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Defend Trade Secrets Act requires immediate review of confidentiality agreements with employees and contractors

published in McAfee & Taft TIPsheet Alert and McAfee & Taft EmployerLINC Alert | May 26, 2016

By Zachary A.P. Oubre

On May 11, 2016, President Obama signed the Defend Trade Secrets Act (DTSA), which creates a new federal cause of action for misappropriation of trade secrets. Although the DTSA provides several new changes to trade secret law, one provision requires immediate action.

Required notice of whistleblower immunity

The DTSA provides certain whistleblower immunity for employees from DTSA lawsuits when those employees turn over trade secrets to government officials for suspected violations of law or reference trade secrets in court documents filed under seal. Importantly, the same provision also requires that employers provide notice of the immunity in any contract or agreement with an “employee” regarding confidentiality.

Who needs the notice?

Under the DTSA, the new notice requirement applies to “any contract or agreement with an employee that governs the use of a trade secret or other confidential information” “that [is] entered into or updated after [May 11, 2016].” As a result, this new requirement is potentially applicable to non-disclosure agreements for every new employee hired after May 11, 2016, as well as any update to employee policies governing confidentiality after that date. Entering into brand new non-disclosure agreements with every employee may not be necessary, as the DTSA allows employers to provide the requisite notice in a document that cross-references employee policies for suspected violations of law.

Required notice does not end with W-2 employees, however, since “employee” is defined to include “any individual performing work as a contractor or consultant for an employer.” So, DTSA notice may also be applicable to agreements with any person or company doing work for a business. Moreover, the statute does not specify what “work” such independent contractors or consultants have to perform, so cautious trade secret holders who want the benefit of notice should consider including it in every agreement that references trade secret or other confidential information.

Penalty for lack of notice

If a trade secret owner fails to provide the notice required under the DTSA and later pursues a claim for trade secret misappropriation under the DTSA, the trade secret owner will not be able to collect exemplary double damages or attorney fees under the DTSA. The DTSA does leave current state trade secret law in tact, however, so such damages and fees may still be available through a state law cause of action. Nevertheless, lack of notice may have further-reaching consequences than what is provided in the DTSA, as litigants and enforcement agencies may try to argue that lack of notice is cause for other damages or that a particular agreement intended to protect trade secrets is unenforceable.

The takeaway: Review and update confidentiality agreements now

If a trade secret owner fails to provide the notice required under the DTSA and later pursues a claim for trade secret misappropriation under the DTSA, the trade secret owner will not be able to collect exemplary double damages or attorney fees under the DTSA. The DTSA does leave current state trade secret law in tact, however, so such damages and fees may still be available through a state law cause of action. Nevertheless, lack of notice may have further-reaching consequences than what is provided in the DTSA, as litigants and enforcement agencies may try to argue that lack of notice is cause for other damages or that a particular agreement intended to protect trade secrets is unenforceable.