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Employers – Do your Contracts Comply with the Defend Trade Secrets Act?

By Eric J. Schreiner

Employers were provided with another weapon to protect their confidential trade secrets when the Defend Trade Secrets Act (“DTSA”) became federal law on May 11, 2016.  The DTSA created a federal civil cause of action for misappropriation of trade secrets and provides for various remedies where misappropriation is proven, including civil seizure, injunctive relief, compensatory damages, punitive damages equal to two times compensatory damages, and attorneys’ fees.  In order to preserve the right to recover punitive damages and attorneys’ fees against an employee or former employee, however, an employer must include notice of the DTSA’s whistleblower immunity provisions in any contract with that employee addressing trade secrets or confidential information.  In the absence of providing this required notice, an employer cannot recover punitive  damages or attorneys’ fees in a later lawsuit under the DTSA.  Consequently, employers should review and consider revising their relevant contracts to include the required notice.

The DTSA provides immunity from criminal or civil liability for disclosure of trade secrets where:  (i) an individual discloses a trade secret in confidence to a federal, state or local government official, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law; and (ii) a disclosure is made in a document filed under seal in a lawsuit or other court proceeding.  In addition, the DTSA permits an individual to disclose a trade secret to his or her attorney in the context of a lawsuit against an employer asserting that the employer retaliated against the individual for reporting a suspected violation of law, and also allows the individual to use the trade secret information in the court proceeding provided that any document containing the trade secret is filed under seal and any disclosure is made only pursuant to a court order.

The DTSA requires an employer to provide notice of this immunity “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.”  The employer can provide this notice in the agreement itself by summarizing the DTSA immunity provisions (or by just including a copy of the relevant immunity provision of the DTSA).  Alternatively, the DTSA permits an employer to satisfy this notice requirement by cross-referencing in the agreement “a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law.”  If an employee is not provided notice in one of these two ways, the DTSA provides that an employer cannot recover punitive damages or attorneys’ fees in a later lawsuit against the employee for violating the DTSA.  It also is important to note that this notice requirement:  (i) applies to any contract or agreement entered into or updated after May 11, 2016; and (ii) applies to contracts with contractors or consultants because the DTSA defines employee to include any individual performing work for an employer as a contractor or consultant.

In light of the notice requirement in the DTSA, employers should review the contracts and agreements that they currently use with employees, consultants and contractors.  This includes not just basic employment agreements and confidentiality agreements, but other agreements such as separation or severance agreements that may include provisions addressing trade secrets or confidential information.  These contracts should be revised going forward to comply with the DTSA notice requirement.  Otherwise, an employer will not preserve its ability to recover punitive damages and attorneys’ fees in a lawsuit under the DTSA.

If Kleinbard can assist you in reviewing your relevant contracts, or if you would like more information on this issue, please contact Eric J. Schreiner at 215.496.7217 or eschreiner@kleinbard.com.