Thursday, May 12, 2016

President signs the Defend Trade Secrets Act of 2016—what employers need to know

Yesterday, President Obama signed into law the Defend Trade Secrets Act of 2016. It creates a uniform, federal standard for the protection of corporate trade secrets.

What do employers need to know about this new law?

1. It creates a uniform federal cause of action for the misappropriation of trade secrets. Thus, companies, particularly, but not limited to, those that operate in more than one state, can seek nationwide relief from the misappropriate of trade secrets, without regard to differences in state law. Also, because it creates a federal cause of action, it grants access to federal court without regard to the state of citizenship of the parties.

2. It does not circumvent state laws regarding the enforceability of non-competition agreements. Employers are still free to limit their employees’ post-employment activities, subject to applicable state laws.

3. It does not preempt state trade secrets laws, to the extent they provide greater protections.

4. It creates a mechanism for the civil seizure of stolen trade secrets. In “extraordinary circumstances” a federal court may order the civil seizure of property “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” Moreover, interestingly, one of the pre-conditions on this seizure is that the “applicant has not publicized the requested seizure.”

5. One who claims to have an interest in any seized material may move the court “to encrypt any material seized or to be seized … that is stored on a storage medium.”

6. Aside from this newly created civil-seizure remedy, other more traditional remedies are also available—injunctions, compensatory damages, exemplary damages, and attorneys’ fees.

7. Injunctions, however, are not intended to serve as back-door non-competition agreements. Instead, injunctions are limited in scope to what is necessary to “prevent any actual of threatened misappropriation” of the trade secret. This is one area where state-law inevitable disclosure remedies might prove more favorable than this federal law.

8. Exemplary damages (limited to two times the amount of compensatory damages) and attorneys’ fees are only available upon proof that the misappropriation was “willful and malicious.” 

9. Attorneys’ fees are also available against a plaintiff if the defendant can show that the claim was brought in “bad faith,” or that a motion to terminate an injunction was opposed in “bad faith.”

10. Disclosure of trade secrets are protected if made in confidence to a government official, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law, or if made in a complaint or other legal document filed under seal in a lawsuit or other proceeding.

While this law may not change the legal status of trade secrets it does add another arrow to the corporate quiver of trade-secret protections, which most (honest) employers should welcome.