When You Really Want To Keep A Secret – The Defend Trade Secrets Act of 2016 (DTSA)

The United States Congress this year has enacted, and the President has signed into law, the Defend Trade Secrets Act of 2016 (DTSA). The DTSA expands significantly on the protections in The Uniform Trade Secrets Protection Act, North Carolina General Statutes Chapter 66 Article 24. More importantly, the DTSA contains certain requirements that affect all employment and independent contractor agreements with provisions protecting confidential information.

Any business with confidentiality provisions in employment agreements or in independent contractor agreements should conform those agreements to the DTSA, because the DTSA allows employers to sue employees who violate confidentiality provisions for punitive damages and to recover attorneys’ fees – but only if the agreement expressly gives notice of “whistleblower” protections in the DTSA. The DTSA gives immunity from misappropriation claims to whistleblowers who disclose trade secrets or confidential information to government officials for the purpose of reporting or investigating a violation of law. Notice of this whistleblower protection is an express condition of the enhanced remedies granted to employers by the DTSA.

For the DTSA to apply, the trade secret must relate to a product or service in interstate or foreign commerce. The DTSA’s protections apply only to misappropriations that occur after the DTSA was enacted May 11, 2016.  Prior acts are protected only under state law.

The DTSA, like the North Carolina Uniform Trade Protection Act, defines “trade secret” broadly, to include business or technical information (the federal statute adds financial, scientific, and “other”), if the owner has taken reasonable measures to keep the information secret and the information “derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means, by another person who can obtain economic value from the disclosure or use of the information.” A “trade secret” could be the “secret recipe” for Kentucky Fried Chicken®, the process for installing artificial turf, a price schedule for attorneys’ services, or a script for customer service calls.

The DTSA also contains a civil seizure provision not found in state law. A court may order on an ex parte basis (without notice to the alleged violator) the seizure of trade secret property in “extraordinary circumstances” – circumstances where the accused would likely destroy or hide a stolen trade secret if given prior notice of the proceedings. The employer also must post a bond and, generally, there must be a hearing within 7 days of the order. A defending party who is damaged by a wrongful seizure may sue for damages for lost profits, damages for loss of goodwill, attorneys’ fees, and punitive damages, if the seizure was sought in bad faith.

The statute is designed to give increased protection to trade secrets. Trade secrets and confidential information are often critical components of a successful business. Well-crafted agreements with employees and independent contractors are vital to the proper protection of those assets.