Trade Secret Misappropriation Recourse and Whistleblower Protection

New Legislation Impacting Business

All businesses have intellectual property and trade secrets.  A company is in business because it is offering something of “value” which can be a number of things from product to process to promotion.  For example, proprietary software, product systems, new product generation, or even client lists.  The loss or misappropriation of such can be devastating to the success and profitability of a company.

In a measure to further protect businesses, the Defend Trade Secrets Act (DTSA) of 2016 was signed into law on May 11, 2016 after being unanimously passed in the Senate and ratified in the House. It creates a federal cause of action for trade secret misappropriation.  The central provision of the DTSA will be codified as 18 U.S.C. § 1836(b) and reads:

An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.

What this Means

A “trade secret” means “all forms and types of financial, business, scientific, technical, economic, or engineering information …  if—(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the another person who can obtain economic value from the disclosure or use of the information.”

Misappropriation includes: without permission (A) obtaining a trade secret that was knowingly obtained through improper means or (B) disclosing or using a trade secret with knowledge that either (1) it is a trade secret or (2) it was obtained through improper means. The “improper means” include “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.” However, misappropriation does not include “reverse engineering, independent derivation, or any other lawful means of acquisition.”

The DTSA also creates an ex parte seizure procedure for use in extraordinary circumstances where the party against whom the seizure is ordered would “destroy, move, hide, or otherwise make such matter inaccessible to the court, if the applicant were to proceed on notice to such person….”

Protection for Whistleblowers Under DTSA

The DTSA seeks to protect whistleblowers from criminal or civil liability for disclosing a trade secret if the disclosure is made for purpose of reporting a violation of law. Employers have an affirmative duty to provide employees notice of the new immunity provision in “any contract or agreement with employee that governs the use of a trade secret or other confidential information.” Failure to comply means that the employer may not recover exemplary damages or attorney fees in an action brought under the DTSA for theft of trade secrets against an employee.  The definition of “employee” is drafted broadly to include contractor and consultant work performed by an individual for an employer.

What Companies Should Do Next

Companies should update their employment manuals, employment agreements and confidentiality agreement to disclose the whistleblower immunity provisions in the DTSA. Otherwise the company is not eligible to recover double damages or attorney fees in trade secret litigation.