Employers’ Rights and Responsibilities Under the Defend Trade Secrets Act of 2016

By Michael A. Shadiack & Lauren F. Iannaccone

On May 11, 2016, President Obama ratified the “Defend Trade Secrets Act of 2016,” giving employers a private cause of action against employees who misappropriate trade secrets. However, the Act, which immediately went into law and effect, offers both employers and employees certain legal protections.

As for employers, the Act opens up the federal court as a venue for wary employers to potentially stop employees from disclosing important trade secrets. To obtain an order preventing an employee from disclosing trade secrets, the employer has the burden to meet eight factors by “prov[ing] the facts” and “conclusions of law necessary to support the order.” This standard -- at least on paper -- is less than the “clear and convincing” burden used to obtain this type of order in state court. This is important from an attorney practice perspective (if given the choice of venues, federal court may be a more favorable forum), as well as from an employer perspective (it may have a lesser burden of proof in federal court). As soon as the federal court enters an order, the trade secret materials may be seized, taken into court custody and secured.

During the proceeding, if an employee is found to have wrongfully misappropriated a trade secret, the employee may have to pay the employer damages for actual loss, unjust enrichment, royalties and exemplary damages. Additionally, if an employee misappropriates a trade secret in bad faith, willfully or maliciously, then the court may award attorneys’ fees to the employer.

While the Act seems to favor employers, it also protects employees by offering them broad “whistle-blowing” protections if a trade secret is disclosed. Specifically, the whistle-blowing provision of the Defend Trade Secrets Act gives employees full immunity under both federal and state laws if the employee makes a confidential trade secret disclosure to a government official or an attorney in the course of reporting or investigating a “suspected violation of the law.” The Act explicitly places the burden on the employer to now include this immunity information in its employee handbook, employment contracts and non-disclosure agreements that discuss an employee’s obligation to safeguard the trade secrets or confidential information of the employer.

Accordingly, employers are encouraged to review and update their employee handbooks, employment contracts and non-disclosure agreements to address this new legal requirement. If an employer fails to make this update and does not appropriately inform its employees, the court may find that the employer has forfeited any damages or attorneys’ fees it would otherwise have been entitled to if it is proven that an employee wrongfully misappropriated a trade secret. 

For information on updating your company’s employee handbook, employment agreements and non-disclosure agreements to comply with the new “whistle-blower” immunity notice contained in the Act, please contact the attorneys in Connell Foley’s labor and employment group.