Time to Change Your NDAs: The Defend Trade Secrets Act of 2016

Time to Change Your NDAs:  The Defend Trade Secrets Act of 2016

business, office, law and legal concept - picture of man and womThe US federal Defend Trade Secrets Act of 2016 was signed into law in May.  It brings more consistency to the hodgepodge of statutes and case law surrounding the misappropriation of trade secrets and offers new rights and remedies to those who seek to defend their intellectual property rights.  The immediate impact on most businesses will be to the documents they use to manage their trade secrets, particularly those they use for employees and independent contractors.As an initial suggestion, until further case law and best practices develop, I suggest that companies consider the following changes to their standard documents:

  1. The DTSA generally follows definitions like “trade secret,” “misappropriation” and “improper means” from the Uniform Trade Secrets Act that serves as the basis for state trade secret law in much of the country. However, Massachusetts and New York have not adopted the UTSA.  Be sure agreements that use defined terms for these concepts track the new definitions in a way that also reflects the relevant state law definitions.  Note that the term “improper means” expressly excludes reverse engineering, so companies should be sure their agreements still contain appropriate protections.
  1. Certain kinds of damages are not available under contracts and agreements entered into after the statute went into effect unless DTSA language is added. Agreements with individuals that govern the use of trade secrets or other confidential information should include a disclaimer like the following, modified to fit the particular agreement:

“Notwithstanding anything contained herein to the contrary, to the extent provided in the Defend Trade Secrets Act of 2016, (i) individuals may not be held criminally or civilly liable under any Federal or State trade secret law for certain disclosures made in confidence solely for the purpose of reporting or investigating a suspected violation of law or otherwise in a lawsuit; and (ii) certain disclosures may be made by individuals who file a lawsuit for retaliation by an employer for reporting a suspected violation of law.”

An employer may include this kind of disclosure in employee handbooks or other policy documents as long as it provides a cross-reference to a reporting policy for a suspected violation of law.

  1. Most contracts have clauses about the forum for resolving disputes. While some employers prefer arbitration, many agreements instead provide that all claims arising under the agreement must be resolved in court.  The DTSA makes a technical change to case law limitations on the jurisdiction of federal courts to hear certain state law claims.   Agreements that refer only to state courts should therefore be revised to give employers the right to seek remedies in federal court as well. This way, employers can pursue claims under both federal and state law at the same time without having to navigate quite as complex a procedural minefield.
  1. Almost all confidentiality and intellectual property protection agreements include an acknowledgment of some of the elements a court would consider in granting an injunction, like monetary damages not being a sufficient remedy for breach. The DTSA goes even further than injunctions. Under extraordinary circumstances, it gives a court the power to authorize ex parte seizure of material containing trade secrets to prevent its dissemination (that is, seizure during the pendency of a case without prior notice to the party whose property is being seized).  Courts can appoint a special master to oversee the investigation and seizure and can even authorize law enforcement to participate. Employers should consider adding language to agreements with employees who have access to key trade secrets that an injunction would not be a sufficient remedy and that the employee consents to exparte relief under the circumstances described in the statute.It is not yet clear how effective this kind of language will be, but we can expect much litigation about the whole topic.
  1. Speaking of injunctions, the DTSA generally does not expand state law rights to injunctive relief or otherwise preempt state law. Separate DTSA injunctions must be based on “evidence of threatened misappropriation,” a much higher standard than an employee’s simply knowing a trade sec  The choice of state law governing the contract is therefore just as important as it has been.  Courts typically apply the law of the employee’s home base, but for employers with multistate contacts it may make sense to review the choice of law provision to see if there are enforceable options.
  1. Commentary on the DTSA so far has mostly focused on employees and independent contractors. However, businesses can also use DTSA in other contexts to protect their tradesecrets.  For instance, companies that make disclosures to prospective investors or acquirorsshould consider using nondisclosure agreements that require parties receiving company information to include DTSA-like provisions in agreements with their own employees and independent contractors.

The first cases were filed under the DTSA within days of its enactment.  It is not clear how successful they will be since claims have to relate at least in part to the misuse of trade secrets after the effective date of the statute.  However, since the cases do show that the national landscape is moving quickly toward new focus on the statute,businesses should consider protecting their competitive positionsnow by making changes to their confidentiality and intellectual property protection agreements, employee handbooks and other published policies.