Employers Should Give Immediate Attention to the New Federal Trade Secrets Act

May 12, 2016 Advisory

Less than five weeks after federal trade secret legislation cleared the Senate, the Defend Trade Secrets Act (DTSA) has been signed into law by President Obama, effective today. 

The new law will have immediate effects on employers’ day-to-day operations. Because many businesses treat highly sensitive business information as trade secrets, the enactment of the DTSA will cause HR departments to give new attention to employment agreements and confidentiality clauses in contracts. 

For example, the DTSA includes a new whistleblower provision that immunizes certain disclosures by employees that employers might consider to be improper disclosures of trade secrets. If the employee’s disclosure of highly sensitive company information is made in confidence to "a Federal, State, or local government official… or to an attorney…solely for the purpose of reporting or investigating a suspected violation of the law" or as part of a legal proceeding, then that disclosure cannot form the basis for a misappropriation claim against the employee. This safe harbor extends immunity to both state and federal trade secret claims. 

More significantly, employers now have an affirmative duty to notify employees (potentially including employees of contractors or consultants whose services involve highly sensitive company information) of this new whistleblower immunity in "any contract or agreement with employee that governs the use of a trade secret or other confidential information." Failure to comply with the notice requirement may preclude employer claims under the statute seeking exemplary damages or attorney fees in DTSA lawsuits against employees to whom no notice was provided. To get the maximum benefits of this new law, employers will want to incorporate the immunity notice into relevant employment agreements and policies as soon as practicable. 

The DTSA also provides for injunctive relief such as placing conditions on the conduct of new employees when there is a "threat" of misappropriation alleged against them. Although the DTSA expressly defers to "applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business," such as noncompete agreements, the DTSA gives little guidance on how federal courts should balance the interests of businesses in protecting their trade secrets against the interests of individuals in seeking employment. 

The DTSA gives HR professionals a new opportunity to update employment agreements and confidential information policies and procedures to ensure the protection of company trade secrets, along with compliance with the new whistleblower protections. Failure to act promptly could lead to significant restrictions on companies seeking to take action against current or former employees who are suspected of stealing trade secrets.