This past Spring, we reported on the recently enacted Defend Trade Secrets Act (“DTSA”), which provides a new federal civil cause of action to trade secret owners seeking to pursue claims of trade secret misappropriation. Last week, the U.S. District Court in Massachusetts addressed the whistleblower immunity provision of the DTSA, which protects anyone who discloses a trade secret in confidence to a government official or an attorney “solely for the purpose of reporting or investigating a suspected violation of law.” In denying an employee’s motion to dismiss his employer’s DTSA claim, the district court held that a defendant must present evidence to justify the immunity. The case is Unum Group v. Loftus, No. 16-cv-40154-TSH (D. Mass. December 6, 2016). Continue Reading Federal Court Rejects Defend Trade Secrets Act Whistleblower Immunity Defense on a Motion to Dismiss and Orders Employee to Return Stolen Trade Secrets
We are pleased to announce the webinar “Trade Secret Audits: You Can’t Protect What You Don’t Know You Have” is now available as a webinar recording.
In Seyfarth’s ninth installment in the 2016 Trade Secrets Webinar Series, attorneys Robert Milligan, Eric Barton, and Scott Atkinson focused on trade secret audits. It is not uncommon for companies to find themselves in situations where important assets are overlooked or taken for granted. Yet, those same assets can be lost or compromised in a moment through what is often benign neglect. Experience has shown that companies gain tremendous value by taking a proactive, systematic approach to assessing and protecting their trade secret portfolios through a trade secret audit.
As a conclusion to this well-received webinar, we compiled a summary of three takeaways that were discussed during the webinar:
- As part of any trade secret audit, confidentiality agreements should be updated to include the new immunity language required by the Defend Trade Secrets Act (DTSA) to preserve the company’s right to exemplary damages and attorney’s fees under the DTSA.
- A trade secret audit, and the resulting protection plan, should have three primary goals:
(1) Ensure that a company’s trade secrets are adequately identified and protected from disclosure;
(2) Ensure that a company has taken adequate steps to protect itself in litigation if a trade secret is misappropriated; and
(3) Limit the risk of exposure to other companies’ claims of trade secret misappropriation.
- As part of a trade secret audit, onboarding and off-boarding procedures are evaluated to ensure that the intellectual property rights of third parties and the company are respected.
On May 11, 2016, President Barack Obama signed into law the Defend Trade Secrets Act of 2016 (“DTSA”), which Congress passed April 27, 2016. So, what does the passage of the DTSA mean for your company?
In a nutshell, the DTSA “federalizes” trade secret law by creating a federal claim for trade secret misappropriation and creates new remedies, including an ex parte seizure order to recover misappropriated trade secrets. It also serves as a reminder that trade secrets can be highly valuable to your company and that you should ensure that your company has reasonable secrecy measures in place to protect them.
Nevertheless, the DTSA also imposes new obligations on employers. To take full advantage of the remedies provided under the DTSA, companies have an immediate obligation to provide certain disclosures in all non-disclosure agreements with employees, contractors, and consultants that are entered into or updated following the statute’s effective date.
Seyfarth’s DTSA Desktop Reference guide describes the DTSA’s unique legal structure and remedies. We also provide tips and strategies in light of the passage of the DTSA.
How to get your DTSA Desktop Reference guide:
This publication may be requested from your Seyfarth contact in hard copy or eBook format (compatible with PCs, Macs and most major mobile devices). The eBook is fully searchable and offers the ability to bookmark useful sections and make notations for easy future reference.
To request the DTSA Desktop Reference guide in eBook or hard copy, please click the button below:
Cross Posted from California Peculiarities.
Seyfarth Synopsis: Protecting trade secrets from employee theft requires more than using an NDA when onboarding employees. If businesses want to protect confidential information, they need a cradle-to-grave approach, reiterating employee obligations regularly, including during exit interviews. (Yes, you need to do exit interviews!)
Headline stories in intellectual property theft tend to involve foreign hackers engaged in high-tech attacks to pilfer vast troves of data stored by big businesses or government entities, such as those involving Russian government hackers or the Chinese military. The losses are staggering. In 2009, McAfee estimated that cybercrime cost worldwide economies $1 Trillion. That number was cited by (a then-youthful) President Obama in his first speech on cybersecurity. Since that time, attacks by professionals and nation states have remained at the forefront of both news reports and the public perception. Since then, hack attacks have remained at the forefront of both news reports and the public perception.
But despite the disproportionate attention given to high value, high-tech attacks by outsiders, many U.S. businesses recognize that threats from the inside are just as costly as revealed by a 2014 PricewaterhouseCoopers survey. Nevertheless, “only 49%” of organizations surveyed had “a plan for responding to insider threats.”
Trade secrets are particularly susceptible to theft because they, by definition, consist of secret information with economic value. Company insiders often find that information too tempting to be leave behind when changing employers, or when seeking new employment. Therein lies the problem.
Trade secret theft by employees may not grab as many headlines as neo-Cold War espionage, but the data suggest that employees, not outsiders, pose the greatest threat of loss from trade secret theft. The good news is that a little proactivity by employers will go a long way toward keeping them out of the 49% who lack a plan to prevent leaks.
Of course, in California, obtaining protection is not all that simple. Non-compete agreements are, with very limited exceptions, a non-starter under Business and Professions Code § 16600, so you need special steps to keep your trade secret house in order. And because a California trade secret plaintiff (e.g., a former employer suing its former employee) likely must identify its trade secrets with reasonable particularity before commencing discovery, it pays to invest time on the front end to identify and inventory your trade secret information before litigation arises.
So, what can employers do?
Update Non-Disclosure Agreements to Comply With the DTSA, and See That Employees Know Why NDAs Are Important
Almost all employers (we hope) have confidential/non-disclosure and trade secret protection provisions in their employment agreements. But have these agreements been updated to comply with the recently enacted Defend Trade Secrets Act (“DTSA”) and its important employee/whistleblower notification provisions? And what are employers doing to help ensure compliance with their agreements? Rolling out new agreements is relatively easy. Making sure they are effective takes some doing.
Remember, your organization will not even have trade secrets to protect unless it has made “efforts reasonable under the circumstances” (under the California Uniform Trade Secrets Act) or has taken “reasonable measures” (under the DTSA) to maintain the secrecy of the information it claims to be a trade secret. Cal. Civ. Code § 3426.1(d); 18 U.S.C. § 1839(3)(A).
Implement Computer Use and Social Media Agreements and Policies
Most trade secret theft occurs via electronic device. Make sure your company has computer use and access policies and agreements that:
- Set forth that company computers, network, related devices, and information stored therein belong to the company;
- Indicate that access to company computers and networks are password-protected, with access authorized only for work-related purposes;
- Make use of data storage/access hierarchies, with the most valuable information being accessible on only a need-to-know basis, with security access redundancies (housed in a highly secure database that requires unique user credentials distinct from the log-in credentials the employee uses to access a computer workstation);
- Identify which devices are allowed in the workplace—BYOD practices have become popular, but also present challenges in regulating information flow and return. If employees use their own devices to perform work for the company, make clear that the company data on those devices belong to the company;
- Notify employees that the company reserves the right to inspect devices used for work to ensure that no company data exist on the devices upon termination of employment;
- Define whether cloud storage may be used by employees, under what terms, and what happens when employment ends;
- Define whether external storage devices (e.g., thumb drives) are allowed and under what terms; and
- Identify whether and how employees may use social media associated with their work—trade secrets must never be publicly disclosed, but beware of any overreach that would suppress employee communications protected by the National Labor Relations Act.
Build a Culture of Confidentiality—Make Sure Employees Know What The Company Regards as Confidential and Then Remind Them Routinely
Employees need to understand what information your company considers confidential. Educating employees on this subject should start at the beginning of employment, continue throughout employment, and recur at the end of employment. Tools that can help in this regard include:
- Onboarding procedures to emphasize the importance of company confidential information;
- Including in NDAs an express representation that the employee does not possess and will not use while in your employ confidential information belonging to any former employer or other third party;
- Using yearly (or more frequent) brief interactive e-modules emphasizing the importance of maintaining the confidentiality of company information;
- Requiring that the employee sit for an exit interview; and
- Requiring that the employee certify in writing, during exit interviews, that they have returned all company information and property (the employee may provide property on the spot or make statements about what will be returned—you should inventory all such indicated property and information).
Properly Exiting Employees—Particularly for High Risk Employees—Matters!
Not all employees present the same risk of loss. Generally, the loftier an employee is in the corporate hierarchy the greater the threat that that employee will expose company confidential information. The following recommendations are for mid-to-high risk departing employees:
- The person conducting the exit interview must be prepared—use a checklist;
- “Preparedness” for higher-risk employees will include (1) identifying, before the exit interview, the trade secret and confidential information the employee routinely accessed and used during employment, (2) reviewing for unusual activity the departing employee’s computer and work activities (including card key facility access data, where available) in the days and weeks leading up to their exit, (3) using an exit certification as noted above, and (4) inquiring where the employee is going and what position the employee will hold;
- Where initial investigation warrants, discreetly interview company-friendly co-workers of the departing employee to identify potentially suspicious conduct;
- Immediately shut down the departing employee’s access to company computers, networks, and other data repositories (e.g., cloud or other off-site storage). Cutting off access to company computer and data may be warranted before exiting the employee, depending on the perceived risk of data theft;
- Send a reminder-of-obligations letter to the now former employee, reciting ongoing obligations to the company and attaching, where useful, a copy of the NDA the employee has signed;
- Consider notifying the new employer, but tread carefully here to avoid overstepping or providing a basis to be accused of interfering with the employment relationship between your former employee and the new employer; and
- Depending on the threat level you perceive, consider having a departing employees’ emails preserved and their electronic devices forensically imaged.
With best practices in place, protecting your company’s trade secrets should be more like routine, but vigilant maintenance, than preparing to do cyber battle with foreign states. Organizations understandably focus on creating the next “big thing,” increasing sales, and building investor value, but slowing down enough to be purposeful in protecting intellectual property is a must.
While the Defend Trade Secrets Act of 2016 (“DTSA”) has only been in effect for a few months, the first wave of cases raising DTSA claims have started to generate federal decisions. In what appears to be the first substantive ruling under the Act, the Northern District of California illustrated some the advantages – and limitations – of DTSA claims in the context of injunctive relief.
Henry Schein, Inc. (“HSI”), a manufacturer of medical, dental and veterinary supplies, sued its former employee, Jennifer Cook, under the DTSA and a host of other California state law claims. Henry Schein, Inc. v. Cook, 16-cv-03166-JST (N.D. Cal.). Cook, a former sales associate, is alleged to have taken HSI’s trade secrets (including customer information) to her new employer, a competing dental supply company, despite her confidentiality agreements with HSI. HSI sought a temporary restraining order and, later, a preliminary injunction under both the DTSA and California state law claims. The court entered a temporary restraining order and preliminary injunction prohibiting Cook from disclosing HSI’s trade secrets to her new employer, but refused to enter a preliminary injunction that would prevent Cook from contacting or doing business with her former HSI customers in light of California’s policy against non-compete agreements.
Perhaps the most striking aspect of the court’s ruling was ultimately how little effect the DTSA had upon it. The DTSA has been widely viewed as an avenue for plaintiffs to bring trade secret claims in federal court, but HSI already had diversity jurisdiction for its state law claims and, as noted by the Court, HSI’s California Uniform Trade Secrets Act claims closely mirror those brought under the DTSA. In other words, HSI could have brought its state law trade secret misappropriation claims against Cook in federal court even if the case had been filed before the passage of the DTSA, with little impact upon the court’s ruling. The Court noted at several points, in both the TRO and PI orders, the similarities between the DTSA and California’s Uniform Trade Secrets Act, and considered HSI’s claims under both statutes without distinguishing between the two.
The court’s rulings also serve as a reminder that the DTSA does not supplant state law concerning the enforceability of non-compete agreements. California’s longstanding adverse treatment of non-compete agreements was the basis for the court’s refusal to enjoin Cook from “contracting or doing business with her clients,” especially when HSI had failed to show “specific evidence that Cook was utilizing trade secret information to solicit customers.” While not the explicit basis for the court’s ruling, the DTSA requires “evidence of threatened misappropriation,” and not merely a showing that the individual has information in their possession, before the issuance of an injunction under the Act. 18 U.S.C. § 1836(b)(3)(A)(i)(I).
While the court’s decision in HSI may not go into great detail in its consideration of the DTSA, it is worth noting why the court did not have to do so. DTSA claims will, in many cases, closely track claims under state law. The plaintiff in HSI already had an avenue to federal court based on the complete diversity of the parties, but other litigants will undoubtedly have to rely on the DTSA as their basis for federal jurisdiction. The DTSA’s most striking feature – its ex parte seizure provision – remains untested in federal court.
On May 11, 2016, President Obama signed the Defend Trade Secrets Act (“DTSA”), which Congress passed on April 27, 2016. With President Obama’s signature, the DTSA has now become the law of the land, and a federal civil remedy for trade secrets misappropriation now exists.
What does the passage of the DTSA mean for your company?
On Monday, May 16 at 2:00 p.m. Central, in Seyfarth’s sixth installment of its 2016 Trade Secrets Webinar series, Seyfarth attorneys will describe the key features of the DTSA and compare its key provisions to the state Uniform Trade Secrets Act (“UTSA”) adopted in many states. They will also provide practical tips and strategies concerning the pursuit and defense of trade secret cases in light of the DTSA, and provide some predictions concerning the future of trade secret litigation.
The Seyfarth panel will specifically address the following topics:
- Brief history of the DTSA
- What does the DTSA provide?
- Provisions unique to the DTSA
- The DTSA’s whistleblower immunity provision
- The DTSA’s notice requirements for agreements entered into or updated as of today
- Strategies in trade secret litigation in light of the DTSA
- What should an employer or business do now?
If you have any questions, please contact firstname.lastname@example.org.
*CLE Credit for this webinar has been awarded in the following states: CA, IL, NJ and NY. CLE Credit is pending for GA, TX and VA. Please note that in order to receive full credit for attending this webinar, the registrant must be present for the entire session.
Seyfarth Synopsis: A new federal civil cause of action is now available to trade secrets owners seeking to pursue claims of trade secret misappropriation under the Defend Trade Secrets Act (“DTSA”). To take full advantage of the remedies provided under the DTSA, companies have an immediate obligation to provide certain disclosures in all non-disclosure agreements with employees, contractors, and consultants that are entered into or updated following today. Our post provides a brief history and summary of the DTSA, and, notably, provides business owners a list of tips and strategies to implement in light of the DTSA’s passage.
Today, President Obama signed into law the Defend Trade Secrets Act of 2016, which Congress passed on April 27.
What does the passage of the DTSA mean for your company? In a nutshell, it means your company can now pursue claims for trade secret misappropriation in federal court like other forms of intellectual property (i.e., patent, trademark, copyright) and seek remedies such as a seizure order to recover misappropriated trade secrets. It also serves as a reminder that trade secrets can be highly valuable to your company and that you should ensure that your company has identified such assets and put in place reasonable secrecy measures to protect them.
Below, we provide an overview of the DTSA’s key provisions. We also provide tips and strategies in light of the passage of the DTSA.
What Does the DTSA Provide?
The DTSA authorizes a civil action in federal court for the misappropriation of trade secrets that are related to a product or service used in, or intended for use in, interstate or foreign commerce. Prior to the passage of the DTSA, civil trade secret claims were solely a matter of state law, with 48 states having adopted some version of the Uniform Trade Secrets Act (“UTSA”) and the remaining states recognizing common law claims for misappropriation of trade secrets. While the DTSA does not displace these state law claims, it provides a federal civil claim above and beyond the state law claims that previously existed.
How Does the DTSA Work?
The DTSA creates a uniform standard for trade secret misappropriation by expanding the Economic Espionage Act of 1996 (“EEA”) to provide a federal civil remedy for trade secret misappropriation. The DTSA also provides pathways to injunctive relief, monetary damages, and other remedies in federal court for companies whose trade secrets are misappropriated, including via ex parte property seizures (subject to various limitations). Through the ex parte seizure provision, a plaintiff can seek to have the government seize misappropriated trade secrets without providing notice to the alleged wrongdoer. The DTSA further harmonizes the differences in trade secret law under the UTSA and provides more uniform discovery procedures.
What Are the Significant Provisions of the DTSA?
The DTSA provides aggrieved parties with legal recourse in federal court via a federal trade secret cause of action (whereas previously, relief was only available under the state law UTSA or common law claims), as well as new remedies, including a seizure order. Below are the key provisions of the statute:
- The DTSA provides for actual damages, restitution, injunctive relief, significant exemplary relief (up to two times the award of actual damages), and attorney’s fees.
- Ex parte property seizures are available to plaintiffs, but subject to limitations. As noted above, an ex parte seizure means that an aggrieved party can seek relief from the court against a party to seize misappropriated trade secrets without providing notice to the alleged wrongdoer beforehand. As a measure to curtail the potential abuse of such seizures, the DTSA prohibits copies to be made of seized property, and requires that ex parte orders provide specific instructions for law enforcement officers performing the seizure, such as when the seizure can take place and whether force may be used to access locked areas. Moreover, a party seeking an ex parte order must be able to establish that other equitable remedies, like a preliminary injunction, are inadequate.
- Injunctive relief for actual or threatened misappropriation of trade secrets is available in federal court. However, a court will not enjoin a person from entering into an employment relationship unless there is a showing through evidence of “threatened misappropriation and not merely on the information the person knows.” This language was included in the DTSA to guard against plaintiffs pursuing “inevitable disclosure” claims.
- The statute of limitations is three years. A civil action may not be commenced later than 3 years after the date on which the misappropriation with respect to which the action would relate is discovered or by the exercise of reasonable diligence should have been discovered.
- A whistleblower immunity provision exists to protect individuals from criminal or civil liability for disclosing a trade secret if it is made in confidence to a government official, directly or indirectly, or to an attorney, and it is made for the purpose of reporting a violation of law. Similarly, a related provision states that 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 as long as the individual files any document containing the trade secret under seal and does not disclose the trade secret, except pursuant to court order.
- The immunity provision places an affirmative duty on employers to provide employees notice of the new immunity provision in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” This notice provision applies to contracts and agreements that are entered into or updated after the date of DTSA’s enactment (May 11, 2016).
- An employer will be in compliance with the notice requirement if the employer provides a “cross-reference” to a policy given to the relevant employees that lays out the reporting policy for suspected violations of law. Should an employer not comply with the above, the employer may not recover exemplary damages or attorney fees in an action brought under the DTSA against an employee to whom no notice was ever provided. Curiously, the definition of “employee” is drafted broadly to include contractor and consultant work done by an individual for an employer.
- The “Trade Secret Theft Enforcement” provision increases the penalties for a criminal violation of 18 U.S.C. § 1832 from $5,000,000 to the greater of $5,000,000 or three times the value of the stolen trade secrets to the organization, including the costs of reproducing the trade secrets.
- The DTSA further amends the RICO statute to add a violation of the Economic Espionage Act as a predicate act.
What Distinguishes the DTSA from the UTSA?
Because claims may still arise under states’ varied versions of the UTSA , it is important to highlight the important ways in which the DTSA differs from the UTSA. Most notably, the DTSA opens the federal courts to plaintiffs in trade secrets cases. The DTSA also allows for an ex parte seizure order. A plaintiff concerned about the propagation or dissemination of its trade secrets would be able to take proactive steps to have the government seize misappropriated trade secrets prior to giving any notice of the lawsuit to the defendant.
Nevertheless, the ex parte seizure order is subject to important limitations that minimize interruption to the business operations of third parties, protect seized property from disclosure, and set a hearing date as soon as practicable. As referenced above, the ex parte seizures are limited and may only be instituted in “extraordinary circumstances.”
The DTSA also contains no language preempting or displacing other causes of action that may arise under the same common nucleus of facts of a trade secret claim, unlike the UTSA as interpreted by some states which preempt such claims.
As also noted above, unlike the UTSA, the DTSA also provides protection to “whistleblowers who disclose trade secrets to law enforcement in confidence for the purpose of reporting or investigating a suspected violation of law,” and the “confidential disclosure of a trade secret in a lawsuit, including an anti-retaliation proceeding.”
Why Employers or Businesses Should Care and What They Should Do
Here are some tips and strategies we believe will assist employers and business owners in complying with and taking full advantage of the relief available under the DTSA:
- Update: Starting immediately, all non-disclosure agreements with employees, contractors, and consultants that are entered into or updated following today must contain disclosures of the DTSA’s immunity provisions (either set forth directly in the agreement or in a policy that is cross-referenced in the agreement). Employers who fail to provide these disclosures cannot recover exemplary damages or attorney fees in an action brought under the DTSA against an employee to whom no notice was provided. Consequently, employers should immediately update their standard agreements to include the required disclosure language. Remember that employee is broadly defined under the DTSA to include contractor and consultant work done by an individual for an employer.
- Review: Have qualified counsel review policies and relevant agreements to ensure that they contain the required language noted above. Additionally, ensure that your company is using non-disclosure agreements with your employees and that such agreements have clear definitions of trade secrets and confidential information and are not overly broad.
- Ensure and Protect: Do you have valuable information that could be protected as a trade secret? First, identify valuable sources of information in your organization. You should then check to see how your company protects such information. You will only be able to pursue trade secrets claims if you can show that your company employs reasonable secrecy measures to protect its trade secrets. Check out one of our recent webinars discussing best practices for the proper treatment of trade secret information. We have found that a trade secret audit with the assistance of counsel can be valuable for companies trying to identify and protect their trade secrets.
- Prepare: To protect your company’s trade secrets and avoid DTSA claims against your company, maintain proper on-boarding and off-boarding procedures and counsel your employees regarding the handling and further protection of your company’s confidential and trade secret information, including recurring employee training. Also closely monitor relationships with vendors and contractors who may have access to your company’s trade secrets and confidential information and ensure that there are appropriate protections in place.
It will be a brave new world with the passage of the DTSA. Federal courts will likely become the new forum for trade secret litigation. Make sure that your company is ready.
Please visit our blog, Trading Secrets, for further coverage of the DTSA. We regularly update our page featuring DTSA developments, and we recently recorded a webinar and podcast featuring coverage of the DTSA updates (as of April 11, 2016). We will also be hosting a webinar on Monday, May 16. The webinar will describe the key features of the DTSA and compare its key provisions to the state Uniform Trade Secrets Act (“UTSA”) adopted in many states. The webinar will also provide practical tips and strategies concerning the pursuit and defense of trade secret cases in light of the DTSA, and provide some predictions concerning the future of trade secret litigation.
We are happy to discuss with you what the DTSA may mean for your company.
Today, President Obama will sign into law the Defend Trade Secrets Act (“DTSA”) in a public “pool spray” Oval Office ceremony. The final gathering is set to occur at 3:20 PM Eastern in the Brady Press Briefing Room. The President will sign the DTSA at 3:35 PM Eastern. Stay tuned for further coverage.
In Seyfarth’s third installment of its 2016 Trade Secrets Webinar series, Seyfarth attorneys Robert Milligan, Justin Beyer and Daniel Hart, provided attendees with a thorough discussion of the fundamentals as well as latest updates on the Defend Trade Secrets Act and the proposed EU Trade Secrets Directive. The panel gave insight into the limitations and benefits of the Act and the proposed Directive.
Below are three takeaways from the well-received webinar:
- With the passage of the Defend Trade Secrets Act, there is now a federal cause of action for trade secrets disapproval. Some of the key provisions in the Act include a three year statute of limitations, the availability of attorneys’ fees, exemplary damages, as well as increased criminal penalties for a violation of the Economic Espionage Act. It also includes portions of the DTSA as predicate offenses for the RICO Act.
- The Act also contains language requiring that an employer include information relating to whistleblower immunity for employers to obtain exemplary damages. This only underscores an important point to anyone maintaining employment agreements which contain restrictive covenants: it is imperative for employers to monitor applicable state and federal law to best preserve and maintain their rights and employment agreements.
- The European Commission’s directive on trade secret protection will mark a sea-change in protection of trade secrets throughout the European Union. Each of the EU’s 28 member states will have a period of 24 months to enact national laws that provide at least the minimum levels of protections afforded to trade secrets by the directive. Look for greater consistency in trade secrets protection throughout the European Union in the years ahead.
Join us on Friday, April 29 at 12:00 p.m. Central for our next webinar, “Protecting Confidential Information and Client Relationships in the Financial Services Industry.”