Remember when you, as an employer, asked an attorney to prepare a contract containing a covenant not to compete? Or maybe you, as an employee, had questions about such a covenant. Or, perhaps, an attorney prepared a document for you as an employer that prohibited the disclosure of trade secrets either separately or within that “restrictive covenant” document. Well, it’s time to dust those contracts off and take another look at them – they may all have to be revised or scrapped.
President Obama signed the Defend Trade Secrets Act on May 11, 2016 (“DTSA”) (P.L. 114-153, S. 1890) after passing both Congressional chambers on April 27, 2016 in virtually identical form. The law amends 18 U.S.C. 1836 and expands on the Economic Espionage Act of 1996 by allowing civil remedies in addition to criminal penalties. According to published reports, Congress enacted the law in response to concerns regarding foreign trade-secret espionage.
The law authorizes a trade secret owner to file a civil action in a federal court, without regard to any jurisdictional limit, seeking relief for trade secret misappropriation related to a product or service in interstate or foreign commerce. Remedies include an award of damages (including exemplary damages two times actual damages) and injunctive relief. In addition, attorney’s fees may be granted to a prevailing party under certain circumstances based upon “circumstantial evidence”. The law follows the “discovery rule” regarding the statute of limitations, imposing a three year limit on bringing an action once the misappropriation is discovered by the trade secret’s owner.
In order for an employer to be awarded “exemplary damages” or attorney’s fees in a trade secret misappropriation matter an employee must be given notice of certain immunity provisions contained in the law. An “employee” is broadly defined to include a “contractor or consultant”. The notice requirement may be met explicitly in a contract or agreement “entered into or updated after [May 11, 2016]” or by “cross-reference to a policy document”.
DTSA permits a court to pass a “seizure order” based on certain required findings of fact. This may be done on an “ex parte” basis, meaning that the defendant need not be present for the order to be passed. The findings of fact must include the fact that “immediate and irreparable injury” will occur to the owner of the trade secret if the seizure order is not granted by the court. The court is to then to take custody of the trade secret materials and hold a hearing regarding the seizure within seven days thereafter. The law states explicitly that the seizure order is to be issued only in “extraordinary circumstances”.
Prior to enactment of the DTSA, owners of trade secrets could look only to state law for civil remedies regarding trade secret misappropriation. DTSA does not supersede state law, it is another layer on top of it. So both state and federal law must be reviewed in any case of claimed trade secret misappropriation.
Maryland has adopted the Model Uniform Trade Secrets Act with only slight variation. It can be found at Md. Comm’l. Law Code Ann. §11-1201, et. seq. Also, certain trade secret protections are included in Maryland’s version of the Uniform Computer Information Transactions Act also codified in the Maryland Commercial Law article. Finally, in addition to the foregoing, Maryland courts have developed some common law regarding trade secrets, including a duty of loyalty by an employee to an employer and duty of non-disclosure of trade secrets. A discussion of Maryland law pertaining to the protection of trade secrets is beyond the scope of this article, but the caveat is that both the DTSA and Maryland law must be examined in any claim of trade secret misappropriation.
Some points to consider regarding DTSA:
- As to the “notice provision” of the law:
- How broad is the term “consultant”?
- Does a “contract or agreement” have to be in writing?
- Would an “updated” agreement include a change in compensation?
- How much “cross referencing” to a policy document is required?
- In most instances, contractors and consultants will not have access to employer policies so that the only notice which they may be given is by way of the agreement with them.
- Will the DTSA apply to professionals, particularly those for whom restrictive covenants are illegal under state law?
- What is the scope of the application of the DTSA to a “…product or service used in, or intended for use in, interstate or foreign commerce.”?
- Will the “seizure order” provisions of the law lead to abuses among competitors, even work stoppage at a business to which a seizure order may apply?
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