President Obama Signs Federal Trade Secrets Act

May 18, 2016

A new law hit the books on May 11, 2016, when President Obama signed the Defend Trade Secrets Act (DTSA) of 2016 that establishes federal trade secrets law. The article explores what employers need to know about DTSA and how the new law may impact their rights and obligations.

Prior to the enactment of the DTSA, companies were left to rights granted under state law to protect their trade secrets. Nearly all states, including Wisconsin, have adopted the Uniform Trade Secrets Act (UTSA). However, there are significant differences among the states in application of the UTSA. This has caused many expensive headaches for companies with trade secrets that had employees and operations in multiple states. For the first time, the DTSA creates a civil remedy for misappropriation of trade secrets under federal law and gives U.S. district courts original jurisdiction over civil actions brought under the law.

The most controversial portion of the DTSA is the ex parte seizure provision, which permits a court to order the seizure of property if deemed necessary to prevent the propagation or dissemination of the trade secret. A party seeking an ex parte seizure, however, has a very high burden and is required to demonstrate that “extraordinary circumstances” exist warranting the seizure. The ex parte provision also allows a defendant to seek damages for abusive or wrongfully-acquired seizure orders.

The DTSA also includes a whistleblower provision that provides that 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 is made (a) “in confidence” to a federal, state or local government official, either directly or indirectly, or to an attorney, and solely for the purpose of reporting or investigating a suspected violation of law, or (b) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

Companies must pay particular attention to the notice provision under the DTSA which provides that employers provide notice of the immunity provision in “any contract or agreement with an employee that contains provisions governing the use of a trade secret or other confidential information.” This notice provision applies to all contracts entered into or amended after May 11, 2016 (the date of the enactment of the DTSA). Under the notice provision, the DTSA broadly defines employee to include any individual performing work as a contractor or consultant for an employer.

While the DTSA gives companies a powerful tool to obtain relief in federal court for misappropriation of trade secrets, companies need to act promptly to protect their trade secrets and avoid violating the notice provisions. First, companies should identify what confidential information qualifies for trade secret protection. Second, companies should ensure that any future agreements with employers or independent contractors include provisions governing the use of trade secrets include the required “notice” language. Lastly, companies need to ensure their security protocols and employee termination procedures adequately protect their trade secrets.