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The Defend Trade Secrets Act - Employer Confidentiality, Non-Disclosure Agreements and Updating Employee Handbooks

June 6, 2017

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The Defend Trade Secrets Act of 2016 (‘the Act”) creates a new cause of action that can be filed in federal court by employers against employees or former employees (and others) for misappropriation of the employer’s trade secrets.  Up to now, trade secrets were only protected by State law, and the protections provided for trade secrets could vary from state to state.

 

The Act also provides that employees or former employees are not liable under any federal or state trade secret law if they disclose an employer’s trade secret in confidence to a federal, state or local government official or to the employee’s attorneys, if the disclosure is made solely for the purpose of reporting or investigating a suspected violation of law. 

 

The Act also permits the employer’s trade secret to be disclosed in a complaint or other document filed in a lawsuit, if the filing is made under seal. 

 

An individual who files a lawsuit against his or her employer for retaliation based on the employee’s reporting of a suspected violation of law may disclose the employer’s trade secrets in confidence to an attorney, and may use the trade secret information in the court proceeding so long as the individual files any document containing a trade secret under seal and does not disclose the trade secret, except pursuant to a court order.

 

Most importantly, the Act requires employers to “provide notice of the immunity * * * [the right of employees to disclose trade secrets to government officials and to their lawyers in confidence] in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.”  The Act further specifies how the notice to the employees may be made: it is sufficient, says the Act, if the contract or agreement cross-references to a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law and sets forth the immunity provisions. 

 

What happens if the employer’s new agreements fail to comply with the Act?  If the confidentiality agreements the employee signs do not have the required notice, the employer may not be awarded punitive damages or attorneys’ fees in a lawsuit against an employee for disclosing trade secrets – even if the employee is found guilty of disclosing the trade secrets to a competitor, or is found guilty of using the employer’s trade secrets to compete against the employer!  In such a situation, however, the employer would still be entitled to get injunctive relief (barring the employee from further disclosures) and to recover any damages caused by the employee’s disclosures.

 

Here is an example of how the Act changes things in the U.S. Before the Act, an employee who disclosed an employer’s trade secret to a government official or to the employee’s lawyer because the employee believed the employer was breaking the law could be sued by the employer for breaching a confidentiality agreement prohibiting any unauthorized disclosures of an employer’s trade secrets.  This created a disincentive for employees to report suspected violations of law.  An employee who reported a suspected violation of the law by his employer and who disclosed trade secrets to a government official or a lawyer to help prove the case could still be sued by the employer for breach of contract, or for misappropriation of the employer’s trade secrets.  The Act changes things by making it clear that the employees can’t be sued if their disclosures of the employer’s trade secrets were made on a confidential basis only to government officials or to lawyers, and only for the purpose of reporting or investigating a suspected violation of law.

 

So, employers in the U.S. should make sure to provide notice of the immunities provided by the Defendant Trade Secrets Act of 2016 in any employment agreements involving confidentiality/trade secret protections, and amend employee handbooks or other policy documents given to employees to do the same.   

 

The Act applies only to agreements entered into or updated after the date of enactment of the Act (April 2016).

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