Earlier today, President Obama signed into law the Defend Trade Secrets Act (DTSA), which the Senate and House passed with overwhelming bipartisan support. While the impetus for the new law has been trade secret theft by foreign and domestic interests in the form of economic espionage, the DTSA applies to the workplace as well. But instead of limiting the workplace provisions to employees, Congress specifically expanded the scope of the DTSA to cover independent contractors as well.
The DTSA will fill a huge hole in the law of trade secrets. In the past, U.S. companies that were victimized by a theft of trade secrets and confidential information were relegated to seeking relief under state laws. The new law now provides a federal civil remedy for trade secret misappropriation. However, two of the key federal remedies available under this law for workplace theft of a company’s trade secrets – exemplary (double) damages and attorneys’ fees – require employers to include in their employee and independent contractor agreements a special form of notice to those workers.
What protections does the DTSA provide for companies?
DTSA protection covers trade secrets that are related to a product or service used or intended to be used in interstate or foreign commerce. Because most companies operate across state lines or internationally, it is expected that only the most local of businesses will not be able to make use of the DTSA to protect their trade secrets and confidential information (collectively referred to as “trade secrets”) from misappropriation.
Here’s what the DTSA can do for companies that have been victimized by or are threatened with misappropriation of their trade secrets by their employees, independent contractors, and competitors:
- provide a federal court forum for seeking relief;
- facilitate discovery from third parties in other states who may be in receipt of misappropriated trade secrets;
- obtain actual damages or restitution of unjust enrichment (i.e., disgorgement of ill-gotten gains) occasioned by misappropriation of trade secrets;
- add “exemplary” damages of up to twice the amount of actual damages or restitution in the case of willful and malicious misappropriation;
- provide a full range of injunctive relief, including enjoining actual or threatened misappropriation and ordering affirmative acts to protect a trade secret;
- require the misappropriating party or parties to pay a royalty in lieu of an injunction where circumstances would render an injunction inequitable;
- recover attorneys’ fees if the misappropriation was willful and malicious;
- obtain a civil seizure order on an ex parte basis in extraordinary circumstances to preserve evidence or prevent dissemination of the trade secret;
- impose penalties for a criminal violation of the Economic Espionage Act to the greater of $5 million or three times the value of the misappropriated trade secrets; and
- allow for additional remedies that may be available under an applicable state trade secrets law.
What are the special workplace immunity provisions and notice requirements?
The DTSA provides for immunity from liability for the confidential disclosure of a trade secret to the government or an attorney. Recognizing that the mere reporting to a third party of a trade secret could violate the rights of the trade secret owner, Congress added a new provision that appears to provide for criminal and civil immunity for anyone that provides services in the workplace, including independent contractors, who disclose a trade secret under two circumstances: disclosures in confidence to a federal, state, or local government official, or to an attorney, for the purpose of reporting or investigating a suspected violation of the law. The immunity covers disclosure of the trade secret in a court complaint or other document filed under seal in a judicial proceeding.
This immunity also extends to a worker who files a lawsuit against a company for retaliation for reporting a suspected violation of the law. Such a worker may disclose the trade secret to his or her lawyer for use in the legal proceeding, provided the court document is filed under seal and does not disclose the actual trade secret other than pursuant to a court order.
Congressional lawmakers wanted to make sure that those who provide labor in the workplace learn about this immunity. Congress put the onus on companies by requiring them to give notice of the immunity to their “employees” in any contract that addresses the use of trade secrets. The term “employee” is defined to include “any individual performing work as a contractor or consultant for an employer.” To my knowledge, this is the first time Congress expanded the term “employee” to include independent contractors.
Businesses will be wise to include the immunity notice in all new and updated contractor and consultant agreements with their independent contractors. This provision may be of particular significance to government contractor firms that regularly use consultants and routinely update their independent contractor agreements from project to project.
The immunity notice requirement may well apply to standard, unilateral confidentiality agreements that companies typically require employees and contractors to sign. The notice requirements, however, only apply prospectively, covering contracts entered into or updated after the date of enactment of DTSA. Companies may also satisfy the notice requirement in an alternative, less burdensome manner. The House Committee Report states that “an employer may choose to provide such notice by reference to a policy document setting forth the employer’s reporting policy for a suspected violation of the law that provides notice of the immunity.” Such policy documents, though, are not typically provided to independent contractors. Indeed, in order to minimize direction and control over independent contractors that can result in a finding that they were misclassified, companies would be wise not to have their employee policies apply to contractors.
To induce employers to provide this “immunity notice” and encourage the reporting of trade secret misappropriation, Congress included an unusual takeaway provision in the DTSA: a company that does not provide the required notice loses the right to two of the most useful remedies in the new law: exemplary damages and attorneys’ fees against a worker who was not provided with such notice. For those companies that give contractors access to any of their trade secrets, it is plainly worthwhile to include an “immunity notice” in any newly-issued independent contractor agreements including any agreements that are modified or amended in any respect.
Written by Richard Reibstein.