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What Does the New Federal “Defend Trade Secrets Act” Mean for Employers and Employees?

In the near future, President Obama is expected to sign the bill that flew through Congress with little opposition, titled the “Defend Trade Secrets Act of 2016” (“DTSA”). The DTSA will federalize employers’ rights to enforce claims for misappropriation of trade secrets against departed employees, among others. The impact of the statute will be significant for both for employers and employees.

The major benefit to employers will be that a federal cause of action for enforcing trade secrets will allow for more uniform enforcement, procedures, and remedies against departed employees who have taken trade secrets to their new place of employment. Previously, trade-secret law was only enforceable under the Uniform Trade Secrets Act, which 48 states had adopted with varying definitions of what constitutes a trade secret and differing remedies for enforcement. Notably, however, the DTSA will not pre-empt state law so state law claims will continue to be available to supplement federal claims.

In addition to the benefits stated above, the other major benefit for employers will be the availability of ex parte seizure orders. An ex parte seizure order will be allowed, however, only in “extraordinary circumstances” and will prevent the disclosure or use of stolen trade secrets without advance notice to the perpetrator.

In contrast, the major benefit for employees (including contractors and consultants) will be that the new statute provides certain protections for “whistleblowers.” Indeed, employers now will be required to inform their employees of such whistleblower protections. The key protection for employees will be that if an employee discloses the employer’s trade secret “solely for the purpose of reporting or investigating a suspected violation of law,” the DTSA provides full immunity from liability to the employee. If employers do not give the required notice, however, they can lose their right to recover exemplary (punitive) damages or attorneys’ fees against a departed employee.

Similarly, an employee who is in litigation against his or her employer with a whistleblower retaliation claim also will be immune from liability for disclosing trade secrets to the employee’s attorney or filing pleadings or motions that reference the trade secrets (if filed under seal).

In sum, the DTSA likely will have an impact on trade-secret litigation akin to how the Class Action Fairness Act (“CAFA”) affected class actions. After CAFA took effect in 2005, nearly all major class actions were filed in or removed to federal court, the case law became more uniform, and corporations began winning more regularly. Applying this analogy to the DTSA, we expect a similar course. Nearly all actions will be filed in or removed (if available) to federal court, the case law will become more uniform, and corporate employers will begin to prevail more frequently on claims to protect their trade secrets.

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