New Federal Trade Secret Act: What Businesses Need To Know
By: Dean A. Kent
Trade secrets are the oldest form of intellectual property and, unlike patents, trademarks and copyrights, the value of a trade secret arises from others not knowing the secret. Companies such as Coca-Cola, WD-40, Heinz 57, and Kentucky Fried Chicken rely on trade secrets including secret formulas, recipes, processes, or techniques used to make their products as critical components of their success.
On May 11, 2016, the Defend Trade Secrets Act of 2016 (“DTSA”) was signed into law and is effective immediately. The law provides a federal civil cause of action for misappropriation and theft of trade secrets. The DTSA is intended to supplement, rather than preempt, state trade secret law. Until now, federal law only governed criminal enforcement and prosecution and any civil claims had to be brought under state law. The DTSA will affect employee hiring and separations, employment contracts, business contracts containing non-disclosure or confidentiality clauses, and when the business or its employees discuss the company’s business with third parties.
The new law provides for certain remedies, including injunctions, damages, and, if a misappropriation is found to be “willful and malicious,” exemplary damages equal to actual damages (doubling the total damages recoverable), as well as attorneys’ fees. In certain circumstances, the DTSA also allows a trade secret owner, on an ex parte basis (i.e., without telling defendants), to obtain a court order allowing the seizure of stolen trade secret items in the defendants’ possession. If such a seizure is deemed wrongful or excessive, however, the DTSA allows an individual or business whose property has been seized to sue for damages.
The DTSA also contains a “whistleblower” provision that provides immunity to an employee who discloses trade secrets or an attorney for the purpose of investigating a violation. It also provides immunity for disclosure of trade secret in a complaint or other litigation filing, provided the filing is made under seal. The “whistleblower” immunity provisions should now be included in any contract or agreement with an employee that includes confidentiality and/or trade secret provisions. Alternatively, employers may cross-reference a policy document, like an employee handbook, that is provided to the employee that specifies the employer’s DTSA reporting policy for a suspected violation of law. Failure to comply with the DTSA “whistleblower” notice requirement will result in the employer losing the ability to recover double damages and attorneys’ fees that might otherwise be available. The DTSA “whistleblower” notice provision is required in all agreements entered into on or after May 12, 2016.
If your business utilizes confidentiality or non-disclosure agreements to protect its trade secrets, it will be necessary to review and revise future agreements to incorporate the DTSA’s whistleblower immunity notice, or cross reference a provision in your employee handbook that references your DTSA policy, to allow for a claim of double damages and attorneys’ fees. Further, businesses should review and, if necessary, expand any exclusive venue provisions in their agreements to avoid precluding the pursuit of a civil claim in federal court under the DTSA.
Although the DTSA provides an opportunity to pursue civil trade secret claims in federal court, in some circumstances state court and state laws may be the better option. In addition, bringing a DTSA claim in federal court may also result in the court exercising supplemental jurisdiction over other claims, as a result of which contract and employment issues that would have been decided in state court will be litigated in federal court.
For more information about the new Federal Trade Secret Act, please contact your lawyer, or if you are not currently a client of our firm, contact:
Dean A. Kent (813) 227-7423