The Federal Defense of Trade Secrets Act: How it can impact employers
Date: May 3, 2016
The most significant employer news in recent weeks Congress’ recent passing of the Defense of Trade Secrets Act (the Act), which President Obama is expected to sign. The law, which, technically is an expansion of the Economic Espionage Act of 1996, has several significant features that benefit the owners of trade secrets, but which also create new concerns for all Employers.
First, the law does not preempt state trade secret law but does seek to create harmony in the law of trade secret protection and provide some uniformity in discovery in such cases. Where state law would give greater protection or flexibility to trade secret owners, they may continue to avail themselves of that law.
However, the most significant aspect of the Act is that it permits a federal court to issue an ex pate seizure order. This is a double edged sword of which all Employers must be mindful. It is an obvious boon to the former Employer claiming that a former employee stole its trade secrets. But the new Employer of that employee is now subject to having its computers seized without notice. This creates an obvious need for all Employers to be careful when hiring new employees who could be bringing trade secrets from their former Employer with them.
Employers should review offer letters, employment contracts, restrictive covenants and non-disclosure agreements to be certain that they not only prohibit misuse of the Employer’s trade secrets, but those of all prior Employers. (The definition of “trade secret” is substantially the same as in the Uniform Trade Secrets Act which all states but New York and Massachusetts have adopted) Ex parte seizure orders are not likely to be a matter of course. The party seeking such an order must not only satisfy the normal criteria for an injunction but must also offer specific evidence that the normal injunction procedure (i.e. after notice and hearing) would be inadequate to prevent harm because the person who has taken the secret information would evade or violate an injunction normally obtained by destroying evidence, moving, hiding or otherwise making the evidence of theft inaccessible. To protect the subject of a seizure order from harm the Act requires that explicit instructions be given by the court to the court officers enforcing the seizure order as to when the seizure may occur and whether force (e.g. breaking and entering) may be used. Further, the Act forbids the copying of seized property, though state law might be broader here.
Monetary relief including actual damages, exemplary damages of two times actual damages and attorney fees in addition to an order requiring restitution and other injunctive relief are available under the Act, but the Act imposes limitations on the court in obstructing an employee from working in his or her chosen field. An injunction may not prohibit an employee from accepting employment with a competitor but may limit what work the employee can do for the competitor if there is evidence of actual or threatened misappropriation. That is, it is insufficient that an employee knows trade secrets of the former employee to curtail what he can do for the subsequent employer. There must be a showing of actual or threatened misappropriation. Here again, state law might be broader if a state has adopted and “inevitable disclosure” standard (as Pennsylvania has) and can be used for broader injunctive relief as to future employment. (“Inevitable disclosure” is not sufficient under the federal Act to limit future employment.)
The Act gives immunity if an individual discloses a trade secret in confidence to a government official or to an attorney for the purpose of reporting a violation of law. Critically, this part of the Act requires employers to notify employees of this immunity provision “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” This duty can be satisfied by the employer providing a “cross-reference” in the agreement to a policy given to the employee that lays out the reporting policy for suspected violations of law. But, this provision of the Act likely will require most employers to modify existing Employment Agreements and NDA’s. To those employers using restrictive covenants, I urge you to change your agreements, etc. It is important that in doing so you are mindful of any state law consideration issues. The penalty for non-compliance with this provision of the law is that the employer may not recover exemplary damages or attorneys’ fees. Also note that the definition of “employee” includes contractors and consultants.
Additionally, the Act increases criminal penalties for a violation from $5 million to the greater of $5 million or three times the value of the stolen secrets, which includes any cost of reproducing them. The Act also amends RICO to add a violation of the Act as a predicate act under RICO.
This Act is critical to employers that have trade secrets. At a minimum, employers should be looking at their restrictive covenants and offer letters to be sure that they do not subject themselves to its provisions and to ensure that they can avail themselves of all of its protections. That is to say, it is truly a double-edged sword.
For questions, comments or additional information, please contact Robert Small, Partner in our Employment Practice Group, at email@example.com or via phone at 215.495.6541.