The Defend Trade Secrets Act of 2016: Employment Context

May 2016

Although not limited to the employment context, it is likely that The Defend Trade Secrets Act of 2016 will primarily be used by employers who are concerned about misappropriation by recently departed employees, and provides new options for protecting their intellectual property. There are some instances in which the use of these new procedures will involve a trade-off. There are also new protections for employees who make limited disclosures of their employer’s trade secrets in an effort to enforce the laws. A little something for everyone, perhaps.

The primary significance of the new statute is to give a federal court option to the owner of a trade secret who believes it has been misappropriated. Almost every state has passed a version of the Uniform Trade secrets Act, which protects this kind of intellectual property through enforcement in the state courts. Although generally consistent, there are some variations between the states. State courts may also be viewed as less favorable to the IP owner, under some circumstances and in some localities.

Remedies

A successful plaintiff under the Act may get an injunction preventing any threatened misappropriation, or requiring affirmative actions to protect the trade secret. Money damages, including punitive damages and attorneys’ fees, are also available. In exceptional circumstances where an injunction is not fair, the court could condition future use of the trade secret on the payment of a royalty for a limited period. The most important trade-off concerning the statute is, perhaps, that no injunction may prevent a person from entering into an employment relationship. This means that the use of this option comes at the price of not enforcing any restrictive covenant against competition. It might even mean that covenants concerning customer solicitation could not be enforced, if they prevent a former employee from entering into an employment relationship.

The Act provides for a remedy that is unusual in the federal courts – an order of seizure, which can be obtained without the other side having the opportunity for input before it issues. The requirements for this are pretty stringent. It resembles writs of seizure that are available in many state courts, including Pennsylvania.  Under the federal statute, however, the property does not go into the custody of the plaintiff until after a hearing where he proves it belongs to him, and the other side does get to be there and raise a contest at that hearing.  In the meantime, the property is to be held by the court.

Section 7: Immunity

Section 7 of the Defend Trade Secrets Act does something else interesting. It provides immunity from liability to a person who discloses a trade secret if the disclosure is made confidentially to a lawyer or a government agency solely to report or investigate a suspected violation of the law, including by filings in court if they are under seal. It also allows an individual who files a lawsuit against an employer for retaliation for reporting a suspected violation of law to use trade secret information in that suit, so long as any trade secret documents filed with the court are under seal, and not disclosed further disclosed without a court order. Employers are supposed to give notice of this immunity and, if they don’t, they lose the ability to seek punitive damages or attorneys’ fees from an employee for any violation of the Act. The loss of those remedies does not depend on the employee’s proper conduct, but only on the absence of the notice.

So, – and not that we know any employers who would do such a thing – it is likely that the threat of being sued for misappropriation of trade secrets will be a less effective way to prevent employees from using documents that are relevant to showing they are the subjects of retaliation.

The following article is informational only and not intended as legal advice. Speak with a licensed attorney about your own specific situation.