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How ‘The Defend Trade Secrets Act’ Affects Your Employment Agreements

On May 11, 2016, President Obama signed the Defend Trade Secrets Act (DTSA) into law. The DTSA is immediately effective, and applies to misappropriation that occurs after its enactment. The DTSA is the most significant expansion of intellectual property law since the Lanham Act was passed in the 1940s. The DTSA largely tracks the Uniform Trade Secrets Act (UTSA), with a few notable exceptions, including that, in extraordinary circumstances, the DTSA will provide for ex parte seizures of property to prevent the dissemination of trade secrets.

Exemplary Damages and Attorneys’ Fees Conditioned on Notice

If a trade secret protected under the Act is “willfully and maliciously” misappropriated, the DTSA provides for an award of attorneys’ fees and exemplary damages in an amount not more than twice the damages awarded. 18 U.S.C. §§ 1836(b)(3)(C)-(D). The DTSA also provides for attorneys’ fees to be awarded to a prevailing party where the claim of trade secret misappropriation is made in bad faith, or where a motion to terminate an injunction is made or opposed in bad faith. 18 U.S.C. § 1836(b)(3)(D). The DTSA requires, however, that the employee against whom the action is brought must have received specific notice of certain immunity provisions as a condition of awarding exemplary damages and/or attorneys’ fees under §§ 1836(b)(3)(C)-(D).

Immunity Provision

Under § 1833(b)(1)(A) of the DTSA, employees have the right to turn over protected trade secrets to the government or to an attorney when illegal conduct is suspected, provided that the disclosure is solely for the purpose of reporting or investigating the suspected violation of the law. Similarly, under §§ 1833(b)(1)(B) of the DTSA, employees can disclose protected trade secrets in a complaint or other document filed in a legal proceeding, provided the filing is made under seal. The DTSA places the burden on the employer to provide notice of these immunity provisions to its employees, and specifically excludes from available remedies the attorneys’ fees and exemplary damages that are available under §§ 1836(b)(3)(C) and (D) if the notice requirements are not met, but only for contracts or agreements updated or entered into after enactment of the DTSA. §§ 1833(b)(2)(C) and (D).

How to Comply

According to the DTSA § 1833(b)(3)(A), an employer “shall” give notice of immunity in any contract or agreement with an employee that governs the use of trade secret or confidential information. An employer will be deemed to be in compliance with DTSA § 1833(b)(3)(A) “if it 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.” DTSA § 1833(b)(3)(B). It bears note that the DTSA’s definition of “employee” is broad, and includes contractors and consultants.

To ensure that the full panoply of remedies are available, employers should hereafter include in all contracts or agreements with an employee (or contractor or consultant) that govern the use of trade secret or confidential information (and consider revising agreements with existing employees to include) clear and specific language giving notice to employees of the immunity provision under 18 USC §1833(b)(1) and (2).

Separately, in view of the provision of § 1833(b)(3)(B), the employer’s reporting policy for a suspected violation of law should be set out in the employer’s policy document that is provided to its employees. Because the notice obligation only applies to contracts or agreements entered into after the enactment of the DTSA, there does not appear to be any requirement that employers to enter into new contracts to replace existing ones. Nonetheless, for existing employees (as well as consultants and contractors), employers should consider giving notice of a policy amendment that provides notice of the immunity protection (or employer’s reporting policy for a suspected violation of law).

To read about other provisions of the DTSA, please see our previous GT Alert, “The Defend Trade Secrets Act of 2016.”