Employee Disclosures of Trade Secrets Under the New Defend Trade Secrets Act

Gary Friedman, Jeffrey Wang, Lance Gotko
June 2, 2016

On Wednesday, May 11, 2016, President Obama signed into law the Defend Trade Secrets Act (DTSA).  The DTSA is a significant piece of legislation that creates a federal cause of action for misappropriation of trade secrets and provides for enhanced damages for trade secret violations.

But despite its name, the Act also provides immunity for whistleblowers who disclose a company’s trade secrets under certain conditions.  We believe that all employers should be aware of this aspect of the DTSA, which we briefly summarize here.

First, the DTSA provides that an individual shall not be criminally or civilly liable under any federal or state trade secret law for disclosure of a trade secret if the disclosure is made either (a) in confidence to an attorney or to a federal, state or local government official “solely for the purpose of reporting or investigating a suspected violation of law,” or (b) in a complaint or other document filed in a lawsuit or other proceeding, if the filing is made under seal.  The DTSA also protects individuals who file lawsuits for retaliation by an employer for reporting a suspected violation of law.  In those circumstances, an individual may disclose the trade secret to the individual’s attorney and may use the trade secret in the court proceeding, provided that the individual (1) files any document containing the trade secret under seal and (2) does not disclose the trade secret absent a court order.

Second, the DTSA contains a notice provision that requires employers to “provide notice of the immunity” described above, and to do so “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.”  The impact of this provision is mitigated by an accompanying provision that allows employers to comply with this requirement if the employer “provides a cross-reference to a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law.”  The notice requirement applies to “contracts and agreements that are entered into or updated” as of May 11, 2016, the date of enactment of the DTSA.  Thus, it is important to ensure that a policy document is consistent with the DTSA before cross-referencing it, whether in a new employment agreement or in an update that applies to existing employees (such as in an employee’s annual re-certification of his or her confidentiality obligations).  In addition, employers should be aware that, for the purpose of these whistleblower provisions, the DTSA defines “employee” to include not just employees of the company but also “any individual performing work as a contractor or consultant for an employer.”  Depending on the nature of the employer and its work force, this definition may sweep in a large universe of individuals subject to the protections of the DTSA.

Third, notwithstanding the broad notice requirements, the consequences of non-compliance by an employer with those requirements are limited – namely, that the employer will be precluded from recovering attorneys’ fees or exemplary damages (the enhanced damages that the DTSA now authorizes in certain circumstances) in a lawsuit against an employee for trade secret violations.  Regardless, employers may be reluctant to forego the possibility of such recoveries, which can serve as a significant deterrent to an employee’s willful misappropriation of trade secrets. Also, as a compliance matter, employers will have an interest in complying with applicable legal requirements even if the financial consequences of non-compliance are not severe. 

As a starting point, employers should examine their existing agreements and other policies that govern the use of the company’s confidential information and trade secrets, in order to assess compliance with this aspect of the DTSA.

A copy of the DTSA, with the provisions discussed above highlighted, can be found at the link below. If you would like to discuss any of this further with us, please feel free to contact Jeffrey Wang, Lance Gotko, or Gary Friedman.

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