Impact Of New Defend Trade Secrets Act

A new federal law, the Defend Trade Secrets Act (18 U.S.C. section 1836 et seq.), was signed into law on May 11, 2016.  Among other things, the Defend Trade Secrets Act creates a new private civil cause of action under federal law for the theft of trade secrets that are used in interstate commerce.  In short, the Defend Trade Secrets Act creates more ways for businesses to protect their trade secrets, but employers must provide certain notice to their employees, such as through an employee handbook update, in order to take full advantage of these new protections.

Like most states, California defines a trade secret as information that:

  1. Derives independent economic value, actual or potential, from not being generally known to the public; and
  2. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

A famous example of a trade secret would be the secret recipe used in preparing chicken at the KFC restaurant chain.  (If KFC’s secret recipe was accidentally revealed to the public as was recently alleged, however, then it would no longer qualify as a trade secret because it would not satisfy the first prong of the definition of a trade secret.)  Trade secrets need not be famous, and could include anything that satisfies the two prongs above, including techniques, processes, procedures, patterns, and many other things a business may create or develop.  If something qualifies as a trade secret and the trade secret is misappropriated (e.g. an employee tries to sell the trade secret to a competitor), then specific legal remedies are available to the owner of the trade secret.

Under the new Defend Trade Secrets Act, the definition of a trade secret is virtually the same as under California law, but there are several key differences between existing California law and the new federal Defend Trade Secrets Act.  First, the Defend Trade Secrets Act creates a new private civil cause of action under federal law in the event a trade secret is stolen.  In other words, for the first time the owner of a trade secret can now bring a civil lawsuit in federal court, as opposed to state court, when a trade secret is misappropriated.

Second, the Defend Trade Secrets Act enables federal courts to act quickly and issue an order for the “seizure of property necessary to prevent the propagation or dissemination of the trade secret” via ex parte application.  This is a new tool for owners of trade secrets to seek immediate court action when necessary to prevent irreparable injury.

Third, whereas California law requires a trade secret owner to “identify the trade secret with reasonable particularity” when bringing a lawsuit for misappropriation of a trade secrets, the Defend Trade Secrets Act has no such requirement.  Thus, suing under the Defend Trade Secrets Act, rather than under California law, could be an attractive option for trade secret owners who are concerned about having to describe their trade secrets in documents that are publicly filed with the court.

Fourth, the Defend Trade Secrets Act contains whistleblower protections that provide immunity to employees who disclose trade secrets in the course of reporting the company for an actual or suspected violation of law.  Employers are required to provide notice of this whistleblower protection to their employees in any document that discusses their policies for employee use of trade secrets or other confidential information.  For most businesses, this document would be an employee handbook or a non-disclosure agreement (commonly known as an “NDA” or “Confidentiality Agreement”.)  If employers fail to provide this notice, then the employer is no longer eligible to be awarded additional fines or recover attorneys’ fees if it is successful in bringing a misappropriation of trade secrets lawsuit against a former or current employee.  Therefore, employers have a big incentive to provide the required notice.

The new Defend Trade Secrets Act offers more protections for employers to protect and enforce their rights with respect to trade secrets, but requires employers to provide certain notices to employees in order to take full advantage of these rights.  For any questions about the Defend Trade Secrets Act or about updating your employee handbooks and NDAs, please contact Patrick Klingborg.