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Defend Trade Secrets Act: How To Inform Employees

5.25.16

Jeff Barnes article, “Defend Trade Secrets Act: How To Inform Employees” was featured on Law360 on May 25, 2016.

The Defend Trade Secrets Act amends the Economic Espionage Act by providing a civil remedy for trade secret misappropriation. The statute offers many benefits to businesses, including federal question jurisdiction for trade secrets disputes, robust equitable relief (with ex parte seizure orders carried out by law enforcement in extraordinary situations), and the ability to recover compensatory damages, punitive damages and attorneys’ fees. However, to enjoy the full panoply of remedies available under the DTSA, employers must take immediate action to comply with a specific notice requirement mandated by the statute.

The DTSA’s Notice Requirement
The DTSA balances trade secret protection with the public’s interest in having illegal activities reported and investigated. To that end, the DTSA provides immunity to individuals who disclose trade secrets in certain situations:

An individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that — (A) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

 An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual — (A) files any document containing the trade secret under seal; and (B) does not disclose the trade secret, except pursuant to court order.

The DTSA requires employers to notify employees of these immunities “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” The DTSA broadly defines employee to include consultants and independent contractors, so a company’s notice obligations extend to agreements with these individuals that govern the use of trade secrets or confidential information. If an employer fails to give notice to an individual in the manner prescribed by the DTSA, the employer cannot recover punitive damages or attorneys’ fees in a DTSA action against the individual.

What Agreements are Covered by the Notice Requirement?
 The DTSA’s notice requirement applies “to contracts and agreements that are entered into or updated after the date of enactment of this subsection.” Accordingly, an employer will not be penalized if its existing agreements do not contain a notice provision. However, any new or updated agreement that governs the use of a trade secret or confidential information must comply with the DTSA’s notice provision.

 Over the course of an employment relationship, employees and employers may enter a variety of agreements that come under the purview of the DTSA’s notice provision. These agreements include offer letters or employment applications with contractual language, employment agreements, restrictive covenant agreements, nondisclosure agreements, stock or incentive plans, bring your own device policies and computer use agreements, and separation agreements.

 Indeed, employers that successfully create a culture of trade secret protection and take steps to protect the secrecy of their confidential information remind employees of their nondisclosure obligations at every opportunity. What happens if, over time, an employer and employee enter several agreements governing the use of a trade secret or other confidential information, but one — and only one — does not comply with the immunity notification requirements? Does the one slip-up foreclose the employer’s ability to recover punitive damages and attorneys’ fees under the DTSA? The answer is probably yes.

What Must the Notice Say?
The DTSA does not state how detailed the notice must be or what precisely it must say. Is it sufficient for the agreement to provide a citation to the immunity provisions and direct the employee to review them on his own? Does the employer need to quote both provisions in their entirety? Or is there a middle ground where an employer may paraphrase the immunities? For now, we do not know the answers to these questions.

 What we do know is that, in DTSA litigation, employees will challenge the adequacy of the employer’s notice in an effort to limit the employer’s remedies. At this stage, the only bulletproof notice is one that copies the immunity provisions verbatim. Unfortunately, the DTSA’s immunity provisions are lengthy and cumbersome for an employment agreement. This particularly is the case for those employers who desire concise agreements with simple language easily understood by all walks of employees. In lieu of reciting the immunity provisions in the agreement itself, some employers may elect to attach a copy of the provisions to their agreements (preferably with an acknowledgment for the employee to sign).

Are There Alternatives to Providing Notice in the Agreements?
The DTSA states that employers will be considered in compliance with the notice requirement if they provide “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.” Nothing in the statute’s language expressly requires that the policy document notify the employee of the DTSA’s immunity provisions. However, it would seem odd for Congress to create an avenue for employers to comply with the notice requirement that does not require any notification of the immunity provisions.

As with the notice provision, we do not know exactly what the policy document must include. Furthermore, we know employees will challenge the sufficiency of the employer’s policy document to avoid punitive damages and attorneys’ fees.

Employers can preemptively address these expected challenges by drafting a thorough policy document that:

  1. Contains instructions on how and to whom employees should report possible violations of law;
  2. Ensures employees will not be retaliated against for reporting suspected violations in good faith; and
  3. Recites the DTSA’s immunity provisions in their entirety. The more comprehensive and detailed the policy document, the more likely that it satisfies the DTSA.

 Any new or updated agreement governing the use of trade secrets or confidential information now must comply with the DTSA’s immunity notice provision. Many types of agreements may be subject to this notice requirement, therefore employers should perform an inventory of their agreements with employees, contractors and consultants to identify who will be affected. They should update these agreements to ensure that the appropriate language is included. These steps must be completed for employers to take full advantage of the remedies afforded under the DTSA.

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