrets Act of 2016 is Now Effective: Are You Notifying Employees and Contractors of Their Rights?

By: Greg Northen Editorial Assistance: Kyle Kennedy On May 11, 2016, the Defend Trade Secrets Act (“DTSA”) was approved by Congress and signed into law by President Obama.  The DTSA now, for the first time, allows for private civil litigation for trade secret misappropriation in federal district courts.   Historically, such actions were limited to State courts under State laws. The DTSA took effect on May 12, 2016.  For purposes of the DTSA, a “trade secret” is defined as: “all forms and types of financial, business, scientific, technical, economic, or engineering information, including 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 if—
  • the owner thereof has taken reasonable measures to keep such information secret; and
  • the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”
Essentially, a trade secret is any information that a company or individual has taken reasonable measures to keep secret from public disclosure, and the company derives value from the secret information.  Under the DTSA, “misappropriation” means the acquisition, disclosure, or use of a trade secret without consent, by one who knows or has reason to know that the trade secret was acquired by improper means, and “improper means” includes acts of “theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means,” but is not “reverse engineering, independent derivation, or any other lawful means of acquisition.  These standards are similar to many State laws, but additional provisions in State laws still apply to protection of trade secrets. Important New DTSA Provisions: Private Civil Action As stated, the new law provides a new federal claim for victims of trade secret misappropriation.  The DTSA allows the “owner of a trade secret that is misappropriated” to bring a civil action in Federal court if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce, which is an very broad standard.  The statute of limitations for a civil action under the DTSA is three years after the date on which misappropriation of a trade secret is discovered or with reasonable diligence should have been discovered.  Notably, ongoing misappropriation only constitutes a single claim of misappropriation under the DTSA. In extraordinary circumstances, the DTSA permits courts to issue an order for the seizure of property as “necessary to prevent the propagation or dissemination of the trade secret” at issue.  However, a court may only grant such a seizure if it clearly finds certain factors present, such as a finding that other equitable or injunctive relief would be inadequate, immediate and irreparable injury will occur, and the harm of the applicant outweighs harm to person against whom the seizure would be ordered and harm to any third parties. Whistleblower Protections and Notice to Employees of Immunity The DTSA enacted addition provisions regarding the use of trade secrets.  An individual has criminal and civil immunity under any Federal or State law for the disclosure of a trade secret that is made:
  • in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and solely for the purpose of reporting or investigating a suspected violation of law; or
  • in a complaint or other document filed in a lawsuit or other proceeding, if such a filing is made under seal.
Thus, the DTSA provides a limited whistleblower protection for employees who disclose trade secrets to an attorney or government agent for the purpose of reporting the suspected violation of any law or if filed under seal in a legal action for review by a court. Importantly, employers must now, for the first time, provide notice of such immunity “in any contract or agreement with the employee that governs the use of a trade secret or other confidential information.”  This requirement applies to contracts and agreements entered into or amended after the DTSA became effective on May 12, 2016.  Essentially, the law wants to allow employees to use trade secret information in employment-related investigations, complaints, and litigation to uncover wrongdoing (i.e., whistleblowing), and the notice provisions informing them of the above-mentioned permissible uses is intended to educate employees of those protections. An employer is in compliance with this requirement if it provides a cross reference to another policy document given to the employee setting forth the employer’s reporting policy for suspected law violations.  If an employer does not comply with the notice requirement, then as a penalty the employer may not recover damages or attorney fees in any lawsuit against an employee to whom notice was not provided.  Importantly, the DTSA includes in its definition of employee “any individual performing work as a contractor or consultant for an employer,” so written agreements with contractors who have access to trade secret information must also include this notice. As mentioned, this Federal law is new, but State laws in Arkansas and elsewhere have had similar protections for many years.  However, the notification provision for employers who have information affecting interstate commerce (basically everyone!) is a new requirement and should be implemented immediately for employees who are governed by any agreement or policy that restricts use of trade secrets.  Now is a good time for employers to review current security protocols on maintaining trade secrets as required by the DTSA and state law. If you have any questions or concerns regarding the new federal protections for trade secrets or compliance with the DTSA and Arkansas law, please contact a CGWG attorney for assistance.