Defend Trade Secrets Act requires updates to employment and contractor agreements, including NDAs—but employers should consider their options

May 18, 2016

Employment Law Alert

Author(s): Matthew J. Frankel

The recently enacted Defend Trade Secrets Act contains provisions regarding whistleblower immunity and employers’ obligations to notify employees and contractors of such immunity in covered agreements. This alert discusses what employers need to consider before updating their agreements and/or policies.

On May 11, 2016, The Defend Trade Secrets Act (“DTSA”) was signed by President Obama, a move some have called the largest expansion of federal intellectual property law in decades. The DTSA largely tracks the Uniform Trade Secrets Act (“UTSA”), the substantive law governing the misappropriation of trade secrets that has been enacted (with some variation) in all but two states (please see our prior Alert about passage of the DTSA). However, the DTSA contains some unique provisions with no UTSA analogues, including the subject of this Alert: provisions regarding whistleblower immunity and employers’ obligations to notify employees and contractors of such immunity.

The DTSA provides, in 18 U.S.C. § 1833(b)(1) under the heading “Immunity,” that:

“An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that . . . is made . . . [1] in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney” and “solely for the purpose of reporting or investigating a suspected violation of law”; or [2] “in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.”

In subsequent provisions, 18 U.S.C. § 1833(b)(3)-(4), the DTSA states that “[a]n employer shall provide notice of the immunity set forth in this subsection in any contract or agreement with an employee [or contractor or consultant] that governs the use of a trade secret or other confidential information.” Ostensibly, this provision requires employers to include the immunity language in 18 U.S.C. § 1833(b)(1) in any employment, independent contractor or consulting agreement containing non-disclosure provisions, or any stand-alone non-disclosure agreement (“NDA”) or similar agreement with employees, contractors or consultants entered into on or after May 11, 2016. While the DTSA does not require pre-existing agreements to be revised, it does appear to require new, updated or revised agreements to include this language. It also provides that an employer may comply by providing the employee a cross-reference to a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law.

Accordingly, going forward, employers should update their standard agreements to comply with the DTSA’s immunity notice provisions—right? Not so fast. In 18 U.S.C. § 1833(b)(3)(C), Congress enumerated the consequence for non-compliance with the immunity notice provision, and it turns out the non-compliance may be inconsequential in practice.

Here’s why. The DTSA (like the UTSA) provides, in 18 U.S.C. § 1836(b)(3)(C)-(D), for an award of “exemplary damages in an amount not more than 2 times the amount of [actual] damages” and recovery of attorney’s fees in cases of “willfull[] and malicious[]” misappropriation. However, under 18 U.S.C. § 1833(b)(3)(C), these additional elements of recovery are unavailable if the employer has not provided the immunity notice required by 18 U.S.C. § 1833(b)(3)-(4). Indeed, this is the sole consequence set forth in the DTSA for failing to provide the required immunity notice.

Because no employer would want to lose these important potential remedies in a trade secret misappropriation suit, employers should include the immunity language—right? Again, not so fast. While non-compliance would render unavailable such remedies under the DTSA, nothing in the DTSA suggests that non-compliance would render these remedies unavailable under state trade secret law, i.e., the UTSA. Thus, an employer might be able to forgo including the immunity notice in its covered agreement and still be able to recover exemplary damages and attorney’s fees under the UTSA in a subsequent trade secret suit.

Here’s why and how that might work in practice. Congress expressly chose not to preempt existing state trade secret law, meaning that parallel state law UTSA claims can be asserted alongside DTSA claims. Thus, most employers suing for trade secret misappropriation (if a federal venue is desirable) will take a belt-and-suspenders approach of alleging both DTSA and state law UTSA claims. Because the UTSA permits recovery of exemplary damages and attorneys’ fees in cases of willful and malicious misappropriation, such remedies should be available under the UTSA even if non-compliance with the DTSA’s immunity notice requirements render them unavailable under the DTSA.

Of course, the above analysis is hypothetical and assumes that courts would not interpret the DTSA’s non-compliance provision expansively so as to preclude state law remedies not explicitly listed in the statute. Likewise, it is impossible to say whether courts might permit a government agency to enforce the immunity notice requirement as a stand-alone mandate, whether employees might successfully use such non-compliance as a defense to alleged wrongdoing or as a basis for stand-alone claims (e.g., a statutory violation actionable under California Business & Professions Code § 17200), or whether non-compliance might result in other negative consequences for the employer even if not enumerated in the DTSA. While such outcomes would seem to violate the well-established canon of statutory construction expressio unius est exclusio alteriusi.e., that Congress’ express enumeration of a specific consequence for non-compliance precludes the imposition of other, unstated consequences—anything is possible, at least until there is precedential case law on which to rely.

Even so, employers should think critically about providing a detailed notice of whistleblower rights if not providing such notice is unlikely to have any material negative consequences. Such a notice might encourage an employee planning or engaging in misappropriation to manufacture a bogus “whistleblowing” issue in order to shield or obfuscate his or her misconduct. Although Congress appears to have anticipated and precluded the misuse of immunity in this fashion in 18 U.S.C. 1833(b)(5), in the shadowy, gray areas in which trade secret cases often arise, the immunity provisions still provide plenty of room for potential mischief.

In any event, employers and their counsel should carefully consider these issues before robotically updating standard employment agreements, NDAs and other similar agreements to include the DTSA immunity notice. While most employers will likely want to err on the side of inclusion, just to be safe, each employer should consider the ramifications on the employer’s own workplace before doing so.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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