NEW FEDERAL DEFEND TRADE SECRETS ACT REQUIRES REVIEW OF ALL CONFIDENTIALITY AGREEMENTS

On May 11, 2016, the President signed into law a bill that amends the federal criminal code to create a federal private civil cause of action for trade secret misappropriation known as the “Defend Trade Secrets Act of 2016” (DTSA; amending 18 U.S.C. §§ 1832 – 1839).  This Act provides a federal level of protection for trade secrets related to products or services moving in interstate or foreign commerce.

An “employer” (an undefined term in the Act) which owns a trade secret may file a civil action in Federal Court seeking relief for trade secret misappropriation by an employee or an independent contractor. State law remedies are still available.

Whistle Blower Immunity

An individual has immunity from liability for confidential disclosure of a trade secret to the Government or in a court filing under certain conditions.  This includes a disclosure made in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney, but solely for the purpose of reporting or investigating a suspected violation of law; or a disclosure made in a complaint or other document filed in a lawsuit or other proceeding if such filing is made under seal.

Employer Notice obligations under DTSA

The DTSA states, “An employer shall provide notice of the immunity set forth in this subsection in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.”  The DTSA’s definition of employee for the purposes of this notice includes “any individual performing work as a contractor or consultant for an employer.”  The definition therefore sweeps in virtually any agreement by which a business entity is contracting with an individual to perform work for the business, where that agreement includes a provision protecting confidential information or trade secrets.

These agreements may include the following:

  • Employment agreements and offer letters
  • Consultant agreements
  • Confidentiality agreements
  • Non-disclosure agreements
  • Contracts for the purchase or sale of a business, if the seller is retained as a consultant and the agreement has a confidentiality provision
  • Non-compete agreements, if (as is typical) these agreements contain a confidentiality provision
  • Invention, assignment and return of property agreements, if (as is typical) these agreements contain a confidentiality provision
  • Computer software development agreements
  • Certain vendor/purchaser agreements
  • Litigation settlement agreements involving ex-employees, contractors or consultants
  • Joint Venture agreements
  • Technology transfer agreements
  • Material transfer agreements
  • Any other agreement that references confidential information and defines a relationship between a trade secret owner and its employee, independent contractor or consultant.

The failure to insert an immunity notice provision into an agreement precludes an “employer” from collecting double damages or attorney fees under the Act.  Even more seriously, the failure of such an agreement to have an immunity notice provision may result in a court finding that there is no agreement at all, or that no trade secrets are involved in the agreement.

Litigation

Employers may now file an action in federal court for misappropriation of trade secrets and ask for injunctive relief and damages.  The bill has a seizure provision to the effect that if the court finds that immediate and irreparable injury will occur, the court must take custody of the seized materials and hold a hearing within seven days.

Action steps for Companies

For these reasons, companies should consider reviewing their procedures for protecting trade secrets.  We strongly recommend that all agreements of the kinds listed above be reviewed and revised as necessary to adequately protect the owner’s trade secrets and confidential information and make maximum use of the new federal act.