by Gary Franklin A new federal law protecting confidential business information became effective on May 11, 2016. The adoption of the Defend Trade Secrets Act (the “Act”) arose from the federal government’s recognition of the importance of trade secrets and the devastating impact on the economy from their misappropriation. Trade secret theft causes annual losses of more than 2 million jobs and over $300B to the American economy undermining the means and incentive for entrepreneurs to innovate.
Trade secrets are a form of intellectual property that consist of information that has independent economic value that is not readily ascertainable to others and been kept secret. Trade secrets include formulas, compilations, programs, devices, methods, techniques or processes. Examples include plans, designs, software, customer lists, recipes, pricing information, and manufacturing information. A trade secret is protected as long as it is kept secret. Once lost, however, it is lost forever. Business, then, must take precautions to mark documents confidential, restrict access to and control dissemination of sensitive information, use confidentiality and non-disclosure agreements, and employ any other reasonable means to maintain the secrecy of important information.
Up until now, trade secrets were governed by state law. Most states, including Vermont, adopted the Uniform Trade Secrets Act. The new federal law aligns a trade secret owner’s rights to protect their confidential information with the federal rights enjoyed by owners of other forms of intellectual property including copyrights, patents and trademarks.
The new Defend Trade Secrets Act provides a federal private right of action for trade secrets. The significant elements of the Act include the following:
- In appropriate cases, the Act allows for seizure of stolen trade secrets on a short term basis until a full hearing is held in court with all parties present. An order allowing for seizure will also attempt to balance the need to avoid interrupting legitimate business activities;
- During the course of litigation, safe guards can be implemented to maintain the confidentiality of trade secrets;
- The Act authorizes injunctive relief to prevent misappropriation of and protect the trade secret, although certain restrictions reinforce employee mobility and prevent restraints on trade;
- Additional remedies may include an award for damages, including unjust enrichment and in certain cases royalty payments;
- The Act authorizes an award of attorney’s fees and punitive damages if the misappropriation was malicious or made in bad faith;
- The Act provides a new whistleblower provision protecting employees from the disclosure of trade secrets to law enforcement to report or investigate the possible violations of law, or in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.
Notably, the whistleblower provisions must be disclosed in every employee contract that governs the use of a trade secret or other confidential information. The failure to provide such disclosure will bar the recovery of exemplary damages or attorney’s fees against an employee who did not receive such notice. Accordingly, employers must consider updating employee contracts and company manuals and policies to comply with these notice provisions.
Also of note, the statute of limitations for the federal private right of action is three years after the date on which the misappropriation should have been discovered whereas under Vermont state law the statute of limitations is a more generous six years.
The new federal legislation does not preempt state law allowing trade secret owners a choice to pursue relief in either federal or state court. Having a federal act, however, provides important advantages. The new federal legislation should result in a robust and uniform body of law giving greater guidance on the maintenance of confidential information and prevention of its misappropriation. Litigants will also be able to take advantage of nationwide service of process and discovery eliminating ineffective and costly efforts to pursue stolen trade secrets in foreign jurisdictions. Federal cases will also remain before one judge who generally has greater resources and support and is better equipped to provide more timely and comprehensive action in complex and technical proceedings.
In sum, the Act is an important step in recognizing the substantial value of trade secrets and modernizing the tools available to maintain and protect them.
A shareholder at Burlington-based Primmer, Gary Franklin is an experienced and respected Litigator. Gary focuses his practice in the areas of Business Litigation, Shareholder Disputes, Employment, Bankruptcy, and Intellectual Property. Contact Gary Franklin today at [email protected].