The Defend Trade Secrets Act of 2016: Implications for business, employers and employees

On April 27, 2016, Congress passed the Defend Trade Secrets Act (DTSA), which President Obama promises to sign soon.  This proposed legislation, which is designed to be an expansion of the Economic Espionage Act of 1996, would authorize a private civil action in federal court for the misappropriation of a trade secret that is related to a product or service used in, or intended for use in, interstate or foreign commerce.  Current law only allows for criminal cases to be brought by federal prosecutors, while any private civil cases have to be filed under state law.

Overview of trade secrets

Trade secrets potentially affect every business.  While patent protection requires that inventors meet certain criteria, trade secret protection is applicable to all types of information so long as the information is kept a secret and its secrecy provides a competitive advantage.  As a result, and because trade secrets do not involve government registration like patents, trade secret issues are likely to result in a vast array of business transactions, including employee hiring and firing, business relationships involving confidentiality agreements, and even when employees discuss company business with friends, colleagues or on social media. The DTSA now potentially governs all of these activities.

Key aspects: Uniformity, federal jurisdiction, and ex parte seizure of property

The DTSA was intended to establish a uniform law of trade secrets in lieu of the myriad of differing state trade secret laws that currently exist. Trade secrets are generally protected by state law under a particular state’s adoption of the Uniform Trade Secrets Act. The DTSA has some similarities with the Uniform Trade Secrets Act, but differs from the UTSA in several important aspects.  First, it allows private companies to file civil lawsuits for trade secret theft in federal courts.  Second, and perhaps most controversial, the DTSA provides for ex parte civil seizure, which allows a court to have law enforcement seize a defendant’s property. As a result, a plaintiff afraid of the disclosure of its trade secrets will be able to have the government seize those trade secrets from a defendant without prior notice of the lawsuit to the defendant.  This protection goes well beyond what a court is typically willing to order under existing state law, and, due to the initial controversy surrounding this provision, Congress limited such seizures to “exceptional circumstances” in a recent amendment to the Act prior to its passing.

Whistleblower immunity and notice requirements 

The DTSA also provides whistleblower immunity for employees from DTSA lawsuits when employees turn over trade secrets to government officials to expose alleged illegal actions by the employer. This immunity provision also requires that employers provide notice of the immunity in any contract or agreement with an “employee” (which is defined to include independent contractors and consultants) regarding confidentiality. If an employer fails to provide this notice, the employer may be prevented from recovering exemplary damages and attorney’s fees on claims brought under the DTSA.

Restrictions on employee competition and solicitation

Other provisions of the DTSA are likewise specific to employers.  Many trade secret cases involve former employees leaving to go to work for a competitor.  A concern raised regarding early versions of the bill was that the DTSA would hinder employee mobility.  Thus, the DTSA was amended to indicate that injunctive relief that would “prevent (or place conditions on) a person from entering into an employment relationship” must be “based on evidence of threatened misappropriation and not merely on the information the person knows.” In addition, an injunction preventing or limiting employment cannot “otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.”  As a result, Oklahoma law generally limiting (and many instances prohibiting) non-compete agreements in employment relationships is likely applicable to DTSA claims.  However, these provisions only specifically limit injunctive relief and may not prevent former employers from seeking money damages. Moreover, Oklahoma law generally allows non-solicitation agreements in employment agreements and, thus, a court could conceivably enter an injunction prohibiting a former employee from soliciting specific customers even if there is no written non-solicitation agreement.

Reach of the DTSA to foreign countries

Another notable difference between current trade secret law and the DTSA is that the DTSA may have foreign reach. The Act contemplates a private action regarding misappropriation of trade secrets for “use in, or intended for use in, interstate or foreign commerce” and a key concern of drafters of the law was foreign industrial espionage.  As a result, it may be applicable to foreign business of domestic companies.

The takeaway: Review and update confidentiality agreements

A final notable provision of the DTSA is that it leaves current state trade secret law intact.  As a result, although it was intended to establish uniformity in trade secret law, it will likely only add a layer of complexity to what is already a complex field.  Nevertheless, this law allows businesses another opportunity to protect trade secrets. Now is a great time for businesses and employers to review whether they have adequate protections of their trade secrets or other confidential information and consider updating or implementing confidentiality agreements with employees and third parties that have access to such information, including adding the new notice requirements of the DTSA.