Michael G. Trachtman
Powell Trachtman Logan Carrle & Lombardo, P.C.
MEA General Counsel
You fire your sales manager, and then find out that she downloaded to her personal computer a copy of your confidential customer and sales history database. You hire a computer consultant who, you later discover, copied your proprietary software, and you suspect the consultant might be using it as part of his consulting practice. You discover that a competitor is using CAD files that had to have come from your company. What can you do? The answer is: a lot, so long as you do it in the right way.
In May 2016, Congress enacted the Defend Trade Secrets Act (DTSA). The statute can provide you with substantial protection against the theft or unauthorized use of your trade secrets by, for instance, employees, independent contractors, consultants and competitors. Here’s what you need to know.
What’s a “trade secret”? The definition of a “trade secret” is fairly loose: it is information that provides economic value to a business, and that the business attempts through reasonable means to keep confidential. So, just by way of example, if you have a valuable manufacturing method, a unique formula, a proprietary customer database, and so on, and if you use reasonable efforts so that only those with the need to know have access to that information, it would likely qualify as a “trade secret.”
What’s the impact of DTSA? Most states already have trade secret laws that, upon the theft of a trade secret, provide for injunctions, damages, punitive damages and, sometimes, attorneys’ fees. However, when trade secrets are taken, they often migrate beyond the borders of individual states, and it can be difficult and cumbersome to chase the wrongdoer, or those who acquired the trade secrets from the wrongdoer, through the myriad of states, and even countries, where the trade secret may have been used or disclosed.
DTSA helps to solve that problem. It amplifies trade secrets remedies (including double-damages and attorneys’ fee provisions) and, very important, it allows access to federal (and not just state) courts, which can provide protection on a national and, often, international level. Additionally, federal courts often move more quickly than state courts, and in many instances they have more familiarity with trade secrets issues. Under DTSA, companies will also be able to prevent the importation of products made with misappropriated trade secrets, even if the misappropriation occurred outside the US. Businesses which rely upon patents will have a broader range of options to protect their intellectual property.
In addition, in cases where an employee who is subject to a noncompete leaves for a competitor and also takes trade secrets, DTSA may allow employers to pursue not only the trade secrets issue, but also the enforcement of the covenant not to compete in federal courts.
And, in a provision that may have very substantial significance, in “extraordinary circumstances,” DTSA allows for immediate (that is, before there is even a hearing) seizure of stolen trade secrets as may be necessary to prevent their dissemination.
But – an important caution. DTSA includes specific protections for whistleblowers, paralleling similar protections mandated by the SEC, EEOC, NLRB and FINRA. In order to be entitled to double-damages and attorneys’ fees under DTSA, companies must include a prescribed whistleblower protection notice in, for example, employment, independent contractor, severance, release, non-compete, and confidentiality agreements, and also in employee handbooks.
As the law evolves toward the generalized protection of whistleblowers, the inclusion of this kind of notice is a good idea, even apart from DTSA.
The take-away. Here’s where we suggest you go from here:
- Identify your trade secrets. Many companies assume that in order to qualify as a trade secret, information must rise to the level of the formula for Coca Cola or the KFC Colonel’s secret blend of herbs and spices. Not so – so long as it adds value to your business, a database, a process, software code, a manufacturing technique, a formula, and much more, can qualify for trade secret protection.
- Treat them as trade secrets. If you do not treat the information as a trade secret, neither will the law. You will need to go beyond merely directing employees not to use or disclose the information – rather, you will need to take the steps necessary to keep the trade secret from being used or accessed by those who do not need to do so. Lock the file cabinet. Put the information on a separate hard drive, or a separate partition of a hard drive, and password protect it.
- Do a document review. Have your employment, consultant, confidentiality and similar agreements, related forms, and policies and procedures reviewed for DTSA compliance purposes.
Let us know if we can help.