Recent Court Rulings Provide Guidance to Employers Using the Defend Trade Secrets Act of 2016 to Protect Proprietary Information
The Defend Trade Secrets Act of 2016 (“DTSA“) can be a powerful tool for businesses seeking to maintain a competitive advantage by protecting their proprietary information. However, the growing body of case law interpreting the new statute suggests that companies should take note of wrinkles in the DTSA in order to maximize its effect.
Passed by Congress in 2016, the DTSA affirms the increasing importance of trade secrets to the nation’s economy.1 This is particularly true for businesses in technology corridors such as Northern Virginia. Whereas before the DTSA, companies were largely limited to state trade secret legislation, they can now invoke federal legislation and the federal courts to protect their proprietary information in a targeted manner.
The DTSA empowers businesses to pursue, among other things, injunctive relief, treble damages, attorney’s fees and the pre-trial seizure of property necessary to prevent the dissemination of trade secrets. Nevertheless, recent court decisions illustrate that companies should take care when seeking relief under the DTSA. This is especially true when a legal issue touches on the DTSA’s associated whistleblower protections, which generally permit the disclosure of trade secrets to government authorities for reporting purposes and, under certain circumstances, in legal proceedings.
For example, in Christian v. Lannett Co., Inc., No. CV 16-963, 2018 WL 1532849 (E.D. Pa. Mar. 29, 2018), a pharmaceutical company filed a counterclaim against a former employee who sued the company for discrimination. The counterclaim alleged, in part, that the former employee’s transfer of 22,000 pages of company documents to her counsel as part of the underlying litigation ran afoul of the DTSA because, unbeknownst to the company, the former employee retained trade secrets after her employment terminated. The court disagreed, finding that the disclosure was permissible because it was made as part of a discrimination lawsuit and also because there was no evidence suggesting that the former employee’s attorney intended to use or disclose the information outside of the litigation. As a result, the court dismissed the company’s DTSA claim.
In Xoran Holdings LLC v. Luick, No. 16-13703, 2017 WL 4039178 (E.D. Mich. Sept. 13, 2017), a research and development company brought a DTSA claim against a former employee, alleging that he began to compete unlawfully using company confidential information. Although the court allowed the DTSA claim to proceed after the former employee filed a motion to dismiss the case, the court barred the company’s claim for both attorney’s fees and exemplary damages. Exemplary damages generally consist of up to twice the amount of loss damages and any unjust enrichment caused by the misappropriation. One of the reasons for the court’s ruling was the failure of the former employee’s employment agreement to include the DTSA’s mandatory notice requirement. The notice requirement generally requires that all employment agreements governing the use of trade secrets or other confidential information include special notice of the employee’s ability to use or disclose the information for protected purposes. The whistleblower protections and notice requirements under the DTSA also extend to any individual performing work as a contractor or consultant. Therefore, to ensure compliance with the DTSA and preserve claims for attorney’s fees and exemplary damages, employers should consider reviewing the terms and conditions of their employment agreements and policy documents that govern the use of trade secrets and confidential information.
These two cases contain valuable lessons for businesses concerned about protecting their proprietary information. Lannett shows that courts, given a legal basis, may be inclined to permit certain reasonable disclosures of trade secrets, such as those made in the course of litigation, and further demonstrates the need for the merits of a DTSA claim to be carefully considered before starting down the expensive path of litigating a trade secrets claim. Xoran demonstrates that the failure to comply with the technical requirements of the DTSA can significantly blunt its power. In Xoran, the technical omission of the notice requirement from an employment agreement may have cost the company two-thirds of its potential damages, along with the recovery of its attorney’s fees.