United States: New Federal Law To Require Immediate Change To Agreements Governing Trade Secrets

Last Updated: May 17 2016
Article by Christopher J. Banks and Mark Krotoski

The new federal trade secret law will likely require immediate action for all businesses that use trade secrets or other confidential information.

The Defend Trade Secrets Act of 2016 (DTSA), which is expected to be signed into law this week, includes a provision that will require companies to add an explicit, written disclosure that identifies immunity provisions for certain types of trade secret disclosures in the DTSA to every "contract or agreement with an employee, [contractor, or consultant] that governs the use of a trade secret or other confidential information. . .entered into or updated after the date" that the DTSA is enacted.1 

To be clear, the DTSA will not require companies to amend or update such agreements that were entered into before US President Barack Obama signs the DTSA into law. However, after the law goes into effect, all new agreements (as well as any amendments or other "updates" to pre-existing agreements) will require an appropriate disclosure that identifies the immunity provisions of the DTSA if the contract relates to trade secrets or other confidential information.

A company that fails to comply with the new disclosure requirement will forfeit the ability to recover exemplary damages or attorney fees for trade secret misappropriation under the new federal law against an employee, contractor, or consultant whose contract was entered into or updated after the DTSA's enactment.

Background

The DTSA was passed by US Congress on April 27, 2016 and presented to President Obama for signing on April 29 (see our April 2016 LawFlash " Landmark Trade Secret Law Establishes New Rights and Remedies" for a summary of the DTSA's major components). Under the US Constitution's Presentment Clause, the President has until Wednesday, May 11, 2016, to sign the DTSA into law. Given his statement of support for the DTSA in the past, it is expected that the President will sign the DTSA into law by this deadline.

Among its major provisions, the DTSA will create, for the first time, a federal civil cause of action for misappropriation of trade secrets. In another important provision, the DTSA will amend Section 1833 of the United States Code, Title 18, to provide immunity to individuals who disclose a trade secret to their attorney, a court, or a government official in certain, specified circumstances. Specifically, the immunity provision provides that individuals cannot be held criminally or civilly liable under any federal or state trade secret law if they disclose a trade secret (a) to federal, state, or local government officials, to their attorneys, or in a sealed court document, for the purpose of reporting or investigating a suspected violation of the law; or (b) to their attorneys or in a sealed court document in connection with a lawsuit for retaliation by an employer for reporting a suspected violation of the law.

Subsections (b)(3) and (b)(4) of Section 1833 will impose a requirement that companies provide explicit notice of this immunity "in any contract or agreement with an employee [further defined to 'include[] any individual performing work as a contractor or consultant for an employer'] that governs the use of a trade secret or other confidential information."

Notice will be able to be provided either directly in the contract itself or through a cross-reference in the contract to a "policy document provided to the employee, [contractor, or consultant] that sets forth the employer's reporting policy for a suspected violation of the law."2 

Recommended Next Steps

We recommend that all businesses consider promptly reviewing and revising their policies, handbooks, and standard contracts governing the use of trade secrets and other confidential information that apply to employees, contractors, and consultants to comply with the DTSA. Such policies, handbooks, and standard contracts should add the required notice provision so that the business will be able to take full advantage of the DTSA in the event of a misappropriation.

Given the breadth of this provision's application to all contracts with employees, consultants, and contractors governing the use of trade secrets and other confidential information, businesses should consider whether the contracts included in such review should also include contracts with vendors, service providers, joint venturers, and the like, who might also be deemed "contractors or consultants" under the new law.

The DTSA provides new, landmark trade secret protections. In order to obtain the full benefits and rights under the DTSA, we recommend that all businesses and trade secret owners (a) take an inventory of existing trade secrets and confidential business information; and (b) assess whether their trade secrets have "reasonable measures" in place to protect them as required under law (typically through a regular trade secret audit).  

The DTSA also provides new rights and protections for trade secrets "misappropriated" after the date of enactment. The merits of any trade secret misappropriation case should be fully assessed under the new standards provided by the DTSA.

Morgan Lewis would be happy to work with you to revise your policies, handbooks, and standard contracts to conform with the requirements of the DTSA, help assess whether your trade secret and confidential business information have reasonable protective measures in place, or otherwise work with your business and personnel to minimize the risks and maximize the benefits for your company under the new law.

Footnotes

1 18 U.S.C. § 1833(b)(3).

2 18 U.S.C. § 1833(b)(3)(A) & (B).

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

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