A New Venue and Remedies for Trade Secrets Actions, Provided Your Employment Agreements Allow For Them

June 2016

On May 11, 2016, President Obama signed the Defend Trade Secrets Act of 2016 (“DTSA”) into law, which became effective immediately. The DTSA gives federal courts original jurisdiction over claims for misappropriation of trade secrets. Trade secret misappropriation claims will not need to be brought in federal court as the DTSA does not preempt existing state laws, but it gives companies the option of bringing such claims in federal court in every lawsuit. The DTSA also provides for specific remedies companies may wish to pursue, if their employment agreements contain specific provisions, which will be discussed further below.

The DTSA is largely modeled after the Uniform Trade Secrets Act (“UTSA”), which has been adopted by most states, including Minnesota (Minn. Stat. § 325C et seq.). For example, like the UTSA, the statute of limitation for DTSA claims is three years from the date of the alleged misappropriation, and there is only a minor difference in the definition of trade secret, which should likely have no impact on enforcement. The most important deviations, however, are found in the remedies available under the DTSA.

I.  Equitable Relief Available under the DTSA 

A.  Injunctions a Court May Issue

Courts may enjoin actual or threatened misappropriation under the DTSA in all but two specific instances:

1. An injunction may not prevent a person from entering into an employment relationship; and
2. An injunction may not “conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.”

Instance #2 above merely expresses that the DTSA does not preempt state laws allowing specific professional, trade, or business practices. To that end, a state’s law on the viability and enforcement of noncompete actions will certainly impact the ability to obtain an injunction under the DTSA.

Additionally, the DTSA does not adopt the “doctrine of inevitable disclosure,” which means that an injunction must be based on evidence of threatened misappropriation and not merely on the information a person knows.

B. Ex Parte Seizures Available

Unlike the UTSA, the DTSA provides that courts may, “only in extraordinary circumstances,” approve ex parte applications for the civil seizure “of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.”

The DTSA sets forth the specific elements that an order for ex parte seizure must contain, and states that such an order may only be issued if an injunction would not be adequate because a party “would evade, avoid or otherwise not comply with such an order” and, if given notice, would “destroy, move or otherwise make such matter inaccessible to the court.” And if an ex parte seizure is ordered and later found to be wrongful or excessive, the party whose property was seized may recover damages against the party that requested the seizure.

As this is a new remedy under law, it is uncertain to what extent judges will be willing to entertain such requests, let alone grant them. Moreover, certain federal judges in Minnesota will refuse to even hear requests for injunctive relief – such as motions for temporary restraining orders – without notice and response from the defendant. Accordingly, until the law is developed in this area, there will be significant uncertainty for all parties.

II. Monetary Relief Available under the DTSA

In addition to the injunctive relief available under the DTSA, plaintiffs may recover damages for:

1. actual loss caused by the misappropriation of the trade secret; and
2. unjust enrichment caused by the misappropriation of the trade secret that is not included in the computed damages for actual loss; or
3. in lieu of damages measured by any other methods, the damages caused by the misappropriation measured by imposition of liability for a reasonable royalty for the misappropriator’s unauthorized disclosure or use of the trade secret.

Additionally, exemplary damages in an amount up to two times the amount of damages may be awarded if the trade secret is willfully and maliciously misappropriated. And attorneys’ fees may be awarded to the prevailing party if:

1. a claim of the misappropriation is made in bad faith, which may be established by circumstantial evidence;
2. a motion to terminate an injunction is made or opposed in bad faith; or
3. the trade secret was willfully and maliciously misappropriated.

However, attorneys’ fees and punitive damages are only allowed if the plaintiff has satisfied a requirement to provide notice of whistleblower immunity to the defendant, as discussed below.

III. The DTSA’s Requirements for Employment Agreement

The DTSA provides whistleblowers with immunity from criminal or civil liability in both federal and state trade secret misappropriation actions for disclosure of a trade secret if that disclosure is made:

1. solely for the purpose of reporting or investigating a suspected violation of law; and
2. in confidence to a government official or an attorney.

Whistleblowers also face no liability if the disclosure of the trade secret is made “in a complaint or other document filed in a lawsuit or other proceeding” if that filing is made under seal. Moreover, an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding.

To ensure you are entitled to seek attorneys’ fees and exemplary damages under the DTSA, employers must provide notice of the whistleblower immunity to the employee, consultant, or independent contractor alleged to have misappropriated the trade secret. Specifically, an employer must give this notice “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.”

Such notice need not be in the contract agreement itself, however, as long as the employer provides a cross-reference to a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law. Although this requirement applies to contracts and agreements that are entered into, or updated after, the date of the enactment of the legislation, it is yet to be seen whether courts will grant full exemplary damages or attorneys’ fees for claims brought in which the underlying employment agreement was executed prior to May 11, 2016 and does not contain the notice of whistleblower immunity. To make the best efforts at ensuring that a court may apply the DTSA to individuals with agreements executed prior to May 11, 2016, employers should consider providing all such individuals with a document which sets forth the employer’s reporting policy for a suspected violation of law, including the notice of whistleblower immunity.

Contact FMJ today to analyze and update your employment agreements for new employees, consultants, and independent contractors, as well as to satisfy the notice requirement for currently employees so that you will be able to take advantage of the new protections afforded by the DTSA.

David Carrier is an attorney at Fafinski Mark & Johnson who practices in the HR & Employment and Litigation groups. He can be reached at david.carrier@fmjlaw.com or 952.995.9500.