Congress Enacts the Defend Trade Secrets Act: Time to Revisit Employment Agreements and Protection of Confidential Information

In May 2016, President Obama signed into law the federal Defend Trade Secrets Act. The DTSA, among other things, creates a federal civil cause of action for trade secret misappropriation. Though the law itself mandates few changes to employer practices, the DTSA’s enactment provides a good opportunity for employers to revisit their agreements, policies and procedures with an eye toward protecting their intellectual property. This article will discuss some of the practical steps that employers should take in light of the DTSA, as well as evaluate how the law may affect trade secret litigation in North and South Carolina.

Protecting Trade Secrets – Considerations under the DTSA

The DTSA contains only one directive to employers: they must include a notification of whistleblower immunity in each of their new agreements with employees. 18 U.S.C. § 1833(b)(3) (those that are entered into or updated after May 11, 2016). The law defines employee broadly, to include contractors and consultants as well. The language of the notice is specifically prescribed by the statute, and essentially notifies the employee that his participation in whistleblower proceedings is excepted from the reach of the DTSA. The law allows this notice to go directly into the employment agreement or to be provided by cross-reference to a general policy document.

The penalty for failing to include the notice of immunity under the DTSA is slight: an employer will be ineligible to receive double damages and attorney’s fees under the DTSA if it has not included the required notice in its employment agreement with the employee. It remains to be seen, however, whether any other federal agencies will also try to police and enforce the immunity notification. Thus, whether or not an employer anticipates relying on the DTSA, it ought to include the DTSA’s notice of immunity in its employment agreements going forward. 

The DTSA, like other state trade secrets laws, requires that a trade secret owner take “reasonable measures to keep such information secret” to seek relief for misappropriation. Though the law does not specifically define these measures, courts applying similar state laws do so frequently. The measures a trade secret owner ought to adopt include written confidentiality agreements; secure, password-protected computer systems; written policies (that are actually enforced) concerning the distribution of confidential and trade secret information outside the company; and limiting access to information within the company to those with a legitimate need to access it. These steps may seem to be both common sense and common practice, but often companies—particularly in periods of growth or reorganization—lose control over how information is handled, who has access to it, and even who is contractually bound to protect it. 

Trade secrets, like many things in life, are often not valued until they are gone. It is not uncommon for a company belatedly to realize that its customer information, business metrics or strategic plans are actually valuable commercial information that give it a competitive advantage. Unfortunately, many companies do not come to that realization until after the competitively sensitive information has been taken and used by a competing enterprise. As the DTSA causes companies to re-evaluate employment agreements and the measures taken to protect their trade secrets, it also presents a good opportunity better to identify specific trade secrets and ensure they are being properly protected from disclosure.

Federal Trade Secret Law – Impacts in North and South Carolina

Both North Carolina and South Carolina, like almost every other state, have adopted a variation of the Uniform Trade Secrets Act. Many of the relevant provisions of the DTSA, including its definitions, are largely consistent with the uniform act. A few differences exist, however, between the federal and state acts that will emerge as trade secret misappropriation is litigated in federal courts.

The chief difference between state and federal law is that the federal law provides a federal cause of action and, thus, access to the federal courts. How many plaintiffs avail themselves of this forum remains to be seen, as the processes for obtaining expedited relief in federal court can sometimes be more prolonged than those in state court. As federal courts interpret and apply the new federal law, however, a more uniform, consistent and predictable body of law may emerge.

The DTSA also provides a new remedy that, as a practical matter, is unavailable in state court: the remedy of seizure. Thus, a plaintiff may seek an ex parte order that law enforcement retrieve its trade secrets or the media on which they are stored. The showing required to achieve seizure is high, and the consequences for a plaintiff who obtains a seizure order wrongfully—including lost profits, cost of materials, attorneys’ fees and potentially punitive damages—are likewise substantial. These disincentives, in combination with the way in which electronic information proliferates with such ease (making seizure practically impossible), will likely make seizure an unattractive and rare option.

Thus, for the time being, the DTSA may not have much effect in steering traditional state law cases into the federal forum. For one, North Carolina law provides for treble damages for trade secret misappropriation, while the DTSA provides only for double damages on a showing of willful and malicious misappropriation. And the scope of injunctive relief in federal court is likely no greater than that available in state court. 

Like state law, the DTSA authorizes injunctive relief against a person who misappropriates trade secrets but does not sanction an injunction that would “prevent a person from entering into an employment relationship.” Thus, the doctrine of “inevitable disclosure”—that a person’s misappropriation of trade secrets is so egregious or competitively harmful that it justifies enjoining his new employment entirely—seems to be rejected under the DTSA. Though neither North Carolina nor South Carolina has expressly adopted the doctrine of inevitable disclosure, for the time being, neither forum’s law seems any less hospitable to the idea than the DTSA.

Conclusion

There will be times when a federal forum is preferred, such as in a multijurisdictional dispute or one where seizure is a viable remedy. In interpreting the language of the DTSA, federal courts may ultimately expand or better delineate the rights of trade secret owners. In the meantime, however, the passage of the DTSA serves principally as a reminder to employers (a) to refresh their employment agreement templates so they are compliant with the DTSA and (b) to evaluate all of the ways in which they identify and protect their confidential and proprietary information.