Just When Your Handbook Thought it Was Safe to Go Back In the Water: The Impact of the Defend Trade Secrets Act on Employers

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On April 27, 2016, the U.S. House of Representatives approved the Defend Trade Secrets Act (DTSA) by a 410-2 vote, the DTSA previously passed the Senate with an 87-0 vote. The DTSA provides employers with federal jurisdiction and remedies for misappropriation of trade secrets. The Act amends the Economic Espionage Act, which previously did not provide a private cause of action for trade secret misappropriation, to include provisions that largely track the trade secret misappropriation provisions of the Uniform Trade Secrets Act (e.g., definitions of "misappropriation" and "improper means").

A private civil action for trade secret misappropriation per the DTSA must be commenced within "three years after the date on which the misappropriation with respect to which the action would relate is discovered or by the exercise of reasonable diligence should have been discovered."

The DTSA has three notable provisions:

1. Permits ex parte (i.e., without notice) seizures of materials containing misappropriated trade secrets "in extraordinary circumstances";

2. Provides immunities from federal or state civil or criminal liability in certain circumstances for whistleblowers who disclose trade secrets in certain situations; and

3. Requires employers to notify workers of the immunities in any agreement governing use of trade secrets or confidential information.

The DTSA includes a wide range of remedies, including:

Specifically with respect to employment relationships, the DTSA:

1. Expressly prohibits a federal court from entering an order to "prevent a person from entering into an employment relationship," and requires that "conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the [employee] knows."

2. Prohibits federal courts from entering injunctions that "conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business." Thus, it would not countermand South Carolina case law determining the terms of covenants not to compete or the validity of geographic restrictions in same.

3. "Immunizes" whistleblowers from civil and criminal liability, under both federal and state law, who disclose trade secrets "in confidence" to a federal, state or local government official, "either directly or indirectly, or to an attorney" where such disclosure is "solely for the purpose of reporting or investigating a suspected violation of law." It also provides immunity for disclosures made in a "lawsuit or other proceeding," so long as that filing is made under seal, and it provides:"[a]n 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 does not allow a whistleblower to simply make trade secrets public, even if she does so to expose perceived wrongdoing.

4. Requires employers to provide notice to employees, which includes consultants and/or independent contractors, of their right to disclose and potentially use trade secrets in the limited circumstances described above.

a. Employers must provide such notice to such individuals "in any contract or agreement with an employee that governs the use of a trade secret or other confidential information."

b. Alternatively, an "employer shall be considered to be in compliance with the notice requirement . . . if the employer 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."

c. This requirement applies "to contracts and agreements that are entered into or updated after the date of enactment of this subsection."

d. No precise language is provided for the required disclosure, particularly in a cross- referenced policy. Non-compliance with the disclosure requirements bars an employer- plaintiff from recovering any exemplary damages or attorneys' fees that it might otherwise be entitled to receive under the DTSA.

In light of the notice requirements of the DTSA's whistleblower provisions, employers should review agreements and documents likely to include trade secret, confidentiality, or similar provisions, such as employment agreements, employee handbooks, non-competition agreements, or severance agreements. Employers should also review their general policies pertaining to protection of confidential information to fully utilize the new federal protection the DTSA provides.