Immediate action for Human Resource Departments on the Defend Trade Secrets Act

by Dennis Crouch

The Key: Starting May 12, 2016 all employers will be required by Federal Law to provide a notice-of-immunity to employees and contractors “in any contract or agreement with an employee [or independent contractor] that governs the use of a trade secret or other confidential information.” (If the DTSA is enacted as expected.)

Whistle Blower Immunity: The Defend Trade Secrets Act (DTSA) amends 18 U.S.C. 1832 to provide limited whistle blower immunity. The headline for the provision is “immunity from liability for confidential disclosure of a trade secret to the government or in a court filing.”  Thus, an action that would otherwise count as 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.

The statute is clear that the immunity extends to protect against both state and federal law; both civil and criminal allegations.  A statute also (unnecessarily in my view) includes a provision that allows someone “who files a lawsuit for retaliation by an employer for reporting a suspected violation of law” to disclose trade secrets to his attorney and “use the trade secret information in the court proceeding” so long as documents containing the trade secrets are filed under seal and are not disclosed except by court order.[1]

Under these rules, it seems that the party planning to disclose another’s trade secret in open court should first seek an order of permission from the judge. And, at that point, the court will be required to allow the third party to explain the importance of the trade secret.[2]

Required Notice to Employees and Independent Contractors: Under the provision, employers are required to provide notice of the immunity “in any contract or agreement with an employee [or independent contractor] that governs the use of a trade secret or other confidential information.”  The statute suggests that this may be done via reference to a policy document rather than restating the entire immunity provisions in each agreement.  The statute does not appear to have any small-business exception to the notice requirement.

Failure to Comply with the Notice Requirement has a fairly small penalty: If the employer later sues the employee (or independent contractor) for trade secret misappropriation under the DTSA, the employer will not be able to collect exemplary double-damages or attorney fees.  No other specific penalties are provided, but neither does the statute indicate that these are the sole potential penalties.  I could imagine the FTC pursuing employers who fail to provide the notice (but likely only as part of a larger enforcement campaign). In addition, you might imagine a class action suit against major employers who fail to provide the notice. Finally, since this is a requirement of all contracts involving trade secret or confidential information, failure to provide the notice in a particular instance could be seen as evidence that either (1) there was no agreement or (2) the agreement did not involve trade secrets.[3]

Who Needs the Notice?: The notice requirement applies to employees as well as “any individual performing work as a contractor or consultant for an employer.”  Although the statute does not define ‘individual,’ I believe that the best interpretation is that individuals include only humans and not business entities. This conclusion is based upon the statute’s implicit distinction between “entities” and “individuals.”  A common situation might be a start-up company contracting with a cleaning company to do the janitorial work.  Do the people doing the actual vacuuming and cleaning need to have received the notice?  The statutory answer to that will depend upon how a court construes the language “performing work as a contractor or consultant for an employer.”  At this point, a cautious trade secret holder who wants the benefits of notice would ensure that those individuals are also provided notice.

Timing:  The DTSA will be effective once enacted and apply to “any act” that “occurs on or after the date of enactment.”  I expect that President Obama will sign the DTSA on May 11, 2016 and that will be its enactment date.  The notice requirement will “apply to contracts and agreements that are entered into or updated after the date of enactment of this subsection.”  Thus, as of May 12, 2016 employers must begin providing notice under the law.

Earlier this week, the White House issued a new white paper on the problems created by the existence of so-many covenants not-to-compete binding low-skilled workers.  Of course, this new notice requirement will mean that more employer HR departments will now be considering if it is time to add those contracts (along with the notice requirement).

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[1] A potential hole in the provisions involves arbitration proceedings (that are common in employee disputes) since, immunity applies to court disclosures and disclosures to government officials, but not expressly to private arbitrators.

[2] This process is outlined in the newly added 18 U.S.C. § 1835(b).

[3] I think it is an important topic for another time stems from how the statute subtly distinguishes between a “contract” and an “agreement” and also between “trade secrets” and “other confidential information.”