In Part 1 and Part 2 of this series of posts, we began the discussion of what the Defend Trade Secrets Act (DTSA), enacted in May 2016, really means for employers in defending their trade secrets. In particular, we addressed some of the “good” the DTSA offers for employers, including: (1) a clear path to federal court, (2) ex parte seizure orders and (3) international application. In this Part 3, we address the bad — four potential downsides of the DTSA for employers.
- Immunity for Whistleblowers. The DTSA specifies that an action that would otherwise constitute trade secret misappropriation will be immunized if the disclosure: (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. Significantly, the DTSA also specifies that the above-described immunity applies under both state and federal law and in the context of both civil and criminal allegations. This provision will encourage some whistleblower employees to insert trade secrets in their complaints against employers to try to shield themselves from an action by their employer under the DTSA.
- Mandatory Disclosure of Rights in Confidentiality Agreement. Like the Uniform Act and a majority of the states which have adopted it, the DTSA allows for an award of attorneys’ fees where bad faith misappropriation is proven. In addition, exemplary (double) damages are awarded where willful or malicious misappropriation is proven. However, in order to be eligible for either attorneys’ fees or double damages under the DTSA, the following notice must be provided within the employee’s non-disclosure agreement or within a written policy expressly referenced by such an agreement:
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.
Although many states’ trade secrets acts modeled after the Uniform Act also permit awards of attorneys’ fees and exemplary damages under standards nearly identical to those applicable under the DTSA, the above language will be necessary in order to pursue fees and damages under the DTSA. Further, because the DTSA expressly defines “employees” to include consultants and contractors, the foregoing language will also be required with respect to non-disclosure agreements signed by those workers.
- No Inevitable Disclosure Theory. The DTSA expressly forbids injunctions which “conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business” or which limit employment based “merely on the information the person knows.” This language likely prohibits inevitable disclosure claims, through which an employer might otherwise seek to prevent an employee from working for a competitor on the grounds that his job duties will inevitably involve the use of his former employer’s trade secrets. This approach is consistent with a recent report by the White House on Non-compete Agreements, which addresses “the potentially high costs of unnecessary non-competes to workers and the economy.”
- No Express Presumption of Irreparable Harm for Misappropriation. Establishing irreparable harm is an essential component of obtaining interim injunctive relief while a trade secrets case is pending, but establishing irreparable harm can be difficult where harm from misappropriation cannot easily be monetized. Accordingly, some jurisdictions create a special presumption of irreparable harm in the event of threatened misappropriation of trade secrets. The DTSA, however, fails to specifically apply such a presumption, leaving employers subject to varying standards of proof in pursuing temporary restraining orders and preliminary injunctions. In some instances, employers seeking such relief may instead be required to prove an imminent threat of irreparable harm by focusing on such factors as injury to customer relationships or other aspects of the goodwill of the business.
All of these potentially “bad” aspects of the DTSA need to be reviewed and understood by employers. In our fourth and final post on this topic, coming soon, we will discuss ambiguities in the DTSA and the room for influence by courts regarding how the DTSA is applied to real life business situations.