Labor & Employment Alert: The Defend Trade Secrets Act of 2016 Creates Federal Jurisdiction for Trade Secret Litigation

May 24, 2016

The federal Defend Trade Secrets Act (DTSA) ushered in a new era of protection of trade secrets. For the first time, companies have a private right of action for misappropriation of trade secrets under federal law. In this regard, DTSA provides a needed supplement to the federal Economic Espionage and Computer Fraud and Abuse Act. The Act applies to disclosures resulting from any act taken after May 11, 2016.

The DTSA permits civil actions in federal court for the misappropriation of trade secrets. Trade secrets are defined as “all forms and types of financial, business, scientific, technical, economic, or engineering information” that derives independent economic value from being not readily known or ascertainable to others and for which the owner takes “reasonable measures” to keep secret. Thus it is crucial for you to take measures to protect the confidentiality of your trade secrets if you expect the courts to act to protect them from misappropriation.

To remedy misappropriation, the court may issue an injunction, award actual damages, order disgorgement of  profits attributable to misappropriation or impose a royalty; and, in cases involving wilful and malicious misappropriation, award punitive damages up to twice the amount of actual damages suffered and attorneys’ fees.

Seizure at the Commencement of a Case
A particularly potent form of relief provided by the DTSA is ex parte seizure. Federal courts are empowered to order seizure of property without notice or a hearing to prevent dissemination of a trade secret. However, this form of relief may be used only in extraordinary circumstances where an injunction or restraining order would be inadequate and immediate and irreparable harm would otherwise occur.

Immunity from Liability for Protected Disclosures
The Act creates immunity from criminal or civil liability for disclosures made confidentially to a government agency or an attorney solely for the purpose of reporting a suspected violation of law or a disclosure in a lawsuit if it is made under seal. This immunity applies to all service providers, independent contractors and consultants as well as employees “performing work as a contractor or consultant for an employer.”

Notice to Employees Required
Employers must provide notice of the immunity discussed above in any post-May 11, 2016 contract with an employee or other person performing work as a contractor or consultant for an employer, if the contract prohibits the disclosure or personal use of trade secrets or confidential information. Failure to provide the notice will disqualify the employer from an award of punitive damages and attorneys’ fees against an employee who was not given the notice. Here is an example of a suitable notice provision:

The federal Defend Trade Secrets Act provides immunity from criminal or civil liability for 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.

No Preemption of State Law

Common law and the Uniform Trade Secrets Act (adopted in all states but N.Y. and Mass.) afford protection from trade secret misappropriation. The federal DTSA offers the advantage of explicitly providing an ex parte seizure remedy, a uniform body of trade secret law and the availability of a federal forum in all cases, but it does not preempt state laws, which remain available for owners of trade secrets.  The DTSA does not permit the court to grant an injunction that would prevent a person from entering into an employment relationship or conflict with state law limitations on covenants not to compete.  It is likely, however, that an action under state law to enforce a covenant not to compete could be filed in the same lawsuit as a claim under the DTSA by invoking the federal court’s supplemental jurisdiction. 

This alert is intended to keep readers current on matters affecting Labor & Employment law, and is not intended to be legal advice. If you have any questions please contact the Eckert Seamans lawyer with whom you have been working. Eckert Seamans Cherin & Mellott, LLC, 2016, all rights reserved.

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